Bernie's $50 billion magic act

Fifty B’s—that doesn’t even seem like much cash these days with the talk of $700 billion bail-outs and $1 trillion stimulus packages. But the Bernie Madoff story should certainly cause some of the erstwhile high-flying hedge fund investors to think twice about where they’ve parked their money given the number of people who lost the farm in the last 48 hours.

What is surprising is the lack of commentary—so far—about the possible impact of this disappearing act on the rickety financial system already whipsawing dangerously. Some of the biggest losers are hedge funds who will now be hit with more huge redemption demands both from people who lost fortunes as well as others eager not to join them. The whole shadow banking system that already is having to sell assets at emergency prices will have to find more cash. Right?

I don’t pretend to really understand all this, but logic suggests that the process will drive depressed prices down further and exacerbate the crazy demand for super-safe U.S. government debt, now paying virtually no interest. While Paulson pours cash into the bottomless pit of financier balance sheets, far larger sums are gobbled up by the deleveraging process and what sure looks like an old-fashioned run on what used to be called a ‘bank’.

When we thought we had seen everything—the august Wall Street firms buckling, the megabanks collapsing, whole suburban tracts in foreclosure, the Republicans nationalizing finance—now we find out that one of the oldest names in the New York money business was running a crude Ponzi scheme of unimaginable cynicism, paying off investors with a steady influx of fresh money from the gullible. And hardly anyone even noticed.

Is anybody in charge?