$50 Billion Is Missing (Extract)

Extract from a story in Issue 20, January 19, 2009 of The Jerusalem Report. To subscribe to The Jerusalem Report click here. With public trust in capital markets at its lowest level in decades, both in Israel and abroad, the last thing the world needs is a huge fraud, the mother-of-all-Ponzi-schemes - one where a respected Jewish fund manager turns out to have committed a 30-year-long $50 billion fraud. This scenario is now reality. With the arrest of Bernard L. Madoff on December 11, his firm Bernard L. Madoff Investment Securities LLC. (BMIS) was placed in receivership by Federal Judge Louis L. Stanton. Losses of some $50 billion are just under the $62 billion in listed assets held by Enron when it announced Chapter 11 bankruptcy in December 2001. According to the Wall Street Journal, the final reckoning may actually exceed $50 b. Leading American Jewish foundations, organizations, schools and universities, and Israeli banks, charitable organizations and universities who invested their money with him have all lost fortunes. Some lost everything. A great many blameless and needy people have been badly hurt. To put things in perspective, $50 billion is equal to about one-third of Israel's entire annual Gross Domestic Product. And this time I cannot say, it is only money that is lost. Because it is money that went, and would go, to the most deserving and most praiseworthy causes. And now it is apparently all gone. It is the last thing the American Jewish community and Israel need in these difficult times. Losses in global capital markets exceed tens of trillions of dollars and are still mounting. The global recession deepens by the day. Israeli firms are announcing massive layoffs. Trust in banks and in capital markets is the lowest in living memory. The Madoff scam will doubtless play into the hands of anti-Jewish groups who blame the current global financial crisis on the Jews. 'It's all just one big lie' The New York Times reports that in the week of December 1, Madoff told a senior executive he was struggling to raise $7 billion in cash to cover withdrawals by his clients. That "senior executive," we now know, was one of his sons. On Wednesday, December 10, Madoff's sons Andrew and Mark visited Madoff's office, on the 17th floor of the so-called "Lipstick" building on Third Avenue in Manhattan. They asked for an explanation. He invited them to his apartment. Then he told them that he had defrauded investors, through his fund BMIS. "It's all just one big lie," he reportedly said. "I was operating basically a giant Ponzi scheme." Andrew and Mark phoned a friend, a lawyer, who in turn called U.S. government prosecutors and the Securities Exchange Commission. On Thursday morning Andrew and Mark met with government officials, and the FBI subsequently sent two agents to Madoff's Manhattan apartment. He confessed and was arrested. Bail was set at $10 million. Andrew and Mark will be state witnesses. They are prohibited from talking to their father. Madoff, who is 70, was charged on a single count of fraud and could spend 20 years in jail. Who lost money? The list of Madoff's victims is desperately long and includes the very best humanity can offer. It includes leading Jewish philanthropies, American and European banks and investment funds, and Israeli investors, universities and banks, and the list mounts daily. In the United States (estimated losses in brackets): Boston-based Carl and Ruth Shapiro Family Foundation ($155 million), Yeshiva University ($110 million), U.S. Senator Frank Lautenberg's foundation ($12.8 million), Mortimer Zuckerman Trust ($30 million), Elie Wiesel Foundation ($40 million, its entire assets), Los Angeles Federation ($18 million), American Jewish Congress (two-thirds of its endowment), Greater Washington Jewish Federation ($10 million), Charles I. and Mary Kaplan Foundation ($29 million), Ramaz School ($6 million), Spielberg's Wunderkinder Foundation... the list is endless. In Israel: Non-profit organizations: The Yeshaya Horowitz Association, which funds applied medical research (reportedly, $800 million, though according to one newspaper account, the fund's attorney denies this), Chais Fund (invested $250 million in education, and has now ceased operations), Yad Sarah, which loans medical equipment ($1.5 million). Universities: Technion ($72 m.), Bar Ilan, Ben-Gurion and Hebrew University. Finance and Insurance companies: Harel and Phoenix (about $10 million each), Prisma (less than $1 million) and Clal (up to $3 million). European banks also lost heavily. Spain's Santander Bank reportedly lost $3.1 billion, Bank Medici of Austria lost $2.1 billion, Union Bancaire Privée (Switzerland) lost $1 billion. So did HSBC (UK). Royal Bank of Scotland lost $600 million and BNP Paribas (France) has lost about $500 million. Bloomberg news service reports the Madoff case caused the "worst loss for Jewish charities since the 1930s." Bloomberg cites a study by researcher Gary Tobin, showing American Jews, though only 2 percent of the population, "contribute 25 percent of the largest gifts to higher education. To see foundations losing big parts or all of their assets through fraud has never happened before," Tobin says. "This is a tremendous violation of the public trust." U.S. Jews give a reported $5 billion annually to Jewish causes. Israeli philanthropies are already hard-pressed, as donations abroad plummet after donors sustained capital market losses. The Madoff scam will make matters infinitely worse. The writer is academic director of the Technion Institute of Management, Tel Aviv. Extract from a story in Issue 20, January 19, 2009 of The Jerusalem Report. To subscribe to The Jerusalem Report click here.