On Thursday morning, trader Bernard Madoff was arrested by U.S. government agents and charged with running a multi-billion-dollar fraud scheme that may be the biggest swindle in Wall Street history. Investigators say Madoff's investment firm was simply running a gigantic Ponzi scheme, the collapse of which has left investors crippled and for some, wiped out their entire net worth.

So what was actually happening behind the doors of Madoff's firm? How was such a huge scam perpetrated for so long? For the answers, or at least as near as we can figure, check out our FAQ.

Give it to me straight. Did I lose everything?

Wow. Not much for pleasantries, are you? Oh, I'm fine, thanks, and how are you?

No time for that. I just heard about this crazy Bernie Madoff fraud investigation. So that's it, right? I'm penniless?

That depends. Did you have any money invested with Madoff's firm?

Invested? Hell, no. Not unless by "invested" you mean "stuffed into" and by "Madoff's firm" you mean "my mattress."

Then I think you're safe.

I did, however, make some unfortunate wagers on the fifth race at Golden Gate racetrack.

That's a separate issue of poor money management strategy.

The horse's name was Winzapoppin! How am I not going to place that bet? Tell me.

Well, this has been a pleasure, as always. Is that all?

No, actually. I guess as long as you're here you might as well tell me what's going on with this Madoff situation.

Bernard Madoff ran an investment firm that managed billions of dollars worth of funds that attracted investors with a solid rate of return. However, the entire operation collapsed, and investigators now say it may be the largest ever Ponzi scheme.

Aaaaayyyyy!

What?

You know. Aaaaaayyyy! Like from Happy Days?

Ponzi scheme. With a P.

Oh. What does that mean?

Basically, it means that the money being paid to clients as the return on their investment is really taken from new money being put in by other people, and not from any actual investments.

Sounds good for those first people and sucks for the later clients. Tough beans, buddy, but you should have gotten in on the ground floor. Am I right?

Not really, considering most clients would reinvest their "returns" and continue to put new money into the funds. As long as nobody wanted their money back, there would be no reason for suspicion.

What happened?

People wanted their money back.

Whoops. So how much money was lost in this whole scandal?

Madoff himself estimates the losses at around $50 billion.

You can't see me, but I totally just did a spit take.

Yeah, it's a lot of money. Much of it lost by wealthy investors, like members of the Palm Beach Country Club, and a large community of hedge funds and other investment firms.

Suckers! I love it when rich douchebags go broke. That's hilarious.

Then you also might be tickled by the fact that the fraud has also destroyed more than a few charities, educational and civic foundations, and the pensions of some plain old elderly investors.

Oh. Well...uh, probably at least a couple of those old dudes were douchebags, right?

If it soothes your conscience, I'll say yes.

Gosh, so what's going to happen now?

Madoff was arrested on fraud charges and could go to prison for years, as well as pay millions of dollars in fines. As for investors who are now ruined, unfortunately there may not be much that can be done.

Why doesn't he just shake his hips and pound on the jukebox with his fist? That always worked in Happy Days.

I'll suggest it to his lawyers.

Posted by: Jason Reich      I’m a fan of Jason Reich