While it will be a long time before we know for sure how Bernie Madoff kept his operation running, here is a very good crack at explaining it. It's not very long; worth hitting the link and reading the whole thing (If the link doesn't work right away, keep hitting it. It will eventually open.).
Jenkins makes many good points; I especially like:
Journalism follows its own well-trod folkways, of course, and some now insist on trying to make Mr. Madoff symbolic of all that's wrong with our financial system. Yes, the SEC could have done a better job, but policing side deals that rich investors make with money managers arguably is not central to its mission of ensuring fair and orderly markets.
Holman W. Jenkins Jr.: Mad Men – WSJ.com
Feeder funds appear to explain the Ponzi longevity of money manager Bernie Madoff. …
The biggest of these feeder funds appears to be the now famous Fairfield Greenwich Group, operated by Walter Noel with help from Colombian toff Andres Piedrahita, who prospected among the watering holes of London and Madrid. Another was Access International, run by an unfortunate Frenchman who killed himself.
That their proprietors weren't aware they were servicing a Ponzi scheme is plausible — because they had money invested with Mr. Madoff too. Yet this may be a conclusion too far. A Ponzi scheme can be profitable for its "investors," and having their own money hostage would have been a fitting incentive for the feeder's role of pulling in new funds to keep the scheme going.
Inasmuch as they were essentially extracting fees simply for placing their clients' money with Mr. Madoff, who extracted no fees, they'd have every reason to puzzle out exactly what it was Mr. Madoff was allowing them to be paid so handsomely to do.
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Under the law, you can enter a Ponzi scheme through lack of diligence, but you can't exit through proper diligence. If you leave because you smell a rat, you are complicit. Mr. Madoff may have gone on for 40 years, and one suspects a certain folk knowledge existed among many participants that something was not quite right (which is not the same as deciding not to participate).
Indeed, a continuum of complicity will likely be found, extending from the truly duped to the not-so-duped.
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