Before all hell broke loose, Bernie says, he didn’t secure extra financing, saying to himself: "I have Madoff – what do I need with a line of credit?" Now the layoff of employees who have worked for Norman S. Bernie Co. for 30 or more years has begun. [1]
The real danger of the Madoff scandal is that it makes crystal clear things we were never meant to understand.
According to this story,[1] San Mateo CA draper Cliff Bernie is one of the Madoff’s victims. His over $1.7 million account suddenly became worthless when the scandal broke. But let’s take a closer look. The monies "were inherited from Bernie’s late parents who initially invested $250,000 with Madoff 20 years ago." Over the last while, the fantasy wealth was actually subsidizing the cloth store. "Bernie said he withdrew $600,000 from his Madoff account over the past three years, in large part to help keep the business going."
The reporter doesn’t specify if the senior Bernies topped up the account or withdrew from it over time, but a total investment of $750,000 deposited by the early 1990s and "earning" about 10 percent annually would have been close to the approximately $2.3 million, so we might guess that the Bernies collectively invested very roughly $0.75 million. Madoff would have fradulently conveyed their initial investment to even earlier Madoff investors, and the $0.6 million they "withdrew" would have been real monies defrauded from more recent clients.
However, the punch line of the joke is that the added fantasy-league amount of savings Bernie had with Madoff compared to what he would have had with a legitimate investment let him be much more aggressive in his efforts to stay in business (including paying his staff, buying stuffs from manufacturers, etc.). It puffed his little piece of the California economy just a bit higher than it would have been without Madoff’s fraud. Multiply Bernie’s micro-economic effect by Madoff’s thousands or tens of thousands of high-end clients, and it’s obvious that the mythical $50 billion or so of bogus wealth had important macro-effects on the world going back a generation.
Peter Schiff notes [2] that Madoff’s fraud is comparable to the US government stewardship of things like Social Security and America’s sovereign debt. The Bernie Co case is then an easily understood straw in the wind pointing where the larger sovereign Ponzis are heading.
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[1]: "Venerable San Mateo firm a Madoff casualty", by Andrew S. Ross, San Francisco Chronicle, December 24, 2008.
[2]: "In Madoff We Trust", by Peter Schiff, Euro Pacific Capital, December 16, 2008.
Trying to settle this is going to get very interesting. That fact that some investors received stolen money in payments is going to drag this out for many years. Will investors that cashed out in years past have to reimburse a settlement fund? Will those that let their “earnings” accumulate be able to recover the taxes they paid on them? Do Madoff’s books show accurate deposits or will investors need to prove how much of their final statements were actual capital?…and WHY are they letting Madoff spend confessed stolen money on personal security instead of locking him up?
Igor says: foolish
This is Buffet’s ‘only when the tide goes out, can you see who’s been swimming naked’ writ LARGE.
In 1929, there were quite a few other Ponzi schemes that blew up… turns out, a financial bubble covers all sorts of ills. Watch for more .. and no, I’m not referring to Social Security.