Every day you look at the newspaper Bernard Madoff is there, down jacket, baseball cap, and sheepish grin. Wow, is he famous! He combines Al Capone, John Wilkes Booth, and Hitler in badness, while still looking like your uncle Marvin. Why is this harmless-looking old guy hogging the headlines?

The first answer is — duh! — that he stole a lot of money. The papers keep using a $50 billion figure, but that is not a good estimate. The $50 B’s came from Madoff’s own mouth when he was being arrested, but here we have a bozo who never gave anyone a correct number in thirty years, and there is no reason to think that he changed into a truthteller with this one.

But all the perceived losses could be near $40 billion.

The Madoff operation seems to have almost no funds left. Where did the money go? The Madoff family lived very well, shuttling between New York City, Palm Beach, and Cap d’Antibes, but not any more luxuriously than many other rich folks. He may have spent $3 million a year or so, but not enough to chew up even one billion in his lifetime.

A lot of the money was paid out to his customers, who used their Madoff “investment” as their cash reserves, and took out money regularly or occasionally. Since Madoff was faking trading but not doing any, all the cash outflows were fed by new money coming in the door. Just guessing, a billion dollars a year of payouts for twenty years makes $20 billion, half the missing bucks.

The other big chunk of money was from profits that were reported to clients but never existed at all. This was hard for folks to believe, because they were getting trade confirmations and monthly statements in the mail, a rude shock to find all of this fictional. Guessing again, if Madoff was telling people they were making 10% returns on a notional $10 billion in assets, and did this for twenty years, that would generate $20 billion in phony profits.

The two pots, $20 billion money paid out and $20 billion profits add up to $40 billion--about the size of the total fraud. So the disappearance of the funds is not really a mystery. Certainly the investigation now going on will add a lot of entertaining insights on the mechanics of the swindle.

What has to be explained still is why this scam is so fascinating. Madoff is not a big part of the economic problem. How can I say that? Look at some more numbers. Bernie blew $40 billion, an enormous sum, but total market losses (real estate, stocks and debt) are on the order of $40 trillion.

No one can grasp exactly what $40 trillion actually is, but one can calculate that it is 1000 times more than $40 billion. So if Madoff is one-tenth of one percent of the total losses, he is not a big part of the problem, only a teeny detail.

Why do we obsess about Madoff?

• Crooks are Cute: Robin Hood, Jesse James, John Gotti, and Ken Lay (Enron) are mythical figures that get movies made about them. Madoff fooled the rich and the brilliant for decades, a dramatic and ironic movie-to-be.
• Scapegoat: There are too many villains in the crash, and no heroes. Some of the villains are very important players in politics, banking, business, and piracy, and it is convenient to ignore them and pick one guy to focus attention on.
• Elders of Zion: The bad guys and the victims are Jews, and stories about Jewish bankers and speculators find a ready audience.
• Schadenfreude: Did you hear about poor Mrs. G? Yes, the woman who wouldn’t come to your birthday party because she was traveling in Nepal. Well, she’s broke now and...
• Behavioral Finance: Mentally you had your money divided into three layers. One was for safety, cash and high grade bonds. The second was long-term equity investment in mutual funds and hedge funds. The third tranche was for speculation and trips to Las Vegas. But your Madoff money was in the safe pool, the “Jewish Tbills”. Losing the safe pool is more disconcerting than losing the same amount in the risk pool.

Ralph Wanger, CFA, is Senior Advisor to Wanger Investment Management, Inc.