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What Happened To Madoff's Money?
Almost since the news broke that Bernard Madoff had confessed to running a "$50 billion Ponzi scheme", one of the key unanswered questions has been, what happened to all that money?
The short answer is, we don't know yet. "It is still too early to say with any certainty what was going on inside Madoff's business," said Stephen Harbeck -- who heads the SIPC, which is serving as the receiver for Madoff's now-defunct brokerage firm -- at a press conference outside U.S. bankruptcy court last week.
It's worth noting at the outset that the $50 billion figure, which came from the SEC complaint quoting Madoff's own confession, may be inflated. The Associated Press has calculated that investors cumulatively have said they have lost $30 billion.
That's not exactly pocket change. And despite Madoff's lavish lifestyle, it would be virtually impossible for him to have blown through that amount, or even a significant fraction of it, on his own or his family's personal expenses.
Madoff has promised to give an accounting of all his assets by the end of the year. But until the legions of forensic accountants with the FBI, the SEC, and other investigative bodies complete their enormous task of independently tracing the funds, we'll likely remain largely in the dark.
Still, piecing together various reports, several possible answers are beginning to emerge, which, taken together, may go some way to explaining the mystery.
Living the High Life
Madoff may have used some small amount of client money to fund his and/or his family's lifestyle. He owns an apartment on the Upper East Side of Manhattan, estimated at over $5 million, a $3-million beachfront mansion in the Hamptons, a $9.4-million home in Palm Beach, Florida, and a villa on the French Riviera. He also has shares in two jets, and a 55.5-foot yacht. But it bears repeating, this spending can't have accounted for more than a small fraction of the total amount that Madoff investors lost.
Foreign Bank Accounts
Madoff may have stashed some of the money in overseas accounts. The Observer of London reported over the weekend that accountants going over Madoff's books think he regularly directed large sums to offshore accounts in the Caribbean and Europe. But again, there probably wasn't too much in there, or Madoff would likely have tapped it rather than allowing the whole alleged scheme to collapse when he couldn't meet obligations to investors who wanted to withdraw money earlier this month.
Robbing Peter To Pay Paul
More substantially, Madoff's alleged Ponzi scheme appears to have been based on using money provided by new investors to make payouts to existing investors. In other words, much of the money may have been withdrawn by investors who believed they had turned a legitimate profit. And if those gains prove to be a result of Madoff's deception, they would likely be re-appropriated as part of the forthcoming effort to compensate the alleged victims.
Hiding His Losses
Madoff may also simply have lost some of the money through bad trades, and tried to use a Ponzi scheme to cover it up. Note that the criminal complaint filed against him earlier this month says that he confessed to having "had personally traded and lost money for institutional clients, and that it was all his fault." (itals ours)
Still, right now, there are more questions than answers. As Robert Lenzner, a financial reporter for Forbes, who has been covering the story closely, said on CNBC this afternoon: "Nobody can figure out how this was done."
Josh
Zachary
It's likely a combination of big losses wherever he had it invested (markets are down 40% doncha know), and "robbing peter to pay paul."
In a classic ponzi scheme the money goes to A) enough original clients to make the scheme appear legitimate, and B) whatever cut the fraudster is keeping for himself. The final clients (representing the fattest part of the pyramid) are the ones who lose it all.
It's likely that much of the $30 billion is actually gone. Good luck getting it back from the investors who were smart enough to pull out. You'd probably have to prove they knew about the wrong-doing, and weren't just pulling their investment for some legitimate reason.
December 29, 2008 4:34 PM | Reply | Permalink
I am not sure ignorance of the scheme is necessarily a defense if the government decides to recover funds from the Pauls to pay the Peters.
December 29, 2008 5:00 PM | Reply | Permalink
I am not sure ignorance of the scheme is necessarily a defense if the government decides to recover funds from the Pauls to pay the Peters.
December 29, 2008 5:01 PM | Reply | Permalink
Recovering money from these well-rewarded early-birds is a tricky process, involving a court-appointed receiver recovering gains made by all participants in the scheme and then administering the monies among all of the victims. Nobody gives up money easily, so this usually involved years - years - of litigation with no one seeeing any realy dough but lawyers involved in the court actions. Madoff may have salted a chunk away offshore to leave his family - counting on the sheer impenetrability of the scheme's operation to keep this manuever from sight. Who knows... it may work.
December 29, 2008 5:59 PM | Reply | Permalink
I apollogyze of all the damm tipos and bad spellling. The Madoff scheme squandered by brain!!!
December 29, 2008 6:20 PM | Reply | Permalink
"Where did the money go?" is as valid a question to ask about Citi or Lehmann or any other player in the Wall Street poker game, as about Madoff.
How do you "lose money" in the financial markets without somebody else winning it? "By buying financial assets whose price subsequently drops," I hear you cry. As best I can understand this explanation, you paid a billion dollars to somebody for assets that nobody will bid more than a million for today. You turned yourself from a billionaire into a millionaire. But that's because the other fellow got your billion dollars!
I know the Masters of the Universe are smart enough to outwit themselves, but I am not that clever. So would somebody explain to me, in small words, how in hell you organize a poker game in which everybody loses?
--TP
December 29, 2008 5:02 PM | Reply | Permalink
"As best I can understand this explanation, you paid a billion dollars to somebody for assets that nobody will bid more than a million for today. You turned yourself from a billionaire into a millionaire. But that's because the other fellow got your billion dollars!"
But, the person you paid the billion to probably didn't sit on the money. More than likely, they reinvested it. When the value of a lot of the stocks crater, as has been the case lately, the money is just gone.
December 29, 2008 5:14 PM | Reply | Permalink
Interesting question that. I think it has to do with all asset classes losing value simultaneously, there's nowhere to hide. The person you gave that $1 billion to also took a bath wherever he invested it.
We just played a giant consumer game of musical assets. When the economic music ground to a halt this fall, Joe was holding a house worth less than he paid for it, Jane was holding stocks down 40%, Jim is making payments on a giant SUV that no one will even accept as a trade in.
Everything is worth less than we thought it was, and yet we all still have to pay off the debt incurred. When that debt is too staggering, we walk away.
Banks are left wondering what their "assets" (i.e. loans) are worth. Who will pay and who won't? What is the current market value of the collateral?
December 29, 2008 5:41 PM | Reply | Permalink
What's a financial asset "worth", if not the price some buyer paid for it and some seller received for it? In small words: remember Enron? At its peak, the stock was "worth" about $300 per share because some fool paid $300 to somebody else. Money did not disappear; it just changed hands.
Let's say the buyer borrowed that $300 from you. He owes you $300; after the crash he can't repay you. Okay, then: you lost $300 -- but the seller still has it. Substitute "a house" for "a share of Enron" and "$300K" for "$300" and the story does not change.
Make the financial game as complicated as you like, and it's still zero-sum: every transaction has a seller as well as a buyer; the one cannot lose money except by the other winning it.
Now, finance does interact with real life. If a bunch of people who have spare cash lend it to a bunch of people looking to buy houses, what happens? The borrowers pay the borrowed money to carpenters and plumbers to build houses. Come the crash, the carpenters and plumbers don't have to give back the money. The houses are still standing. All that happens is that the lenders end up owning houses they did not particularly want. The houses may be "worthless", but not because money "disappeared" -- the plumbers and carpenters have it. Or the "developers" have it. Or, if we're talking about previously-existing houses, the former owners have it.
As you say, it's a "musical assets" game. Somehow, for their vast helpfulness in running the game, the Masters of the Universe get to live high on the hog. There's something deeply disturbing about that.
--TP
December 29, 2008 6:41 PM | Reply | Permalink
"What's a financial asset "worth", if not the price some buyer paid for it and some seller received for it?"
I understand your point that now the carpenter and plumber have the money.
The point is that the bank doesn't have it. What the bank has is the legal right to go through long and costly foreclosure proceedings on a bunch of homes that are now worth 25% less than the amount that the bank loaned.
So in answer to your question "where did the money go?" The banks lent it all out, and it isn't being paid back.
And yes, it went to financial industry types who were/are grossly overcompensated. It went for stock brokers to buy $2000 dinners, and then the restaurant staff used the proceeds to buy $50 dinners, and the dishwashers at that restaurant used it at the grocery store.
December 29, 2008 7:33 PM | Reply | Permalink
LEVERAGE!
In normal finance, people routinely look at the market value of their investments as if it were real. If you buy 200 shares of a company's stock when the market price is $10, you pay $2000. If you hold it for 20 years, you might well find those shares now worth $5000 at $25 a share. Sell 80 shares back to the person you bought them from, and you both have the same cash you started with. You also have 120 shares worth (in principle) $3000 while he has 80 shares worth $2000. Now suppose those are GM shares: they drop in value to $1 in a year because everyone believes the company is no longer worth anything. Both parties are exactly where they started on a cash basis, but on paper there has been either a $1800 loss (over the whole period) or maybe a $4800 loss (in the last year) and both parties surely see themselves as having lost.
This is made more real by the application of leverage. Imagine that when you had $3000 worth (120 shares) of GM stock and thought you knew auto investing, your broker happily lends you $1000 to buy 100 Ford shares "on margin" with both stocks being collateral. You now have a brokerage account with $4000 in assets and a $1000 margin loan: net value $3000. As both stocks drop in value and hit $5 per share, (for calculation simplicity...) the broker calls you and demands coverage of the margin. You send him $500 and have him sell stock to make up the other $500 by selling 60 shares of GM and 40 shares of Ford. Now you have 60 shares of each one left. Meanwhile, everyone holding those companies in margin accounts is getting margin calls, forcing sales push the prices down on both stocks to $1. So now, instead of having lost $2880 on paper with zero net cash change, you have now also thrown $500 in real money down that drain. That's $380 lost no matter how you look at it, and $3380 from the point of view that you had stocks and cash worth $3500 net that is now worth $120. The broker has not made or lost money (except for the low rate on margin loans) but whoever bought the shares at $5 (helping make the broker whole) now can't get more than $100 for the shares he paid $500 for. Everyone trading the stocks in that scenario loses, and the losses get magnified hugely by the use of borrowed money (aka "leverage") as capital.
For investment houses in the recent past, it has been common to work at huge leverage ratios. In the above example, the leverage ratio was 1:3, i.e. $1000 borrowed to supplement $3000 in net value in the account. The number that gets tossed around a lot these days for investment firms at the peak of their idiocy is 30:1 for Lehman Bros. When the leverage ratio of an operation goes above 1:1, it becomes possible in principle for it to lose more money on paper than it has in actual capital. If Madoff was working in 30:1 territory, he had very little room for error and could easily have wiped out his clients' money many times over by just having a bit of bad luck.
December 29, 2008 7:41 PM | Reply | Permalink
That's way too wordy. The simple answer is that money is not lost, but expectations can be. Market capitalization is not money, it's an extension of single share current price to the whole market for the stock, it's an expectation value.
Madoff surely did not simply buy Treasuries and then burn them to light cigars. But he may have invested unwisely or criminally. We just don't know when the "ponzi" aspect became dominant. It's quite plausible that he was legit for many years but then started gambling and got hit hard, tried to cover his losses and got hit hard again. At that point it wouldn't take many redemptions to wipe him out.
But it's also possible he was funneling investor money illegally to yet unnamed recipients.
I'd also like to know who got their money back from him in the past 12 months.
December 29, 2008 8:51 PM | Reply | Permalink
"How do you "lose money" in the financial markets without somebody else winning it?"
Despite some myths to the contrary, money, unlike matter, is not just simply converted. Money can virtually increase or diminish, and altogether disappear. Which is why the love of it is so fruitless in the whole scheme of things.
Here's my economy layman's point of view;
Value is determined by that old standard "whatever the market will bear", so money DOES inflate and deflate, because it's value is based on perception, not reality.
Madoff's constant funding of the top with funds from new investors at the bottom represents the same money being counted at both ends, by those who received it as a dividend and at the same time by those who invested it as principal.
Both "ends" counted that each dollar as "their" money, but there was only one dollar, being counted twice, with Madoff's scam keeping those investors from knowing they were both counting the same dollar.
As long as the market could hide the scam, Madoff made off like a thief. But when markets collapsed, and too many people wanted their principal back, not just their dividends, then the myth was busted by the fickle finger of fiscal fate.
We can expect more of the same, as things bottom out. The rats are jumping overboard en masse, and Madoff's just one of the bigger ones. There are many more rats to be exposed by this economic downturn.
Possibly, these revelations represent it's one silver lining.
December 31, 2008 12:02 PM | Reply | Permalink
If Madoff is found to be guilty (is there any doubt), then he has to suffer a serious, life altering, loss of freedom as a result. I mean jail, serious time, not some federal country club. As for his family, I would also want to make certain that they don't live the high life from assets he stashed away, or by some domicile law like FL has protecting their house from seizure. These people have to see that consequences are serious, and can't be skirted.
As far as what happened to the money, I'd like to see an accounting of just how much money was paid to Madoff, and what happened to trades. In short, how much money lost was real, and how much was paper gains.
December 29, 2008 5:23 PM | Reply | Permalink
TO think that no one else was involve in this billion dollar theft would be an insult. you need
partners for a cover of this magnitude.(FAMILY)
in this situation everyone that enjoyed the wealth
when it was expendable need to be prosecuted.
in our society greed always take preference over ethnical/moral values.and when these values are disregarded,the preson responsible should be
punished.in our society no one is above the law
punishment is inevitable.
LAST thoughts you think madoff had a scheme .
maybe he should have asked for a bailout.(the big three auto makers).
December 29, 2008 5:41 PM | Reply | Permalink
First off, let's not forget that Madoff paid a lot of dividends over the years to a lot of people. What made it a Ponzi scheme was that he was paying Pete's dividends out of Paul's investment, rather than from returns on Pete's investment. He had to have paid out a hell of a lot for people to keep recommending him to their friends for so long.
December 29, 2008 5:58 PM | Reply | Permalink
First off, let's not forget that Madoff paid a lot of dividends over the years to a lot of people. What made it a Ponzi scheme was that he was paying Pete's dividends out of Paul's investment, rather than from returns on Pete's investment. He had to have paid out a hell of a lot for people to keep recommending him to their friends for so long.
December 29, 2008 5:59 PM | Reply | Permalink
Rethymniotis:
Stock, real property and other assets fall in value without anyone gaining. You can buy Citibank today and at the opening of the market tomorrow there is no one willing to pay more than half what you paid for it. Likewise, when your house drops in value because there are no buyers, no one has gained. So it is not like a poker game, where there is the same amount of money in the bank at the end of the game as there was at the beginning. Assets have no intrinsic value. They are worth what people at any given moment are willing to pay for them.
December 29, 2008 6:05 PM | Reply | Permalink
jthdane:
Talk to me about the fellow I bought Citibank from today, for $10 say. Tomorrow, he still has my $10. Nobody's offering more than $5. I am panicked. So I sell Citibank back to the guy I bought it from. He now has his original Citibank share plus the $5 that I "lost".
Was Citibank ever "worth" $10? Sure -- because I paid $10 for it yesterday. Did money disappear when I sold it for $5 today? Nope -- the other fellow has it.
--TP
December 29, 2008 6:55 PM | Reply | Permalink
This is a variation on the old, and long discredited, zero-sum theory, which says wealth can never really be created or destroyed, as if wealth abides by the same principles that energy in nature does. But it doesn't.
Wealth can be created, obviously....all you need to look around to see that. Are people that lived in 1800 as affluent as they are today? Of course not. And seeing it destroyed is almost as simple, especially if you want to go to a place like Zimbabwe. So it's obvious that wealth changes. It's not zero sum based merely on exchange.
The Citibank stock example used above simply confirms that as a bookkeeping entry, buying a share of stock doesn't change the balance sheet of the buyer or seller. Accounting is about debits equalling credits, so that's correct. But exchange and wealth are not the same thing. If Citibank increases the productive output of its services by 10 times, and the price of its stock stays the same, that doesn't mean Citibank as a whole has not changed in value.
So if I sell my Citibank stock for $10 today, and of course the buyer pays $10, that doesn't mean it's an equal trade, because if it were, it probably wouldn't make a lot of sense to bother to trade in the first place. It's equal for the purposes of bookkeeping only. It may or may not be equal going forward depending on Citibank's actual productive ability, which could be more or less than you think.
December 29, 2008 7:53 PM | Reply | Permalink
You're right and wrong, in my view. Wealth cannot be created by financial transactions, except if we call it imaginary wealth (expectations values). Wealth CAN be amassed, whether by theft, gift, labor, or contract.
When the stock market drops 50% and wipes out $X trillion, that's almost entirely an imaginary loss. That loss can be caused by a shift in expectation values, or it can be the other way around.
December 29, 2008 9:13 PM | Reply | Permalink
Curiously, when the market rises by 50%, nobody bothers to ask, "WTF? How did $X trillion of 'wealth' get created all of a sudden?"
Those who believe that The Market "is not a zero-sum game" naturally have no problem believing that $X trillion can materialize out of thin air, provided enough people make enough bets with each other in complex enough ways. Naturally, too, if The Market "creates wealth", then the financial whizzes who operate it are surely entitled to a share of the wealth they helped create. Hence multi-million dollar incomes for Wall Street players get to seem utterly reasonable. And clawing back the money they raked in over the last few years is even more unthinkable than clawing back the wages of carpenters and plumbers who built actual houses (i.e. created actual, physical wealth) would be.
The notion that the financial market is not a zero sum game is exactly the notion you need to make a Madoff happen.
The overall economy, as opposed to The Market, is of course NOT a zero-sum game. The economy is a process by which human beings create goods and services out of their own labor, and exchange them for different goods and services, created by the labor of other human beings. To the extent that more stuff gets created than gets consumed, real wealth like houses, wafer fabs, and knowledge, accumulates in the world. Ownership of that wealth gets shuffled around in a grand poker game we call "the financial market".
It would be hard to create wealth without the financial markets. But the notion that the financial markets themselves create wealth implies that we can somehow grow our aggregate stock of wealth by simply playing poker with each other.
--TP
December 29, 2008 10:51 PM | Reply | Permalink
I think you're agreeing with my point. People do sometimes use stock as collateral, but in my view that's imaginary too. And yes, of course financial markets make for liquidity even as they siphon off wealth.
December 30, 2008 3:22 AM | Reply | Permalink
You started talking about money but now you're talking about wealth, and they are not interchangeable. Money gets created in the financial markets ultimately by central banks both buying debt directly (as the Fed does with Treasury debt) and by making loans to banks that are collateralized by debt held by the banks.
December 31, 2008 6:27 PM | Reply | Permalink
The doctor is in. Sounds to me as if Bernie is -- as his insanity-defense lawyer is testing -- a manic depressive, and I'll be surprised if he didn't lose huge chunks o'dough in wild and crazy long shots. It wouldn't take long to do it -- if you bet a billion, you can lose a billion. It will take forensic accountants forever to figure out what happened and to ensure that Bernie hasn't got bundles stashed in secret accounts (as he may), but he probably doesn't have much (by his standards, not mine) left.
The Constant Weader at www.RealityChex.com
December 29, 2008 6:51 PM | Reply | Permalink
There are several things that can be done. One would be put him in jail till he tells where the rest of the money is then dont let him out. Two, take him into a field and shoot him in the back of the head. Or both!!
December 29, 2008 7:05 PM | Reply | Permalink
I blame the federal government and SEC for lack of oversight.
We came up with the Sarbanne-Oxley Act to have better corporate accountability and look what happened - the middle tax-payer is being screwed by the U.S. government.
We need a serious income tax protest that will prevent taxpayer money from being shelled out to corrput and mismanaged corporations.
Fascism is at work and humming alone nicely.
December 29, 2008 7:25 PM | Reply | Permalink
While it is certainly possible that Madoff made off with some of his clients' money, I think it is equally possible that he himself profited no more than anyone who manages that much money. I imagine he lost a significant portion of the money and paid out the rest in dividends.
My impression from the little I've read about his confession is that he started out with every intention of running a legitimate investment fund, but that, when he lost his clients' money, he was unwilling to admit his incompetence and lose his reputation as Wall-Street's golden boy.
Of course only time and a lot of forensic accounting will tell.
December 29, 2008 7:53 PM | Reply | Permalink
hello people use your heads. You can own and or be worth a certain amount of money and then zip and it doesnt always mean someone else had or has it! Case in point i own per say Yahoo and i go public at 10.00 a share and i have 1,000,000 shres as owner an the stock goes to 100.00 a share an i am now worth 100,000,000 2 months later it goes down to 5.00 an i am now worth 5,000,000 and no one has my money! I also could have gotten loans an used that as collateral an now i cant pay the 10,000,000 i borrowed an the shares are only worth 5,000,000. So i went from a man worth 100,000,000 an now am worth 5,000,000 and no one has it !
December 29, 2008 7:56 PM | Reply | Permalink
The best way to describe the possibilities is to start off with "pure insanity".
As noted, it is really impossible for someone to burn through even one billion dollars. That is the equivalent of spending $25,000 per hour for ten years. Investing that amount in T-Bills (1-2%) would guarantee you about $60-120k/day in living expenses.
What that means is that every hour you sleep, relax, shave, poop, or somehow fail to spend money, you delay running out of your $1B swindle.
So there are only two possibilities: Madoff put the money into a bank account and then forgot to disappear (instead informing his sons), or he really enjoyed his perceived status as a miracle investor. Maybe he thought he could really pull this off, maybe he was trying to make money, but it didn't work out. Sometimes you are the last one to find out what you don't know.
The real problem is that so many investors trust the confidence expressed by these people. Most people hate to think. If you provide a simple way to avoid thinking, you have a winning product.
December 29, 2008 8:11 PM | Reply | Permalink
Much of the $50 billion never existed, and is "lost" only in the sense that investors had a piece of paper saying their accounts were worth X, when they really had zero.
Madoff sent out carefully falsified statements reporting steady 10-12% gains for investors. Most investors remained "invested" so their imaginary portfolios grew and grew. Only when someone wanted to redeem shares did Madoff dip into new-account money to pay the customer.
In the pre-crash years, redemption was a trickle compared to investment, because Madoff looked like the smartest bargain. With the crash, everyone needed money fast to cover margin calls and hedge redemptions, and the pyramid collapsed.
Money was not "lost," it was redistributed without useful investment until the jig was up.
December 29, 2008 8:24 PM | Reply | Permalink
I read some personal stories of Madoff's victims. There were two cases like this. Retired folks that had a few million dollars invested about 15 years back. They were receiving and living off the couple hundred thousand per year. This money is spent. Over time they got back a big chunk of change except today they are broke. Many of the investors had the interest automatically reinvested, but if enough cashed in on the 12% annual payment, one could burn through 50 bill quickly.
Any body who cashed out entirely within six years is liable to return the entire amount. If for example, someone suspected there was something fishy about Madoff's operation and thereby withdrew their funds, these would, according to recent decisions, have to be turned over to the trustee for disbursement to other victims. One has to prove that the withdrawal was performed without any knowledge or suspicion that something might be wrong. I read of one person who withdrew from Madoff to pay down his mortgage, he now has to satisfy the court that this was the only reason for the withdrawal.
December 29, 2008 8:29 PM | Reply | Permalink
When you lose unrealized gains, it may not look like real money, but it is because of opportunity cost. If you'd known the house you bought for $200K that was briefly worth $800K would be worth $200K again, you wouldn't have bought the damn house, you would have put the money in a CD and been much better off (assuming the CD was insured).
In addition, in states other than California you will have been paying real estate taxes on the $800K valuation. You may have taken out loans based on the supposed value of the house (which you now have to pay back anyway, or lose the place), colleges may have refused your kids financial aid based on the supposed value of your assets, blah blah blah.
The whole way that markets work is that the prosperity of everyone who owns an asset (shares or real estate or whatever) is affected by completely unrelated transactions that set the market price of that asset.
December 29, 2008 9:03 PM | Reply | Permalink
Opportunity loss is indeed painful and expensive, but it differs from actual asset loss in that you cannot answer the title question of this article, "where did the money go." With opportunity loss, the money was never there in the first place and did not go anywhere. With asset loss, the money WAS there but now it's somewhere else. Madoff's victims experienced a mixture of these two losses. But the $50 billion figure is mostly opportunity loss.
December 29, 2008 9:42 PM | Reply | Permalink
However, this does raise the interesting question of what people are going to do who were paying capital gains taxes on millions of dollars in phantom profits for the last 10 years. If the money was never really there, what's the tax liability? Are we going to see amended returns?
December 29, 2008 9:47 PM | Reply | Permalink
To answer the question of "where did the money go" you have to understand that all money is loaned into existence.
There isn't some set amount of dollars that are out there that everyone competes for. Money is created constantly. In a four month period in 2006 1 trillion dollars was created and that pace has been accelerating since 1971. That's as much as was in existence during the first two hundred years our country.
So in the end, when money is 'lost' it really means that loans are defaulted on. The more defaulted loans the more money that's been lost. That's why banks closing or needing to be 'saved' is such a big problem. That means that value of things is decreasing, and the cost of creating new things is rising.
December 29, 2008 10:07 PM | Reply | Permalink
"all money is loaned into existence"
That is misleading. You're talking about ordinary loan defaults. But those don't destroy money, only a Fed or Treasury default can destroy money. And the Fed creates money by accounting tricks, not really by loaning it into existence. The loans are a means to the end of money supply, if you want to talk about how the Fed works.
Defaults destroy expectation values, but money, while about "faith and credit" is not the same as expectations.
And Fractional Reserve Banking does not create money, it rather allows extant money to work harder, so to speak.
December 30, 2008 3:09 PM | Reply | Permalink
I made this Comment in the wrong place. Once again here is my Idea. Once and for all lets take old DARTH VADER CHANEY word and see if it is true about Torture, like water boarding and other forms of inhanced lets say well you get my drift. So lets have BUSH declare Mr. Madoff an Enemy COMBATAN, then off Mr. Madof goes to GUAM., for some of Mr. Chaneys form of Questing, and it should show RESOLTS,now. and we get all the ANS., where the MONEY is and MR. DARTH VADER CHANEY is proven RIGHT. ANYBODY for this?
December 30, 2008 2:16 AM | Reply | Permalink
It's no surprise that this slimy little crook was able to disappear 50 billion after watching Wall Street and the Banking industry disappear several trillion.
In our financial culture we believe in "home schooling."
December 30, 2008 11:11 AM | Reply | Permalink
I sure hope the Justice Department, Attorney General, etc., are aggressive about pursuing the funds from clients who actually made a 'profit' before the scheme collapsed. There was a piece in the NYT a few days ago, quoting several of them who had the clear impression that that was their money and that it would be criminal to take it from them.
It's receiving stolen property, no matter which way you look at it.
December 30, 2008 3:07 PM | Reply | Permalink
Talk to me about the fellow I bought Citibank from today, for $10 say. Tomorrow, he still has my $10. Nobody's offering more than $5. I am panicked. So I sell Citibank back to the guy I bought it from. He now has his original Citibank share plus the $5 that I "lost".
Was Citibank ever "worth" $10? Sure -- because I paid $10 for it yesterday. Did money disappear when I sold it for $5 today? Nope -- the other fellow has it."
This analysis is only true for a private transaction. In a public exchange, buying Citibank at $10 means that's the lowest price anyone was willing to sell their stock for, so it means your $5 not only increased the value of the share of stock you bought, making it now worth $10, it means that you just increased the value of every single share of stock by $5. If there area 100,000,000 outstanding shares of Citibank, it means you just increased the wealth of those shareholders by $500,000,000. Not too bad for a $5 investment. It also means that now those shareholders can use their extra $500,000,000 of wealth as collateral for a loan of, say, $400,000,000. Now, you have $900,000,000 of new money out there. And then the lenders can sell their loan, and leverage that to increase the "money supply" by several fold more. All from $5.
So, where did all that new money come from? Not from your $5. It came from the increased market value of ALL Citibank stocks based on your willingness to pay $10 for the stock. Or, the willingness of all the buyers that day to pay $10. It's usually more than one transaction that sets the price, but on any given day only a tiny fraction of all shares get traded, so it's only a tiny fraction of the market capitalization that raises or lowers the market value of all stocks. This is why it's possible to create or destroy large amounts of asset wealth with relatively little capital. For prices to fall, all that has to happen is for buyers to disappear, until prices fall to levels they feel safe buying at once again. In the process, huge amounts of asset value can disappear virtually instantly, even if the total amount actually traded is quite small.
December 31, 2008 1:05 AM | Reply | Permalink
Its all fun until someone gets hurt! OKAY people, listen up! Wanna know what happened to ALL that money? First of all, there wasn't all that much ACTUAL money, most of it was PERCEIVED to hold value based on the rising of prices of real estate, stocks and so on. I mean to put it simply, real estate has been moving at a pretty good clip for about 10 years, along with the stock market. We have had the longest run EVER of increasing real estate prices (go ask your parents what they paid for their first home and take notes!). Now if you came in at the end of the HIGH of the real estate market, then you paid TOP DOLLAR. Still, if you have a job, can make your payments and aren't planning on any sudden moves, job changes, deaths in the family or marital divorces, you should be okay, continue to make your payments. If however, you have lost your job, your wife is divorcing you and taking half of the nothing you have left, plus whats left of your now devalued pension, you have a problem! Your house won't fetch what you paid for it, but you borrowed the money to pay off the seller, who probably moved to Florida and retired, paying cash for his now devalued retirement home and invested what was left in stocks that are now worth less than he paid for them and has taken a job at Walmart just to cover his cats food. Its a small picture of a big problem. Basically, its like all of us paid $200K for a brand new car, signed the loan papers and drove it off the lot. You all know how the NEW CAR DEAL works right? Same for this. Its now worth less than you paid for it. You still owe and frankly, if you don't need to sell, who cares? BUT, if you do need to sell, you have a shortage, a big shortage. Chances are, you didn't think ANYTHING of signing for your 100% mortgage, thinking "Those fools are giving me $200k? I'm taking it! My wife LOVES this house!" You thought it was okay when you signed for it. Whats changed? I'll tell you what! A HUGE BUYERS REMORSE! Now you want your money back? I knew 4 years ago this was a problem, being in real estate, I was seeing people who couldn't afford a pack of gum, getting huge McMansions, that had just come out of bankruptcy. People had money to lend, prices were going up, how can you get hurt? Because one day, the party is over! Crash and burn! I knew I could not afford the taxes being raised again where I lived (NJ). So I decided I needed to move somewhere the taxes weren't a years salary, IN CASE I LOST MY JOB! I sold my two homes, cashed out, paid off the credit cards (JERKS!), paid off the mortgages (FOOLS!) and went on a ALL CASH diet! When offered FREE CREDIT CARDS, I declined! When offered mortgages on my now paid for home, I resisted! When sent deals for new cars, I ignored them! I live in a paid for brick house, in a MODEST, but nice neighborhood, I have a couple of vehicles (PAID FOR OF COURSE!) and some cash in my safe, along with a a full pantry, and I do as much of the work on my house as I can. I don't travel much, don't need to, I don't need the latest fashions to feel like a human being, my jeans and t-shirts and coat fit me nicely. I don't have to have the latest hybrid off the line (my truck carts my garden stuff, and the van totes the foster kids and the other vehicle is up for sale!). I pay cash or use my debit card. I don't owe anybody a nickel! Now, whats in YOUR WALLET? If you are one of those people who claim they don't have time to cook, your veins and your arteries will pay the price later, while your wallet pays for it now! If you are one of those people who have to have their nails done every week and pay a $100 for getting your hair done every 6 weeks, then you need a REALITY CHECK instead of an unemployment check! We have all been feeding at the pig trough and now the farmer needs a pig for dinner. Which one of you piglets can't run fast? I didn't get this way overnight, I went through a little health and reality crisis back about 2001. I woke up and realized my plans included no back up for catastrophic types of things. When 911 happened, I said I need a BETTER plan! No one had to attack us again, they just let us be our greedy, selfish selves. Eventually, the balloon runs out of air. Now find a chair and sit down! Think about what is important in your life. Make a list. Is it having the latest in French fashions? Here's your sign! FRESH PORK! Maybe having your family nearby, a decent working car, some food in the fridge, yeah, you can do it. Go BASIC! Here's a thought! If you can't pay for it, YOU DON"T NEED IT! What you NEED is housing, food and basic comforts such as blankets, clothing, cleaning and personal hygiene, furniture (careful, don't go crazy here!) and some entertainment (again, watch it!). What you'd like is dinner out with the wife and a movie once in a while, while someone trustworthy watches the kids). Okay, so do it, IF you have the money, and still have a job, otherwise, TV night for you! Maybe you wanted to go to Europe this year, too bad, travel closer to home (we could all spend some money closer to HOME AND help our own local economies!). I have an idea, TRY USED! Save junk from the landfills! Recycle a can! Be a giver instead of a taker! Help someone worse off than you! You might find something worth more than the money, some character, deep inside you! Go volunteer for a local soup kitchen! Go work on a Habitat for Humanity house! Take a class at your local collage or high school, walk, eat less, grow a garden, fix your car, change your own oil. If you must buy something, do it locally, employ local trades people. Read a book or watch a DVD from your local library. This is all stuff you should have been doing anyways. And for God's sake, try and work it out with wife #2 instead of filing for divorce. Maybe the kids don't need to go to HARVARD, maybe your LOCAL COMMUNITY COLLEGE will work just fine for JUNIOR while he gets his butt up off the couch and GETS A JOB at the local McD's! It won't KILL HIM! I assure you! I did it, so can he! And maybe your wife needs to give up the prima donna routine and GET A JOB! Doesn't have to be the top job, just A JOB! Like doing her own housework, COOKING, perhaps a clerk at a local gas station. I hear gas is real cheap right now, so THAT should still be selling. But most of all, try and keep the cash flowing in POSITIVE ways, that enhance YOUR bottom line! I mean how more junky pieces of plastic do you need from the Dollar store this week? Do you HAVE to have the latest HD Plasma 52" screen macked out on the credit card at Circut City? Oh wait, they are in BANKRUPTCY! So if you want to avoid that, try paying attention, watch where your money goes, remember what your Grandparents said to you when talking about the DEPRESSION. You might not want to learn all about canning vegetables, but you might HAVE to learn how to make a garden. For crying out loud people its NOT THAT HARD! Or you can print money in your basement......wait for the CIA and FBI to show up at your house and have a cushy place to land for the next 10 years (Hey! At least your meals will be 3x a day and housing is covered!). Sheesh......America has gotten all gooey and soft inside, lets see if we still got what it takes! Get up off your butts and DO SOMETHING positive!
December 31, 2008 12:16 PM | Reply | Permalink