The $50 billion estimate of how much investors lost in the Bernard L. Madoff Ponzi scheme is likely as bogus as the rest of Madoff’s claims.
In the week since Madoff was arrested by federal agents in his New York apartment, the world has more or less taken at face value his own reckoning of the size of his mega-swindle.
Moreover, news reports have detailed lists of those who entrusted their funds to Madoff and his Bernald L. Madoff Investment Securities (BMIS) firm and are now out millions, tens of millions, hundreds of millions and even billions of dollars.
Those numbers may also, in the end, prove bogus.
Because in a pure Ponzi scheme, say experts, there are no “real” investments and hence no “real” profits to be lost.
Almost without a doubt, many of the victims of the Madoff scheme who are reporting to the news media how much money they lost with Bernie Madoff are still under the hypnotic-like fantasy that their “profits” had been real. But they most probably weren’t.
It is like the math word problems that my sixth grade daughter gets nightly for homework. Follow along:
It is September 2008 and a Jewish charity is given a $1,000 donation from a happy Bernie Madoff investor. The grateful charity takes that $1,000 and invests it with BMIS.
In October, the charity is delighted to see that its investment is now worth $1,010. In November, amazingly, it has risen to $1,022. On December 1st, it is worth $1,035.
Then comes the bad news on December 12th that Madoff and BMIS are one large fraud. How much did the Jewish charity lose?
Of course, the reality of this scheme and the profundity of those injured by it are a lot more complex than my daughter’s math homework.
But even my 12-year-old daughter can tell us, and the news media, that to report the Jewish charity lost $1,035 of its endowment is inaccurate.
The $35 in returns were phony, that much is easy to understand. Although on paper the Jewish charity may have been told it “earned” that money, inside Madoff central, there were no investments and hence no earnings. The money that the Jewish charity “invested” likely went out the BMIS door the very same day to keep up the charade for other so-called “investors.”
What takes an honors student to understand, however, is that the $1,000 the Jewish charity received in the first place also did NOT exist.
That donation was made from funds that another Madoff victim had extracted from his “profits” which came from funds that another victim had deposited with Madoff and so on and so on and so on.
To repeat, the thousand dollar donation in the first place to the Jewish charity, which the donor thought was his money, was in fact the fruits of the swindle of another, who undoubtedly reviewed her statement and was – until December 12, 2008, satisfied with the profits that she had been earning with BMIS.
So when the news media and others take out their adding machines and run the tape – all the way up to $50 billion, the media seem virtually certain to be counting the same “losses” many times over.
There are real losses in the Madoff scandal, and those numbers will be large too. If prosecutors and forensic accountants can ever strip away all the “profits-that-existed-only-in-the-warped-mind-of-Bernie-Maddof” funds, they’ll find that real people and real institutions lost real money, but probably nowhere near as much as the media are reporting and the feds are letting go uncorrected.
Sadly, it is consistent with the life and modus operandi of Bernald L. Madoff, that he would even exaggerate how big a crook he actually is.