Posted on Monday 29 December 2008

Based on Bernard Madoff’s own estimation, he lost approximately $50 billion of investor funds. Every since this disclosure, the biggest questions are where did the money go and how much of the $50 billion remains.

Bloomberg is reporting that "Madoff To Reveal Assets" by year end.
    Investors looking to recoup some of the $50 billion they lost in Bernard Madoff’s alleged Ponzi scheme may get a better idea what the New York financial adviser has left when he is forced to reveal his assets to regulators. Madoff, 70, must provide a detailed list of all investments, loans, lines of credit, business interests, brokerage accounts and other holdings to the Securities and Exchange Commission by New Year’s Eve, a federal judge ruled. Madoff’s foreign business units were given until Jan. 26 to provide a similar accounting. A catalog of Madoff’s assets may reveal targets for angry investors including hedge funds and charities seeking the return of their funds.
This is a curious report. Why would a federal judge ask Madoff to provide an accounting? The SEC states that his records are in disarray and in any event, totally unreliable. Is it to be expected that a man who lived by deception and lies for two decades is going to present an accurate report? Where is the SEC, are they still not interested in this man’s operations? It would obviously make more sense for an outside regulatory agency to produce a report on Madoff’s assets.

Nonetheless, regardless of who produces the report, I would not expect the Madoff funds to show very much in the way of assets due to the magic of compounded interest… We know that Madoff was not generating magical returns of 12% per year over 20 years, so the phantom gains of $39 billion in this example probably never existed…

Madoff probably did not start his fund with the objective of becoming a Ponzi scheme. He was probably drawn into it slowly as his warped ego would not let him admit to the world that he was not an investment genius. Failure to cover previous losses or outperform the market going forward never allowed him to stop the deception once it started. Indifference by regulators allowed him to continue the deception. Madoff’s $50 billion never really existed except on customer account statements. Defrauded investors will now find this out come December 31st.
If I had a bank, I’d take the Depositor’s Money and Loan it to people to build things. I’d use the interest on the loans to pay my operating expenses and make a profit, then I’d give a dividend to the Depositors for letting me use their money. I’d keep enough cash on hand to cover withdrawals from people who needed to get their money back.
And if I ran an investment business, I’d take my client’s money and invest it in some enterprise that was a success. I’d take the returns on the investments and pay my operating expenses and make a profit, then I’d give a dividend to my clients for letting me use their money.
If I were a Ponzi Scheme Manager, I’d take my client’s money and pay good dividends just like a Bank or an investor. I’d pay my expenses and make my profit. I’d keep money on hand to cover investors who wanted their money back. But I’d notice that my bankroll was rapidly diminishing, so I’d have to recruit a lot of new investors to have cash on hand to cover the outlays.
Then, one day, I’d be in a position where I couldn’t find enough new investors to keep things going, so I’d just go to jail and leave people wondering where their money went – dividends, profits, expenses, country club memberships. It costs a lot of money to run a Ponzi Scheme. And when the Judge orders me to list my assets, I would say, "If I had any assets, I wouldn’t be in this courtroom [yet]."

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