Thank God It Was $65 Billion

When Bernie Madoff turned himself in, his firm owed investors $65 billion, but had only about a billion dollars on hand. Never before have we seen anything close to a $64 billion fraud. But in an important sense, the unprecedented vastness of Bernie Madoff’s fraud is a good thing.

“If I hadn’t invested in Madoff, I would have ended up with less than $5 million.”

Its sheer size guarantees that most of the money was not consumed by Madoff’s friends and family. It is exceedingly hard to consume even a billion dollars during your lifetime. You can burn through tens of millions, yes. But tens of billions, no.

In small cons, the crooks can skim off and eat up a substantial part of the investments. The blaggard Charles Ponzi diverted more than two-thirds of investments to his own use.

Madoff’s inability to eat all that he stole is good news because the social costs of the scam are much less than they might have been. It also seems that he didn’t waste investors’ money on imprudent investments. Indeed, he may have made virtually no investments, keeping the money in cash so that it could be paid out to early withdrawers.

The $64 billion must crudely fall into three different buckets. 1) some of it may have been diverted into secret bank accounts; 2) some of it is merely paper losses of claimed gains that never existed; and 3) some of it was transferred to innocent investors who chose to withdraw some or all of their gains early.

Each of these buckets has a bit of a silver lining.

First, any money that Madoff diverted into secret accounts still exists. The good news is that with hard work from the investor trustee and cooperation from the international banking community, this money can be reclaimed to compensate Madoff investors. (And Bernie’s friends and family don’t have much use for a secret $10 billion that they will never be able to spend.) The government has already moved against Madoff’s personal assets which in 2008 were estimated to be over $800 million. Money was openly paid as fees to feeder funds, who may have turned a blind eye to Madoff mischief, but are likely to have to disgorge their compensation to compensate Madoff investors.

Second, let’s consider the paper losses. They are a heartache. If I had invested $1 million with Madoff and thought it had grown to $5 million, I would be devastated to learn that I suddenly had nothing. I might have relied on that $5 million for my retirement while spending down the rest of my assets.

But from another perspective, I’ve lost a lot less than $5 million. If I hadn’t invested in Madoff, I would have ended up with less than $5 million. Indeed, the recent collapse of stock prices in some ways mitigates the harm of Madoff’s mischief even more. If I hadn’t invested with Madoff, I might very likely have invested with some other hedge fund that took a beating this last year. Maybe Madoff only made me lose half a million.

That doesn’t mean investors’ psychic and reliance costs are illusory; but it does mean, looking cash-on-cash, that the lost paper profits far exceed the losses to initial investments that investors would have experienced if they had never heard of Bernie Madoff.

And finally, let’s consider the money that was transferred to Madoff investors who withdrew some or all of their funds before the collapse. These innocents were the unwitting beneficiaries of the scam. Indeed, it is almost certainly the case that the money transferred to Madoff investors was orders of magnitude greater than the amount transferred to Madoff and his henchmen.

This means, from a social perspective, that the Madoff scheme was a huge transfer of assets among innocents. And because Madoff kept the money almost exclusively in cash, and took so little off the table for himself, it was — compared to probably any other fraud in history — an incredibly efficient transfer.

We might end up clawing back some of the Wall Street executive bonuses paid out during the past few years, but it is unlikely that the law will claw back any of the exorbitant returns earned by early-withdrawing Madoff investors. It seems kind of unfair that some Madoff investors get to walk away with a 15 percent annual return and others with a 100 percent loss. But under our legal system, in a fight among innocents, that’s usually the way the cookie crumbles.

It will be interesting to learn who got their money out early. Think for a minute about which types of investors were likely to withdraw early. To be sure, some would be retirees who needed to start living on the money (although many of these would have let it ride to give to their kids upon death without paying capital gains). You wouldn’t think that many people still saving for retirement would withdraw early; they’d want to keep riding a winner.

No, I’m thinking we will ultimately learn that some charities — especially those with smaller endowments — were most likely to withdraw their returns as they accrued to help pay current operating expenses. This is just rank speculation, but at the end of the day, nonprofit investors may have been net beneficiaries of the Madoff scam. To be sure, Madoff decimated charities that woke up one morning with no money at all. But a chance to get a 20 percent return on your money for 10 years (even if you never get your principal repaid), can be a lot more lucrative than just earning ordinary market returns.

The big picture is still one of devastation. The Madoff scam on net is likely to have done more total damage than any other fraud in world history. Even if most of the scam was a transfer among innocents, this was not a lottery that any of them signed up for. But this fraud is also exceptional because the Madoffs’ vigorish on a percentage basis was so exceptionally small.


Great article, with lots of good points. NPR also did a piece where they questioned whether the news media should be referencing it as a '$65 billion fraud'. They took a more extreme version of the fraud to highlight the problem. What if someone promises to take ten dollars from you and turn it into a billion dollars? When you lose your investment, should the media refer to it as a 'billion dollar fraud'?

Joe Smith

One thing you did not mention is that some of the money was paid out as taxable distributions when in fact they were return of capital. Some part of the $65 Billion is going to come back to investors from the treasury when the investors recalculate their taxes.

Trevor L

I'm pretty sure your assessment of the non-profit organizations is untrue. Most, if not all, of the charities used their Madoff investment as an opportunity to make their endowment look good and constantly growing. If a non-profit needs to dip into their endowment, the one place it won't touch are the investments which are constantly accruing money. By leaving those investments in the fund, the non-profit can ensure that the debt caused by the money they just took out would be covered by the returns coming in from the Madoff fund. Also, you are forgetting the aura which surrounded the Madoff fund; non-profits figured that if they got into the fund, they struck gold. In an industry where fund raising is difficult (and required) entry into the Madoff fund is striking gold.


I have a hard time believing that money was not being laudered thru this scheme. That is the only way to account for the missing money.

David A.M. Wilensky

The big loser here is the Jewish non-profit community. I work for a Jewish non-profit in the NY area and many, if not all, of the non-profits that invested with Madoff were Jewish organizations. We'll be feeling this shmuck's harm for years in this sector.

The Reform Shuckle:


I also took it to understand that the $65 billion figure is the supposed amounts that the victims thought their accounts had gained, not the actual investments provided. I wish the media could figure this difference out:

Uncle Solly invested $2million with Madoff.
10 years later Uncle Solly thinks he has now has $10 million invested with Madoff even while having received $200,000 annual ayouts over the last 10 years.
Now Uncle Solly thinks he lost $10million, not $2million.

Also I figure alot of the "non-profits" suffering were/are just charitable trusts that were implimented to funnel profits tax free until the beneficiary's death or across generations or similar...


It may not even be possible, but someone needs to calculate the net inflows minus the net outflows from the fund. This is the true cost of the scandal. For many of us non-Madoff investors that have stayed in the market, we have seen a near-zero return over the last decade or so, so including zero return is not a stretch.

Chris S.

I agree with your position that "most of the money was not consumed by Madoff's friends and family." And I agree with your main pont that the $64 billion is largely illusory as there were virtually no investments made at all.

However, I profoundly disagree with your implication that there is some sort of silver lining to the fact that Madoff was stealing (he certainly didn't earn any of his money) a smaller percentage from an extremely large pile of money.

I think it is more appropriate to focus on the amount of money Madoff stole for himself and his family rather than the percentage of holdings he stole. Ponzi may have taken a larger percentage, but he had far smaller holdings, and he only operated his scam for a few months.

While it may be a challenge to spend more than a few tens of millions of dollars in a year, Madoff ran his scam for at least ten years, possibly as many as 40. Several branches of an extended family could well burn through a billion dollars a decade.


Eric M. Jones

So I understand that Madoff gave most of the money back to early investors. So If I gave you $100 to invest for me, and Dube gave you $50; then you give me $150 back some of which you got from Dube fraudulently--Is my $150 now free and clear, or have I received stolen funds, or made a profit from the fraud you perpetrated on Dube?

I know that investors thought they had some secret inside investment deal. But I think a case can be made that ALL of the investors committed a crime if they got money back from Madoff.

"You can't cheat an honest man." --W.C. Fields

Brad Hicks

I'm going to go along with Trevor on this one: I don't think the payouts went mostly to non-profits. I don't have an evidence, but then, you don't cite any evidence either. What seems far more likely to me is that the early payouts went to people who figured out that this was a pyramid scheme and got out once they'd doubled their money. I will be surprised if they find any investor who made money off of the Madoff scheme who didn't know that the money he was taking was crooked; the innocent people had no incentive to take their money out.

Pyramid schemes and Ponzi schemes are like international drug cartels. We focus our attention on the celebrity leaders, but it's the people in the next two levels below that person who are doing the vast majority of the marketing that makes the scheme possible. Madoff may have come up with the idea, but it was his first couple of rounds of "victims," almost all of whom had some reason to believe that he was crooked, who went out and convinced their "friends" to invest. If you lost money to Bernie Madoff, you don't need to be looking at him to get your money back; you need to be looking a great deal more cynically at the person who talked you into putting your money there. Because they, not Bernie Madoff, were the likely recipients.


Joe Smith

"The big loser here is the Jewish non-profit community."

After thirty or so years as a lawyer I can tell you that one of the first rules of money management is to never, ever, on no account whatsoever, invest with someone you meet through your church.


It is most amusing this is referred to as the largest Ponzi scheme ever perpetrated. Has everyone forgotten about Social Security?


I don't know why, but I just have a feeling some mob connection will come out eventually. Why else would this guy voluntarily plead guilty all of a sudden when he was living comfortably in his penthouse unless there were threats made against him or his family? I guess the feds could have agreed to forgo legal action against his family if he pled early, but I still have a sinking suspicion. Also, this fraud scheme would easily lend itself to money laundering as #4 Hmmmmmm suggested.


Kevin, Social Security is *not* a Ponzi scheme. Look it up.

travis ormsby

A fight among innocents does not usually play out they way this post describes.

If you steal a stereo from me and sell it to someone else, not only am I entitled to get my stereo back, the person who bought it may be held criminally liable if there's a reasonable expectation that they knew (or should have known) it was stolen

At least two independent analysts determined years ago that Madoff was running a Ponzi scheme, and it seems reasonable that many of the "innocents" who withdrew their money early did so because they knew it was fraudulent. Not only should the money be clawed back, those people should face criminal prosecution for being in receipt of stolen property.


who are the early withdrawers? How do we know those weren't the people profiting ... no money invested but got money out? Perhaps Madoff was playing robin hood for fun?

Loretta Huggins

Why isn't Madoff in jail! Jim Bakker went to jail for what the airlines do every day 'over sale' and Madoff has defrauded everyone from the poor to the wealthy in 65 Billion$ - as you stated it is impossible for anyone to spend that much in a life time; yet, the Wall Street financier accused of running a massive swindle that fleeced investors of up to $50bn, is to remain in his lavish Manhattan apartment overlooking Central Park after a federal judge today rejected prosecution calls for him to be jailed.

The decision to allow Madoff to stay under house arrest in the $7m penthouse, rather than transfer him to the Metropolitan Correctional Centre in lower Manhattan, astonished and further angered victims of the scandal. Judge Ronald Ellis refused to revoke his $10m bail, ruling that the prosecution had failed to make its case that Madoff could cause more harm if he remained at large.

Even Enron did get such consideration. Is it just who's interpreting the law?

Well, those are my thoughts!



Nothing like a $65 billion ponzi scheme?
I'm guessing you haven't tried Microsoft Vista yet.


Ref. 12
largest Ponzi scheme ever perpetrated. Has everyone forgotten about Social Security?
- Kevin

Of course. That is the premise of the blog. For any security, bond, equity, real estate, etc., when you include all the suppliers all the customers all the investors all the creditors then you got some winners; you got some losers. Every business is a Ponzi scheme. The Prophet Maddenoff has enlightened us. We give him a big hug and let him out of the slammer for opening our eyes.

Our now opened minds will be good luck for us.




#9 and #15 have it right.

Instead of my Madoff check, what if I cash my Nigerian check for $1,000,000 and the bank finds out it's a fake. Do I have to give back the money?