The revelations around Bernard Madoff today are staggering. Truly. This is the sort of thing that makes you wonder what is real anymore in markets, and what isn’t.
Bernard Madoff, founder and president of Bernard Madoff Investment Securities, a market-maker for hedge funds and banks, was charged by federal prosecutors in a $50 billion fraud at his advisory business.
Madoff, 70, was arrested today at 8:30 a.m. by the FBI and appeared before U.S. Magistrate Judge Douglas Eaton in Manhattan federal court. Charged in a criminal complaint with a single count of securities fraud, he was granted release on a $10 million bond guaranteed by his wife and secured by his apartment. Madoff’s wife was present in the courtroom.
“It’s all just one big lie,” Madoff told his employees on Dec. 10, according to a statement by prosecutors. The firm, Madoff allegedly said, is “basically, a giant Ponzi scheme.”
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Some snippets from the legal complaints related to the Madoff legal blockbuster. His advisory firm has been alleged to be -- including by his own supposed free admission to an FBI agent and to some senior employees -- a multi-billion dollar Ponzi scheme.
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Lots of chatter about whether $50-billion is really the correct number in the Bernie Madoff fraud allegation debacle. What is the right number? Well, here are some key stats:
- According to a Form ADV filed with the SEC a year ago, Madoff's advisory business then had $17.1-billion in assets
- According to the complaint, senior employees, until recently, thought Madoff's business had assets of $8-$15-billion
- Madoff allegedly told a senior employee in early December that he had $7-billion in redemptions that he was "struggling to obtain the liquidity necessary" to meet
So that's it then, right? We're looking at something like $7-$15- billion in fraud-related losses, depending on actual assets. That's a huge number, of course, but less than the $50-billion headline figure.
Well, hang on. Because according to the complaint, Madoff estimated total losses to be at least $50-billion.
Remember, this is Madoff saying it, not the FBI or the SEC, according to the complaint. The latter, larger figure would mean that the Ponzi element here -- new investors paying out old ones without knowing -- was longer and more significant than the firm simply blowing up in the last three months and then doing dumb things. After all the firm had, according to Madoff, been "[insolvent] for years". To generate $50-billion in losses, assuming the Jan 2008 number was right, and assuming he wasn't seeing huge redemptions, and assuming he wasn't paying himself out of firm assets, he had to have been running some sort of scheme for a long time indeed.
