Written by: Ian Young
Whether the case be one of an accidental fraudster, or a fraudster with malicious intent, fraud surrounds us everyday. Asset misappropriation plagues small businesses constantly. We also hear stories of bigger fraud cases, like that of the 1MDB scandal, where the 1MDB trust fund bypassed anti-money laundering laws and was embezzled by the prior Malayasian Prime Minister. With so many people committing fraud, one asks themselves, is it worth it? If it was not worth it, then why would people continue to commit fraud? We are going to answer these question here today by looking at the most infamous fraud case to date, that of Bernie Madoff’s ponzi scheme.
First before we get into whether it was worth it for Bernie Madoff, you need to know what a ponzi scheme is, and the extent of Madoff’s crime. A ponzi scheme is a fake investment scheme, where the fraudster in question never invests the money. The investor takes money from new “investments” to pay the “interest” of the old “investments.” This is why ponzi schemes are also referred to as the “rob Peter to pay Paul” schemes, because you rob the new investors to pay the old ones. This is why ponzi schemes are doomed to fail from the start, but can last indefinitely as long as the scheme continues to get new investors. Bernie Madoff had the largest ponzi scheme, and while it is hard to nail down the exact price because it was an international ponzi scheme, it is believed that he stole around “$64.8 billion in client assets.” (Will Kenton) $64.8 billion is a lot of money, but what was the opportunity cost worth it?Now that we know how much money Madoff made in the ponzi scheme, we need to figure out how much money he was making before to see how much money he could make. What people don’t remember is that Bernie Madoff was the head of a very successful and legitimate stock exchange company. At the height of his stock exchange company Bernie Madoff was making roughly $100 million a year. (Will Kenton) We do not know how long the ponzi scheme was running, but it is thought to be going for 17 years. So just looking at the period of when the ponzi scheme was running Madoff gave up $1.7 billion for $64.8 billion. If the story would have ended the moment the FBI put hand cuffs on Madoff, then yes it would have been worth it, but the story did not end.
Before he was tried in court, he was arrested, and was released on a $10 million bail, raising the opportunity cost to $1.71 billion. The Court case was a brutal one for the defendant, Madoff stole so much money that the government was not willing to give him a plea bargain, and sentenced him on eleven counts of felony. (justice.gov) Madoff got sentenced to 150 years in prison, because he took the full blame of the ponzi scheme. This was controversial because there is strong evidence to believe that his family knew of and helped with the ponzi scheme, but that is a discussion for another time. The important part is that Madoff was sentenced to 150 years in prison, those are 150 years that he could be hypothetically making money if he did not commit fraud. So $100 million a year for 150 years brings the total to $15 billion, so the total opportunity cost would be $16.71 billion. But you might be thinking, “Ian, even if Madoff was locked up at his birth, there is no way he could be alive for 150 years, much less be working and making money that whole time!” This is correct, however you need to take into account that Madoff’s children could take over the company, or he could sell the company for a similar profit, which is why I am still including it in the opportunity cost.But wait there’s more! Even though one Bernie Madoff’s papers his ponzi scheme was responsible for $64.8 billion, this number is drastically overstated. This is because a lot of the money was fabricated interest that only existed on paper. Even though the $64.8 billion adequately represents the time stolen from the investors, the actual principal investments only total $20 billion. Madoff also had a lot of his assets seized. When all was said and done, the total amount of money was $104 million in assets. That brings the opportunity cost up to $16.81 billion. Then you need to consider how Madoff’s family was impacted, because after all they were working at his “investment” company. The total lawsuits to be brought against the Madoff family were roughly $199 million(CNN) this brings the opportunity cost of the crime up to $17 billion.
There is still a $3 billion dollar difference from the amount that Bernie Madoff gained in his ponzi scheme to the opportunity cost, but there is still one factor left unanswered. Those are the lives that Bernie Madoff took indirectly due to his ponzi scheme. Bernie Madoff’s son hanged himself at the age of 46 on December 11, 2010, and Bernie Madoff himself has stated that he is responsible. Charles Murphy, a well-connected hedge funder with Bernie Madoff, lost $7 billion with Madoff; this drove him to jump from his hotel room on the 24th floor to his death.(CNBC) Who knows how many others could not pay their medical bills, could not make their mortgage, and had to spend the rest of their lives barely making ends meet because they lost their life savings with Madoff. Due to this Madoff stole the lives and freedom of many people when he stole their money.
It was not worth it for Bernie Madoff, and if it was not worth it for someone who stole $20 billion, it will never be worth it.
Works Cited
“Bernard Madoff Fast Facts.” CNN, Cable News Network, 24 July 2019, www.cnn.com/2013/03/11/us/bernard-madoff-fast-facts/index.html.JeffCoxCNBCcom. “Investor Burned by Bernie Madoff Jumps to Death from Hotel.” CNBC, CNBC, 28 Mar. 2017, www.cnbc.com/2017/03/28/charles-murphy-investor-burned-by-bernie-madoff-jumps-to-death.html.
Kenton, Will. “The Bernie Madoff Story.” Investopedia, Investopedia, 4 May 2019, www.investopedia.com/terms/b/bernard-madoff.asp.
Longley, Robert. “What Is Fraud? Definition and Examples.” ThoughtCo, ThoughtCo, 26 Aug. 2019, www.thoughtco.com/fraud-definition-and-examples-4175237.
ScottCohnTV. “10 Years Later, Here's What Became of Bernie Madoff's Inner Circle.” CNBC, CNBC, 11 Dec. 2018, www.cnbc.com/2018/12/09/heres-what-became-of-bernie-madoffs-inner-circle.html.
Very interesting topic to compare to what we're learning in Econ. It also makes you consider other such crimes or acts that are so constantly reported and how these instances of fraud never seem to be worth it. But is fraud the only money crime that isn't worth it? What about theft, bribery, or accounts such as tax evasion?
ReplyDeleteSpectacular writing! I think the most impressive aspect was the way you tied in so much economic vocabulary while still having a conversational and relaxed tone. Your structure was great, introducing the topic and then zeroing in on one case. As we are supposed to argue somehow in these pieces, I was a little bit concerned towards the end that you weren't going to state your position, but you wrapped it up well at the end. Clearly you were well researched and passionate about this. Awesome job!
ReplyDeleteMarvelous job, Ian, you truly are an intelligent individual. I'm sure you would have made Bernie proud. I was first tantalized by the Madoff story after ABC's release of the show documenting his rise, titled "Madoff". I also you brought up an extremely thought provoking point when you considered that, although capital-wise his opportunity cost was less than his profit (20 billion vs. 17 billion),the lives lost due to his actions would have tipped the scale in the other direction. It's an interesting point that has been brought up in my APES class, which focuses on the real cost of goods through externalities.
ReplyDeleteWell Cooper, a lot of your other examples that you provided due fall under the large umbrella of fraud. For example tax evasion often goes by the name of tax fraud, bribery of, lets say, government regulators to say you pass certain tests when you don't is misleading investors if you are a publicly traded company, so that is also considered fraud, and if theft is committed inside the company it is usually called embezzlement or larceny, depending on the specifics. A good rule of thumb is if the crime gets committed by members on the inside of the company, it is some sort of fraud. As far as your question is other crimes worth it, the short answer is no, because the risk of the punishment will always be greater than the reward.
ReplyDeleteI love the way you connected this fraud to opportunity cost it was very engaging. It was easy to follow and it clearly showed in the end that fraud is never worth it. You were able to analyze the biggest fraud scandal you could find to get your point across.
ReplyDeleteYou evaluation of the cost of life as a factor of opportunity cost is very interesting, it is not something that I, or others, would usually think about when evaluating the cost of something. However, once the connection is pointed out it makes scene, often not in financial interactions or stories, but when hearing stories from history or war. This connection between econ, which we usually associate with the transfer of money, with things from other classes, really helps in getting a better understanding of opportunity cost.
ReplyDeleteYou talk about this on a larger scale with billions of dollars but very few people have that much money in circulation. With that being said, do you think that one then has a higher opportunity to get away with fraud on a smaller scale with smaller amounts of money? I'm not saying I support committing fraud but I would assume its easier and hence could lead to it being "worth it."
ReplyDeleteIt is a really good question Ryan, and one worth asking. For example, would it be worth it to snatch a $20 bill out of the cash register at your place of work? This is much smaller than stealing billions of dollars, and therefore you will not get a 150 year prison sentence like Bernie Madoff did, because it would be a cruel and unusual punishment. However the thing to remember is that the risk will always be proportionally bigger than the reward. Going back to the situation of stealing $20 from work, you run the risk of losing your job, where you could make much more in the long run than $20. While I do not know much about Risk Management, I can confidently say the opportunity cost of fraud will never be worth it because the punishment will always be proportionally bigger than the reward... but that is only if you get caught.
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ReplyDeleteIan that was a great article, well written and researched. Now write a follow up article about a guide to successfully scam people … Just kidding …. But not really. The reason why is because the ponzi or pyramid scheme that is illegal, still exists in our country and in the world through MLMs(Multi Level Marketing). I remember last year in cross when you rambled for 30 minutes straight about accounting and economic fraud and how it is always caught. Then how come MLMs which are just pyramid scheme tied with some inferior quality goods are still legal in this country?
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ReplyDeleteI like how you connected this story of fraud to opportunity cost and the question, "Was it worth it?" This article really allowed the audience members like me to make a connection we might not have thought of on our own. That as well as thinking as an economist, with analyzing current issues like this one by viewing it on how it relates to economics. This scandal was an example to prove that fraud is never worth it and can affect individuals in ways we couldn't begin to imagine such as his son, who took his own life, and many other lives that were impacted negatively from this scandal.
ReplyDeleteThe way you connected opportunity cost to fraud and something that was a really big deal because ponzi schemes could be happening all around us we wouldn’t know unless we knew what we were looking for. I didn’t think that people of such high stature could be running schemes to help them rise the ranks even faster all while leaving a trail of broken families behind them.
ReplyDeleteThis reminds me of the fraud unit we did in Accounting. We never got into much detail, but this post did a very good job of explaining the ponzi scheme. I never though about the opportunity costs outside of the money. The fact that Madoff's son and coworker took their own lives definitely makes the opportunity cost greater than the chosen decision. With so much money involved, it's hard to even conceptualize the negative impacts Madoff's crime had on the economy. Instead of using the billions of dollars to further companies and help grow the economy, the economy was impacted negatively. Investors who invested great sums of money into Madoff never got their dividends, and the negative connotation now associated with Madoff's company certainly won't go away soon.
ReplyDeleteIan, this a very well written and intriguing piece. Well done. I agree that it was not worth it for Madoff, and you especially sold me when you brought up the lives he took, accounted for and not accounted for. It is unbelievable how long this lasted and how much he stole without this being taken care of. I can only imagine how big of a problem this is today. I can relate to this also, as on instagram many people claim they will invest your money for you, and claim that they will pay you some crazy amount back. It is a complete scam, yet many people fall for it. Even smart people fell for Maddoff's scheme. The opportunity cost definitely was not worth it. Also, only a 10 million dollar bail? I'm shocked because I would never want this man out of jail.
ReplyDeleteIan, you managed to make this rather interesting, bravo! I especially like how you mentioned the opportunity cost for Madoff's children, financially at least. Not only that you made an article of points that are exceedingly difficult to argue. I just simply cannot even attempt to disagree with the points you bring up in this article. Good job man.
ReplyDeleteIn the beginning of the article you talk about how there can be two different types of fraud, malicious and accidental. There is the 2010 example of Theranos where Elizabeth Holmes, arguably, unintentionally created her own fraudulent company. This event could constitute as "accidental" fraud, or at least one with less malicious intent than the example you listed. I wonder how you could prevent non-malicious, fraudulent companies, like Theranos, from gaining traction.
ReplyDeleteThis was very well done. Opportunity cost is something everyone needs to know and think about when choosing a job in the future. This will determine if you are actually making the most you possibly can and doing what is best for you. Everyone should know this before the graduate.
ReplyDeleteI'm very intrigued by this article because most people just think of fraud as bad thing that nobody should do, but you bring in reasoning behind fraud that takes a new angle. Of course, everybody knows that fraudsters try to steal and make money, but the risk reward relationship that you presented was interesting. Of course the punishment will never be worth the reward, but the big question is, the risk versus the reward. At what point from losing a job to the whole Madoff scandal does fraud not become worth the risk? Is it ever worth the risk?
ReplyDeleteGreat article Ian! Although I was slightly confused at the start of the article because I don't know much about the 1MDB scandal, but you explained everything so well and made it fascinating to read. The part that I found really intriguing was the question of how much the lives of people around you are worth. Money can at times seem so artificial and just a number, but when you see how it impacts everyone's lives, it becomes more grounded. Do you think any smaller scale fraudulent activities could be worth it though, if there is still a good amount of money made and only a few years in jail due to it? If Madoff only had to spend say, 10 years in jail, should he still have done it (economically)? It is still hard to say because that could have changed a lot about the lives lost and you would have to take into account the issues and mental impact that being locked up for that time would have too. If it is ever "worth it", I think that means we have a problem with our system because the penalty for such a thing should be much more than just the amount of money that they stole, since that wouldn't be much of a penalty (it would just be like starting over, breaking even). Overall, very interesting to read!
ReplyDeleteWow, who knew a fraud scheme could be so interesting! I think for a lot of these people who work in finance and make that much money each year, the idea that they can be making even more (even if its illegal) is always the goal. These people deal with money everyday, and almost become addicted to making more of it. I also found it very interesting that he confessed to the scheme, when there were many others that were involved. A lot of people like Madoff never take into account the opportunity cost of taking that money, especially when including the relationships he ruined with his family.
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