It was all very secretive and tough to get into, which, looking back, was a brilliant strategy to lure suckers. Unlike the usual Ponzi mechanics, the fund even stopped investments into accounts a few years back, at least in our network. There were the usual warnings prior to investing -- we all knew it was a risk, we were told to make sure we were diversified, blah-blah -- but, my God, it had been going strong for so long and with such fantastic returns, we had to get in. The Securities and Exchange Commission even gave Madoff a clean bill of health several years ago, we now find out. Well, maybe not a clean bill, but it didn't shut him down either. In the topsy-turvy world of investment, we were quietly, richly safe. Until the call. (See the top 10 worst business deals of 2008.)I think everyone knew the call would come one day. We all hoped, but we knew deep down it was too good to be true, right? I mean, why wasn't everyone in on this game if it was so strong and steady? We deluded ourselves into thinking we were all smarter than the others. When it came to the investment game, we had it figured. And what was the game anyway? The way it was vaguely described to us was that the "New York people" had a system whereby they placed a series of instant trades -- at once with futures, currencies and stocks -- and out of this magic recipe fell a tiny 1% guaranteed, no-risk profit for the group. You do that 20 times a year, take away management fees and, voilà, a steady 15% return. Man, these guys were good.
But of course the call did come, as it always does with such things.
« How did Bernie Madoff get away with it? | Main | Did Madoff have help? » First person Madoff16 Dec 2008 09:40 am
Robert Chew, a Madoff investor, on his losses:
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And after the call, the call for a bail out:
http://wcbstv.com/business/madoff.ponzi.scheme.2.888036.html
So did Madoff really blow $50 billion on his own lifestyle or is $50 billion just a made up number that includes tens of billions of rolled over paper profits that never really existed? Whatever hefty sum the rich investors lost, it is actually only what they put in net, plus taxes they paid on phantom gains, less whatever pennies on the dollars they will get when Madoff's real assets are liquidated.
Actually, if you lost $1.2 million with Madoff, and you get $500,000 from SIPC, plus refunds of the taxes you paid on phantom gains, you won't do too much worse than you would have this year in an index fund.
So did Madoff really blow $50 billion on his own lifestyle or is $50 billion just a made up number that includes tens of billions of rolled over paper profits that never really existed?
I expect that $50B does include the fake paper profits, but it also includes a lot of principal. If your trading strategy is producing minimal gains (or actually losing money) then fictitious 10-15% returns will eat the principal pretty quickly. So I suspect most of the money went to investors who took their money out (including their phony profits). But courts may go after that money that early Madoff investors withdrew:
http://www.ft.com/cms/s/0/08f656a8-cada-11dd-87d7-000077b07658.html
I wonder what gave Madoff, psychologically, the license to do this?
I haven't followed this story closely, but given Madoff's background, my guess is that he started this off as a legit operation, got into trouble with some losses, papered them over fraudulently, and then realized that he not only could keep doing so for a long time -- he had to, because he was falling too far behind his supposed returns to catch up legitimately.
But has anyone heard different?
Consider two investors, Bob and Alice, each of whom have $500,000 that they want to invest.
Alice invests her money in an FDIC-insured money market account at Pennsylvania National Mutual Bank of New York City which pays her 4% annual interest.
Bob invests his money in Bernard Madoff's brokerage firm which has consistently averaged a 10.5% return over the last 17 years. Bob doesn't know how the fund can offer such unbelievable returns, but he assumes that the well-connected Madoff is involved in insider trading.
When Pennsylvania National Mutual Bank of New York City fails, Alice is entitled to collect half of the money she invested through the FDIC. When Barnard Madoff's returns are revealed to be the result of a fraudulent Ponzi scheme, Bob can collect his full $500,000 via the Securities Investor Protection Corporation [1].
[1] http://www.google.com/hostednews/ap/article/ALeqM5jF_4G4a4XAV7qDQOp8KfWCykIrYQD953GBKO1
So, who's the bigger sucker? Bob or Alice?
My vote goes to the taxpayer.
Madoff probably believed that he was doing good....that everyone would benefit as he would make up the shortfalls in bad years by outperforming in good years and as long as everyone was keeping their money in, everyone would eventually come out ahead.
With respect to his investors he played into two very important aspects of human psychology. The first is exclusivity. Everyone likes the idea of being part of a members only club where only they and the members get this special deal. Madoff played into this by turning away large numbers of investors. The second is stability. His reported (falsified of course) returns were remarkably consistent and not oversized. He picked just the right sweet spot between moderately outperforming the market and crushing it. The consistency of the returns made it seem like the outcome was predictable, replicable and dare I say "conservative" aka safe.
At some point though he got seriously behind. He wasn't able to fund the redemptions that he was seeing (due to the recession since his fake returns were very good and therefore wouldn't be called unless people needed money) by raising more money so the scheme collapsed.
My vote goes with the taxpayer too staash. I'm with you on this one.
From the brilliant meanderings of Mr. Chew,
"It was all very secretive and tough to get into, which, looking back, was a brilliant strategy to lure suckers."
Gee ya, think? We even have these people THEMSELVES admitting they were suckers now.
That's THEIR fault. Not ours. Madoff's being legally punished. What's the problem?
I fail to see the difference between this and any other Ponzi scheme (can I use that term now that Mr. Chew has or do people want to jump on that again)?
They got swindled. Oh well. Be smarter next time. Especially if you're Mort Zuckerman or Steven Spielberg and you're investing $30-$50 million. Sorry. That might be stupider than the average person who manages to lose $30,000. That's a LOT of money not to be extremely vigilant over.
People get swindled. That's life. And we don't have to have a moratorium for all of them. Nor do we try to mitigate their stupidity or lack of sufficient oversight with regard to their own funds (if that makes you feel better.)
And don't joke about a bailout for the people swindled by Madoff. Next thing you know they'll really be trying to push that one on us too.
Consider two investors, Bob and Alice, each of whom have $500,000 that they want to invest.
Oh, c'mon. If Alice wanted FDIC protection for her full investment, all she had to do was divide her $500K into 5 separate $100K accounts (at different banks), all of which would then be fully insured.
"Somehow, even though everyone agreed that this was the sort of thing the SEC should be aggressively rooting out, and the SEC has perfectly adequate resources to investigate high-profile fraud at a 20-person operation, the SEC dropped the ball so hard it's probably even now still falling through the Earth's mantle towards China."
Part of the problem is that most people expect government agencies like the SEC to be so all-pervasive and able to detect frauds that we disable our own internal fraud detectors - "Oh, what Bernie is doing must be legitimate since he's been doing it so long and if it wasn't legit, the government would have shut him down years ago". Guess what, most government workers are basically decent and good-hearted (though hopelessly inefficient), but they are not perfect. Private enterprises are not perfect either, which is one reason we do not allow monopolies. Government pretty much has a monopoly in the areas where it operates, but that does not mean we should delegate to it our duty to look after ourselves. I have a lot of friends who are cops - I like cops - they are mostly good, honest and brave, but I don't expect that they can save me in every circumstance, since they are not (thank god) all pervasive, therefor I take steps to protect myself - be careful where I travel at night, have good locks and an alarm on the house, and, where appropriate, I may arm myself. Similarly I know some current and former SEC folks - also good guys and gals - but not perfect or omnipotent (no precogs I'm afraid), so I have to protect myself when investing.
Re Slocum's comment above - I believe the FDIC limit has been raised to $250,000 per account.
Hold on to your hats kids- this story has only just begun.