How is what Madoff did different than what banks do?

He misrepresented the performance of his investments, causing his investors to think that the money they had placed with them was growing, when in fact it was vanishing.

If you had invested $1 million with Madoff, you would have received periodic statements indicating that your money had grown by such and such a percentage, and this during a time when most investments were losing money. You would have been thrilled to leave your money in there and keep seeing those increases. Meanwhile new investors are clamoring to get in on the action.

But in reality, your money was vanishing (no one yet knows where). Of 10’s of billions entrusted to Madoff, only about 250 million was left when he was busted. This wouldn’t have become a problem for Madoff as long as very few people tried to pull out of the scheme. When the occasional guy wanted to check out, Madoff could pay him out of the new money coming in, but all of a sudden people lost faith in the legitimacy of his operation and he had to come up with $7 billion that he didn’t have. The game was over.

A bank never has enough cash on hand to reimburse all of its depositors at once, true. But it will always have enough assets, including collectible outstanding loans, to account for all of that money. It could, given enough time, reel all of that money in and pay off all its depositors.

Madoff could never even have come close to reimbursing his investors because the money was simply gone. But he made it appear to the investors that it was all still there, and growing.

The difference is also intention, I think. Madoff appears to have never actually invested anyone’s money. It came in and he used it. True criminal intent.

You give the bank your money, they invest it at 5.5–30% (mortgages-credit cards) and pay you 3–5% (demand-timed accounts) Madoff paid more in dividends than he earned on the investments. This kind of works as long as his investor base is growing but it is bound to fail eventually. The classic Ponzi scheme.

Marina, I question if they will be able tp prove criminal intent. He was successful (and ligit for decades, but with increasing competition he had to pay bigger dividends in a hyperinflationary period-he gambled that he would be able to hold out until the economy changed. His multimillionaire investors, including European bankers should have known something was up years ago. Greed will out. TINSTAAFL

@galileogiel What he did to the many vital non-profits who trusted him and their constituents who will now not be helped was criminal in my book—whether the law comes to that conclusion we shall see.

The non-profits went to him because his ‘profits’ were far better than any others. The people in charge of investing money donated or granted to them were close to criminally stupid. Everybody knows the greater the profit, the greater the risk. And the particular investment scheme he was using, while legal, was extremely risky, mostly run through offshore institutions and are minimally regulated. While he stepped over the line, it would have failed eventually anyway because as the downturn continued and profits decreased savvy investors (the banks) would have pulled out, leaving the rest holding the bag anyway,

Those who invested money for the non-profits, municipalities etal should understand what they are doing or invest in govt bonds. They bear responsibility for their actions. But they will just move on to other mid-six figure positions.

Trust me? Crap!

Zac--I think you are talking about fractional lending/banking....and you've got a point, a fractional banking system works almost exactly like a Ponzi scheme. http://en.wikipedia.org/wiki/Fractional_Banking

This is why we’ve seen banks fail recently, when a mass of people withdraw their money, the banks does not have reserve—the banks depends on new depositors to pay back account holder’s requesting withdrawls—Indy Mac is a prime example.

This is why the Fed is pumbing money into the banking system as account holders keep pulling out cash. Very much like a Ponzi scheme.

Beleive me, the super wealthy Madoff investors will get much if not most of their money back—the system protects the wealthy. It is called SPIC.