Posted 6:03 PM by steve

Some of the numbers circulating about Bernard Madoff's apparent ponzi scheme don't make sense...

The early stories reported that up to $50 BILLION was lost in the scheme.

But for that much money to have been lost, Madoff would have had to have had $50 billion under management but only if he had lost - either through trading losses or outright theft of the money - every last dollar entrusted to him by (as it turns out, naive/stupid) investors. Obviously he wasn't the financial wunderkind he made himself out to be... but was he so bad that he lost everything?

If he hadn't lost everything, working the math backwards from the percentage lost would yield the amount of money he had to work with (for example, if he lost 50 cents of every dollar, then he must have had $100 billion under management to lose $50 billion).

So he would have had to have at least $50 billion under management in order to have lost $50 billion... but did he have even that much?

Well, Madoff reported to the SEC earlier this year that he had $17 billion under management.

IF Madoff was telling the truth (and recognizing the silliness of relying on a liar), for him to have lost $50 billion means he would have had to have lost $33 billion prior to the start of the year and lost all but a fraction of the $17 billion remaining during the course of the year. That's possible, but who knows.

Let me throw out another line (and one that admittedly is a riff on a theme I've worked before*): the $50 billion is NOT the amount of money he was given by investors, it was the amount of money investors thought was in their accounts.

Huh? Keep in mind that for years, Madoff had reported higher than market returns and, presumably, while he was cashing out certain investors, not all of his investors were collecting all of their 'winnings' each year. To illustrate, let's say Steven Spielberg invests $10 million with Madoff and, over the years, is led to believe he now has $30 million in his account with Madoff. Did Speilberg lose $30 million? Or 'only' $10 million, the amount he had actually given to Madoff?

If the former, by adding up the 'balances' of each investors account, one could come up with $50 billion in losses despite Madoff never having that much to work with (and lose and/or steal, whatever may be the case). And may especially be true with public companies which, having reported as gains the previous 'profits' now have to recognize a loss equal to the amount they thought they had, with the amount of such a loss being larger than their actual cash investment.

But if the latter, while still significant, the total real losses - measured by the amount of cash investors no longer have - may be considerably lower.

* with companies such as Enron, where investor 'losses' were calculated from the highest point the stock reached, a level it never would have reached but for the fraud and an amount far higher than the amount actually invested in the stock by investors.