Sesame Street explains the Madoff Scandal

[jducoeur]

Thanks to Between the Lines for the pointer to this lovely little video about economics. Okay, it's probably not really from Sesame Street, and it's not in any way accurate.¹ But regardless of correctness, it is rather viscerally satisfying...

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¹ I find most of the "Madoff is Evil Incarnate" hype to miss the point: the scary thing is that I suspect he simply fell into an easy trap of his own making, and that most people, after the first few steps, would have made just the same decisions he did. The thing about pyramid schemes is that they are easy to start, and *very* hard to stop. You get deeper and deeper so fast that all you can do is keep feeding the monster until it eats you. Indeed, it wouldn't surprise me if it started the same way as the Satyam mess: cooking the books just a little to smooth out a glitch, and then covering over each successive layer until all you have left is the fraud...

Comments

[jducoeur]

He never invested one dime of that money.

An interesting assertion -- and one that not only contradicts my instincts, but the information I've been able to find. On what do you base it?

As far as I've been able to piece together (and admittedly, so far I haven't seen a single neutral, detailed account that pulls the whole thing together, so it could be wrong), this NPR quote from a few days ago sums it up nicely:

He told Chin that he started falsifying account statements in the 1990s because he felt compelled to meet investor expectations. He built a giant Ponzi scheme to ensure that those expectations would not be dashed. He ended up taking new clients' money to both finance a lavish lifestyle and pay off established clients when they asked for redemptions from their accounts.

Madoff said that when he started falsifying the statements he "believed it would end shortly and I would be able to extricate myself and my clients from the scheme. However, this proved difficult, and ultimately impossible. … As the years went by I realized this day, and my arrest, would inevitably come."

That has the ring of truth to me: it fits the usual pattern of such idiocies quite closely. (It's quite close to how the Satyam mess happened, for example.)

The confession was that this was "basically" a Ponzi scheme -- the reports that it was a pure one seem to be inaccurate, at least until the past few years when it was all falling apart. As far as I can tell, this *was* an investment plan at the beginning, which started fudging the books in order to look more impressive, and things snowballed as usual. I mean, you're talking about a man who was heralded as one of the biggest market-makers in the world: I'm not clear on how you rectify that with saying that he didn't invest anything. Far as I can tell, most of the money was invested for most of that time -- it's just that the returns on those investments had nothing much to do with the returns he was paying out. And by the end, it all flowed out of the investments into redemptions to those who got out while the getting was good.

If you've got reliable accounts to the contrary, I'd like to hear them -- like I said, I'm seeing an awful lot of speculation, and precious little fact. (And I *have* done a decent amount of digging around, trying to find those facts: Google is failing to produce them.) But I'm skeptical about the "this was all an intentional fraud from the beginning" theory. The "a little fraud leads to ever-bigger ones" model is much more typical of these cases, and so far matches what I've been able to find...

[goldsquare.livejournal.com]

Going crazy at work, so I have no time to tie the citations down. But there was a lot of reliable sounding information on both the New York Times web site, and Ritholtz.com about how the SEC could find nothing to support evidence that he invested, and if I recall, his allocution said the same thing.

[goldsquare.livejournal.com]

And I can't remember - but a very long article on either Slate or Salon.

[doubleplus.livejournal.com]

Well, there may yet be information to the contrary, but this (http://www.nytimes.com/2009/02/21/business/21madoff.html?ref=business) from yesterday's NYT seems to be from a pretty solid source, not speculation:

The court-appointed trustee who is winding down Mr. Madoff’s business said on Friday that his team had searched records going back almost to 1993 and found no evidence that any securities were bought for investors during that time.

[jducoeur]

Interesting -- that might be the article goldsquare mentioned as well. I'll be keeping my eyes open for further information on this.

OTOH, it does raise the terribly interesting question of where the hell he *was* keeping the money. I mean, the entire point of this particular Ponzi scheme was that he was paying a very steady outgo. Unless he was impossibly good at matching new investors to old, there has to have been a very large float (on the order of billions of dollars) in the middle there. So now I'm rather curious about where it was being held.

(I will admit that my argument has been influenced by an assumption that investing the core funds is the obvious way to float a scheme like this, especially in a bull market; for a market trader like Madoff to have not done so is genuinely surprising and strange. I don't expect him to have invested in the companies he claimed to have, but not to have the money in the market at all is kind of weird...)