What punishment could fit Madoff?

By Scott Burns

Media accounts immediately labeled the disappearance of $50 billion, masterminded by Bernard Madoff, as the largest fraud in history.

It is a greater wealth loss than having one of many household-name companies -- such as Walt Disney (DIS, news, msgs), 3M (MMM, news, msgs) or Boeing (BA, news, msgs) -- vanish without a trace.

The loss is mind-boggling. But the figure does nothing to convey the damage this alleged Ponzi scheme has done.

3 years' worth of crime

One way to measure the extent of the damage is to compare the $50 billion to measures of loss in the FBI's Uniform Crime Reports. In 2007 there were 9.8 million crimes against property in the United States. This included about 2.2 million burglaries, 6.6 million larceny-thefts and 1.1 million car thefts.

I think you'll agree that 9.8 million crimes represent a veritable army of miscreants. In spite of that, our total losses to property crimes in 2007 were a mere $17.6 billion. To be sure, it didn't feel "mere" if you suffered a burglary. The average loss was $1,991. Nor was it "mere" if you were one of the 6.6 million people who suffered a larceny-theft. In those, the average loss was $886.

• Play the video to the right for more on Bernard Madoff.

But when you add all the losses in 9.8 million common property crimes, it's just a fraction of the estimated $50 billion loss authorities blame on Madoff.

Perhaps 2007 was an "off" year for theft?

Well, there was a slight decline in the number of crimes, but not in the amount lost. In 2006, the report shows nearly 10 million crimes against property and losses of an additional $17.6 billion. Similarly, the 2005 report shows nearly 10.2 million crimes against property and a total loss of $16.5 billion.

Add the three years and you get $51.7 billion. Using that value, Madoff has caused losses basically equal to all the losses caused by all the conventional thieves in America for nearly three full years.

What the SEC missed

We get a different perspective by reading the annual report of the Securities and Exchange Commission. That's the federal agency charged with protecting investors. In the listing of "enforcement milestones," the 2008 report (.pdf file) proudly notes that it had "obtained orders in SEC judicial and administrative proceedings requiring securities violators to disgorge illegal profits of approximately $774 million and to pay penalties of approximately $256 million."

In other words, the total recovery of the entire agency, in a full year, was about 2% of what Madoff -- the guy they didn't notice -- made disappear.

This leaves us with two really big questions.

No trust, no oversight

First: What can be done to keep America from becoming a coffee can economy?

I'm serious. Right now all we know is that nothing is trustworthy. Not our political leaders. Not our business leaders. Not the government or private institutions that are supposed to provide oversight and evaluation.

• Talk back: Can we rebuild trust in leaders and institutions?

Can anyone, from any of these institutions, give us any reason not to keep what savings we have buried in a coffee can rather than entrusted to the institutions that have destroyed the most fundamental element of commerce -- trust?

The answer is a flat "no."

Continued: How to punish outlaws

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