Who Madoff with the money?

Where has it gone? Madoff's supposed $50 billion, that is. Now that Bernie is facing a life term in Sing Sing (or maybe in the Club Fed joint in Florida with Conrad Black -- jeez, does even Bernie deserve such a fate?), people are still wondering where all the money has gone.

It would be nice if the media, as well as employing someone who can spell the words "Ponzi scheme", would also give a job to someone who knows what a Ponzi scheme is. No doubt a lot of the cash was creamed off by Madoff himself, but the bulk of it went to....the investors! Or to be more precise, the early ones. Yes, it's true. In a Ponzi scheme, since there are no underlying investments (the bank account where Madoff apparently parked the cash doesn't count), returns to existing investors are mainly funded from cash injected by new investors.

Since Madoff was paying dividends of the order of 12% year-in and year-out, he needed to grow the fund by 12% each year, by attracting new victims, just to stand still. The bigger the fund gets, the harder that becomes. Once the inflows slow, the Ponzi artist starts paying investors back with their own money (i.e. the capital provided by the early investors) and starts to pray. When people ask for the return of their capital, the whole thing starts to unravel very fast. As the credit crunch began to bite, that seems to be what happened to Madoff.

In short, most of the missing £50 billion is hiding in plain sight, in the bank accounts of many of the people who are screaming for Madoff to be lynched. The early investors have got their money back, in the shape of the outsize returns that Madoff was paying in order to rope a new set of marks -- though I doubt if many of the investors (or their lawyers) see it that way. Barring some very messy litigation to wrestle that money back, those who signed up late in the day are going to be out of luck.