Where Is Madoff's $50 Billion? 16 comments
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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. Consider the following scenario. If Madoff had $2 billion in assets under management 20 years ago, the amount of this initial investment, compounded at 12% for 20 years would now be approximately $9.6 billion. If Madoff took in another half billion per year over the next 20 years, to date that amount compounded at 12% would now be worth around $40.4 billion. With other factors disregarded and a total principal investment of $11 billion, the investors' account statements would now show $50 billion of assets.
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. In addition, withdrawals, huge fee payments to feeder hedge funds and losses on investments probably consumed much of the original principal invested. A classic Ponzi scheme collapses when the amounts needed to be paid out cannot be covered by new investment monies, which seems to be the case here.
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.
Disclosure: None.
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This article has 16 comments:
Why take him, of all people, at his word?
Certainly the ending was a Ponzi ending but was it always "bascially" a Ponzi? No front running? No money laundering? No who-knows-what else?
Seems unlikely.
Maybe I'm just a paranoid investor.
$2 billion compounded at 12% for 20 years is not $9.6 billion, but $19.3 billion. A calculator is unnecessary to realize $9.6 billion isn't in the ballpark. At 12% for 20 years, the starting figure will double more than 3 times, putting the result north of $16 billion.
The $40.4 figure is correct if it is assumed the funds were taken in at the beginning of each year. If they were not, that figure could be as much as 10% lower.
In sum, the given scenario provides for just shy of $60 billion, which would mean the phantom return rate would have to be lower than 12% if the $50 billion figure is accurate.
So again, the point of the article seems correct, even if the calculations aren't quite right.
One would have to assume that this $30B claim is all Pincipal and not Principal plus this bogus accrued interest.
Logically,
It is possible that many were content with Madoff re-investing the 'accrued' interest, but many apparently used this accrued interest as cash flow to live, so actually withdrew their monies, periodically if not monthly. In matter of fact if a person invested $100, 20 years ago, then, if he or she withdrew the accrued 10% money annually, they would be sitting without a principal loss at this stage! They actually made money. Who are these lucky few?
We are also told (by filings made to the SEC annually) that Madoff did not actually invest any more than $1B in the market, and since his trading strategy counted on an upward biased market (Buying S&P 100's and selling a call and buying a put simultaneoulsy), he would have made money most of the time, except this year, when the market tanked sharply. The suddeness of the nose-dive, would pretty much wipe-out the $1B, as his collars were at most +/- 5%! and any losses beyond that rate should hit him broadside. So maybe he lost $1B. That means he had $31B to start with and now has $30B.
I think, the 'real' money, if one is to believe that $30B of corpus was lost or is missing, has to be sitting somewhere! Madoff charged no Fees for his skilled management, obviously had no operating expenses, since he worked out of a threadbare office with one secretary and did all of the work himself and a 3 man CPA certified the accounts annually, and said that the only income he generated from the corpus were commissions from trades - so what are we talking - a few million $'s over the years at best in this day of discount commissions especially on trading of indexes.
Interestingly he also stated that most of the trades were through other broker dealers - and not his shop! So he kept next to nothing of those commissions unless he got kick-backs.
So it appears highly implausible that a man with his alleged shy demeanor lost this money. Lost on what? He did not eat the $30B type money. Impossible. He claims to only own three homes and a yacht. That isn't $30B! If the claimaint's are are to be believed, then the money is around folks.
It appears only too 'nice' that his sons turned him in. There is no way, plausible, that this man ran a giant ponzi scheme for years, right under the noses and eyes of his kids and wife. Surely the talk at the Dinner table has to circle around 'how are we all doing' and related financial matters? You can't tell me that the wife (with whom Bernie slept each night) did not know how money appeared in their bank accounts, month after month and year after year. She filed tax returns? right? Surely they got 1099's? W-2's? No?? How come?
Huh??
And I am sure the kids and the Parents partook Dinner together many times during the last 20 years! I would be dumbfounded if this otherwise voluble man (as seen on TV interviews and House testimony) would remain mum and silent and not let on what he did with or at his day job for 20 years! Not possible. This is one giant charade. Bummer no one is really getting to the bottom of this fast - as there is no way that Bernie worked without any Banks - and with this kind of money. It can't be that he Banked with a small Community Bank - it has to be with the Majors. JP Morgan. Bank of America. CitiBank etc.They can and should quickly, in this digital age - print out all of his bank statements for all of the past years and follow the debits and credits. Man, I could do this research in a nano second! Plus, every Bank is required to report transactions of $10,000 or more to the IRS. How can it be that we need Bernie to tell us what became of the money?
Huh??
Pleeesee!
Could it be that some 'honchos' or 'politicos' don't want these facts/secrets out?
It is well near impossible to decently spend-away or lose-away $30B in 20 years, and without notice. Unless he stood on top of the liptisck building each day and rained $100 bills to the walkers below, and that is how it is gone!
His family - all of them, are complicit, as are his brokers and bankers.
Stop the charade.
where the money is is anyones guess. no doubt he acted with his sons and the whole family is in on it - anyone who thinks otherwise is an idiot. in fact, i wouldn't be surprised if old man madoff has a terminal disease and is taking the fall for the sons, knowing that he only has a year or two left. it's the only logical answer here. they should all have their passports revoked until further notice - the govt is bumbling along yet again...
This scheme worked ok in a rising market, because nobody would want to withdraw from an investment that was generating 12-15% per year with no meaningful drawdowns. It was only when his investors' other holdings were decimated in the fall of 2008 that they were forced to get cash from the only source of ready liquidity they had; Madoff. His scheme was actually too good. He should have reported a few slightly down years so that folks would not have the illusion of profits to withdraw.
There is no money remaining. He gave investors' exactly what they wanted.
In order for scheme to work, Madoff would have needed the new investments coming in to cover the net redemptions. So in your hypothetical model, the $0.5 billion every year for 20 years would be the "net" new money coming in. So, let's say $1 billion in real money came in every year in new money (for 20 years), and $0.5 billion went towards redemption (say 5% redemption on average portfolio size of $10 billion for the 20 years), leaving $0.5 billon in net new money coming in every year.
So the principal money at stake is significantly larger than what you have assumed in the hypothetical scenario. Most of the $50 billion WAS NOT phantom gains and did in fact exist at some point. I would hazard a guess that probably closer to $30 billion of it was real people's money.
As for the SEC, they are useless. They say they do not have the resources but he was handed to them on a platter starting in 1999. How about shutting the SEC down and the money saved could be put into a fund to save investors scammed every year.
"...How can it be that we need Bernie to tell us what
became of the money?...
Could it be that some 'honchos' or 'politicos' don't want these facts/secrets
out?
Stop the charade..."
Bravo sunil94062. The only logical explanation appears to be: BM, the fall guy (probably with light household chores as punishment when convicted) to cover monstrous systemic collusion, cheating and corruption. In such a context for the judge asking the thief to please tell him how much he took is just a minor comical sideline anecdote and fits the bigger picture perfectly.
Have a good day