Madoff’s Multi-Billion Dollar Mystery

I was pinged about this last night, and twice this morning.  The generally consensus seems to be that a $50 billion loss “seems impossible” for a lesser known investment advisor that reported $17 billion of assets under management on their latest Form ADV.  The bottom line is there is going to be a lot of speculation, and none of it can be quashed from looking at the complaint.  There are, however, some other points worth considering…

  • The news reports have until now generalized Madoff as an investment advisor, but the Madoff world also involved a broker/dealer that executed trades for others and carried out market making activities.  Those are complex, high volume operations.
  • Madoff was rumored to keep financial records very close to the vest, which if true would make it very difficult to ascertain exactly how many entities under the Madoff umbrella might be involved.
  • Broker/dealers can borrow, and borrow they do.  Additionally, someone as well respected as Bernard Madoff would likely have access to numerous facilities and for many years – this was no upstart.
  • It has been reported that up to 50% of Madoff business was done with hedge funds – hedge funds are also known for carrying significant leverage against positions.
  • If you consider the possibility of many Madoff entities, a long list of otherwise trusting customers, and multiple layers of leverage, estimated losses might not be what will be procured from a single investment advisor, but rather what MIGHT evolve after all the holes in all the balance sheets are uncovered.

    It wasn’t long ago that analysts galore were estimating the total losses from the mortgage meltdown in the $300 to $500 billion range. That number quickly jumped to $700 billion, and then to $1.2 to $1.5 trillion. Mortgage problems have since infected every facet of the credit markets, and number crunchers have already put the liquid price tag at $7.5 trillion (and still growing).

    How ‘impossible’ might the Madoff scenario seem six months from now?

    Editor’s note: Paul Kedrosky has been following bits of this story as they come in – you might want to check out his points here, here, and here, as well as the ‘blast from the ponzi past’ here.

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