For one thing, Madoff didn’t invest simply on behalf of a couple of dozen multibillionaires; he had many common-or-garden millionaire clients, many of whom were introduced to him — I’m not making this up — through the Boca Rio Golf Club in Boca Raton and the Palm Beach Country Club in Palm Beach. Apparently the ability to invest with Madoff was sold as a side benefit of joining the clubs — as ever, if you make something seem exclusive, people will clamor to get it.
It gets worse: a chap called Harry Markopolos has been saying that Madoff was a fraud in May 1999 — almost a decade ago. Obviously, nothing happened, but Markopolos didn’t give up: he wrote the SEC in 2005, saying that "Bernie Madoff’s returns aren’t real". But until Bernie Madoff himself admitted that fact, the SEC was nowhere to be seen. Others saw it too: Cassandra did, and, according to Henry Blodget, many of Madoff’s investors reckoned that he must be a crook and that this was a legal way of profiting from fraud.
There was every reason to believe that Madoff was cooking the books. He posted regular small monthly returns, adding up to 10% per year, year in and year out — essentially the Holy Grail of high returns with almost zero volatility. Even in recent months Madoff perpetuated the fiction:
Mr. Madoff’s Fairfield Sentry Ltd., a hedge fund run by Madoff Investment Services to invest in shares in the S&P 100, claimed to be up 5.6% through the end of November, a period when the Standard & Poor’s 500-stock index was down 37.65%. In October, Fairfield Sentry was said to be down 0.06%, a month when the S&P 500 lost 16.8%.
Now those kind of returns are very attractive to country-club millionaires: you can see where that part of the fraud came from. But it turns out that Madoff’s largest investors were fund-of-funds managers, including huge names like Tremont Capital Management.
Such managers do one thing, first and foremost: they exist as an extra pair of eyes to oversee the actual fund managers; they’re a risk control, and they’re sophisticated enough to smell impossible returns like Madoff’s. I simply can’t believe that they funneled billions of dollars of client money to Madoff without ever talking to his chief risk officer (there wasn’t one).
There’s also the question of the $50 billion number, given that Madoff "only" had $17 billion in assets under management, according to his SEC filings. I see three possibilities which might explain the difference:
- Madoff, falling apart, can’t add up, even after including all the fees he extracted from the funds.
- The amount of funds that Madoff reported to the SEC was a fraction of the amount of funds that Madoff reported to his investors.
- Madoff borrowed the extra $33 billion, as Kaja Whitehouse suspects.
I think the second option is the most likely, but insofar as banks lent Madoff anything unsecured, they’re feeling really stupid right now.
The one thing I’m sure of is that Tremont and Fairfield Greenwich are going to face some massive lawsuits over this — and will suffer enormous redemptions. (Does Fairfield Greenwich run non-Madoff money? It’s unclear, but it’s probably moot; if they did yesterday, they won’t tomorrow.) If they’re idiotic enough to place billions with Madoff, they have no business running anybody’s money.