Arrest made in $50 billion Wall Street fraud

It may be difficult to grasp the scope of a $50 billion fraud on Wall Street, so think of it this way: it’s three times the size of the loan that the Big Three automakers tried squeezing out of Congress this week.  No help?  How about 1/14th the size of Hank Paulson’s TARP fund to rescue … er … Wall Street?  Feds arrested the former chairman of Nasdaq for perpetrating the biggest financial scam since the UN’s Oil-for-Food program:

A Wall Street powerbroker for nearly 50 years who built an influential firm has confessed to a massive fraud scheme that will cost investors at least $50 billion, federal authorities say.

Bernard L. Madoff, 70, facing a single count of securities fraud, declined to speak with reporters after a federal magistrate judge in U.S. District Court in Manhattan ordered him released Thursday night on $10 million bail.

Andrew M. Calamari, associate director of enforcement in the Securities and Exchange Commission’s New York office, said the SEC had filed a civil securities fraud charge as well and was alleging “a stunning fraud that appears to be of epic proportions.”

Madoff allegedly told senior employees that his firm had been insolvent for years and that he was running a Ponzi scheme to make money.  Madoff used incoming investments to show results for previous investors, a mirage that would eventually leave the last set of investors holding a very large bag.  The size of that bag at Madoff’s arrest?  About $7 billion in redemption demands that Madoff was desperately trying to cover.

Why did Madoff tell his employees what was happening?  He wanted to warn them about the storm to follow, but not before he fleeced an additional $200 million or more to give his senior employees some golden parachutes before Madoff turned himself in to the authorities.  One of the employees tipped off the FBI, which swooped in to end Madoff’s fraud.

Madoff got released on a $10 million bond pending his trial.  Believe it or not, that’s twice the maximum fine he could get for his crime.  Of course, Madoff could also get 20 years and be forced to provide restitution, but somehow I doubt he’ll have much liquidity left by the time a verdict gets delivered in the case.

We know that this financial crisis has its roots in government distortion of lending markets and the irrational escalation in housing prices that followed, but that doesn’t mean fraud doesn’t occur as well.  If the feds have the scale correct in the Madoff case, it will send shock waves through the investment community and could fatally undermine confidence in Nasdaq as well.

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