What exactly did Madoff do, and how?

Well….He began by getting people to invest in his “so called” investment firm only to put that money into a bank. He then continued to get more people to invest with him to only use that money to pay his original investors a profit. Eventually he got so good at convincing people to invest with him because of the “fake” large profits that he was giving some of his investors that he scrounged up a few billion dollars from his investors. You can see how eventually you lose all your money. Lots of people knew something was fishy back in 2001 and even the SEC was warned but never investigated him, because he was supposedly still reporting big profits even when the markets were down.

edit: Basically you start with smaller investors and end with large investors. IE. You start with $100. Put that in a bank and earn low interest. You get another investor to invest $200. You pay your first investor $150. You now have $50 in the bank. You then get an investor to invest $300. You now pay your second investor $250. You now have $100 in the bank…...and so on.

NOTE. I would suck at writing one of those dummy books.

Critter is right. A big question is why he plead guilty. My best guess is that a trial leads to a investigation. He pretty much said it was just me. His brothers were involved too. I’m guessing he fell on the sword so it wouldn’t be found out that everyone knew about the scam and would face prosecution.

That is kinda honorable. But he is still a dick and I hope he dies in prison.

Him: I worked on Wall Street, I can make you money.
Them1: Hmm, okay here’s some money.

Him: I worked on Wall Street, I can make you money.
Them 2: Hmm, okay here’s some money.

Him: Here’s your profits, off to reinvest.
Them1: Great, I’ll tell my friends!

Him: I worked on Wall Street, I can make you money.
Them3: Great, here’s some money.

Him: Here’s your money, off to reinvest.
Them2: Great I’ll tell my friends!

Him: I worked on Wall Street, I can make you money.
Them4: Great, here’s some money.

…..

Him: Gee, the market is down, no money to give you right now.
Them1 through Them1,234,567: I want my money out of the fund

Him: Yikes!

Ponzi Scheme

@ubersiren

haha, you beat me to it…

Here’s a concrete example. Suppose I make an offer to Fluther that if anyone gives me $1 on Monday, I’ll “invest” it and give back $1.50 two weeks later. I have lots of lurve, so people trust me.

So on the first Monday, daloon and gailcalled give me $1 each. I have $2.

Next Monday, cprevite and augustlan give me $1 each. Now I have $4.

The Monday after that, I have to pay out. daloon and gailcalled get $1.50 each. They are so pleased with their investment that they each invest another $1, and gailcalled talks up my scheme to ben and andrew, and they each put in $1. So on this Monday I paid out $3 and took in $4, so I have $5 on hand.

The next Monday, I have to pay out again. $1.50 to each of cprevite and augustlan, who are so thrilled that they invest $2 each. They talk this up to other people, and johnpowell and shilolo each invest $1. So I paid out $3 and took in $6, so now I have $8 on hand.

The Monday after that – another round of payouts. $1.50 to each of gailcalled, daloon, ben, and andrew, who each give me another $1. And johnpowell is worried that other people are making money and he isn’t, so he invests another $3. $6 out, $7 in. Now I have $9 on hand.

You can see at this point that the profits that earlier investors see are coming from the investments of people who contribute money later.

Now, I’m in trouble. My fund is not solvent. In the past two weeks, I have $1 each from gailcalled, daloon, ben, andrew, and shilolo, $2 each from cprevite and augustlan, and $4 to johnpowell. This means that if they all want their money back, I have to pay them $13—but I only have $9 on hand. But as long as people keep on investing in greater and greater numbers, or with larger and larger amounts, I’m OK.

Now, suppose Flutherers have less disposable income, and decide to spend all their spare dollars on cake for their girlfriends. Nobody else is investing.

So on the next Monday, I have to pay $3 to each of cprevite and augustlan, and $1.50 to each of johnpowell and shilolo. Each of them are pleased with the outcome, and invest the same initial amount – $2 for each of cprevite and augustlan, $1 for each of johnpowell and shilolo. So I paid out $9 and took in $6. I have $6 on hand, and things are starting to look bad.

The Monday after that, I have to pay $1.50 to each of gailcalled, daloon, ben, and andrew, and $4.50 to johnpowell. Er, that’s $10.50, and I only have $6 on hand. Suddenly my checks bounce. And worse, I don’t have enough on hand to refund anyone’s initial investment.

Multiply these numbers by a million, and run it through a few more cycles, replacing names of Flutherers with names like “Brandeis University,” and you have what Madoff did.

@cwilbur, I wish I could give you 348209380850934834508 lurve for that answer. Not only did it explain it perfectly, but also managed to make me lol4rl (sending cake to their girlfriends) and perhaps unintentionally relate it to my life (Brandeis University).

I needed this to be explained, also. Still blows my mind that it happened.

@omfgTALIjustIMDu: I chose Brandeis for a reason—they had a lot of money invested with Madoff, and lost a good deal of it. That’s part of the fiasco over the Rose Art Museum.

@cwilbur, I know, I’ll be going to Brandeis next year (part of why I’m so interested in this).

In my previous relationship, my ex SO bought into this scheme and tried to get me to join. Luckily I caught her before she actually paid her “recruiter” the few hundred dollars.

does anyone notice the resemblance to the Social Security System ??? ;)

Below is a summary of points that allowed Madoff to fool so many people, investors, auditors and regulators:

http://www.myhowtoos.com/en/red-hot/61-understanding-the-madoffs-fraud

@TaoSan

How about our economy in general?