Thursday, December 11, 2008 3 comments ++[ CLICK TO COMMENT ]++

Potentially the largest ponzi scheme in history revealed

I remember posting that story about the Canadian hedge fund investing in dubious Icelandic glaciers and thinking that we are going to see more scams being revealed. After all, the worst of humanity runs amok during the peak of bubbles. Well, we may be witnessing the biggest ponzi scheme in history. If some of the speculations are true, this is absolutely the worst one ever! Nothing even comes close. Check it out:

Bernard L. Madoff, a legend among Wall Street traders, was arrested on Thursday morning by federal agents and charged with criminal securities fraud stemming from his company’s money management business.


According to the complaint, Mr. Madoff advised colleagues at the firm on Wednesday that his investment advisory business was “all just one big lie” that was “basically, a giant Ponzi scheme” that, by his estimate, had lost $50 billion over many years.


The S.E.C.’s complaint, filed in federal court in Manhattan, alleges that Mr. Madoff informed two senior employees on Wednesday that his investment advisory business was a fraud. Mr. Madoff told these employees that he was “finished,” that he had “absolutely nothing .”

The senior employees understood him to be saying that he had for years been paying returns to certain investors out of the principal received from other, different investors. Mr. Madoff admitted in this conversation that the firm was insolvent and had been for years, and that he estimated the losses from this fraud were at least $50 billion, according to the regulatory complaint.

If the numbers end up being correct, all I can say is Wow! When was the last time an investment scheme resulted in a $50 billion(!) loss? Yes, we have companies worth billions collapsing due to fraud but a ponzi scheme is a completely different animal. People give up their precious savings and do not expect the money manager to loot it all.

It looks like this doesn't impact retail investors so the question that will be on everyone's mind is, which institutional investors were defrauded? Let's hope the damage is distributed across many corporations, pension funds, and so on. If the damage is concentrated, people are going to end up in tears. From a financial point of view, I can't think of too many more truly horrific outcomes than your portfolio manager or broker or trader looting your investments. Capitalists, which is what we all are, accept risk of our investments suffering because the asset values suffer. But almost no one expects their investments to suffer because the guardian overseeing your assets somehow lost your money.


3 Response to Potentially the largest ponzi scheme in history revealed

December 11, 2008 at 8:52 PM

Get short... this is going to kick the market's confidence right in the nuts. Hard.

December 11, 2008 at 11:57 PM

Merry Christmas from Wall Street... too bad Madoff will never be able to repay society for the staggering amount he stole

December 12, 2008 at 2:32 AM

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