December 18, 2008
My Madoff Nitpicks
Posted by David Zaring

$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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