WHY MADOFF NEVER SPENT HIS $50 BILLION

By Dan Rattiner

I have been trying to understand exactly what it is that Bernie Madoff did. I know what a Ponzi scheme is. The part I have trouble with is this - where did the $50 billion go?

Fifty billion dollars would bail out GM, Ford and Chrysler three times. We could support approximately 200,000 workers for three years for $50 billion.

Madoff, on the other hand, is just one man. The world would have us believe that over the past 10 years he secretly spent $50 billion. I do not think this is possible, or certainly not possible without him being very much in the public eye. Donald Trump is in the public eye. He has corporate jets and beauty contests and gambling casinos and skyscrapers. Trump's net worth is about $3 billion.

Madoff has a rather ho hum oceanfront mansion in the Hither Hills section of Montauk. He has an apartment in Manhattan on Fifth Avenue that is valued not at $50 million but $7 million. He has a house in Palm Beach. With his other homes and a few cars here and there, it seems he is living the life of a rich man, but not a super rich man. Think about it. He has not spent $50 billion dollars.

So where did it all go?

To get the answer, let's look at how his Ponzi scheme worked.

He persuaded somebody to send him $1 million with the promise that at the end of the year it would be worth $1.1 million because he was such a good stock picker. Whoever took this first dive into the scheme was so happy with the piece of paper that Madoff sent him telling him he now had $1.1 million that he chose not to withdraw his money. In fact, Madoff had bought the $1 million in stock, but it did not make the $100,000. He was lucky his investor did not ask for it to be paid out.

This man who "made" this money then told his friends about Madoff's amazing abilities, and 10 other people also put up $1 million each and made the $100,000 in one year. Some of them asked for the payout. Madoff had it.

At the end of the second year, therefore, Madoff had $11 million invested in stock, but told people what he really had was $12.1 million, the last $1.1 million being the profit in cash, that had been made. In fact, though he did make a small profit, it was nowhere near able to throw off the $1.1 million if everybody were to ask for it at one time. And so he began keeping cash on hand from some of his new money, and not buying the stocks. He could use this new money to pay the "profit" he promised to the old investors.

Based on this procedure, more and more people lined up to give Madoff more money to invest and less and less of it wound up in stocks. At some point, he had been given $1 billion by 1,000 people - that's $1 million each - and lets say five years had gone by, so he had promises to pay out $100 million a year, compounded annually. On paper, he had $1.6 billion.

Let's stop here a moment. He now actually had a quite a bit of what he was supposed to have in cash. The rest had been paid out to get new investors. And the rest, he just plain owed, but did not have, but lived in the hopes that nobody else would ask for it and still more people would come along and sign up and give him still newer cash.

As you can see, this is getting way, way out of hand, with less and less stock bought and less and less cash on hand as Madoff continued to pay out successfully.

And so, though the early people who got involved were paid huge profits - so they could tell others - the later people just got to give Bernie the money so he could drop it into the abyss. This is not pretty.

So there is where the money went. Madoff, I guess, never spent any huge sum at all. He just engineered everything. And lots of people early on made out great. And then for the rest, when they got to the front of the line, the cupboard was bare.

The point I am making is this. If you follow the money, there are probably 5,000 people who walked away counting their profits. But there are 45,000 people who got none. And there was Madoff, who may have lived high for a while, but never really all that high, and now he's broke and, in addition, wearing an ankle bracelet.

It's like Las Vegas. Madoff owns the casino. But the casino didn't work out very well. Most everybody who went in there lost something. But a few, especially the early spenders, hit jackpots. And now the casino went bust. So there you are.

Of course, everybody trusted Madoff, and he lied because he so enjoyed being the magic man. You can't forgive him that. As for the $50 billion, Madoff doesn't have it, and the 45,000 don't have it. But about 5,000 people have a good part of it, maybe even having, over the years, doubled their money. C'est la vie.

Just call it a restructuring. The authorities say that maybe the 5,000 winners will have to just restructure most of all they won back to the 45,000 losers. We shall see.

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