By now you have probably heard about the arrest of Wall Street titan Bernard Madoff. The firm that bears his name is a top market-maker in Nasdaq stocks. Madoff himself has been a prominent leader in all kinds of industry groups for decades. Now he is a free man only because his wife posted a $10 million bond late Thursday.
According to court documents, Madoff told FBI agents that his business was nothing but a “$50 billion Ponzi scheme.” He said he had been paying investor redemptions with money from other investors. The details of exactly what Madoff did — and how he did it — are still murky. If it amounted to anywhere near $50 billion, the fraud must have been going on for many years.
And here’s the really scary part: No one caught him. Not the FBI, not the SEC, not his “independent” auditors, not any of the agencies whose job is to prevent this sort of thing. The scheme was revealed only because this week Madoff himself admitted it to some of his employees, who then went to the authorities. News reports suggest it may have been Madoff’s own sons who turned him in.
This begs an important question: How many other $50 billion Ponzi schemes are out there waiting to be discovered? If Madoff can do this sort of thing and get away with it for years, I’m willing to bet he isn’t the only one.
As bad as that sounds, here’s something even scarier. Madoff’s fraud was actually quite small, as far as Ponzi schemes go. Commercial banks do the same thing every day. They pyramid depositor’s money to make loans far in excess of their own capital. They can do this and get away with it because on any given day they know only a few depositors are likely to ask for their money back. It’s called fractional reserve banking and is perfectly legal.
An even greater Ponzi scheme is run by our own government. It is called “Social Security.” Here’s how it works: cash comes in from those who are working, and goes out to those who are retired. Think there is a lockbox or trust fund containing excess revenue? Think again. Yes, the trust fund exists in theory, but it owns nothing but IOUs from the Treasury. The cash is spent immediately to fund other government programs.
Without minimizing the pain that Madoff’s victims are feeling right now, I have to conclude that he is really nothing but a small-time crook compared to the Fed, the Treasury and Congress. Unfortunately for him, his particular scheme is not authorized by law. Now he gets to pay the price.