If $50 billion really went poof in Bernie Madoff’s self-described Ponzi scheme, where did the proceeds go? This has to top what any dictator ever siphoned out of a banana republic. (Note that the Journal suggests that at least $17 billion has disappeared, so inflation adjusted, the Perons may be ahead). The story also suggests he was merely a very bad trader and merely lost the money.
In the case of other Wall Street operations that are now toast, the losses were the result of very big losses on positions and overpaying themselves bonuses in years that appeared to be good, but if the profits had been risk adjusted, were not so hot.
But a Ponzi scheme is all about fraud, all about taking as much out for yourself as possible (well, that is also the name of the game on Wall Street generally, but the rent-seeking is presumed to be on the back of an underlying legitimate activity) So where did the dough go?
And Madoff had to know this would blow up. Wonder why he didn’t flee to Panama.
From the Wall Street Journal:
Bernard L. Madoff, a former chairman of the Nasdaq Stock Market and a force in Wall Street trading for nearly 50 years, was arrested by federal agents Thursday a day after telling two senior employees that his investment advisory business was “a giant Ponzi scheme.”
In separate complaints filed Thursday, the Securities and Exchange Commission and the federal government alleged that Mr. Madoff had bilked his investors out of tens of billions of dollars.
The Securities and Exchange Commission, in a civil complaint, accused Mr. Madoff of an “ongoing $50 billion Ponzi scheme,” asking a judge to seize the firm and its assets.
“Our complaint alleges a stunning fraud that appears to be of epic proportions,” said Andrew M. Calamari, associate director of enforcement in the SEC’s New York office. Out of more than $17 billion in assets under management by Mr. Madoff’s firm at the start of 2008, essentially all the assets appear to be missing, the SEC alleged.
In a separate criminal complaint, Federal Bureau of Investigations agent Theodore Cacioppi said Mr. Madoff’s investment advisory business had “deceived investors by operating a securities business in which he traded and lost investor money, and then paid certain investors purported returns on investment with the principal received from other, different investors, which resulted in losses of approximately billions of dollars.”…
The FBI complaint quotes two senior Madoff employees as saying that Madoff Investment Securities’ proprietary trading and market-making activities are run separately from its investment advisory business. The complaint said investors’ losses came from the firm’s asset-management arm, which Mr. Madoff ran on a separate floor of the firm’s offices. These employees said Mr. Madoff kept the financial statements from the firm under lock and key and was “cryptic” about the firm’s investment advisory business, according to the complaint….
The criminal complaint says Mr. Madoff told the two that he believed losses from his fraud exceeded $50 billion. That figure couldn’t be confirmed…..
Earlier this month, the criminal complaint says, Mr. Madoff told one of the senior employees that “clients had requested approximately $7 billion in redemptions, that he was struggling to obtain the liquidity necessary to meet those obligations.”…
Mr. Madoff told investors that he returned an average of 15.7% per year going back to January 1996, according to Hennessee Group LLC, an adviser to hedge-fund investors. Between January 1996 and December 2004, when Mr. Madoff’s fund provided monthly returns, there were only three reported down months. Most months chalked up returns between 1% and 1.5%
Mr. Madoff told investors that his strategy was trading in and out of large-cap stocks and buying options on those shares. When the firm did not see opportunities in the market the strategy was to shift to U.S. Treasuries, according to fund marketing documents and people familiar with his strategy.
Madoff faces as much as 20 years in prison and a $5 million fine if convicted. His New York-based firm was the 23rd largest market maker on Nasdaq in October, handling a daily average of about 50 million shares a day, exchange data show. It specialized in handling orders from online brokers in some of the largest U.S. companies, including General Electric Co. and Citigroup Inc.