What’s the Real Madoff Math?

Tonight, FRONTLINE tackles the Bernard Madoff affair, attempting to decipher the puzzle of the financier’s multi-billion dollar Ponzi scheme. The program delves into the cast of characters involved in the case, including the story of Michael Bienes, one of two accountants who worked with Madoff.

Question: Somebody has to explain Madoff in more detail. You can’t run a Ponzi scheme for twenty years unless you have something people desperately want to buy.

The “smart” people who invested with him were buying what they thought was his insider trading. They deserve what they got. They knew he was doing something illegal; they just got it wrong. And many of them have kept the money!

The dumb people who didn’t diversify also deserve what they got, but with some sympathy for not talking to an investment advisor. No one has added up the “profits” Bernie’s investors took out over the years, which over such a long period must have been substantial. Will they give it back? What were the capital gains taxes paid on Bernie’s false statements?

If I invested \$10,000 with Bernie twenty years ago and left it there, and he earned 15 percent per year on average, did I really lose \$164,000 when he crashed? I don’t think so. Someone needs to do the math. And explain it.

Paul Solman: The math is a nightmare, James, because of the complex tax issues. What would YOU deserve as tax relief if you invested \$10,000 twenty years ago, thought it had grown to \$164,000, had paid capital gains taxes all that time, had planned for your retirement, and spent your money accordingly? And tax relief gets you, at most, 35 percent of the money back, assuming you have enough income against which to write it off.

But I can see your point about taking a “theft loss,” as the IRS has ruled Madoff investors may, on inflated investment returns.

With regard to investors, however, you’re way too harsh, though with you being from Sag Harbor, you probably know more of them than I do. (Indeed, if you know ONE Madoff investor you know more than I do.) You really think Elie Wiesel was banking on Madoff’s insider trading? Steven Spielberg’s foundation? Do you have any idea how woefully ignorant most people are about investing? How frightened? How cowed by a politically powerful, advertising-savvy industry?

As to investment advisors, look: A lot of people were investing in so-called “feeder funds.” Professionals. And some of them too were taken in, don’t you think?

Bottom line: Investors in a Ponzi scheme are pretty much indistinguishable, it seems to me, from perfectly “legitimate” investors. I’ve long been swayed by the insight that ALL enterprise is based on what English economist John Maynard Keynes called “animal spirits,” which he defined as “spontaneous optimism.” The longer such optimism prevails, the more investment there will be in what is, unfortunately, an inherently unknowable — and therefore deeply risky — future.

True, unlike investors in Ponzi/Madoff schemes, investors in earnest enterprises often wind up with something of value. But always, the investing itself is an act of faith, with dreams of some fantastic payoff dancing in investors’ heads. Madoff’s investors weren’t looking for anything fantastic. Yes, the “investments” DID prove to be a fantasy. But you’re going to blame the INVESTORS for that?