It ain\’t over yet

There\’s something that needs to be added to this story:

A TYCOON who made his fortune with BSM driving schools and Spudulike baked potato shops has emerged as the biggest British victim of the multi-billion-pound Madoff swindle.

Lord Jacobs, 77, a former Liberal party treasurer, lost millions in the scam allegedly perpetrated by the Wall Street financier Bernard Madoff.

Jacobs, who had a family fortune of £128m, invested in the scheme on the recommendation of a friend in 1999 and continued to do so until its collapse last December.

It ain\’t over yet, not by a long way.

The returns from Madoff were 10% a year or a little above. Thus, over a decade, you would have got all of your initial "investment" back. OK, you\’ve lost out on what you might have earned elsewhere, this is true. But if you got the 11 th and 12 th years\’ returns then you were in fact making a profit from the Ponzi Scheme.

Which leads us to an interesting wrinkle of US law (and it might be part of UK as well, I don\’t know).

In such a Ponzis scheme those who were paid out are regarded as having profited from the scheme. Which indeed they have in a way, even if unknowingly. They have been paid their "returns" from the new money being put into the scheme. Thus they have to pay those returns back into the scheme so that the investors can be compensated for their capital  losses.

Now Lord Jacobs says he didn\’t put £ 30 million in but imagine that someone did, about a decade ago (and I\’ll use round numbers to make things easier).

Fine, in goes £30 million in 1999. Every year since then our mythical investor has been paid 10%, or £3 million a year. We\’ll also assume that this divvy was taken, not reinvested in the scheme. What is the situation of our investor now?

He thinks that, since the scheme has gone under, he\’s lost his £30 million capital. But he\’s comforted by the fact that he\’s received 10 x £3 million in payouts over the decade. Bit of a face wash there, he\’s lost what he could have invested elsewhere but he\’s not too far behind the game.

Ah, no, that\’s not the way the liquidator looks at it. He has indeed lost his £30 million capital, this is true. But those 10 x £3 million payments have been fraudulently paid to him. So he has to pay those back as well. Yes, really, he\’s got to pay back that £ 30 million as well……and then wait and see whether everyone else has any money left to pay back their returns and thus mean that there\’s any chance at all that he\’ll get any of the original capital back or not.

That\’s the bit that people are missing so far (with the exception of astute people like Felix Salmon)….everyone who got a payout from the Madoff fund owes that payoff back to the fund.

This will all be sorted out sometime around 2030.

As I say, it ain\’t over yet.


4 comments on “It ain\’t over yet

  1. There are two confidence tricks involved – convincing people to part with their money, and convincing people to not take ‘their’ money out. The attractive and consistent (but fraudulent) rate of return does both.

    I will be interested to see whether many people will have to make repayments to the Madoff fund, as opposed to many making large paper losses (and potentially large capital losses) from having let their investment compound year on year. My gut instinct is that a lot of investors will have done the latter. As Lord Jacobs points out – Madoff represented less of a risk than other funds.

    I wonder if anyone used their investment in the Madoff fund to secure credit. They’d be massively in the shit now I would expect.

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