A Bailout For The Wealthy

There is something very troubling to me about the Bernie Madoff scandal. At first, I couldn't quite put my finger on it. Then, after a few days, it started to sink in. The initial reports indicated that the fraud he perpetrated exceeded fifty billion dollars. That's fifty thousand million dollars to you and me. A huge amount of money. Enough to buy all of the big 3 automakers, lock, stock and barrel. We hear big numbers all the time now, so this one should not come as a surprise.

What is surprising is the fact that he was able to swindle the very wealthy using a very base criminal device, a Ponzi scheme. You can wiki Charles Ponzi to get an idea of what happened here. The nutshell version is he told his investors that they would get a big return, and then paid them later with money from newer investors. This could have gone on forever undetected as long as there was an influx of greedy new investors. Ponzi schemes are not new.

What is new, is the use of leverage by a Ponzi scheme. Madoff managed about seventeen billion or so in real dollars, but leveraged them to about 50 billion. Complicated and dangerous, but he had solid credentials. People like to invest in this guy.

What is most troubling to me is that many of his investors are heavy hitters. They are the super wealthy. In addition, many of them had to know that his reported returns were too good to be true. Never a down quarter. Never a monthly loss. Never. Yet these wealthy investors gave him their money anyway. Why? Chances are good that they thought he was insider trading or somehow cooking the books to his clients benefit. So in other words, they were so greedy that they figured a criminal like Madoff would make them more money than an honest broker (as if there is such a thing). And now, already there is talk of a government bailout for these "poor" investors. Do not let this one happen.