“Muddy Waters” on Actual versus Nominal Losses

 

Often there is confusion in media reports on losses

So today I’m here with Muddy Waters to set the record straight.

Manufactured returns can overstate the actual loss investors have incurred.

Early reports were that investors in BLMIS (Bernard L. Madoff Investment Securities, LLC) potentially lost some US$ 65 billion based on the nominal value of their accounts.

Similarly, Wirecard was reported to have “lost” some Euros 1.9 billion in deposits.

In both cases, a lot of the initial speculation focused on alleged theft of the amounts.

But in both cases, the losses were overstated by the amount of manufactured returns.

In the case of Madoff, roughly US$ 19 billion df the US$65 billion was the original investment amount.

The rest US$ 46 billion was fictitious “profit”.

In the case of Wirecard, the Euros 1.9 billion in deposits arose because income was “fiddled” to a corresponding amount.

As Professor Waters (above) has rightly said:

Well, you know, you can't spend what you ain't got

You can't lose what you ain't never had

That doesn’t mean that investors in Madoff’s funds did not have a real loss.

Their loss was opportunity cost of not earning a return on their original investment.

No doubt lower than the US$ 46 billion, but still significant.

Adding insult to injury, the courts ruled that any Madoff investor who received a profit distribution (any amount in excess of the investor’s original investment) had to return it because it was “fictitious”. 

Here’s the US Court of Appeals Second District’s decision.

The US Supreme Court refused to hear the defendants’ appeal on 3 May 2020 (20-1382).

At stake was US$ 41 million.

You are capable of doing the math.

Not many of BLMIS “wise” investors were withdrawing their “profits”.

For Wirecard, the losses were to those lenders and stock investors that extended credit or bought Wirecard stock based on manufactured earnings. 

Unlike the BLMIS investors, the Wirecard "punters" are going to lose a much greater percentage of their original investment.