Madoff’s guilty – but not $65bn guilty
When 70 year-old Bernard Madoff re-appears in court on 16 June he could offer one point of mitigation to reduce his potential 150-year sentence. He did not run a $65bn ponzi scheme. The money was never there: that’s why it was a fraud.
A ponzi scheme involved taking money from the public with the promise or prospect of high returns, then paying the impossible profits from other savers’ capital. It means attracting ever larger new investment and the bubble eventually and inevitably bursts.
That’s what the New York financier did. But the $65bn was the imaginary value achieved from those impossible returns. It never existed except in Madoff’s inflated bookkeeping. All that his investors lost (apart from their credibility) was their original capital plus the reasonable return they might have made elsewhere.
Think of it this way, if you invest $100 for a decade at 5 per cent a year it will compound to about $160. If Madoff claimed a 10 per cent return the investor’s account would show a balance of about $260 after 10 years but that extra $100 is illusionary.
A claimed 15 per cent return would turn the original $100 into more than $400 after a decade but the balance is just as hypothetical. Yet it is those $400s and their equivalents that add up to the $65bn and which aggrieved investors are claiming.
All they are entitled to, surely, is the return of their original $100 plus a nominal and sensible return. However, they won’t get it because most of the money has disappeared.
Where to? Not to Madoff of his wife on the scale sought. The yachts, properties, pianos and jewelry in her name add up to less than $100m taking the total of retrievable assets to less than $1bn.
One of the inefficiencies of a ponzi scheme (in case you’re thinking of starting one) is that they make so little money for their promoters. If maybe three-quarters of the $65bn never existed, most of the rest was paid out to the early investors who did receive the impossible return. The beneficiaries of the Madoff fraud are not Mr and Mrs Madoff but some of their own investors. Don’t expect those customers to repay their false profits however.
Those of you considering an investment fraud should stick to old-fashioned theft. It’s much more rewarding. If Nick Leeson had told his bosses that he hadn’t actually gambled away £800m and the whole bank but had instead stolen just £8m, Mr Baring would probably have plunged a cigar into his mouth and given him a pay rise.
If the Madoff accountants bothered working out how much he really lost it would be a lot less than $65bn and might even deprive him of the title of the world’s biggest fraudster. It might also get his 150-year sentence reduced to life.
