Byron King

What if you woke up one day and there was a flying saucer sitting in the middle of Central Park? It would change your view of the world, if not the universe, right? At least that’s the idea behind the newly released remake of the classic 1951 film The Day the Earth Stood Still.

And what if you went to bed one night and thought that you had money on account in a fine silk stocking firm? What if you believed that you and your family were well provided for? What if you were sure that you had made all the right choices and done all the prudent things? You saved your money. You placed it with a reputable outfit. You were in the bluest of blue chips. And you woke up the next morning and it was all gone? Poof. Vanished. You’re broke! It would change your world, right? Maybe your life would fall off a cliff. Your standard of living would crater.

The World’s Largest Ponzi Scheme — $50 Billion

Well, this is exactly what happened to a lot of people a few days ago. These unfortunate souls invested their funds with Bernard Madoff’s firm in New York. Apparently, Madoff (pronounced “made off”) was running what The New York Times said “may be the largest Ponzi scheme in history.” He may have wiped out as much as $50 billion of other people’s money. $50 billion. No typo.

For about 48 years, Madoff took in people’s money and claimed to invest it through his proprietary “split-strike conversion.” What’s that? Actually, I’ve never heard of it. It’s some sort of investment hocus-pocus that promises something for nothing. But Madoff always claimed he was making solid returns, in good times and bad, of 8-12% per year. Like clockwork. Such a deal.

Madoff’s investment firm was not for just anybody. You had to be somebody to be part of this firm. You had to be invited to invest with Madoff. So at fine country clubs up and down the East Coast, people would politely mention that “I invest my money with Madoff.” And other people would say, “Oh? Can I invest with Madoff too?” Then maybe they would get a discrete solicitation in the mail offering the opportunity to open a modest account. Maybe.

Or maybe they wouldn’t get that solicitation. And the people who were rejected wanted to know why. “So how come my money is no good with Madoff?” they would ask. And thus did the cachet grow. People wanted in. “Hey, tell me how I can invest with this guy?” was the topic at many a dinner of lobster Newburg or veal a l’Oscar. Over the years, thousands of people, firms, businesses, charities, pensions, hedge funds and even government entities placed money with Madoff. And Madoff took it. With pleasure.

It was all a swindle. Madoff was taking in the new money and paying it out to the previous investors. He had no real system of investing. Madoff just dabbled in the markets, making some money here and losing it there. He lived well. He owned a yacht. He attended fancy parties. He was a patron of the arts and charity. He contributed generously to politicians in the Democratic Party (Hillary Clinton, Chuck Schumer and Charles Rangel, among others, in recent federal campaign filings). He was polite and distinguished. He was a counselor to many a family, always good for wise advice about how to make the next right move in life.

Financial Sociopath, Money-Murderer

Indeed, Madoff pretended for decades that things were all right. But things weren’t all right. Madoff and his firm just took money from one group of people and paid it to others. He sent out elaborate statements, documenting how well people’s accounts were doing. Yet in the process, Madoff lost billions of dollars. The funds vanished into money heaven. And Madoff did it all under the noses of auditors, lawyers, accountants, tax agencies, the Securities and Exchange Commission (SEC) and a host of other pretend regulators.

In short, Madoff is a financial psychopath. He’s a money-murderer. He is to money management what Ted Bundy was to unsuspecting young women.

“No Innocent Explanation”

Along the way, a few people raised suspicions. They said things like, “No one can deliver those kinds of results year after year. It’s impossible.” But many other people didn’t want to believe anything was wrong. The final whistle didn’t blow until Madoff’s sons turned him in to the FBI last week. (The sons claimed that they “knew nothing” about the scam.) And according to press reports, Madoff confessed everything to the FBI arresting agent, saying, “There is no innocent explanation.”

Many of Madoff’s clients are from the Jewish community. That was Madoff’s heritage, and thus did Jews form much of the clientele that Madoff cultivated. According to The Wall Street Journal, some Jewish investors called Mr. Madoff “the Jewish bond” because of his solid and predictable returns.

The “Old Money” Is Now Gone

Now with Madoff’s demise, there is an entire swath of Jewish “old money” gone down the tubes. There are personal wipeouts that will devastate entire extended families. The legacy economy of many trust fund families is wrecked. A lot of country club bills, condo dues and school tuition statements are about to go unpaid.

This will impact communities from Boston to Palm Beach and even overseas as far away as Buenos Aires and Johannesburg. That is, for some overseas Jewish families, Madoff held the “safe” money, the strategic reserve for when it was time to pack the bags and move away. (An old African expression comes to mind: “When the Jews leave, it’s time to leave. When the Portuguese leave, it’s too late to leave.”)

Some charities are hitting the rocks too, totally wiped out by Madoff. There are several hedge funds going down like the Titanic, with one fund losing nearly $1.8 billion. Just in Geneva, Switzerland, a number of banks reportedly may be out of $4 billion invested with Madoff. French bank BNP Paribas is said to be on the hook. Japan’s Nomura Holdings, which markets Madoff’s funds, also has been swept up in the financial wipeout. HSBC is taking a serious hit. Kingate Management of Bermuda has reportedly invested part of its $2.8 billion fund with Madoff.

How Bad Is It Out There?

So it makes me wonder. How bad is it out there? How many other Ponzi schemes are there besides Madoff’s? How many more financial psychopaths are ginning up fake account statements? How many little old ladies are there out there who think they have money in an account, but it’s all just some big scam? How many more bad banks? How many bad brokerage houses? How many more bad companies with bad stock? How many more bad government entities with bad finances and worse bonds? How many bad pension funds?

It drives home the point of wondering whom you can trust. And how bad is it with even the U.S. government? Do you really trust government statistics, like the one for the rate of inflation or unemployment? And how about the numbers in the national budget accounts? We’re spending how much? Does money even have any meaning to the people who have the power to appropriate it? Our whole national accounting process has turned into an intergenerational Ponzi scheme.

Really, our $10 trillion national debt is not enough? We are looking at trillion-dollar deficits in just the next year or two. How long can it last? And whom can you believe in any position of authority? So Bernard Madoff had a “system” for investing? And Ben Bernanke has a “system” for managing the monetary policy of the country, right? Hank Paulson has a “system” for managing the Treasury accounts? And Congress and the president — G.W. Bush, and after him B.H. Obama — have a “system” for spending the nation’s limited wealth on important things, yes?

Own Gold and Silver – Just Do It!

How do you know that you don’t own a big fat piece of nothing? It’s why I believe you need to own some real gold and silver. I’ve said it before, and I’ll say it again: You need to own some gold and silver in addition to whatever else you own on account. Just do it! Go out and buy some. Today. Now don’t get me wrong, I’m still very positive about the potential in our ESI portfolio — believe me, we hold plenty of quality assets that will soon have their day. But when all else fails, if you have the precious metals, you still have something you can hold in your hand.

And when someone comes along with that great deal that looks just too good to turn down — steady returns forever, with minimal risk — remember what happened with Madoff. He was a pillar of the Jewish community. “Such a nice man.” Now his fraud has collapsed like the temple around the ears of Samson. Let me mix my Old and New Testaments on this one and quote Matthew 10:36, “A man’s foes shall be they of his own household.”

Until we meet again,
Byron W. King

December 22, 2008

Byron King

Byron King is the editor of Outstanding Investments, Byron King's Military-Tech Alert, and Real Wealth Trader. He is a Harvard-trained geologist who has traveled to every U.S. state and territory and six of the seven continents. He has conducted site visits to mineral deposits in 26 countries and deep-water oil fields in five oceans. This provides him with a unique perspective on the myriad of investment opportunities in energy and mineral exploration. He has been interviewed by dozens of major print and broadcast media outlets including The Financial Times, The Guardian, The Washington Post, MSN Money, MarketWatch, Fox Business News, and PBS Newshour.

  • Charlene Hopkins

    Just finished todays newsletter where you ask how many other Ponzi schemes are out there right now. Well the bigest by far is the one the USA has done to our money. Our retirement account has srunk at any rate and beyond that every dollar still in it is worth far, far less than when we struggled to put it in our IRA or 401K. I am worried that we will not have enought for any life style let alone the one we have enjoyed which is modest by any standard. The dentist wants enough to buy a used car and soon probably a new one, The grocery store is a $100 for basic for two people for a week, not including the runs for fresh vegies or milk. We may be spending less at the gas pump but I am sure the oil countries will not let that go on for very long. Who will help us when we need it? Print some more worthless money and say they are helping. Our best hope is that the government will freeze in place and stop doing anything untill we can all catch up, probably not in my lifetime.

  • Jocelyne Slough

    I enjoyed the title “The day the earth went broke”, even though it’s a bit of hyperbole. My first reaction to the news that some people had lost ALL their money and had mortgaged their homes to the hilt to boot , all for this Madoff guy was, “They had to be greedy”. My second thought was that apparently none of these people ever read Proverbs, which recommends splitting your money into 8 piles. Good old advice, and free as well. Don’t put all your eggs into one basket. What were they thinking?

  • MzScarlett

    this was spelled out in Liar’s poker; license to steal & multiple other books telling of how our Gov allowed the theft of American citizens $; MOST every agency that is “set up” in the USA is only a ‘shell” to make it APPEAR as if they were there to “protect” the citizens. They are not. Consider: multiple books, you can go to;;; etc; or to b&n & type in pharmacutical books; THIS nation is 2 faced: what it SAYS is usually the exact opposite of what it is; what it does; scientific studies have shown that simply taking the lid off clorine bleach just from the fumes: not using it, just removing the lid: causes changes in childrens handwriting due to the problems the chemical causes in the brain. Most businesses do not use it they use the hydrogen peroxide 3% which kills not only bacterias but VIRUSES. In fact if you spray it & then white vinegar it kills e coli, salmonella, & is STRONGER & MORE EFFECTIVE than any toxic made; yet is safe for children, animals, humans, & the earth. Told: “this is the way democracy works” in exploiting & deliberately harming people for $ for sister company the mega Pharma who pays docs offices to meet quota of prescriptions every month: & mega prizes for “pill of the month”: it is CRIMINAL, & only the way of DICTATORSHIPS; IN NO COUNTRY is premeditated deliberate poisoning & killing acceptable but THIS one. The death rate of infants in THIS COUNTRY has been higher than any other country: finally got to #2; the infants die, the women cry; the folks TRY to get something done: to be told, NO. THIS is criminal dictatorship NOT democracy at all; & you see it reproduced now “as they have gotten away with it in the USA for years”; in Iraq: corruption & graft; Afghanistan: split by corruption: Pakistan: corruption & graft: made in the “image” of the USA.

  • Pingback: The Buzz » Blog Archive » Madoff Makes Us Love Gold Even More()

  • Pingback: Just what is the penalty for stealing 50 billion? - TurboBuick.Com()

  • MarkB

    $50 billion in today’s dollars is probably only 1-2 billion in yesterday’s dollars, like late-1990’s dollars, so there’s really no comparison. It’s really not that much, yet, still a ponzi scheme is a ponzi scheme, think social security. :)

    Since we’re on the subject of money, I’ll bring up the gold standard, which is what money/currency/paper is based on. Gold, itself, doesn’t change. Paper(“money”) does. There’s a relationship. Gold doesn’t change. Money’s relationship to gold does. If I was a wise investor, I might have invested in gold a few months or even a year back, taken profits, or am going to take profits, and take profits in non-US currency, which is really lousy, right now. US Paper is probably going to stay that way at least for the next year or two, 12-24 months. Thank the American People and “Their” “Administration”.

  • Pingback: Madoff’s Ponzi Scheme Makes Us Love Gold Even More - Contrarian Stock Market Investing News - Featuring Bargain Stocks()

  • Pingback: Trackback()

  • Pingback: here()

  • Pingback: Trackback()

  • Pingback: Trackback()

Recent Articles

The Euro Isn’t Dead

Peter Schiff

Peter Schiff reports on the broken spell of confidence surrounding the dollar, and how it may also reverse the fortunes of other beaten down currencies...

Gold Miners, RIP…

Bill Bonner

Bill Bonner explains why you can count on central banks to exaggerate the commodities cycle with more cheap credit...

How Historic Lows in Housing Will Set You Up for Incredible Gains

Greg Guenthner

First, we’re dealing with the tightest real estate market in a very long time. Homebuilders haven’t been building for the past decade. And the rental market? Crazy. Rents are sky-high and the rental market these days is tight as a snare drum. I reminded you back in June that the average rates for rental houses have risen by more than 13%.

Matt Insley: “If It’s Sunny, WE’RE Makin’ Money”

Matt Insley

George Soros, Steve Cohen, Israel Englander, Leon Cooperman, Michael Platt, Daniel Loeb, James Dinan, Stephen Mandel Jr., Larry Robbins and David Einhorn… That’s a list of billionaire fund managers that have a stake in the solar sector. Indeed, the solar sector is continuing to warm up with big money…