Bernie Madoff's $50 Billion Fraud thru country clubs

[RJ_Daley]

Rboyce, you figure the cup is half full.  I wonder if there even is a cup, and what it is half full of, whose cup is it, who is holding the cup, who can drink?

When you say investors need to do due diligence, I ask based on what data do you trust to do due diligence?  The credit rating agencies are all under investigation and suspicion of gross incompetence, using phoney models to analyse the soundness of these financial and stock and bond entities.  How does even a little feller do due diligence.  Should one be prohibited from investing unless they have a minimum of an MBA or advanced financial analyst training?  People of great wealth presumable hire highly trained accountants, analysts and such to help them place their multi millions.  Yet, those people are duped as well, due to phoney data and accounting. 

It seems that when even highly educated and trained professionals can't actually fully explain the machanisms of things like Credit Default Swaps, then we have a serious problem with data, reality, and no one can do due diligence. 

I don't know what you do for a living, but, if you are going to tell me that you 'knew' based on advanced education and work in these financial areas, that these vehicles were vapid, vacuous and phoney, where were you?

Not to single out "you", but I ask this in the general sense, where were those that could have known, if there is such a educated person?  If they were around, then they also have a serious lack of ethics if they didn't shout "fire". 

You really don't expect the average retired investor to do real and effective due diligence, do you?  With what credible information and data?

[Sam Maryland]

as the banks were announcing all the "billion dollar" losses over the last year or so I started trying to get my mind around how big a "billion" really is.

if you went back a billion seconds in time, it would take you back to 1976.

a billion minutes would take you back to the time Jesus lived.

in the last year Citigroup has announced losses = to $70+ per second, every second, back to 1976 (and they are not done).

the $50bn number being thrown around on the Madoff thing seems a bit excessive, but clearly it is multiple billions none-the-less.

I suspect that by June 30th only a handful of private clubs in this country will have any waiting list whatsoever...

[Bob_Huntley]

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

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....

Grennspan sounds like Claude Raines in 'Casablanca.'

Bob

[Steve Okula]

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

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....

Grennspan sounds like Claude Raines in 'Casablanca.'

Bob

Rick had his roulette table rigged. Remember?

Plus ça change...

[henrye]

Don't know much about it other than what's in the press.  Strikes me as though it's a pretty common story of a crook duping gullible investors.  Difference is the scale and the fact that lots of the gullible investors were supposed to be knowledgeable and competent.  One thing I have to believe is that he couldn't have been acting alone - the auditor had to know.

[Steve_ Shaffer]

Another NYT article. This one focuses on Palm Beach CC:

www.nytimes.com/2008/12/15/business/15palm.html?ei=5070

[Jim Nugent]

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?

And if it does, will Obama get re-elected?

Actually, I agree pretty much with Craig on this one. 

[Jim Nugent]

For all you who think this is a rare, isolated event, Bloomberg.com just reported:

"Almost a third of hedge funds will shut or merge after the $1.5 trillion industry posted its worst ever performance this year, according to IGS Group, which advises hedge funds on raising money.

“The failure rate is going to go up, the closure rate is going up, and the merger rate is going up,” IGS Chief Executive Officer John Godden said in an interview in London. “It’s going to be a 30 percent wipe out.”

I personally think Godden's estimate is real conservative.  Madoff only got caught because too many investors wanted redemptions.  Bet a ton of other hedge funds are in the same boat.  i.e. if many investors demand redemptions, they, too would go under.  Also many big banks and mutual funds. 

Like I said earlier, I hope you guys are right, but I fear you are not. 

[C. Squier]

For all you who think this is a rare, isolated event, Bloomberg.com just reported:

"Almost a third of hedge funds will shut or merge after the $1.5 trillion industry posted its worst ever performance this year, according to IGS Group, which advises hedge funds on raising money.

“The failure rate is going to go up, the closure rate is going up, and the merger rate is going up,” IGS Chief Executive Officer John Godden said in an interview in London. “It’s going to be a 30 percent wipe out.”

I personally think Godden's estimate is real conservative.  Madoff only got caught because too many investors wanted redemptions.  Bet a ton of other hedge funds are in the same boat.  i.e. if many investors demand redemptions, they, too would go under.  Also many big banks and mutual funds. 

Like I said earlier, I hope you guys are right, but I fear you are not. 

Hedge funds close because the managers can't make money when they're in the red, not because they're insolvent or fraudulent.  Big difference.  Why would a mutual fund close?  If anything, this may help bloated mutual funds shrink down to a size that's actually managable.

[jeffwarne]

Clint is right-many hedge funds close simply because if they have a negative return they just close up and reopen under a different name.
That's one of the reasons you see so few hedge funds (or mutual funds) showing a losing track record.

Trust me, most of these guys aren't geniuses-they were just in the right place for the past 20 years and now the chickens are coming home to roost.
Sadly most of the country bought into performance chasing and will suffer without  the upside these guys enjoyed with your money and leverage.
When they made it , it was their money-when they lose it, it's your money.

[Tim McManus]

You really don't expect the average retired investor to do real and effective due diligence, do you?  With what credible information and data?

Don't invest in a strategy that you can not understand.   Make sure that your investment manager uses an independent broker or custodian to value and hold your assets.  These basic pillars of due diligence won't help you determine who is skilled enough to outperform markets, but they will protect you from fraud in nearly all cases.  Madoff's investors completely ignored these gigantic red flags.

[tlavin]

I completely understand how some of his investors were so effectively duped over the years.  People want to believe that their winning investments are all on the up and up.  They want to believe that somebody like Madoff is different, just because of his own innate skills.  They can be mollified by anecdotal information, like the oft-told tales that Madoff would refuse to take people's money, even though they clamored to be included in his fund. 

But, for the life of me, I cannot understand how these big banks and hedge funds would invest with this guy.  He never revealed his method for the consistent returns that he got, despite the market conditions.  His books only reflected 1 billion shares when he was said to be managing 20 billion or more.  His accountant was a man well into his seventies with an office that only employed a couple people.  Some investors might not get wind of this kind of information, but surely a bank or a hedge fund would do the kind of diligence that would uncover these huge red flags.

[JESII]

And the regulators...they can't even claim to have caught him...the ride just ended.

[Bob_Huntley]

If the SEC and NYSE spent more time on doing their job instead of thinking up asinine Continuing Education studies and tests for the rank and file brokers, maybe schemes like this could be uncovered.

The head of the SEC has probably been the most incompetent Federal official after Michael Brown, the  head of FEMA at Katrina.


Bob

[RJ_Daley]

Don't invest in a strategy that you can not understand.   Make sure that your investment manager uses an independent broker or custodian to value and hold your assets.  These basic pillars of due diligence won't help you determine who is skilled enough to outperform markets, but they will protect you from fraud in nearly all cases.  Madoff's investors completely ignored these gigantic red flags.

Tim, I don't think that is exactly correct.  In part it is applicable to the Madoff scheme because of the lack of independent broker, custodian and clearing house.  But, the average small individual investor relies heavily on analysts from these independent brokers.  Personally, I have been burned several times by what appeared to be good broker analyst info and evaluation, such as K-mart being rated as a good buy and sound and so forth by ML analysts in ~1999, but the accounting data was stated incorrectly, and there was suspicion of the analyst being overly courted by the management to not fully state the facts.  I suffered the same bad  so-called independent analyst nefarious relationship with TYCO and ML.  (what a pity   )

I haven't a clue about the nuts and bolts of GAAP and such.  But, neither does the average investor.  Most active individual investors must rely on good data, and competent analysis, and let's face it, luck or intuition or some version of speculative foresight in making investment decisions.  

These people that trusted Madoff with so much did so in part due to his history of Wall Street experience.  He was thought to be one of the 'master's of the universe" with all his backround including Chairman of NASDAQ,many years on board of governors, 40 years owner manager of his firm... etc.  

When it gets right down to it, many of the folks as described at the Palm Beach CC were wealthy, presumably more knowledgeable than the average cat sort of people, yet with a bio like Madoff's, and the aura of covetted and special privelege that comes in these exclusive enclave settings like PBCC, the victims thought they were on the inside with a "special" guy, when they were really on the outside, being suckered and taken advantage of by operation of the very setting they thought was insulated from the rest of the harried investor world.  It was the perfect setting where it was socially unpopular to actually speak of the details of financial doings and costs and scrutinizing where your money was going.  What a set-up for a con!!!

[Sam Maryland]

One of the large publicly traded US banks said this today:  "We would like to inform you that ABCD Diversified Hedge Fund and ABCD Alpha Strategies Fund have no exposure to any of the Bernard Madoff funds.  Our due diligence process does not allow an investment in such a strategy.  There were a number of red flags that our process identified, including an affiliated broker dealer, a small unknown auditing firm, lack of access to the PM, lack of transparency and overall secretive..."

What surprises me is how much exposure Euro banks have.  In these instances I think the banks will be on the hook for the $$$, they will have to replenish the customer accounts.  Could be wrong.

As for the 1/3 reduction in the number of hedge funds, comparing that to Madoff is not a fair comparison.  Lots of hedge funds will close due to poor performance, very few will close because they perpetrated an outright fraud (but a number will close because they were stupid enough to hand $$$ over to Madoff).

As if AIG, LEH, BSC, et al weren't enough, Madoff just put another big hurt on the wealth surrounding Pound Ridge!!  Just kidding Matt ;-)

[Lou_Duran]

There is a lot of pop finance and economics going on here.

As the WSJ indicates, there were warnings about Mr. Madoff.  We don't know how many prudent investors did their due diligence and refrained from joining the fund.  We do know that the SEC had information that something was not right, and, for whatever reason, did not act.

I won't be irresponsible and suggest that political considerations similar to those at play in the Fannie and Freddie debacle kept the regulators' head in the sand.  It is known that Madoff was politically active and a heavy donor.  Perhaps the regulators simply believed that rich people should have enough sense to know their bedfellows intimately.

Regarding the characterization here and in the popular press regarding hedge funds, they are hardly a homogenous entity or way to invest.  Like with the fates of many individual stocks and mutual funds, some hedge funds have huge losses this year.  However, there are any number of them that have done very well relative to the market and are performing as they're designed.  Among the biggest problems facing well-performing hedge funds today are redemptions from investors needing to cover their other obligations and that new money has all but dried-up.

Regarding the mental capacity or horsepower of these folks, for a large part, they compare favorably with even the brightest of our posters.  The suggestion that very smart people would place millions with rather ordinary opportunists may be the impression given by the Madoff affair, but I don't think that this is hardly the typical situation.  I haven't seen Madoff's client list, but if I was a fiduciary to one of them, I'd be getting a good lawyer.

Most hedge fund managers invest their money in their funds right along with their clients.  For the most part, they live their jobs and the losses of their clients are extremely personal.  It is much more than money to them, and, whether we like it or not, their success is very important to our country.

As NYC public servants will soon learn, those outrageous, inconceivable Wall Street bonus checks of yesteryear which funded their payrolls are all but gone.  Who is going to come to their rescue?  Uncle Sam?  And who is going to rescue him?  The Chinese?  And who's going to save the Chicomms as the rural masses continue to migrate to the cities and can't find work?     

We are going through a perfect storm which, I believe, can trace its genesis to the New Deal, but really regained its energy when the children of the sixties came of age during the Clinton administration.  These folks are now in charge.  Ironically, they are highly a secular bunch but will need to govern with a strong faith in the supernatural.  If we are to get our ire up, perhaps we should direct it in the proper direction.

Yesterday's local paper had a witty Mallard Fillmore cartoon whose theme was the ignorance of history among college students forcing a re-examination of our most valued aphorisms.  Santayana's famous quote "Those who cannot remember the past are condemmed to repeat it" was modified by crossing out"condemmed to repeat it" and replaced with "a highly sought-after voting bloc".  Populism requires short memories.  One of the tragegies of life is how hard it is to overcome our inherent shortcomings, of which greed is indeed a very serious one, but no more so than envy.   

[Rich Goodale]

I like that Mallard Fillmore quote, Lou.

As for the Vics, there are a lot of very smart people who got caught in the Madoff web even though for many of them it was OPM that they were "managing" that got disappeared, as per Dunbar (the character in Catch-22, not the golf course).

Somebody said above that all the banks were insolvent.  There's nothing new about that--all banks are and always will be technically insolvent, as their role in life is to borrow short (deposits) and lend long (mortgages, commercial debt) and do so at very high leverages (6-1 even before all the recent shenanigans).  Their insolvency only comes when their lenders (the depositors) lose their cool an dask for their money back en masse.  As it is the Christmas season, watch "It's a Wonderful Life" again to see how panics mostly affect the good guys who are playing by the rules.

Madoff is just one of the "Potters" who will be exposed before this whole sordid mess is resolved.

Have a happy one--at least we don't live in Zimbabwe.........

[RJ_Daley]

Lou, I agree with the Santayana's quote.   But you missed the part of history that needs to be remembered so as not to repeat it.  It wasn't the Hoover part of responding to the crisis with miserly conservatism that is now widely understood to have exacerbated the problem (and which you seem to suggest a conservative and miserly approach to this crisis rather than the massive spending that is now 'regrettably' needed).  

But, you don't have to go back to the "new deal" to rail like a 'Corkerite' in a bottle about what the new admin will/must do and not do.  Nor do you need to go back there to understand the premise you opened with:

..We don't know how many prudent investors did their due diligence and refrained from joining the fund.  We do know that the SEC had information that something was not right, and, for whatever reason, did not act.

I won't be irresponsible and suggest that political considerations similar to those at play in the Fannie and Freddie debacle kept the regulators' head in the sand...

You need to go back no further than the FINRA era and Mr Gramm's manipulations: (wiki version for summary)

http://en.wikipedia.org/wiki/Commodity_Futures_Modernization_Act_of_2000
[url]

and associated with that crippling of SEC oversight resources to take the watchdog away from the henhouse was the cut in the SEC budget in 2003 which Sen Sarbannes warned would hurt enforcement, and the insiders like Sen Shelby and Rep cronies pointed the way to justifying.  As Paul O'neill explains in his book how that SEC budget was cut to spin the funds over to the Iraq effort, one can learn from a man that was at the table during this era of deregulation and defunding the guards so as not to look into the ever increasing complexity of the bust-out and bilking scandals of the American investors and taxpayers.  

Lou, going back 75-80 years to find blame in the 'new deal' and associate blame for what has happened now with democrat philosophies and recovery efforts then is like pointing to horseshoe tracks in the Nevada desert and saying they were made by Zebras.  That is the method of modern conservative talk radio spin, not the facts.  I don't know much, but I'm pretty sure I know this...  

[SL_Solow]

For those who are quick to fault the regulators, most hedge funds are largely unregulated because they restrict their offerings to accredited investors.  Since these larger investors are presumed to be sophisticated enough to protect themselves, the regulators such as the SEC are limited intheir ability to act prior to a showing of fraud.  Of course the definitions pertaining to investors were created at a different time and the size of investments have increased markedly.

[RJ_Daley]

I'm waiting for Shivas to come on here and explain everything about the current crisis and particularly with what happened to the 'members' of the PBCC in "Caddyshack" terms.  Who are the correlating cast of characters? 

[George Pazin]

It wasn't the Hoover part of responding to the crisis with miserly conservatism that is now widely understood to have exacerbated the problem (and which you seem to suggest a conservative and miserly approach to this crisis rather than the massive spending that is now 'regrettably' needed).  

Might want to read some other historians/economists, something like The Forgotten Man by Amity Schlaes.

-----

Never ceases to amaze me how many smart folks fall for con men, legal or illegal. The lure of easy money...

[RJ_Daley]

George, no time, so I'll go for the summary version:
http://www.reason.com/news/show/123476.html

It seems she starts off with the effects of uncertainty and "“bold, persistent experimentation”.  What else could they do?  they were treading in unknown territory.  They had to experiment.  And, the wasn't the Hoover reluctance to intervene with massive spending for stimulus still widely seen as the tug that set the hook deep into the depression and that early stimulus is now believed in hindsight would have been better?

Then she ends up with the typical "forgotten man - taxpayer" rant about the ubiquitous government growth vis-a-vis the social security system and says that is why she wrote the book.
"The most important thing for our generation is that the New Deal will come back to bite our children when they pay yet higher payroll taxes because we did not dare to reform Social Security and other entitlements. There are not enough people to pay for Social Security, and Social Security is set up so that you can’t fix it just by growing the economy. "

Isn't the book just another taxpayer rant and rationale to do what is now impossible to contemplate in the real world? 

Isn't the real question, what did we learn about the early reluctance to provide serious stimulus by Hoover and the slow learning curve of feeling their way by experimentation, with mistakes made by FDR, yet stimulus was what was needed at the end of the day to effectively deal with the problem.  So now what, go back to the reluctance of the taxphobia people and close the pocket book at this time? 

[Lou_Duran]

SL,

You are absolutely right.  I think that the term qualified or accredited investor has a specific definition, maybe even legal.  Sophisticated, wealthy folks have the wherewithall to obtain the best information and if they fail to do so, it is largely their problem.

Not running in Mr. Madoff's economic, political, and civic circles, I don't have any specific memory of him prior to last week.  But given the amount of the money in question and the fact that the SEC was contacted on several ocassions by professional people with serious charges, even a cynical Monday morning quarterback has cause for concern.

Perhaps the lesson is that we should take from this is President Reagan's admonition and always "trust, but verify".  Most of us put way too much faith in what people we like and trust say without critical reflection.  One the few things Joe Perches and I agree on is that on things that matter, we should always be skeptical.

Dick Daley,

You probably don't do it with malice, but you consistently attempt to diminish me and what I put out there for consideration with the notion that I am parroting Rush Limbaugh or Sean Hannity- "That is the method of modern conservative talk radio spin, not the facts.  I don't know much, but I'm pretty sure I know this...".

I could be indignant and defensive about your method of attacking the individual rather than positing superior counter-arguments, but, I confess, I do enjoy Rush and Sean, and believe that their sometimes exagerated, show-bizz shtick is directionally accurate.  You and I have debated on numerous occasions the way the world works and we simply see things very differently.  Perhaps you should expand your universe of source information just a bit beyond Moore, Franken, MSNBC, CNN, and your fellow disaffected, socialist nut jobs.   

Much has been written regarding the causes of the Great Depression.  George's reference to Ms. Schlaes' work is a good one, but I am sure you won't find the emotional satisfaction you are seeking by reading it.  I offer the following link that references the WSJ with some temerity as I've come to realize that information that contradicts fervent faith can make the believer apoplectic, but here it goes anyways:   

http://www.businessandmedia.org/articles/2008/20081104085447.aspx

Two things appeared to have exacerbated a bad business cycle into a terrible depression: 1) protectionism with high tariffs on imported goods which led the rest of the world to react in kind; and 2) an extremely tight money supply.  Summarizing what FDR's friend and Treasury secretary Mr. Morganthau was quoted as saying, throwing the kitchen sink at the problem only made it worse.

It is ironic how roles have reversed somewhat 70-80 years later.  Today's protectionists are the Democrats.  Unfortunately, President Clinton was entirely wrong when he declared that the era of Big Government was over.  As President Bush, his Republican congress, and governors such as the one we have in CA, Republicans have long abdicated the position that governments that govern least govern best.  Frugality and small government has given way to which party can show their support for the biggest bailout of powerful constituencies.  There is no longer a tension, a competition for the minds and hearts between those who hold the individual as the epitome and those who abstractly place the collective on the throne.  The outcome, I fear, is the "europization" of America with ongoing, dimishing prospects for the rest of the world.  I sincerely hope that I am completely wrong.

Rich Goodale,

You are right.  I was a participant in the industry in Texas during the bank and S & L crisis of the late 1980s early 90s.  It is a shame that the ordinary person doesn't understand how things work on the margin.  Sad that a similar mark to market approach to valuing assets snow-balled the system and took down many otherwise healthy institutions.  I never bought completely into the notion that there were way too many of them (banks and S & Ls) and that consolidation was necessarily a good thing.  Today, some of the small local and regional banks with prudent lending practices are in the best shape.

I still have warm memories of Victoria Falls and the wildlife parks in what was once the breadbasket of Africa.  What an absolute pity.   

[HamiltonBHearst]

Mr Daley

Since you are smart enough to know who to blame in this fiasco other than Madoff, perhaps you are smart enough to do your own research and not have invested in KM, MER, and TYC.