Sorry. I must be stupid. I still don’t get it.

Bernie Madoff started a fund back in the 1970s (Correction, 1960).

OK. This fund took people’s money and held it, giving them returns of around 10-17% (or 20%), according to different reports. People knew they got this return because they saw the statements.

The statements, which I posted earlier, were fake, but noone could tell. The returns, some now say, were suspicious, but at least one financial algorithm (or “metric”…how’s that?…that’s a nice trendy word meaning nothing much more than measurement) apparently didn’t catch the fraud, if it was that.

There were other odd things. The fund sold its assets at the end of each year and bought them back the next to avoid disclosing what it owned. You could get your statements in the mail but not on the net. Odd, but you trusted the guy and said nothing.

So far so good.

Through savvy networking and good PR as a philanthropist, Madoff played off his SEC/Nasdaq connections to sell this confidence trick to a huge number – some 4000 – clients from the creme de la creme of the NY, Florida, and European money worlds.

Now, here’s the problem. That might make sense over 2, 3, or even 5 years. But apparently, this went on for 48 years, without triggering anything more than cursory investigation.

That I don’t understand. Weren’t there several collapses of the stock market and the economy in that period? How does a Ponzi scheme survive repeated deflations in asset values? Don’t people come out of the woodwork during a crash asking for their money back?
And how do we know that everyone now claiming a loss actually did lose their money with Madoff? If his books are so unreliable, how would anyone know anyway? What if some of them made money with him, got rid of it, and are now claiming a loss? Or are exaggerating their losses. That would help them get government funds or collect on insurance or win legal remedies. Has anyone thought of that?

(Sorry to be so suspicious and without offense to those who really did get hurt).

If Madoff was so in bed with regulators, what’s to stop the regulators pouring over his books in private. What’s to stop them from cooking the books to create whatever appearance they want?

Suppose Madoff is only taking the fall for someone much bigger? And all this to-do is intended to throw dust in our eyes while some more complicated scheme is being put together? (Remember the so-called rescues we saw this summer and fall?)

Take this description in the Telegraph:

“The investors who have come forward – many of whom had no idea their money was being managed by Madoff due to the complex scheme he operated, by which certain funds fed into others – have so far claimed losses of $35 billion, still some $15 billion shy of the $50 billion total that Madoff is alleged to have mentioned to his two sons, Mark and Andrew. That alleged confession was triggered after investors whose fingers had been burnt by the financial crisis asked Madoff for their money back – they wanted $7 billion, but there was only $300 million in the bank. The system of sucking in new money to pay existing investors, which federal investigators allege had gone on since at least 2005, could not continue. Madoff’s group of companies is now under federal control, with investigators from the FBI, the Securities and Exchange Commission (SEC), and the US attorney-general’s office camped in the firm’s headquarters, the so-called “Lipstick Building”, poring through reams of paperwork… ”

Now, where did all that money go? Was it just the falling market? What about his trading returns? And that secret firm he also ran, which even his sons knew nothing about?

More here at Bloomberg:

In its 1992 lawsuit, the SEC claimed accountants Frank Avellino and Michael Bienes began raising money in 1962 and placing it with Madoff while promising investors returns of 13.5 percent to 20 percent, according to court documents obtained by Bloomberg. As of October 1992, their firm, Avellino & Bienes, had issued $441 million in unregistered notes to 3,200 people and entities, court papers say. They invested solely with Madoff, who opened his business in 1960.Avellino and Bienes, who were represented by Sorkin, agreed in November 1992 to shut down their business and reimburse clients. Lee Richards, the court-appointed trustee over Avellino & Bienes, hired auditors Price Waterhouse to scrutinize the books of the firm, which operated as an unregistered investment company, according to the SEC…”