It is not certain that Bernard Madoff set out to create the biggest Ponzi scheme in human history. For one thing, every Ponzi scheme is doomed to eventual failure. These schemes depend on paying out funds to existing investors from the inflow of funds from new investors. The day is bound to come when the original investors want to take their money out or when there are no more new investors putting their money in. In most such schemes, the day of failure arrives quite quickly. Mr Madoff was, however, a skilful operator in a favourable market. Somehow he kept his scheme expanding for at least 10 and perhaps 20 years.

I imagine that the Madoff fund may have started life as a fairly humdrum hedge fund, with a target yield of 10-12 per cent. In the boom years of the 1990s many hedge funds were regularly achieving such yields - George Soros's funds would have been doing better than that in many of the years of the 1990s.

Perhaps the Madoff fund simply had a bad year. Money was still coming in, but the real performance was slipping. That might have discouraged future investors. Mr Madoff, an experienced investor, decided to borrow from the cash that was coming in. That would have been clearly illegal.

Then, perhaps, in the different conditions of the new millennium, he found that he was slipping further behind. He might have borrowed more from the new subscribers. He would have been fighting on the wrong side of compound interest. Each year it would have become more difficult for him to balance the inflow and outflow. Every year the debt of the fund to its investors would have become larger. Yet he had established a social network of fundraising, with investment coming from private individuals, banks, hedge funds and funds of funds and from feeder funds which had been specially established. While the fraud grew bigger, he became ever better at operating it.

It could never last, Ponzi funds never can. To keep a fund going for ever, it would be necessary to raise subscriptions from every star in the universe. In the end, such funds are mathematically doomed to failure. On the assumption that Mr Madoff was a sophisticated trader, one must assume that he would have known that. But it can hardly have been his ultimate objective. There is no personal ambition to be gained from having created the biggest financial failure in history and having ruined many of one's friends. What may have happened was that Mr Madoff took a false step, trying to improve his position in the market, and found that he had lost his footing.

He has, however, left behind a most terrible mess. No one knows what the real figures will prove to be. Has he lost $50 billion? Are any of the figures truthful? It sounds as though no auditor will be able to establish finally what the real figure is.

The account books were created to deceive, to cover up what was really happening. It will be a fortunate coincidence if they can be made to disclose the real balances. Money was paid in and money was paid out. That is the sole reality. Some investments may have been made, but they would not have been proportionate to the flows of money. Any reality that once existed would have become a Ponzi reality, the world as it was rewritten by Mr Madoff to provide the nominal return on investment that would draw in the additional funds needed to keep the Ponzi machine going.

One can see that unfortunate people have lost large sums. That is a human tragedy. They will want to get their money back. It is little use their suing the fund, which would still be in existence if it had any serious amount of money left.

The only people who are likely still to have significant sums of money are the intermediaries who bought Madoff funds for their clients. The investors' lawyers will be looking at those firms who might be accused of failure to protect their clients; lawyers for the funds that may be sued will be looking for a valid defence. This argument may involve thousands of different parties, thousands of lawyers, billions in fees, and might still leave behind billions in losses. What Mr Madoff has left behind him is like the aftermath of a great battle - wreckage, confusion and suffering.

The key legal question is one of duty of care, and this will vary from case to case and contract to contract. Hedge funds, funds of funds and feeder funds bought Madoff securities for their funds or for their clients. These investments are now worthless, or nearly worthless. Did the intermediate funds promise to exercise “due diligence” in satisfying themselves that the Madoff investments were sound securities? If they failed to exercise due diligence, are these intermediate funds liable for the losses which may have resulted from their negligence?

Mr Madoff had many associates in the US and Europe. Those who have lost money will want to sue any associates who knew, or ought to have known, that the Madoff results were fraudulent. The Securities and Exchange Commission itself had detailed warnings that Madoff might be a fraud, but failed to act on them. Can the victims of the fraud sue the SEC for negligence as a regulator?

That, as people say, is a good question. Unfortunately, it is one which may not be answered in less than a generation's litigation. I would not be surprised if the grandchildren of Madoff's investors were still suing the grandchildren of hedge fund managers in 50 years' time. A long-term Ponzi fraud can become a nightmare for investors, if perhaps a bonanza for New York lawyers.

The exposure of fraud is a natural consequence of a credit crunch. People who have overspent during the preceding boom find that they are heavily in debt, and their creditors are pressing them. In the case of Mr Madoff, some of his investors wanted their money back. He could not provide it. That caused the collapse of his fraud. We should expect there to be more frauds exposed in the coming months.

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