Bernard Madoff isn't the type of monster you think he is -- and that's dangerous.

Madoff owned homes in Florida, Manhattan, and southern France. He belonged to the exclusive Palm Beach Country Club, and he owned an 89-foot yacht.

Most of the money that paid for his lifestyle was pilfered from investors in his $65 billion Ponzi scheme; the man was clearly motivated by greed and a necessity to keep up appearances.


My guess is that 99% of people would agree with this. The problem that they would be 100% wrong.

And therein lies the problem with the Bernie Madoff saga: Investors are inferring the wrong moral from his story, and that means we're all missing out on one of the most important investing lessons of our time.

But first: Where did all the money come from?
Starting in the early 1960's, Bernie Madoff worked as a market maker for stocks and bonds that weren't good enough to be traded on the New York Stock Exchange. He did well, and as his career progressed, Madoff was in the center of a brokerage revolution.

Before the mid-1970s it would have been prohibitively expensive for the individual investor to buy large sums of stocks or bonds. Because commission rates became deregulated, however, the costs to buy and sell stocks plummeted. Madoff was an important cog in the wheel that opened investing to the masses.

Bernie and his brother profited greatly from this trend by creating one of the first computerized systems that matched buyers with sellers. The system was fast and cheap, and by the early 1990s Madoff Securities was executing 9% of the daily volume on the New York Stock Exchange.

Business was so successful that one competitor estimates that during the 1980s, Madoff made as much as $25 million per year. At this rate, he clearly brought in hundreds of millions of dollars over the course of his career. All of that money was both real and completely legal, so it was likely with this computerized market-making business that Madoff paid for life's luxuries.

So where's the scandal?
At about the same time Madoff began his career as a market maker, he began a side business. In fact, this "side business" could perhaps have been more akin to a hobby when it started.

Madoff began accepting money from family and friends and offered to invest it for them -- absolutely free of charge. It's difficult to tell when this "hobby" became a full-time fraud. Some say Madoff had always planned on running a Ponzi, but there's evidence that would indicate otherwise.

In 1992 he was forced to give back $441 million to investors because of wrongdoing on the part of some of his associates. This represented a large portion of Madoff's assets under management at the time, but he was able to pay investors back within eight days of a request. Such a quick turnaround suggests that the scheme could not have been in full swing by then.

Madoff himself actually claims the fraud started five years earlier. When the market crashed in 1987, he was forced to abandon his low-risk arbitrage techniques because his investors were calling to redeem their money. With his bread-and-butter opportunities becoming scarce, and the pressure to produce results mounting, he began falsifying returns. It was then that Madoff also started using new investors' money to pay old investors.

At the time, he considered this a short-term solution that he could quickly resolve; he had been growing his hobby -- legitimately, he claims -- for more than 20 years. The problem (as with any lie) is that it took bigger and bigger lies to continue covering up the original lie, until things ballooned out of control.

As word got out that Madoff was able to produce positive returns during down times, the real money started to flow in. Banco Santander, UBS, and Credit Suisse began approaching Madoff to manage money. A number of feeder funds were created to pool capital to Madoff. The funds made a killing because they charged investors for the opportunity to invest with Madoff, and Madoff didn't charge the feeder funds a penny.

Though he may not have made a killing from his scheme, there were other benefits. Madoff was held in extremely high regard. Family and friends were able to retire comfortably thanks to his successes, and he was routinely a guest of honor at major institutions. That kind of attention "feeds your ego," Madoff claimed, and coming clean would have ruined his reputation.

Madoff himself states that it was only around 2003 that he started to realize the extent of the problem he had created. By then, he thought continuing the fraud was his only choice -- ignoring the fact that he'd surely be defrauding millions more as time went on. And we all know what has happened since then.

Missing the point
In the aftermath of Madoff's confession, we spent a lot of ink here at the Fool going over lessons learned from the scandal. Certainly there were some valuable takeaways offered, but there was one buzzword used the most: "greed." To say that we should be wary of investing with greedy management is sound advice, but that isn't the lesson to be learned here.

Many assume that what motivated Madoff to squander the savings of millions of people was a desire to have more toys or pad his bank account. In fact, nothing could be further from the truth. In the end, the fraud stemmed from his desire to be viewed favorably and to please others. It overruled any allegiance he may have had to the truth.

Greed is dangerous, but if we're to learn anything from the Madoff scandal, it's that there's something far more toxic than greed: an inability to soberly confront an undesirable reality.

Skirting the facts of life may not sound nearly as sinister as greed, but that's what makes it so dangerous. Usually we can see greed coming from a mile away. Dishonesty, especially when it springs from an understandable desire to project a positive image, is far more likely to slip under our radar.

I'm not making apologies for Madoff; he is selfish and pathological. Instead, I think it's important to understand why he did what he did. If we don't understand that it was hubris -- not greed -- at the root of the scheme, the next Madoff will slip right under our radar, too. If that happens, we won't have any excuses for how we let it occur.

Fool contributor Brian Stoffel does not own shares in any of the companies mentioned. You can follow him on Twitter, where he goes by TMFStoffel.

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