Bernie Madoff's $50 Billion Fraud thru country clubs

[cary lichtenstein]

I've been reading about Bernie Madoff's $50 billion dollar Ponzi Scheme and it makes for fascinating reading.

Phones are ringing off the hook in New York, Palm Beach, Boca, etc.

He belonged to 6 Country Clubs and used those memberships, golf games, lunchs, to meet people and get investors:

Palm Beach CC
Boca Rio
Old Oaks CC
Atlantic CC
2 more I forgot already

People begged him to take their money

Can someone post a link please

[Steve_ Shaffer]

Cary,

See my post on Old Oaks

Here's one of the NYTimes many articles:

www.nytimes.com/2008/12/13/nyregion/13madoff.html

[TEPaul]

Just read that article. My post was not appropriate.

[cary lichtenstein]

In the same vein, how about having him head up the SEC?

Nothing like having a criminal with an adroit mind fix something he took advantage of. They know all the tricks.

He could run it during the day and serve his time at nite and share a cell with the Illinois Governor.

[Bill_McBride]

In the same vein, how about having him head up the SEC?

Nothing like having a criminal with an adroit mind fix something he took advantage of. They know all the tricks.

He could run it during the day and serve his time at nite and share a cell with the Illinois Governor.

I thought we already had criminals running the bailout?

Or is it just foxes running amuck in the henhouse?

[TEPaul]

"In the same vein, how about having him head up the SEC?"

I hope you're not completely joking about that because I think there's some actual precedence for it, as, for instance, when FDR made Joe Kennedy the first head of the SEC or the organization that preceded it. Many said back then it was a brilliant move because FDR had put a guy in an oversight capacity over the manipulative minds in stocks and the market who understood their games every bit as well or better than they did.

[PCCraig]

Madoff might even be considered as an appropriate replacement for the recently disgraced Illinois Governor.

Tom-

"Disgraced" in New York/New England is calling "doing your job" in Chicago Politics 



Madoff had a lot going for his payola scheme...mostly that he was the old head of the Nasdaq I believe which would add some credibility to his abilities. However a payola can never end well, no matter how smart and well conected the trader.

You could make the point that all Hedge Funds are glorified Payola schemes...look at Citadel; they aren't letting their investors to take out their money until April. Doesn't sound like an investment to me.

[TEPaul]

Pat:

Perhaps you mean ponzi not payola. In my experience a ponzi scheme was essentially using some investor money to pay off other investors (earlier investors) to make it look like the underlying nominal business was in some way profitable or would be.

[Carl Rogers]

Sadly, many extremely well compensated individuals in the financial services industry have forgotten that there is a difference between risk and fraud.

There will be repurcussions for a long time in this on going litany of nonsense.  I do not see any one advocating the privatization of social security anymore.

The Wall Street Journal in their Journal Report Section had some interesting retirement investment alternatives.

[Jay Flemma]

Cary,

See my post on Old Oaks

Here's one of the NYTimes many articles:

www.nytimes.com/2008/12/13/nyregion/13madoff.html

Steve can you lin the thread?  Thanks.

[Jason Topp]

This blurb from today's Wall Street Journal hits home:


"In Minnesota, he attracted investors from Hillcrest Golf Club of St. Paul and Oak Ridge Country Club in Hopkins, investors say. One of them estimated that investors from the two clubs may have invested more than $100 million combined."

http://online.wsj.com/article/SB122914169719104017.html

[Craig Sweet]

Looks like it might touch the NY Mets as well...

http://www.nytimes.com/2008/12/14/sports/baseball/14wilpon.html

[Jim Nugent]

I think this is the start, the tip of the iceberg.  Expect many many more scams like this will soon come to light. 

[Michael J. Moss]

Jim Nugent,

In terms of the Madoff fraud being the tip of the iceberg, I have to disagree. What sets this scandal apart is that Madoff was the manager of the invested assets and custodian of the assets. It was Madoff's word that the assets were there. His auditors were not exactly a household name either. It will probably come out that his communications to his investors (the trade confirmations and the like) were bogus. I also expect to hear he didn't act alone.

Standard operating procedure of most, if not all, legitimate investment partnerships is the existance of a "prime brokerage" agreement with a Goldman Sachs or some other recognized financial institution. They function to clear trades and warehouse the partnerships assets. They also provide a credible paper trail of the transactions for auditors who specialize in reviewing these types of partnerships. The Goldmans and Morgans make money from lending these partnerships money, providing them leverage and making a spread - a separate conversation - and charging them commissions to execute trades. It's a good business when their clients don't blow them up. They have risk management systems in place for the clients they clear, which in hindsight, they should have paid more attention to themselves. Though many hedge funds have gotten annihilated in this market, and managers are going to have a difficult time justifying an arrangement that charges "2 and 25" in the future, they operate honestly.

Who knows what was going on in Madoff's mind. It's possible he thought, or deluded himself, into believing he was going to make everyone's money back over time. (If only he didn't get hit with $7 billion of redemptions - unlucky!) When the book is written on this period, his story will be a big ugly chapter. His actions have harmed so many individuals on so many levels, including charitable endowments, and even here in White Plains, NY, my synagogue. It's really so sad. We humans have the potential to do so much good, but also such evil.

To me, what's truly remarkable is how the guy could sleep at night.

[Mike_Young]

Michael,
As you say...so many of these guys think they will "pay it back " with future trades etc.
I had a client 15 years ago ...president of a bank.....no one knew he had been making loans in the names of his friends but using the proceeds personally  and the friends had no idea the loans existed....he always paid the interest but the loans were now over 1.5 million.  He decided to build a golf course and got another bank to finance about 4.5 millon of the project.....yet he had a deal with us for 2.5 million for the course.....things were proceeding nicely and he had everything under control.....paying the notes down and clearing things up.....THEN...his bank was sold....the audit picked it al up immediately and he went to jail for 7 years....he was one of the nicest guys I knew or know...he always pad me       He told me he knew he was done when the owner died and the bank went up for sale.....BUT if he had had one more year....it would have all been paid back and never found.....
I would bet anything this happens everyday and is never found in all types of transactions....especially some of these big golf developments......

[PCCraig]

Pat:

Perhaps you mean ponzi not payola. In my experience a ponzi scheme was essentially using some investor money to pay off other investors (earlier investors) to make it look like the underlying nominal business was in some way profitable or would be.

Tom-

You're right, I got the P words mixed up.

I understand the scheme, I was only saying that the amazing thing is that because of his good reputation he was able to prolong the inevitable.

[Craig Sweet]

There are some major "chickens" out there that will come home to roost in the next 12-18 months....it will not be pretty....and there will be nowhere near enough money to "bailout" any of it.

[rboyce]

Agree with Michael Moss, it's unlikely that there are more than a tiny handful of bad actors like MadeOff left to come clean. There is a very simple due diligence checklist that investors and their reps use when evaluating a manager. I'm posting the list below with a brief comment on what may have gone wrong this time. I'm also sincerely sorry for those who were taken by this dirtball.

This list is from a CFA Institute textbook titled "Alternative Investments Portfolio Management". Most portfolio management texts will have similar lists. The bracketed comments are mine...

1. Assess the market opportunity offered - [Madoff was using routine stock strategies with overlying options strategies. Nothing special. Should have been a red flag considering the returns he created with this strategy.]

2. Assess the investment process - [trap, Madoff was assumed to have special knowledge of the market via his complementary market making activity.]

3. Assess the organization - [trap, appearances were good.]

4. Assess the people - [trap, Madoff's reputation was good.]

5. Assess the terms and structure - [trap, Madoff charged less than most.]

6. Assess the service providers - [HUGE RED FLAG, almost everything was done internally so there were few checks and balances. The auditor was practically non existent.]

7. Review documents - [This is an unknown to anyone except those involved.]

[C. Squier]

There are some major "chickens" out there that will come home to roost in the next 12-18 months....it will not be pretty....and there will be nowhere near enough money to "bailout" any of it.

Nostradamus, will the world end in 2012 as well?

[Steve_ Shaffer]

Here's the latest from Palm Beach:

www.palmbeachpost.com/localnews/content/local_news/epaper/2008/12/12/1212madoff.html?imw=Y

[Jim Nugent]

rboyce and Michael Moss, as Jim Rogers (co-founder of the Quantum Fund) said a few days ago, most big U.S. banks are bankrupt.  Hedge funds, IMO, are in even worse shape.  I hope you are right, but believe I am.  We'll see soon enough what happens.  

[RJ_Daley]

It is said that if ethics are poor at the top of any organization, institution or government, the rot will filter down through the entire ranks.

Who is left to argue that ethics in American government and business has not rotted pervasively?  I disagree with those who say this is the exceptional case.  Ethics and greed have proven themselves as the hallmark of Wall Street, and this is being proven every day, even now.  Bailout gifts by insider cronies like Paulson to and for his compatriots to "loosen credit" and get the banks moving again; and what did they do?  Yeah, you know, whether you are ready to admit it or not.  At the most critical time when people in power and influence at the top of these financial institutions need to step up, be ethical, loyal, and patriotic Americans, they screwed us again with greed and mismanagement with our taxpayer insured TARP funds.  And, you expect something different?  That is the definition of crazy.  

Madoff is a no different than most everyone else in the funny money creation world who are greedy investors who prop up or invent other schemes like Credit Default Swaps and all the other exotic leverage and bundling paper money vehicles, scheming arrangements that no sane or even trained mind can fully understand, let alone an ethical mind.  They are all slight of hand financial tricks to create an illusion of wealth based on leverage, without anything more than speculation based on greed behind them.

And, isn't it curious that Madoff has so many clients that are private golf clubs or he schmoozed clients through associations in select private clubs.  Talk about the ultimate access seeker or multiple club member guy that arranges access for others more focused on being somewhere and being somebody and in a small but illustriative way, covetting golf as they covet money and prestige.

If this whole bundle of scandals keeps up, while not only hating us, and desiring to collapse our way of life, our enemies will probably even pity us for how this last 30 years generation has mucked up a noble country and what was once our American ideal.  The root of it all our problems is lost 'ethics' from the top filtered down.  IMHO

[Craig Sweet]

I'm talking credit default swaps...huge amount of money at risk here...

From Bloomberg.com in Nov.08...

"Even the size of the market is up for debate. ISDA says more than $47 trillion of contracts are outstanding, while the DTCC puts the figure closer to $35 trillion."

These people that created the various instruments are not stupid,but they let greed totally blind them to the consequences of being wrong....no over sight...little regulation.  Even Greenspan was shocked by the abuse....

[rboyce]

Whoa, whoa, guys. I am saying that there are not too many ponzi schemes like MadeOffs out there because the vast majority of investors conduct serious due diligence. You are saying the market and economy are a wreck and there are crazy things going on. See how these are totally different topics?

Also, it is common to extrapolate the recent past into the future. Example - things are bad and they're gonna get worse. In good times it's a new era or different this time. We all fall into this behavioral trap.

Right now I'm taking a cup half full approach. Times like this weed out the bad actors and set a foundation for more honest and practical economic activity.

I've read all Jim Rodger's stuff from "Investment Biker" to "Bull in China" to "Hot Commodities" and he is brilliant. But, he makes mistakes too. For example, did he ever stop pounding the table on commodities as they plunged the last six months?

[rboyce]

Craig,

Yes, CDS are scary, but put them into perspective. The notional amount is very different that the net amount of money at risk. Even when the market got completely blindsided by Lehman paper going to zero the CDS contracts settled out <10% of the notional value.

Otoh, I totally agree that there should be a clearinghouse for CDS contracts just like other derivatives. The private derivative market is a wild west that has created way too much risk.