Madoff Loses Billions in Ponzi Scheme

Investing in a hedge fund run by a former chairman of the NASDAQ should be a safe move. Enough of the well-to-do thought so that Bernard L. Madoff found himself managing $17.1 billion for them. Actually, the correct word is mismanaging. Almost every penny is gone, the result of a Ponzi scheme of incredible size and duration.

Charles Ponzi has the dubious honor of having this particular swindle named after him, but it is a time-worn favorite of conmen the world over. Essentially, investors hand over the money, and as the fund increases in size, investors of longer standing get pay offs from the incoming funds of newer investors. It's a brilliant system until there aren't any new investors.

Undoubtedly, it didn't start out that way for Mr. Madoff. However, when a financial storm hits, few on Wall Street don't have the instinct to try to weasel out of things. Most resist the urge, but Mr. Madoff had been a big wheel in finance and for him to lose his clients' money no doubt grated on his soul. Besides, he could win it all back – the motto of every failed gambler.

According to the US Attorney's criminal complaint filed in court, Mr. Madoff told at least three employees on Wednesday that his hedge fund business was a fraud and had been insolvent for years, losing at least $50 billion. His 25 or so clients were out every penny of the $17.1 billion of money under management. That 25 clients is misleading because many funds invested their clients' funds with him. Eventually, thousands could be involved.

“Insolvent for years” suggests that someone in the regulatory business was out to lunch, for quite a while. Spokesman for the SEC Scott Friestad essentially admitted as much last week when he said, “Our complaint alleges a stunning fraud -- both in terms of scope and duration."

Naturally, the Bush administration's unwillingness to regulate business in any way is largely at fault. However, one would not be surprised for find out that the insolvency went back farther that 2001, when Mr. Bush took office. No one believes that a Ponzi Scheme is a true investment vehicle, and therefore, sufficient regulation must exist to ensure that true investment vehicles are just that.

© Copyright 2008 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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