How Bernie Madoff Could Have Lost $50 Billion

The shocking confession by Bernie Madoff that he was running a $50 billion Ponzi scheme had many people shaking their heads in disbelief. How could this guy have been running $50 billion in a small family shop without anyone noticing? Doesn’t he only have a couple of dozen clients? It was at least comforting to think that the total losses from the scam might be far more limited than Madoff’s words implied.

But Madoff might not have been exaggerating. While the direct clients of his asset management business might have been limited to a 25 or fewer investors, those investors were often institutions representing scores of other investors. Fairfield Sentry, for instance, is a hedge fund run by the well-respected firm Fairfield Greenwich. It’s sole business, as far as we can tell, was giving money to Madoff to invest. That means that every single investor in Fairfield Sentry may have had their investment wiped out by the Madoff Scheme.

What’s more, Nomura Bank apparently issued securities that it described as “3X Leveraged Version” of Fairfield Sentry, meaning that it lent money to investors to invest in Madoff’s scam. We have no idea how widespread this kind of operation might have been, but it sheds light on how exposure to Madoff could be much more widespread than many suspect. (You can download the promotional materials for this Nomura product here.)

This chart, by the way, shows what a 3X leveraged exposure to Madoff was supposedly returning. All you need to do is look at those miraculous returns to understand why so many investors we itching to fork over cash to Madoff.