BernieMadoffCalculator


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The Bernie Madoff game			December 16 2008

Inputs			How fast can you lose $50bn?
Initial amount invested ($m)	1000000		To lighten the winter gloom, we've brought you the "Bernie Madoff game". Pretend you are running a Ponzi scheme. Decide the fictional return you want to promise investors, how much to siphon off for yourself and how long to let the scam run. Then watch the losses mount.
Return promised to investors (annual)	10%	10%
Amount siphoned off or lost (annual)	0%	0%
Years scam lasts	50

Output
Total money raised ($m)	117,925,638
Amount siphoned off or lost	116,809	0.1%	You can flex any numbers in blue.
Amount recycled to investors	117,808,829	99.9%

			www.breakingviews.com
Explanation
By Hugo Dixon

To lighten the winter gloom, we've brought you the "Bernie Madoff game". Pretend you are running a Ponzi scheme. Decide the return to you want to promise investors, how much to siphon off for yourself and how long to let the scam run. Our interactive game then calculates the total losses.

The game supposes that, at the end of each year, you pay back your investors all their capital plus the return you say you have made for them. To get the cash to pay your old investors, you need to raise money from new investors. Obviously, if you really do make as much money as you say you are making, there's no problem. But if either you lose money - of siphon it off for yourself - there's a hole in your accounts. The longer the game goes on, the bigger the hole. The game comes to an end when you can't find enough new investors to fill the hole left by old investors demanding their money back.

It's not clear exactly how Madoff operated. But he pretended he was delivering an annual return of around 12%. So that's the number we've used as our default. But you can vary it. Watch out, though. If you promise excessive returns, your investors are likely to sniff you out earlier.

We also don't know whether Madoff was losing money or siphoning it off - although at the very end of his scam he allegedly did tell his sons that he was proposing to pay out fat bonuses. We've chosen a figure of 10% a year for the combined effect of investment losses and amounts siphoned off. Again you can vary it.

Finally, we don't know how long Madoff's scam has been going on. But he has been in business for several decades. We've chosen 20 years.

You start the game with $1bn to play with. With all these assumptions, the total amount raised comes to $53bn - roughly what Madoff himself allegedly managed to spirit away. Not all of that money is lost or siphoned off. The bulk of it - $30bn - gets recycled from new investors to old ones.

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