$50 billion is a lot of money, but it is too bad that Bernard Madoff probably didn't steal that amount. If he did, I suspect that it would be very easy to make his investors whole. We'd find out where he stashed it and give it back to them. There's no way he could hide $50 billion, or even begin to dissipate it. That's circa more money than Bill Gates has, or Warren Buffet, and so on. So I don't get the "steal" part and the "$50 billion" part of the Madoff affair.
It seems to me that what likely happened with Madoff is that he may have illegally smoothed his results by dipping into the client kitty, and he's down some large quantity of money mostly because the stock market is down. But $50 billion?
It is five times more than even superlarge hedge funds like Citadel have lost. The best known actively managed mutual fund in America, Legg Mason's Value Trust, had $20 billion under management by its 25th anniversary. If none of the funds that people have actually heard of are down $50 billion, even though they admit being down 50% or more, it's hard to see how an obscure asset manager with only 25 investors and three gateway hedge funds could possibly contrive to lose such an amount. But maybe he somehow acquired that kind of money under management (partly because it kept growing 12% a year, fictionally) and invested it only in stocks that lost essentially all their value. Maybe.
But the fact that it is the declining stock market that uncovered Madoff, rather than some betrayal by his confidants makes a bit more sense. That, at any rate, is how I understand this all but unintelligible statement from SEC Chair Chris Cox:
"We say that a rising tide lifts all boats. When the economic tide goes out, some of the skeletons that wash up on shore are Ponzi schemes such as this one. So one of the ways that these things are unhappily discovered is the roof falls in because of market conditions."
And I think this is what Salmon and Fox are basically saying as well. It is still worth noting. Madoff probably didn't steal $50 billion. But he did, like everyone else, lose a lot of money in the market, and in so doing, his fund failed, revealing his allegedly dicey accounting gimmicks in spectacular fashion.
One more gripe, which is the sort of gripe I always have about high profile white collar circuses. It seems to me that the other potential white collar defendants in the financial crisis should be thanking goodness for this appearance of a new fall guy. If Madoff's illegal smoothing was exposed because of the financial crisis, and if there's a couple of others like him (which I view as likely), and if you believe that the white collar prosecutions will be more symbolic than reflective of financial crisis causes (I'm in this camp too, usually), Dick Fuld and the AIG people may have just dodged bullets. The criminal focus could turn more towards tricky money managers, and fixing the insurance people didn't price right and over-exposure to an inflated housing sector might be left to regulatory reform.
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1. Posted by Miriam Baer on December 18, 2008 @ 14:09 | Permalink
I wouldn't expect the SDNY, EDNY and NY AG's office to pack up any time soon. However ridiculous the Madoff scheme may seem (multiple red flags with the SEC, a failure to explain his success other than a "mystique" that family and friends attached to him, and a tiny accounting firm auditing the books), it doesn't appear to have much to do with the current meltdown other than David's point that recent market losses thwarted Madoff's ability to hide his prior "smoothing." These facts, however interesting, will not likely quell populist and political calls for white-collar blood.
2. Posted by David Zaring on December 18, 2008 @ 14:20 | Permalink
Yeah, you're probably right. The investigations are under way, and the point is the sort of gestalt-ey thing that doesn't really make much legal difference. Probably it's just venting about the need (understandable, though not always useful) to put a face on the crisis.
3. Posted by Steve on December 18, 2008 @ 14:29 | Permalink
I think you are missing the larger issue. The scathing complaint filed with the SEC in 2005 (and raised as early as 1999) written by Markopolis not only convincingly demonstrates that Madoff's entire structure was suspect and the returns were not feasible based on the stated strategy, but it states rather presciently that the most likely scenario for the returns Madoff was that "Madoff Securities is the world's largest ponzi scheme."
And as to your point about the overestimate of losses, even in 2005, estimates varies between 20 and 50 billion, so 50 now may not be that much of a gross exaggeration. Read the doc here.
http://www.slideshare.net/hblodget/markopolos-madoff-complaint-presentation
4. Posted by Steve on December 18, 2008 @ 14:34 | Permalink
One last point. I would say it is much more likely, especially given the scrambling to open new feeders in the past few months, that the market may have uncovered the scheme, but only indirectly. The most likely scenario is that there were an unusual number of redemptions from pensions and plans that needed to rebalance and the scheme was built on continued reinvestment, not realization of gains by most investors.
5. Posted by David Zaring on December 18, 2008 @ 16:47 | Permalink
Steve, I agree with your last point, and the Markopolos memo is worth noting. I still think this $50 billion thing is unlikely. Guaranteed wrong, of course, but even Harry M. has him pegged at $20-$50 billion. And really, a totally secret, totally massive thing? Hmmmmm.
6. Posted by JonathanOZ on December 18, 2008 @ 21:46 | Permalink
Бывает
7. Posted by taxrascal on December 19, 2008 @ 20:20 | Permalink
I think what's missing is information on how much investors put in, and when. $1 at 12% for twenty years is $9.64, so some of the $50 billion he 'lost' might have been 10% invested money and 90% faked gains. But it sounds like he raised most of his money recently. As of 2001, sources said he ran $6-7 billion, but Bloomberg has identified $35 billion or so of losing investors so far (and his 'returns' dropped to single digits after 2000 -- maybe he had finally gotten close enough to catching up by then that he thought he might be able to earn back all the money he lied about, just so long as the bar was lower).
It's going to be some serious Keynesian stimulus for the financial sector when the Feds start hiring out jobless MBAs to sort through Madoff's paperwork and figure out what on earth actually happened.
8. Posted by LittleGuy on December 20, 2008 @ 18:21 | Permalink
So, let me get this straight..... Bernie....may I call him Bernie snce I'm just a little guy?.....Bernie really spoiled the hedge fund ponzi party. Right? Isn't that what really just happened here? Is it me or is every fund manager within 25 miles of ground zero calling their Cayman Island bank acount officers and lawyers asking about things like...."non-extradition" treaties, policies and practices. Me thinkst they might even be prepping the wife and kids for the upcoming fleeing. Subtle little suggestions like, "honey, the schools in Grand Cayman have come a long way. They even rent mopeds to the students."
Oh, this should be interesting. Here's an idea.....call Yorkville Advisors (formerly Cornell Capital) in Jersey City and ask them how are things going in the fund and if they care to share any of the details.
Anybody ask if ANYTHING they have ever invested in survived their death spiral attack? Yet, they continue to brag about returns.
Yeah, right.
Buckle up boys. Turbulence ahead.
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