Wait a minute - let's do some math.
This was a ponzi scheme, he took in money and (when requested) paid out the money he took in so it appeared people were getting profits. So... money out plus account balance equals money in plus/minus any gains/losses minus whatever he skimmed off for himself.
So... if he skimmed of less than 40%, he was doing these people a favor compared to being invested in the market. I'm not so sure I'm feeling sorry for these people chasing a "for sure" 12% return.
I've wondered "where's the money?". We know that some went to all the investors who made withdrawals, but how much was that?
So I did some math, too. Here's my approach:
I assumed:
- the inititial deposts totaled $10 million, 30 years ago
- since then, he reported 12% annual returns
- annual withdrawals averaged 12% of the annual balances
- after 30 years, the paper balances were $50 billion.
To make those assumptions work out, I needed to have the deposits go up by 27.5% per year. That is, the deposits were $10 million, $12.75 million, $16.26 million, .... with the last year's deposts totaling $11.5 billion.
Given all that, the inflation-adjusted deposits totaled $62 billion over the 30 years. The withdrawals totaled $35 billion. This gives a net to Madoff of $26 billion, which is also the loss to the victims, ignoring any gains they could have earned on real investments in excess of inflation. (Wlso less any real assets they can recover at the end). I'm using an inflation rate of 3% to do the adjustments.
I was surprised how little the withdrawal rate matters. For example, if the withdrawal rate were 0%, the deposits would have had to grow at 23.3%, and Madoff would have taken $27 billion. A withdrawal rate of 24% requires a deposit growth rate of 30% and Madoff's take would have been $25 billion.
If this model is anywhere near accurate, Madoff's profits on this were bigger than I had expected before I did the math. Now I am wondering where all the money went.
Of course the individuals who got in early and got all their money out early went to their graves knowing that their investments with Madoff had been very good. Those that got in late and didn't take anything out lost everything they invested.
