UPDATE:this story  seems to have the date corrected to a week later than I thought. It has several links and some further discussion.
FURTHER UPDATE: Clic-the-pic to read full PBS news release on their major upcoming documentary on this.
Twist sent this Fool story  along, which in turn referenced this YouTube  of an extract of a C-span interview with Rep. Paul Kanjorski (D-PA) Capital Markets Subcommittee Chair. I’m not going to put up anything besides a partial transcript and yet another embed of this must-see video (the first 2 minutes is pretty dull 😉 ), but Doomers should read the Fool  commentary. Twist will likely have something to say later in the day, but for the moment I’ll just let Rep. Kanjorsky have the floor (this has been on YouTube for a couple of weeks).
Rep Paul Kanjorski [2:02]: They are right to this extent. Why did we do that? We did that because the Secretary [Paulson] …
Look, I was there when the Secretary and the Chairman of the Federal Reserve came those days and talked with members of Congress about what was going on. It was about September 15th [2008 — that would actually have been the evening of 18th-19th].
Here’s the facts, and we don’t even talk about these things. On Thursday [that would have been September 18, 2008], at about 11 O’clock in the morning, the Federal Reserve noticed a tremendous draw-down of … money market accounts in the United States. To the tune of $550 billion was being drawn out in a matter of an hour or two. The Treasury opened up its window to help. They pumped $105 billion in the system and quickly realized that they could not stem the tide.
We were having an electronic run on the banks.
They decided to close the operation, close down the money accounts, and announce a guarantee of $250,000 per account so there wouldn’t be further panic out there. And that’s what actually happened.
If they had not done that, their estimation was that by 2 o’clock that afternoon [Sept 18, 2008] $5.5 trillion would have been drawn out of the money market system of the United States — would have collapsed the entire economy of the United States, and within 24 hours the world economy would have collapsed.
Now we talked at that time [Sept 18th-19th?] about what would happen if that happened. It would have been the end of our economic system and our political system as we know it. And that’s why, when they made the point we’ve got to act and do things quickly we did.
Now Secretary Paulson said let’s buy out the subprime mortgages. That’s what he came to Congress [with] — but he said give us lattitude and large authority to do many things as we decide … necessary. And give us $700 billion to do that.
Shortly after we enacted our bill with those very broad powers, the UK came out and said: No we don’t have enough money to buy toxic assets. Instead we’re going to put our [UK’s] money into banks so that their equity grows and they’re not bankrupt. And so the UK started that process and that’s true. It was much cheaper to put more money in banks as equity investments than to start buying their bad assets. Because it became early determined that we’d probably have to spend $3 or $4 trillion of taxpayers’ money to buy these bad assets. And we didn’t have — we only had $700 billion.
So Paulson made a complete switch, went in and started putting money [into] buying securities and reinvesting into banks in the United States.
Why? Because if you don’t have a banking system you don’t have an economy … [4:49]
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. 
The real danger of the Madoff scandal is that it makes crystal clear things we were never meant to understand.
According to this story, 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  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.
The reputation of Professor Scott Nelson’s recent article on The Panic of 1873 (links and discussion at this Doom post; further discussion here  ) continues to expand.
Click the Pic to go to this slightly garbled account. Environmentalism journalist Kaushik Das Gupta provides an interesting summary of Nelson’s theory for his Indian audience. He’s using this cover from a 1873 Harper’s issue, which represents President U.S. Grant rescuing "America" from the end result of that era’s housing bubble: "I am glad you are unhurt. Houses in this street have been on false bases for long time." Clearly our expectations for President-elect Obama are similar.
A bit later: I forgot to add an important nuance. Obama is not actually reprising Grant’s role, that job goes to Hu Jintao. The new American President is actually replaying Benjamin Disraeli.
The "ABCP rescue," also known as the "Montreal Agreement" or "Montreal Accord" dates back to August 12, 2007, and is the 16-month old grand-daddy of all efforts to fight the credit crunch. The whole thing has been managed and fought perfectly out in the open, with litigation, investor votes, bankruptcy proceedings and even broad legal protection of the perps against any effort by their victims to sue them. Imagine a 1/10th scale model of the auction-rate securities (ARS) scandal, but without regulators and the NY Attorney General standing up for investors.
So after all those promises, delays, and court action it comes down to the same thing. Without bottomless buckets of free government money (remember we’re in the middle of a constitutional crisis with the government having suspended parliament!) this puppy is going to simply collapse into a puddle of evil-smelling custard.   
Madoff counted several large hedge fund investment firms as clients, along with some European banks, so if his firm has lost more than $50 billion, the impact could be widespread. 
The article that gave us today’s letters-of-fire still doesn’t feel quite right. A Ponzi scheme with just a handful of clients? I’m remembering many, many years ago to a perfectly ordinary scandal with a volunteer church treasurer. Accounting rules, auditors and regulators are there to protect such folk, and in that I’d be inclined to include Madoff. Just picking at random from the bottom of the stack of hundreds of comments to the above article, there’s a link to a post by blogger Cassandra Does Tokyo which has this assertion that it was all too obvious, at least looking backwards.
Some crimes are too perfect. Some facades too well-painted to be original or convincing. A good hustler knows he must lose sometimes in order to win. THAT is the reflection of reality that makes it believable, and gives confidence to the punter who will shortly be taken out. THAT was what was wrong with Bernie Madoff’s ponzi. The people who were taken – like the Family Office and many others investors who in time will go public on their fleecing – wanted badly to believe they were onto to something that was so good that they ignored the most obvious signs of bogusness. It just didn’t make sense. It just didn’t add up. Even Jim Simons earns it. There is no free lunch.
There’s never just one cockroach, but Doomers can expect a blizzard of MSM ink about how unique Madoff’s case is. Let’s hope that, for the first time in history, they’re right. Later …The Street has just gone into this meme big-time.
While Hanlon says the news will affect investors over the short term, he asserts that major incidents like the Madoff case are few and far between, and that once the initial shock dissipates, sentiment will recover.
"I know the gut reaction is to say this will shake investor confidence and it’s terrible for the economy, but it’s likely a one-off," Hanlon says. "Everybody can see the number of assets at risk, and they might do some selling because this scheme could take the market down in the near term. But I think this occurs infrequently enough that people expect it’s unlikely to happen to them. I hate to say it, but it’s like a plane crash."
… like 111 because it was so obviously preventable, perhaps. Comment by a Haligonian
UPDATE: This entry from a NYT blogger continues the theme that lots of insiders knew or suspected this for a long time. So does this make those hedgie clients outsiders? Maybe just greedy
“The numbers were too good to be true, for too long,” Girish Reddy, a managing director at Prisma Partners, an investment firm that invests in hedge funds, told The Times. “And the supporting infrastructure was weak.”
Mr. Reddy told The Times that his firm had looked at the Madoff funds but decided against investing in them because their performance was too consistently positive, even in times when the market was incredibly volatile.
FURTHER:This Reuters piece just in sounds like something out of F. Scott Fitzgerald. Tom Wolfe’s likely to get a few ink-stains on that white suit writing this up.
MIAMI, Dec 12 (Reuters) – Hedge fund managers and other Wall Street professionals are scrambling to tabulate losses from Bernard Madoff’s alleged $50 billion fraud, but the financial pain for individual investors is already clear.
Many clients of Madoff, a former chairman of the Nasdaq Stock Market, were recruited at New York and Florida country clubs, such as the Palm Beach Country Club, where Madoff has been a longtime member, according to news reports.
"At one point, he was the favored broker of Palm Beach," a club member told the Palm Beach Post newspaper. "Every big guy was his client. I’ve received dozens of calls about this today. There are a lot of people who lost a whole of money with this guy. But no one will admit to it in public."
but I expect they forgot about that fast enough when the auto sector bailout fell apart in the Senate.
Meanwhile, yesterday also saw the NY Fed reporting an enormous sell-off of GSE Agency Debt by foreign central banks, the second largest weekly drop in holdings they’ve ever recorded. Twist & Co. are presently sunning themselves on the beach somewhere in Central America, and with Doom South blessedly out of wireless internet range for the moment our weekly table updates are temporarily on hold. I think we can wait, the numbers are pretty ugly.
According to the complaint, Mr. Madoff advised colleagues at the firm on Wednesday that his investment advisory business was “all just one big lie” that was “basically, a giant Ponzi scheme” that, by his estimate, had lost $50 billion over many years.
“We are alleging a massive fraud — both in terms of scope and duration,” said Linda Chatman Thomsen, director of the S.E.C. enforcement division. “We are moving quickly and decisively to stop the fraud [say what??] and protect remaining assets for investors.”
This isn’t a Guinness Record for scapegoating over the last 2,000 years, but surely we must be getting close. Stop any of Madoff’s colleagues from daring to speak the truth in future is more like it, IMHO. For the love of Adam Smith, guys, Capitalism is a Ponzi Scheme. That’s why we worship growth.
Aha! the light is beginning to dawn. This report  indicates he had only a handful of (very, very large) clients. That might help to explain how the scheme (presumably) became undeniable. (later: This really is stunning. Could it really be this bad? Looks like. By studying this situation perhaps we will perhaps see similar patterns in some of the firms with more clients that have been failing recently.)
According to a Securities and Exchange Commission document filed in Jan. 2008, and cited in the complaint, the firm had between 11 and 25 clients for the fiscal year ending Oct. 2007 and managed about $17 billion in assets in 23 different accounts.
UPDATE SUNDAY NIGHT DEC 14TH: In the link above, I’m quoting reporter Jim Spencer from the Denver Post of Feb 21, 2007: "The risky-lending boom of the early 21st century was a Ponzi scheme." Curiously, this sounds very similar to what the following author says from hindsight. A few voices are starting to come around to my earlier response.
"Ponzi Nation", by Matthew Goldstein, BusinessWeek, December 14, 2008.
But derivatives consultant Janet Tavakoli may be onto something. In a note to her clients, she says the biggest Ponzi scheme of all may be the one that brought the world financial markets to its knees. And that’s the scheme that united Wall Street bankers with mortgage lenders in a bid to funnel more and more money into the market for supbrime homes loans. She says the packaging of iffy home loans into securitized bonds that could be sold to insitutional investors—many of them relying on borrowed money—was a system born to fail.
“The largest Ponzi scheme in the history of the capital markets is the relationship between failed mortgage lenders and investment banks that securitized the risky overpriced loans and sold these packages to other investors—a Ponzi scheme by every definition applied to Madoff,” says Tavakoli. “These and other related deeds led to the largest global credit meltdown in the history of the world.”
Many thanks to Doomer V for this dig. Doom rarely finds American academic historians helpful in putting the present crisis in perspective, but this guy from Virginia’s W&M recently hit one out of the park.
I’ve often reflected on how the American Century (1945 – ????) has been unfolding much as did the British one (1815 – 1914). The UK had it’s own generation of "baby boomers" born in the immediate post-Napoleonic era, notably John Ruskin and his contemporaries such as Karl Marx. Our Summer of Love (1968) upheavals have a profound echo in the Revolutions of 1848, and now the present crisis is emerging as a sequel to the Panic of 1873.
Good Monday Morning Middle America, your King of Simple News is on the air.
So tomorrow is the big day when we will finally, after a very long anticipated wait, celebrate the end of political campaign commercials. I don’t know how John McCain has time to campaign, he calls my house three times per day.
But for today, we have to get away from politics and try and stay ahead of whatever it is that is gaining on us.
I was going to wait until late December to award my King of Simple “Outstanding Idiot of the Year” award, but a clear cut winner has emerged that I am confident cannot be overcome. Therefore, I will make the presentation early this year to 77 year old, Keith Rupert Murdoch.
Herbie Goes Bananas indeed! Telegraph’s Gordon Rayner tells the sad story  of how the world’s hedge funds piled into a naked short play on VW stock and, starting last Sunday afternoon, got given given their heads in their hands to play with to the tune of almost $40 billion. Here are a few choice quotes from the article (well worth reading the whole thing!)
"I liked the whole fear factor," [Cohen] said …
The biters have been well and truly bitten, and in a week full of ironies it was Porsche, manufacturer of the hedge fund managers’ transport of choice, which was to blame.
"I have had hedge fund managers literally in tears on the phone," said one London-based analyst …
Many fund managers believe they are victims of a stitch-up orchestrated by the German government and Porsche.
The root of the hedge funds’ demise lies, appropriately perhaps, in the murky practice of short selling …
… this week’s losers include David Einhorn, the poker-playing president of the American fund Greenlight Capital, who helped drive down the value of Lehman … [no way I’m touching that straight-line]
The German establishment has never tried to hide its contempt for them, with a leading politician referring to hedge fund managers as "locusts".
Germany’s somewhat eclectic financial regulations did not require Porsche to disclose this, and so none of the hedge fund managers had a clue what Porsche was up to.
A couple years ago I went to buy a home
I called up on an ad on the telephone
The Realtor told me now is the right time to buy
She said "Owning a home is American as apple pie" Continue reading Billybob's Subprime Blues
Full marks to Mrs. M for digging this amazing story  out of page C4 of our local paper.
A Dartmouth [Nova Scotia] real estate agent says Ottawa is forcing agents to play Big Brother by requiring them to get and store personal information about their clients.
"It’s a privacy issue more than anything. It has been mandated upon us," said the Re/Max agent, who asked not to be identified.
Do any Doomers know if America’s NAR or other national Realtor organizations force their members to do this?
Some agents across the country are upset about the new rules, which have created more paperwork, said Bob Linney, spokesman for the Canadian Real Estate Association.
"There are members who believe that we are now being asked to do the work of government and not being compensated for it. Realtors did not go to spy school. They were not trained to collect all this personal information or to look out for the things that (the transactions centre) now wants them to," Mr. Linney said Thursday from Ottawa.
Twist and I have had run-ins with RE agents before but for the most part we have been impressed with their professionalism. Many of our most valuable contacts and sources work in the field. Doom has gone to bat for Realtors before, and this looks like another time to do that. There is no way that Canada’s RE agents should have to work at cross purposes to the interests of their clients like this.