Where did all the “Madoff” money go?

September 24, 2009

Erin Arvedlund- Erin Arvedlund is a journalist who has worked for Dow Jones, The Moscow Times, TheStreet.com, Barron’s and the New York Times.  She is author of “Too Good to be True: The Rise and Fall of Bernie Madoff“. The opinions expressed are her own. -

Where did all the money go?

After I wrote “Madoff: The Man Who Stole $65 Billion” this was probably the first question I received from almost everyone. And I am forced to tell the bizarre truth: there’s probably no money left.

This is the nature of what are known as “Ponzi” schemes, or a classic pyramid scheme–Bernard Madoff constantly had to raise money from new investors to cash out the old investors, or “redeem” them, as a traditional hedge fund or mutual fund would.

But Madoff was not running a traditional hedge fund–not at all. He was running a cash-in/cash-out fraud, using the London branch of his brokerage firm as the piggy bank where he would wire money to and fro to make it look like he was trading for the hedge fund.

But there was no hedge fund, and there was no $65 billion at the end. Madoff lied about the amount of assets he was overseeing.

So where did the money go?

Remember, the $65 billion was a phantom number: that included all the phony profits from over the decades (in my book, I write that the scam probably began in the early 1960s!).

Working backwards, let’s assume Madoff promised average returns of 10 percent a year, over a period of 35 to 40 years, and the true dollars invested–and therefore lost–is likely closer to between $10 billion-$20 billion.

That’s still a shocking amount–but at least it’s one that U.S. prosecutors and the Madoff trustee charged with cleaning up the mess and paying back investors can get their arms around.

Assume Fairfield Greenwich Group, one of Madoff’s infamous “feeder” funds, took out roughly $7 billion; Jeffrey Picower, Madoff’s favorite investor, took out $5 billion, and Stanley Chais, who raised money in Hollywood for Madoff, took over roughly $1 billion, and suddenly, $13 billion is accounted for.

So where is the rest?

It’s possible Madoff spirited away a few percent of the billions he stole, but even whistleblower Harry Markopolos, who stalked Madoff for nearly a decade and warned the U.S. Securities & Exchange Commission multiple times, has estimated Madoff likely only kept perhaps $350 million for himself.

In short, it would have been easier for Madoff to run a true, bona fide hedge fund than to create the millions of pages of phony statements, using an antiquated computer and old letterhead.

With the guilty plea of his lieutenant Frank DiPascali, we now know Madoff did not act alone. He lied about that just as he lied for so many decades. the question is: who else will be charged?

Comments

finally–an intelligent analysis i.e. “how much and where did it go..”…For months, “journalists” and “media outlets” have been purposefully mis-stating the facts because a story about someone that purportedly stole $65 billion is a headline that sells newspaper, regardless of whether its true or not.

 

very good perspective…the kind of information that’s been broadcast on “Bernie’s Blog” for months…www.bernard-madoff-scam.blogspot. com

Posted by jackie | Report as abusive
 

Recently we were told how SEC officials “audited” Bernie Madoff (what the heck were they auditing!!!) on numerous occasions, and they found “nothing wrong” with the way he was running or conducting “his business”. Either the SEC officials who audited Madoff were illiterate, blind, “or willfully – deliberately blind” (which seems to be the general consensus), or, Harry Markopolos is truly a genious for having fingered & having picked the “scam artist for more than a decade”., or, as we have commented before, Bernie Madoff is in fact the “contemporary patsy” and in the same line as Lee Harvey Oswald, “covering up / who covered up for the real monsters, ie., JPMorgan & Co., Golman Sachs & Co., and their lot, who are the true / real perpetrators of this financial tsunami before us. The notion being perpetrated / suggested that “somehow” Bernie Madoff pulled the wool over the eyes of so many people, so many organizations, for so long, “all by himself”, leaves you to wonder that he truly dealt with “real dummies” all this time…Stay “tuned”, the “other shoe is about to drop”..and then you will see and realize (as in the case of Lee Harvey Oswald), Bernie Madoff did not “all of the sudden “plead guilty voluntarily and out of the goodness of his heart”, and “did not utter one word”, about anything and or any other accomplice. Lee Harvey Oswald was truly “shut – shot” to keep his mouth shut (what a co-incidence)- and Bernie “will suffer a heart condition if he decides to open his mouth”.. Stay tunned..

 

Why is the so obvious possibility of bribery of SEC officials never mentioned? Can anyone know if higher-ups in the SEC might also have been “investors”?

The Reuters article on 12-10-08 contains the opinions of Michael Steinhardt – who’s own fund was promising similar and higher than normal returns – who did not escape SEC notice. He, along with Salomon Brothers, apparently paid some hefty fines for their alleged attempt to corner the two year treasuries market in the early 1990s.

A 60 Minutes special about 9 years ago looked at several cases – one individual interviewed was a personal acquaintance – of the crooked way some Federal agencies handled tax cases and in the case of the man I knew – a false charge made by the EPA. The EPA was found guilty of fraud for falsifying test data because this man refused to plead guilty. He told me that the EPA had a policy of not pursuing wealthy or large scale polluters because they could keep them tied up in court for years, nor of prosecuting small scale polluters because there was little to be gained, but that they targeted businesses in a middle range that had some cash but not so much they would likely be willing to spend it for high cost and lengthy court battles.

The Federal government – no level of government anywhere in the world – has never been gleaming white. Since 911 we have tended to find it more comforting to think that the Federal Government always walks hand in hand with the Angels.

I still find it hard to believe that Jerome Kerveil was able to defraud SocGen all by his lonesome. There wasn’t a single mention in any USA paper about an earlier scandal that was still going on when Kerveil was charged. It had involved an Israeli money laundering scheme that, when it was finally detected, had resulted in 130 SocGen employee arrests and over 80 convictions. I found the only mention of it in the Daily Star Lebanon and related online searches.

Posted by Paul v Rosa | Report as abusive
 

We have had for over a century an “Elite Social” Class in this country that intermarry. We in essence have replaced monarchs with oligarchs. It should come as no surprise to anyone that these oligarch’s financial connections to politicians trump the due process of law and statute. Many times they foist laws upon us that protect their monopolies.

World Bank directors have been saying for some time (albeit privately) that the U.S. must break free from the strangle hold banking oligarchs have on the government. Otherwise any recovery will be consumed from further collapses requiring more bailouts to these large financial institutions that continue to invest irresponsibly.

A well kept secret outside of academic circles is British centralized banking caused great economic harm at home and to the colonies in the 18th century. This widespread fact may well have been the greatest single unifying factor among the colony’s decision to seek independence.

As for now the American people remain divided. Change is unlikely. That is exactly how the wealthy and influential would like things to stay.

Posted by Anubis | Report as abusive
 

Aristole, Paul V Rosa, Anubis, I found your comments even more informative then the article! Thanks for shedding some light on this issue for me.
I’ve always thought with the huge amounts of missing money surrounding this case, how has it been possible only ONE person has been charged?
One person capable of theft in these amounts?
No one else was involved?

Posted by Dutch | Report as abusive
 

Dear Writer,
I posted a detailed comment on the above subject ,but i got oops information from this system.
i am a man of writing on many interesting economic subjects to this great news service provider.
Back to subject, what you said is true.
Why people are suffering by these financial agencies.
I have read or observed from many sources, regret to say that, many American banks, and many noted, well known financial institutions were either closed or gave no return results to its investors.
Now, time has come to investigate , formulate and regulate these ill financial agencies to return public deposits or public borrowings at the earliest.
Hereafter, all concerned law regulating agencies to see that , investors should not go dry under any circumstances.
Here, what you have mentioned not small money.But huge money was gone with the wind.
Now, world famous economists should admit that, Capitalism has its own weakness on general finance.

 

“The central bank is an institution of the most deadly hostility existing against the Principles and form of our Constitution. I am an Enemy to all banks discounting bills or notes for anything but Coin. If the American People allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the People of all their Property until their Children will wake up homeless on the continent their Fathers conquered.”

Thomas Jefferson

Posted by RFL | Report as abusive
 

Dear Author,
Happy to say that,i have grasped of your writings on economic subjects.
Quite interesting and it is very useful to many economic students for their upgrading.
Here, what you said is true.
But, this is shocking news to all investors.
What happened to such huge money.Where it had gone, whether to some body!s pockets or due to lavish life styles at the cost of others.
After reading of these bad episodes on finance, Americans and other Capitalist countries people will have second thoughts to invest their hard earned or inherited or saved money to any private financial firms and to any well mouth to mouth publicized financial institutions.
Time has come for wider wisdom in investment fields.

 

Somebody, somewhere, is sitting around the fireplace in a bathrobe, smoking a Havana cigar, and laughing his butt off. The same thing happened during the Great Depression; all the money went to just a few people, but know one ever found out who those people were.

Posted by Mufaso | Report as abusive
 

lets waite and see what happens.But investors should know that because of the complex nature of capitalism and open market operations their a lot hedge funds like Maddoff who are still in the system and has backing from regulator and make it difficult to uncover their activities. watch out for investment that promises abnormal return.Because it may also have abnormal risk.

 

If Madoff said he had $65 Billion in funds, then that is the impact he had on the market. That is the figure by which his liability will be gauged, in any market of any account.

Excuse-making is infectious, almost chic these days on Wall Street. From any attempt to play down the market impact at this stage of, say, a Madoff – be such an attempt ever so pragmatic, as it may – it is to be deduced there are a whole lot of other financial entities who would love to be allowed to say likewise, namely that they really weren’t all that … bad.

I say deduced, not deducted. Certainly not deducted from their liabilities. Since U.S. banking and investment entities are run on a charismatic rather than pragmatic basis in this day and age, they are every bit as bad as they say they are, even if they’re just saying it for as long as they think they can get away with it.

They all knew better, but they kept saying they had a whole lot of money they just didn’t have, thus dealing the market a death blow. On that basis, by their own lurid projections, are the swindlers to be judged. Every last one.

Posted by The Bell | Report as abusive
 
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