Bernie Madoff of Ponzi Scheme Infamy Has Died in Federal Prison

[jmowreader]

25. Uhh...not quite

Before Madoff decided to become a crook, he was an excellent and well-respected financier. The Ponzi wouldn't have pulled in a cent if anyone else would have tried it, because of the nature of the thing.

This is Harry Markopoulos' analysis of Madoff's Ponzi:

https://math.nyu.edu/faculty/avellane/madoffmarkopoulos.pdf

This is what Madoff claims to have done:

He first bought a "basket" of 30 to 35 large-cap stocks. Next, he sold out-of-the-money S&P 500 index call options against the value of the stock basket. Then he bought out-of-the-money S&P 500 index put options to protect the investment. Madoff claimed this would return 12 percent to the investors, which means it was returning 16 percent to him because no one runs hedge funds out of the goodness of their hearts. He also claimed it only lost a little money in four months of its existence, which is strange because there were several crashes in the market while Madoff was running this.

Markopoulos believes Madoff would have needed to earn 20 percent just on his stock selections to make this work, which is the first and biggest problem here: large-cap or "blue chip" stocks do not throw off 20 percent profit per year. They are extremely stable. You can get...oh, two to three percent out of them. If you build your portfolio around the Pink Sheets (penny stocks and foreign companies...both BASF and Bayer trade on the Pinks, and those are exceptionally stable companies - but since they're headquartered in Germany, they have to be traded OTC) you can make 20 percent...but you can ALSO lose 100 percent, and no one is going to throw ten million dollars at you to invest in penny stocks.

Markopoulos points out another huge problem, which is that there aren't enough call and put options in existence to do what Madoff said he was doing. He also points out that Madoff's counterparties are a little weird - Madoff claimed to trade derivatives exclusively through the Union Bank of Switzerland and Merrill Lynch, but the two biggest firms in the derivatives he claimed to use, which he would need to move the amount of derivatives he was supposedly moving, were Goldman, Sachs and Citigroup.

But seriously, the only way this shit would have sold is if a financial titan like Madoff said it worked.