Unless Madoff was burning the investment money in some giant pyre where did it all go? By all accounts he wasn’t living insanely large. Assuming he had even minimal level of investment savvy how do you burn up 50 billion dollars?
The same way you can lose a couple of million dollars gambling. First, you start with small losses and then you keep increasingly upping the stakes in order to make that money back.
A Ponzi scheme starts losing money as soon as new investors stop appearing, so I guess that is what happened.
He ran a business in which he gained new investors for his firm based on returns he supposedly netted and then paid to previous investors. The problem is that the returns he was paying to these people didn’t actually come from profits on their investments but from money received from other, newer investors. And he kept this up for several decades.
So in other words, over a sizable period of time he ran up 50 billion dollars in monies paid to previous investors that he got from more current investors. A classic Ponzi scheme.
Ponzi schemes eventually collapse because a point is invariably reached where money needed to pay older investors exceeds income from newer investors and the scheme collapses. This is what happened with Madoff, and the 50 billion dollars has been lost because it has been dispersed in payments to previous private and institutional investors.
As far as why he did it, in Madoff’s case I think he just got carried away with the size and prestige of his company and he resorted to Ponzi-like skullduggery in order to make it appear that he and his firm were a lot more successful than were. It seems to have been more an issue of ego (and not wanting to let certain people down, family members and so forth) than greed or the result of excessive personal spending.
The question is how does a $50B ponzi scheme excape an independent audit?
Aksia seems to have been on top of things; re Madoff’s auditors: “Friehling & Horowitz had three employees, of which one was 78 years old and living in Florida, one was a secretary, and one was an active 47 year old accountant (and the office in Rockland County, NY was only 13ft x 18ft large). This operation appeared small given the scale and scope of Madoff’s activities.”
Is the 50 billion dollars the principal invested or does it also incude the dividends supposedly accumulated at 10 percent a year?
The money was (I guess) paid out to later investors. So when people thought they were getting returns on their money, they in fact were getting capital back.
This is the last thing we needed right now. In China he’d be summarily executed for this. I’m starting to wonder if that’s a bad idea.
He was just doing his patriotic duty. (video link)
I can’t believe that I have never seen that! OMG thanks for the laugh this morning 
Question: how did Madoff falsify all those records? Supposedly, he was sending his investors 100-page transaction reports-if they bothered to read them they might have asked how he (madoff0 was generating those huge returns.
What bothers me-these well-heeled investors are going to demand that the taxpayers bail them out!
It was very “exclusive”, and what the members were given razzle-dazzle bullshit to keep them thinking something was happening that wasn’t happening.
Kind of like a cult, really.
-Joe
Piss away?! Have you seen his turnip?!
So over time some investors actually got close to 50 billion (less his expenses) in appreciation back out of the investment vehicle/scheme. I didn’t understand that. I thought most of the money was staying in the fund and accumulating (fake) equity.
Just when they did “draws”. Example, I put in $50M and take out $1M a year for my foundation.
Ponzi’s original scheme was framed in a simple “pay me $X and in a few weeks I’ll return to you $Y” terms. It required a lot of cash turnover just to keep going. It had to keep growing or it would collapse. It’s more common for modern “Ponzi schemes” to have more limited cash outflows – Investors are encouraged to keep their money invested so as to make even more. The amount investors still do withdraw is more than covered by the net investments, but growth in membership can safely plateau after a while.
I don’t think anywhere near $50 billion got paid out. It was probably simply lost, most likely in the traditional fashion of buying high and selling low, and probably accelerated by a strategy of “doubling down” as Shalmanese described above. The current financial crisis flushed out the fraud both by crushing the fund’s actual investments and by causing investors to make unusually large withdrawals (out of fear and need for cash).
“White Collar” criminals who lose millions (or billions!) of other peoples money steal more time away from peoples lives than serial killers.
At a certain point, losing enough money becomes just as bad as killing somebody. Our government acknowledges this when it does cost/benefit calculations on environmental policies. Look at this story from the Washington Post:
50 billion divided by 7.22 million equalls 6,925 lives worth of money lost! I’m not a big fan of the death penalty, but if murderers deserve it so does Enron-scale thievery.
Take a look at some “cult” members …
Source: Breitbart News Network
Source: Fund Fraud Hits Big Names - WSJ
Source: HSBC joins victims of Madoff’s alleged fraud | Financial Times
Some “cult.”
As was posted above, the “auditing company” was a joke. I don’t see how this escapes public scrutiny. We’ve already seen large accounting firms disgraced, but this doesn’t even qualify as ridiculous. It’s the mechanical equivalent of a bank that stores money in a paper bag behind the counter.