For once, it's nice to be wrong

Back in March 2009, I had this to say about the Madoff mega-fraud:

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.

Most of that still holds up, but it's good to see that the final sentence has proved too pessimistic. When the Madoff fund imploded, every investor claimed to have lost all their money, but as I pointed out at the time, those who hitched up with Madoff early had done just fine. Those improbably outsized dividends were in fact a return of capital, funded by the latecomers. Amazingly, lawyers have managed to explain this successfully to some of the biggest winners from the scheme, and have so far secured the return of $10 billion, including an unbelievable $7 billion returned by the estate of just one investor this past week. It's probably better not to enquire too closely as to just what methods of persuasion the lawyers may have resorted to, but the end result is the right one. And who knows, some of the journalists who covered the original story may now have a better understanding of how a Ponzi scheme works.