The Madoff episode shows us how easily we believe we can find a leader who can do things in a non-transparent setting that no one else can accomplish. That sophisticated analysts after the fact dismiss the possibility of sharing the gains of front running because it would have been illegal speaks to the heart of the problem. If we believe our leader is cleverer than others then we need not fear detection. If we believe our leader is stealing for us then the “red flag” of non-transparency is nothing of the sort since this will be the context in which our gains are realized....--David M. Levy & Sandra J. Peart (2013) "Learning from Scandal about what we Know and What we Think we Know"
I have always been intrigued by the Madoff scandal. In part, that's due (think Humean pride) to the fact that my college friend, Erin Arvedlund first broke the story, but the more important reason, (and I am not the first to note this) is "that [on average] the victims were [relatively] wealthy and educated." (Levy & Peart 302) In particular, lots of purportedly sophisticated investors were also duped by Madoff. Greed can explain some of this. But while the investors with Madoff were clearly also fairly greedy, what they clearly valued in him was the predictability of the returns---so, the greed was channeled in ways that reduced uncertainty. According to the best economic theory of the time (and perhaps ours, too), getting regular, out-sized returns in predictable and seeming low-risk fashion should be impossible. Yet, faced with the reality of the (apparent) returns people chucked theory and went with money in the bank.
That's in fact, not so surprising. But here's where the story becomes interesting because Levy & Peart remind the reader that, in fact, the wealthy and educated Madoff investors ignored many 'red flags,' and they did so because of Madoff's connections, his reputation, and -- this is key for what follows -- his secrecy. For, many Madoff investors kind of assumed that he was doing something fishy. Levy & Peart quote a passage from Harry Markopolis (another early critic of Madoff):
“… the [rich, investing] Europeans believed he was front-running and they took great comfort in it. They thought it was phenomenal because it meant the returns were real and high and consistent and they were the beneficiaries of it. They certainly didn’t object to it: there was a real sense of entitlement on this level. … What they didn’t understand was a great crook cheats everybody. They thought they were too respectable, too important to be cheated. Madoff was useful to them, so they used him.” Markopolos (2010: 104 [see also here for a quick overview]).
What makes this is interesting is this: a lot of the best educated and wealthiest investors assumed that in the world they live in, crony capitalism just is the norm, that is, standard practice. Which is to say these investors with Madoff kind of assumed that he was a crook, but that he was their crook and that he would not cheat them because they were important, well connected people (etc.). [Think of donors to the Clinton foundation.] The point is that if crony capitalism is actual or believed to be actual (and I recognize there are problems with such a move to opaque context) then it is entirely rational to want to have a political insider or leader to favor your side (you just want good monitoring mechanism of the insider so she honors her debts to you).
Here's where Levy and Peart provide a new frame to understand Madoff. Rather than seeing him merely as an updated version of a Ponzi-scheme (this is Markopolos's correct way of understanding Madoff), Madoff stands in for a type of leadership in which followers don't mind a leader's thievery (of faceless others) as long as we can assume we're among those that benefit. Because Levy and Peart have a fondness for wisdom of proverbs and folk-wisdom, in particular, I note that the underlying idea is nicely captured by the following saying: He may be a sonofabitch, but he's our sonofabitch. (According to the internet ;egent it originates with FDR.)
This entails that exposure of some misdeeds or ethical lapses in a leader/would-be-leader is not thought of as a problem among would be supporters, as long as the systematic pattern of benefits and harms is distributed along desirable and predictable inside/outside lines. In fact, public attention to such misdeeds only adds to the credibility among his supporters that the leader will deliver the goods for them. This year's Presidential election campaign has shown some such mechanism(s) in action.
For example, Trump explicitly offers a picture of the the world in zero-sum terms, and offers the possibility that he can deliver better deals for America especially for his supporters. In fact, he prides himself on generating manifestly bad deals for his suppliers and would-be-partners (symbolized in the fact that Mexico would pay for the Wall; not to mention his willingness to kill families of terrorists, etc.). His willingness to insult and attack elites and outsiders enhances his credibility for the thought that he is our crook. This is why the Clinton campaign ads that depict Trump as a shady businessman may well have misfired. Liberal critics of Trump (that includes most of my intellectual friends) insist that all this shows his would be supporters are immoral and irrational (because dumb, etc.). Let me grant -- for the sake of argument -- the immorality charge (I am a big believer in human imperfection so entirely untroubled by this). But, as I said above, if you happen to think that the crony capitalism is the norm in our day and age -- and it is hard to argue against this fact (recall this post, too)-- then wanting to have a crook on your side is a rational response. After all, this is why the educated and wealthy stuck with Madoff for so long.
In the previous paragraph I am making a thinner claim than you may think. For to say that 'x is rational' is not to entail that (i) x is optimal or (ii) uniquely rational. The lesson here is that in a world of crony capitalism to undermine a Madoff like leader, you need to show not just that he is could be harming his own would-be-supporters, but also that alternative leaders (i.e., one that favors another group, or some other set of commitments) would not be worse for them.