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Investing with Madoff

by LAWRENCE R. VELVEL

Click here to read Part One.

Click here to read Part Two.

Click here to read Part Three.

The amount of money stolen by Bernie Madoff is currently impossible to know. When arrested, Madoff said $50 billion was lost. It is widely surmised that, in saying 50 billion, he was claiming the amounts shown on the latest monthly statements to investors, which were dated November 30, 2008. It’s also possible that 50 billion is the total amount of principal actually invested over the years, not all of which was lost to investors because lots of them must have fully redeemed their investments over the 20 to 45 years or so of his Ponzi scheme. And recently, one reads, the government is estimating the loss at about 37 billion, but whether this is the amount shown on the latest statements or the amount actually invested is uncertain.

One thing all the estimates of loss have in common, though, is that they are all big numbers. Even when they are based on the most recent statements, it is clear that many, many billions of invested principal was lost. So where did the money go?

Just for kicks, assume that, over the years, 60 billion dollars of principal was invested with Madoff, that a third of it, or $20 billion, was redeemed, and that another third, or another $20 billion, was taken out by investors who thought they were getting income. What happened to the remaining $20 billion, to the earnings that this $20 billion were making when Madoff invested it, and to the earnings of the other, redeemed and withdrawn $40 billion while it remained with Madoff? You can change the assumed numbers I’ve used, but the question of what happened to the money will remain unless one supposes that every dollar of the enormous sums Madoff took in over the years, plus the money he earned investing those sums, was withdrawn over the years as a redemption of principal or as withdrawal of (falsely supposed?) earnings. And personally, I won’t believe such a supposition until it is shown to be true; the sums are too large and my suspicion is that too many people put in huge sums and let the money ride rather than withdrawing it.

So, if I am right, where are the many billions that are liable to be left? Where did they go? Has Madoff stashed them in Swiss banks? Are they in real estate or stocks and bonds all over the world? Was Madoff the king of bad investors, so that he lost tens or scores of billions in the market over the years so that there truly is nothing left? Was this, as at least a few suspect, a Mafia operation in which billions upon billions were siphoned off by the mob? Who knows? All I can say is that one hopes the government finds out the answers and that, as said, until shown the contrary, it is hard to believe that every nickel Madoff took in and every nickel he made by investing was lost.

Indeed, it has been written that Madoff got into trouble this autumn because he was having difficulty coming up with enough money to meet a $7 billion dollar request for redemption by one of his feeder funds, Fairfield Sentry. Doesn’t this seem to imply that he had several billions? — Was he really trying to raise fully seven billion in just a few weeks?

Now for the question of what can be done.

Before discussing specific courses of action, though, I want to make three preliminary but vital points. As you will see, the current law is seriously ill equipped to remedy this horrible situation. Such a disaster as a $50 billion dollar Ponzi scheme that wiped out thousands, left old people destitute by the many hundreds or thousands, destroyed or injured charities, injured pension funds, and demolished confidence in the market was simply never foreseen by the law and never prepared for in the law.

As well, many of the investors in Madoff were people who did exactly what is supposed to be done in a capitalist system. They worked like dogs all their lives, they saved up a million or two million dollars for their old age, and then invested it with someone whose eminent positions, leadership in the financial world, and decades of putative success made him seem eminently trustworthy; and they depended upon government — upon the SEC — to protect them against a fraud, particularly because their own ability to ferret out Madoff’s scheme was very limited or nonexistent.

Protecting against fraud has been the SEC’s duty to citizens, its duty to them, since its creation in the 1930s, and small people, as said, had no ability to ferret out Madoff’s scheme on their own. These are not the billionaires, or the huge institutions, that could hire expensive experts in due diligence. Nor did they even know that such due diligence experts-for-hire existed. These are the plain people who worked hard and saved all their lives, as capitalism says they should, and who, as so many legislators and witnesses said at the hearing of January 5th, depended on their government to protect them and had every right to do so, but were failed by their government, were horribly failed by it, because of one of the most willfully negligent, incompetent, and perhaps even complicitous courses of action any agency has ever engaged in.

Finally, there is this. Several have indicated to me that there is a current of prejudice running through the position of those who say the government should do little or nothing to alleviate what Madoff did to people and that it is politically unpalatable to help the victims. The idea underlying these comments is that people think that those who suffered are just a bunch of rich Jews, so the hell with them. This is sheer anti-Semitism. It’s also wrong on crucial facts. Yes, there were very wealthy Jews who lost fortunes, the kinds of people who, along with large institutions, the mainstream media has so extensively focused on. But there were lots of small people in their 60s and 70s and 80s who now don’t know how they are going to live. There were lots of people who aren’t Jewish. There were small charities that sponsored vital medical research that has and will benefit billions of people of all races and religions. There are pension plans for firemen. And the refusal, the claimed unpalatability, of helping the victims of Madoff contrasts badly, does it not, with the fact that huge banks, investment houses, huge insurance companies, and giant auto companies, each of which was itself worth scores or hundreds of billions of dollars, are each receiving scores and even hundreds of billions of dollars in bailout monies, are receiving it although these companies and their executives, who make tens and scores of millions each year, were not victims of any fraud or illegality, much less criminal fraud or illegality that the government had a duty to stop, but instead made stupid, greedy decisions that ran the companies into the ground — decisions, moreover, perpetrated by the very executives whose multimillion dollar salaries will be saved by the bailouts, whose salaries of ten and twenty million dollars and more will be saved by the bailouts.

Lawrence Velvel, dean of the Massachusetts School of Law, is the author of Thine Alabaster Cities Gleam and An Enemy of the People. He can be reached at: Velvel@VelvelOnNationalAffairs.com

 

Lawrence Velvel, dean of the Massachusetts School of Law, is the author of Thine Alabaster Cities Gleam and An Enemy of the People. He can be reached at: Velvel@VelvelOnNationalAffairs.com

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