IT’S A MAD
, MAD, MADOFF WORLDWhen I wrote here that the world’s financial crisis was caused by a huge fraud called a Ponzi scheme(see
Colombian con echoes credit crunch ) I could not have imagined that four weeks later one of America’s most respected financial figures would admit that his $50 billion (£33.5 billion) investment fund was exactly such a scam. His scheme was, he is reported to have admitted, "all just one big lie".Bernard Madoff was a pillar of New York society. Entry to his exclusive investment club was carefully guarded. The rich and select members allowed in were given a consistent return on their money of 10% to 12% a year for a decade or more. But there was no underlying investment. Existing clients were paid using the capital coming in from new customers.
It is the oldest con in the book. Nevertheless Madoff attracted enough new money from major banks and serious investors to keep his scam alive for more than ten years. But when the credit crunch led to investors trying to withdraw $7 billion of their capital the money just wasn’t there to pay them and he had to put his hands up – literally – to the FBI.
Normally Ponzi schemes target financially naïve people who are easy marks for such an old con. But Bernard Madoff’s fraud netted some of the most sophisticated and best advised investors in the world. Spanish bank Santander – which owns Abbey and Alliance & Leicester and took in £18 billion of savings accounts from the bailed out Bradford & Bingley – lost £2bn. HSBC lost £670 million and Royal Bank of Scotland – now owned by us all – about £400mn. French and Swiss banks were also conned as were some UK investment managers, pension schemes and several large US charities – one lost £365mn.
All were tempted in by an offer that clearly was too good to be true and despite the fact that Madoff’s fund was audited by a firm no-one had heard of and its tiny staff operated in secret and refused to reveal to its investors where their money was earning its living. Because it wasn’t
. Though where it has gone remains a mystery.Although $50 billion is a huge amount it is only 1% of the $5000 billion (and counting) cost of the financial fraud perpetrated on us all by the banking system over the last few years. And Madoff’s success strengthens my belief that the whole banking crisis was caused in the same way.
In 1999 one of Madoff’s rivals wrote to the SEC to warn "Madoff Securities is the largest Ponzi scheme in the world."
Not any more it’s not.
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