Friday, July 10, 2009

Madoff & Inflation

In what I would describe as a case of victims imitating perpetrators, victims of (and onlookers to) Bernie Madoff's grand fraud have engaged in a kind of inflation of his crimes that bears at least a family resemblance to his very fraud: He sucked in investors by promising (and seemingly delivering) returns that substantially beat the market. In the response to Madoff, we can identify three examples of his victims (and others) treating him as a bigger fish than he really is.

1) The length of the sentence. Madoff was sentenced to 150 years in prison. Various news reports (e.g., this one) have noted that under the Sentencing Guidelines, he will be required to serve at least 80 percent of that sentence. I'm not sure where that figure comes from, because by my calculation it's even higher. The Sentencing Guidelines themselves (large file warning!) say (at p. 3), that "the abolition of parole makes the sentence imposed by the court the sentence the offender will serve, less approximately fifteen percent for good behavior." The actual formula for time off for good behavior is fixed by statute at a maximum of 54 days off of each year served after the first year. That means that Madoff will end up serving a minimum of over 130 years. In 130 years, he earns 130 x 54 days, or 7020 days, which is 19 years and 85 days. So, 285 days into his 131st year in prison, he's done. (The extra 5 days adjust for the leap years he avoids at the end of his term.) This means that Madoff would be over 200 years old when he would be eligible for release.

What's the point of that? I get that Judge Chin wanted to send a stern message that what Madoff did was very very bad. But rapists can get lighter sentences, even under the very strict Federal Sentencing Guidelines. Madoff's sentence of more than twice his likely lifespan is reminiscent of a point that Oliver Wendell Holmes makes in the first lecture of The Common Law: Modern systems of justice, Holmes says, find their roots in ancient ones, and in ancient times, even inanimate objects that caused harm were punished, much in the way you might today hit your computer to punish it when it malfunctions. Thus, with Madoff, I sense that were it possible Judge Chin (here acting in accord with the Madoff vicitms), would have sentenced Madoff's corpse to remain in prison. An unrealistically long sentence for the living Madoff is the next best thing.

To be crystal clear, I agree that what Madoff did was very very bad, especially the part where he defrauded charities. Truly despicable. But piling on the sentence doesn't really change anything.

2) Dollar value of the fraud. In describing the dollar value of the fraud perpetrated by Madoff, the most widely used number, as far as I have been able to ascertain, is $50 billion. But this number is fictional: It's an estimate of the aggregate value that Madoff told his investors their portfolios were worth. A much more meaningful number would be how much money investors put in and didn't get back, which is apparently something around $13 billion, although even that number might be too high. After all, if those same investors had put their money in a legitimate fund, some of them would have lost a good deal of value. To be sure, Madoff shouldn't be heard to make that sort of argument, since the investors could have put their money in T bills. But we still have the question of why anyone would seriously use the fictional Madoff number rather than the amount of money actually lost--which is itself substantial. The answer, I think, comes from phenomenon number 3.

3) The effort to make Madoff the bad guy in the financial crisis. A $13 billion fraud is a big deal, but it's chump change compared to the amounts blown by Citigroup and AIG. By inflating Madoff's scheme to $50 billion, it gets closer to that range, and thus feeds the narrative of greedy bankers derailing the economy. It lets Madoff serve as the villain for the whole sorry mess.

Now Madoff is a pretty good stand-in for other greedy bankers who put their short-term bonuses ahead of their shareholders' long-term interests. But focusing on the greed of individual bankers distracts us from the regulatory regime that permitted the greedy bankers to do what they did. Or to put it differently, if Bernie Madoff didn't exist, Citigroup and AIG would have had to invent him.

Posted by Mike Dorf