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Wall Street’s Old-Fashioned $50 Billion Swindle

Forget credit default swaps, mortgage-backed securities and all those complicated financial instruments that are causing the economy so much trouble. Wall Street is reeling today instead from a straightforward, by-the-books, $50 billion Ponzi scheme apparently orchestrated by the once-respected investor Bernard Madoff, a former chairman of the Nasdaq Stock Exchange. There is no complex chain of securitization here, no pieces of risk sliced and diced into tranches. This is a throwback to rip-offs of old — a time-honored tactic using money from new investors to pay back the old ones, until the whole thing collapses.

Clusterstock has the indictment, if you want to read the details. Madoff’s firm, Bernard L. Madoff Investments, ran more than two dozen funds for decades, overseeing $17 billion and promising high returns and low fees. But a few days ago, Madoff blew the whistle on himself, telling senior executives at his firm and the FBI, according to the indictment, that it was all one big lie, a giant Ponzi scheme. He was broke.

But what pushes this beyond a juicy Wall Street rip-off story is the sheer size of the swindle — possibly the largest fraud in Wall Street history — and its implications for other hedge funds and investors.

From the New York Times:

“We are alleging a massive fraud — both in terms of scope and duration,” said Linda Chatman Thomsen, director of the enforcement division at the Securities and Exchange Commission. “We are moving quickly and decisively to stop the fraud and protect remaining assets for investors.”

Andrew M. Calamari, an associate director for enforcement in the S.E.C.’s regional office in New York, said the case involved “a stunning fraud that appears to be of epic proportions.”

Those proportions have some concerned about how this will play out, beyond Madoff’s personal saga, according to The Times:

There was some worry on Wall Street that Mr. Madoff’s fall would shake more foundations than his own.

Calculated Risk supposes Madoff had about 10 to 25 hedge funds as clients, that they lost everything, and that some hedge funds will be taking some serious write downs soon.

Looks like Wall Street will be sorting through the wreckage of all this today, to see how much damage has been done. As if there weren’t enough to worry about, already.

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