It’s been in the news for a while now. I guess it’s time to start a thread on it.
I’m not all that familiar with the case, but as many of you know, Bernie Madoff was an extremely well-trusted and well-respected person, once Chairman of the Nasdaq exchange, founder of an apparently extremely successful investment firm, and huge philanthropist. Now it turns out, the fantastic returns he was earning for his investors over the years were largely fake, he was actually losing money for years, and only paying off those who withdrew money by using the money coming in from new investors. In short, it was a massive Ponzi scheme, offering phoney high returns to those who withdrew money first at the expense of the suckers who signed up later. Losses are now estimated in excess of $50 billion, and all kinds of decent and trusting people and institutions (many of them charitable) are being screwed for tens or hundreds of millions of dollars. The whole phoney castle came crashing down finally, becasue in these horrendous financial times, investors requested billions of dollars of withdrawals, Madoff just couldn’t scrape up the cash to pay them off, and his grown sons turned him in to the authorities. Madoff himself has admitted it was all fake and he was losing money for years.
Interestingly, many outsiders suspected him for years, because it seemed impossible for him to generate the terrific returns he claimed to be generating, month after month, year after year, through good times and bad. Turns out they were right. As the old saying goes, if it looks too good to be true, it probably is. But, for the past few years, and decades, people have grown so incredibly stupid, greedy, spoiled and trusting of financial institutions, regulators, advisors, and the like, and those institutions, regulators, advisors and the like have grown so lax, ineffective, greedy and morally corrupt, that they were led like lambs to their slaughter.
Check this out.
[quote]The three-person auditing firm that apparently certified the books of Bernard Madoff Investment Securities, the shuttered home of an alleged multibillion-dollar Ponzi scheme, is drawing new scrutiny.
Already under investigation by local prosecutors for its potential role in the scandal, the firm, Friehling & Horowitz, is now also being investigated by the American Institute of Certified Public Accountants, the prestigious body that sets U.S. auditing standards for private companies.
The problem: The auditing firm has been telling the AICPA for 15 years that it doesn’t conduct audits.[/quote]
money.cnn.com/2008/12/17/news/co … 2008121808
How could people invest $50B in a firm that has never been audited? Go figure.
Anyway, this catastrophe seems typical of all the other financial catastrophes the world is presently experiencing, starting with the absurd inflated housing price and explosion of mortgage loans to people with no credit whatsoever scandal that is described in that great Michael Lewis article I linked yesterday. People have been living in a fantasy world and now are crashing back to reality.
It will be interesting seeing how this massive fraud unfolds, but what I fear is the government will end up bailing these victims out, too, and tacking the $50B onto bill with all the other scandals the common taxpayers must make amends for.