Bernie Madoff's $50 Billion Fraud thru country clubs

[RJ_Daley]

Lou, I'm not trying to diminish you as an individual.  In fact, I stated that you seem to have the first part of your post about right, IMHO.   I just was trying to indicate that the method of pointing out the line about 'not remembering the past - doomed to repeat it'  while conveniently not remembering the whole past as it pertained to this issue is putting what I hear as the conservative talk show spin/method we have come to expect on these matters in these times.  

Maybe I'm alone on this, but I find it laughable and incredible that the whole talk show crowd ( and as I hear you, yourself) can come up with these contorted and labored ways of finding fault with anything and everything they can remotely link in current conditions as primarily rooted in historical democratic policies and philosophies.  Yet the realities are clear when it comes to this whole deregulated grab fest created indisputably by the idealogues on your conservative "less goverenment-deregulation'" side of the equation.  These historical facts about who created FINRA and who cut the SEC enforcement budget and who took Fannie and Freddie out of the perview of SEC and put them under HUD-OFEA and who creates loopholes to evade both taxes and accountability to the people as precursor to this crisis are conveniently ignored.  (your original concession that SEC went missing or sleeping on the job) Your isolating FDR 'new deal - bold experimentations' to get us out of THAT depression, as origins of this problem, while not recognising the Hoover response or lack thereof as being standard old conservative party 'let the market take care of itself' notion, is selective history at best.  

Yes, Smoot Hawley tarrifs were the conservative business crowd's original lobbied position back then.  Yes it is ironic that now labor and liberals want "fair trade" which has been distorted to accuse of absolute protectionism by the right.  I'd bet that the business crowd would be crying the loudest for tarrifs again, had they not spun all the manufacturing and profits off shore in the first place.  If the profits depended on on-shore American based plants and manufacturing, the business crowd would still be in Smoot Hawley mode.  But, they gutted on-shore manufacturing, moved it to slave labore and wages third world, then blamed it on unions, and then rail against unions for wanting to save American jobs and manufacturing.  What a con...

[George Pazin]

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

I don't doubt that is the message some would take from the book. I simply suggest it as a check against the notion that Hoover did nothing, and the notion that FDR's plans are what was needed and were successful.

You reap what you sow. We've been sowing since FDR and before; what we're experiencing now is just the tip of the iceberg.

Anyone that can look at the economic history of the US and the world and conclude that free markets don't work and government intervention does is someone I am incapable of influencing at all, so I will bow out now.

[RJ_Daley]

No Hamm, I'm not smart enough, nor smarter than millions of other investor/shareholders that believed the analysts who have financial educations well above my puny self.  I believed the stock tauts when they published the data based on 10Ks and required reports that must legally be correct, yet were infact illegal misstated data.  

We presumably have a government that hires cops and knowlegeable enforcement professionals to oversee accounting principles so as to be confident that the data is honest.  When the cops are taken off the beat, or 'ham'strung   to do their jobs effectively, then honest people get beaten, not by their lack of due diligence, but by organized and enabled deception.

Bad things can happen in any business where they go bust and investors loose money.  But, this is different.  It is not lack of due diligence as a shareholder or potential investor.  It is lack of honest information and unconflicted interests by analysts for investors to make investment decisons upon.  Why do you seem coddle the criminal deceivers and enablers and overlook the incompetent enforcement, and blame their victims?

[RJ_Daley]

George, before you go, please tell me what relationship, 'fair' and 'honest' and 'legal' must have with your notion of 'free markets'?  Where in that same history of the world has there ever been totally free markets that you can say have worked that have not been regulated in various ways, starting with honest and transparent markets.  Does a perfectly free market work if there are ever dwindling numbers of winners and ever increasing numbers of loosers, and loss not due to indolence, but deception and cheating?  Who regulates that in your free market?  This ain't golf George, where you self regulate and call penalties on yourself.  Free markets need a ref and enforcer on rules or it is a deadly spiral down to the end for all but the few winners who gain advantage by hook or crook... IMHO.

[mike_malone]

 While the details of this disaster are still murky it seems clear that  the "accelerators" of this scam were the funds of funds that did horrible due diligence. The unfortunate consequence could be continued pressure on hedge funds as investors just want their money back.

   I remember when I set up my own investment firm and enthusiastically told my first few clients about it. There was an uncomfortable pause at their end of the phone which quickly went away when I said "Oh, and by the way , I won' t be keeping your securities in a box under my desk!".

   I am having trouble developing sympathy for people who overlooked his constant statements that he had some secret way of successful investing.

  I also am a little annoyed at all of those who are coming out and saying that they smelled something bad about Madoff. Don't they have some responsibility to blow the whistle?

[RJ_Daley]

Mike, blow the whistle to who?  Has there always been someone on the other end listening for the whistle?  Did the enforcers have a list of priorities and allocations of investigative resources to have been able or willing to address this earlier? 

I sure don't know the answer.  Please explain to me how this happens.  I hear some say the SEC is one of the most effective agencies of government still operating.  Yet, they can get a charge on Martha Stewart for lying under oath, not the alleged secruities crime (as I understand it) for peanuts cash at stake, and they miss a fraud with a 50billion scope of loss?

If it is the case that the SEC is overwhelmed by all the accelerating pace of scandals in recent years, and potential out there of what other shoes haven't yet dropped, what does that say about us in the U.S.? 

[George Pazin]

George, before you go, please tell me what relationship, 'fair' and 'honest' and 'legal' must have with your notion of 'free markets'?  Where in that same history of the world has there ever been totally free markets that you can say have worked that have not been regulated in various ways, starting with honest and transparent markets.  Does a perfectly free market work if there are ever dwindling numbers of winners and ever increasing numbers of loosers, and loss not due to indolence, but deception and cheating?  Who regulates that in your free market?  This ain't golf George, where you self regulate and call penalties on yourself.  Free markets need a ref and enforcer on rules or it is a deadly spiral down to the end for all but the few winners who gain advantage by hook or crook... IMHO.

Where did you get the notion that free markets mean no laws whatsoever? That is anarchy, not free markets.

Free markets are no more - and no less - than freedom of choice extended to the economic arena. You cannot have a free choice exchange without certain regulations, but that is a far cry from massive intervention in the marketplace by the government.

What I - and, seemingly, sadly few others - object to is the notion that the enlightened Masters of the Universe can manipulate markets at their own will and there will only be positive consequences to their manipulations.

You love to state as fact that free markets have been tried and have never worked. That is your opinion, it does not happen to be mine. My opinion is that free markets are rarely tried, whereas government intervention is the most proven loser of all. Even casual inspection of the areas in which our economy are suffering would reveal that it is invariably the areas where the government is most involved.

EDIT: corrected the typo Dick caught.

[henrye]

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.

I would hope that the lawyer would be retained to go after Madoff & Co. and not to defend your actions against your client, because as a fiduciary you really wouldn't have any justifiable defense.  Time to dig deep, recover what you can and make your client whole.

[Richard Choi]

Interesting discussion. My $0.02...

I live by the rule that you should never trust your money with someone else. There is only one person why has the exact same monetary goal as you do - you, so trust no one with your hard earned money.

The problem with Madoff affair is that people always believe there are people out there who are so much smarter or better connected  that they will always perform better than everyone else when the facts say that this is not true. These "Masters of the Universe" don't know any better than an average Joe's off the street. If you look at the statistics, the percentage of winners/losers on Wall Street are basically dictated by chance and not skill. Even if you have some money managers who made extraordinary money, it is more likely that he/she was just lucky, rather than he was more talented than everyone else.  You can basically equal a typical return by a money manager by choosing securities at random. But people don't like mathematics and hate statistics. So they keep entrusting their money to these modern snake oil salesmen.

The most telling part of Madoff fraud was that its return was so amazingly consistent. Math tells you that this is almost impossible. But people believed that Madoff was smarter and more talented than everyone else so they ignored the evidence.

In the end, math won and people lost. It always will.

[Kalen Braley]

Some details on the big name losers..

HSBC, one of the world's largest banking groups, could lose $1 billion, it announced Monday.

The Royal Bank of Scotland (RBS) told CNN its hedge funds had exposure of up to 400 million British pounds ($600 million) to funds managed by securities broker Bernard Madoff.

France's BNP Paribas (BNPQ.Y) said Sunday its maximum potential loss was about 350 million euros ($468 million).

Spain's Banco Santander (STD) said it had a direct exposure of 17 million euros ($23 million) while clients of its hedge funds had 2.33 billion euros ($3.1 billion) at risk in Madoff's firm. Spain's second-largest bank, BBVA (BFR), said it could lose up to 300 million euros ($404 million).

Japan's Nomura (NMR) on Monday said it had 27.6 billion Japanese yen ($303 million) of exposure, but that the impact on its capital would be limited.


http://money.cnn.com/2008/12/15/news/newsmakers/Madoff_exposure/index.htm?postversion=2008121508

[RJ_Daley]

Even casual inspection of the areas in which are (sic 'our') economy are suffering would reveal that it is invariably the areas where the government is most involved.

Yup George, it is a simply explained honest difference in our points of view.  I think you could alter yours to say "Even casual inspection of the areas in which ouR economy are suffering would reveal that it is invariably the areas where the government is most uninvolved and failing to do its job as they were charged with doing, via cronism and designed to fail legislation, as lobbied for by those seeking to game and take advantage of the original intent."

But then I guess somewhere deep down I'm some sort of conspiracy nut.  I'm already scrutinizing the video to see if there was a second "shoeman" on a grassy knoll...  

[Kalen Braley]

RJ, et al.

You know what the real problem is with all you guys debating OT stuff...its always the wrong thing. 

http://www.cnn.com/2008/TECH/12/15/internet.sex.survey/index.html

[George Pazin]

Even casual inspection of the areas in which are (sic 'our') economy are suffering would reveal that it is invariably the areas where the government is most involved.

Yup George, it is a simply explained honest difference in our points of view.  I think you could alter yours to say "Even casual inspection of the areas in which ouR economy are suffering would reveal that it is invariably the areas where the government is most uninvolved and failing to do its job as they were charged with doing, via cronism and designed to fail legislation, as lobbied for by those seeking to game and take advantage of the original intent."

But then I guess somewhere deep down I'm some sort of conspiracy nut.  I'm already scrutinizing the video to see if there was a second "shoeman" on a grassy knoll...  

That's the difference - you see failed government intervention as the government being uninvolved - I see it as the government being ineffective. If the government wasn't doling out favors, cronyism wouldn't be nearly as popular, for instance. If the government didn't heavily regulate the securities industries, then maybe some folks would have been more inclined to look at what Madoff was doing, rather than misplacing blind faith in the SEC.

[John Kirk]

Where did you get the notion that free markets mean no laws whatsoever? That is anarchy, not free markets.

Apparently, the existing laws are insufficient to prevent a debt fueled meltdown.

The overwhelming majority of today's problems are caused by greedy lenders extending credit to those who can't afford it, and greedy consumers accepting that credit.

And Lou, then money supply is not too tight.  This is a housing price bubble, one in a series of commodities bubbles created by loose credit.

I have a new friend at my health club who made a compelling argument against further bank regulation.  In summary, he says this has been extremely traumatic for the banks, and that the most likely reaction is for banks to become overly selective in their lending practices.  If we regulate our banks further, then commerce will take their banking business elsewhere.

Still, I don't see how we then prevent a recurrence of today's problems.

[John Kirk]

Interesting discussion. My $0.02...

I live by the rule that you should never trust your money with someone else. There is only one person why has the exact same monetary goal as you do - you, so trust no one with your hard earned money.

The problem with Madoff affair is that people always believe there are people out there who are so much smarter or better connected  that they will always perform better than everyone else when the facts say that this is not true. These "Masters of the Universe" don't know any better than an average Joe's off the street. If you look at the statistics, the percentage of winners/losers on Wall Street are basically dictated by chance and not skill. Even if you have some money managers who made extraordinary money, it is more likely that he/she was just lucky, rather than he was more talented than everyone else.  You can basically equal a typical return by a money manager by choosing securities at random. But people don't like mathematics and hate statistics. So they keep entrusting their money to these modern snake oil salesmen.

The most telling part of Madoff fraud was that its return was so amazingly consistent. Math tells you that this is almost impossible. But people believed that Madoff was smarter and more talented than everyone else so they ignored the evidence.

In the end, math won and people lost. It always will.

We think alike.  We know alike.

In fact, I'd argue the only way "broker guy" beats the market over the long haul is with illegal information.

[George Pazin]

Apparently, the existing laws are insufficient to prevent a debt fueled meltdown.

The overwhelming majority of today's problems are caused by greedy lenders extending credit to those who can't afford it, and greedy consumers accepting that credit.

And who's pushing this debt-fueled situation?

Free market lenders would be going bankrupt, not being propped up for further problems down the line.

Every time someone commits a white collar type crime, it is trumpeted as a failing of the freee market, and the free market is emblazoned as Public Enemy #1. That would be like saying every time someone commits murder, that would should abandon all of our personal freedoms in favor of living in a police state.

Free markets require laws, and enforcement of those laws, not the complete abandonment of laws, nor the government trying to tweak the results in one way or another.

[Jeff Goldman]

Hello Lou!

Hope you are doing good.  If this debacle can be traced to the New Deal, please explain how the New Deal caused similar debacles such as the one that precipitated Shay's Rebellion, the Panic of 1873, the Panic of 1893, and Richard Whitney's huge fraud in the 1920s.  Thanks.

Jeff  

[John Kirk]

Hi George,

I don't quite follow you here.

We are in total agreement that a true free market system would have allowed these horseshit banks and brokerages to fail.  It appears that many are way underwater.  The greatest tragedy of all is the way these banks protected themselves by investing in so many unregulated, off-balance sheet transactions that the government decided it could not let them fail.  The whole thing smells of cronyism, though.

"Help!  We need 700 billion dollars.  Now!"  This after several years of the gaudiest paychecks in business history.  A middlin' guy working on Wall Street has been making $500-1000k per year, you know.  It's enough to make you scream.  These are the people least worthy of assistance.

[George Pazin]

Hi George,

I don't quite follow you here.

We are in total agreement that a true free market system would have allowed these horseshit banks and brokerages to fail.  It appears that many are way underwater.  The greatest tragedy of all is the way these banks protected themselves by investing in so many unregulated, off-balance sheet transactions that the government decided it could not let them fail.  The whole thing smells of cronyism, though.

"Help!  We need 700 billion dollars.  Now!"  This after several years of the gaudiest paychecks in business history.  A middlin' guy working on Wall Street has been making $500-1000k per year, you know.  It's enough to make you scream.  These are the people least worthy of assistance.

I do agree with you, sorry if it didn't come cross that way. Folks on here love to rip the free markets, as though free market capitalism means anything goes, no laws whatsoever. My point to Dick is simply that free markets does not mean an absence of laws.

The existing laws may indeed not be sufficient, though I personally believe they are simply not being enforced vigorously, as opposed to being insufficient. And considering who has been charged with creating and enforcing the laws, it isn't surprising. What's surprising to me is the proposed solutions by many on here and many of the enlightened outsiders - more laws to make people feel better, while those making the laws and enforcing them (and I mean all of them in Washington, both parties) are complicit in covering up their own misdeeds.

Jeff -

Love the sarcasm (I really do, I'm not being sarcastic ) But seriously, do you see any difference between the recoveries after the panics you mention and the much deeper and longer lasting Great Depression? Some might say it shows how wrong the policies of both Hoover and Roosevelt were.

[Richard Choi]

I think everyone can agree that there has to be a balance between free market and regulation. Too much of either and you end up with a mess like this.

Based on what has happened over the last decade, I think the market can use more regulation. While it is entirely possible that we may go overboard with regulation, we will have to apply more regulations until we start seeing the negative effects.

[Lou_Duran]

Rats, I had this eloquent retort to Dick's "Phil Gramm defanged the SEC" argument and I lost it in cyberspace.  Dick, there were complaints about Madoff's unreal returns throughout the 1990s.  The SEC had a complaint filed as early as 1999 and did nothing about it.  Whatever Texas Senator Gramm did in the 2000s, it had little to do with Madoff's fraud.

Jeff,

I am doing fine, thank you.  Panics have existed throughout the history of mankind.  Tulips, stocks, commodities, etc.  Markets are highly imperfect and volatile.  They are just a whole lot better than the alternative.  But if you have some reasoned, interesting, relevant information on the ones you mention, I am all ears.

I would also be curious to know what level of the economy you believe the government should account for.  Is a third enough?  Is half better?  How many "public servants" can the economy reasonably sustain?  Do you think that half of us can depend on the government for our livelyhood and the economy will somehow continue to chum along?

John Kirk,

If I gave the impression that I believe the money supply is too tight today that is certainly not my intention.  The opposite is the case.  My only reference to a tight money supply was to the post-1929 time frame when the Hoover administration failed to provide liquidity in the midst of the stock market and banking collapse.

As to brokers not being able to beat the market, you can believe what you want, but given that the maket is an average which reflects both good and bad picks, I think it is reasonable to conclude that there are some brokers who pick more winners than losers and beat that average.  To believe otherwise would lead one to only buy index funds or, as in current times, to remain highly liquid.  But, as I am sure you know, there is even considerable risk in just sticking your money under a matress.

HenryE,

You are right about not having much of a defense ("other smart people did it too"), and that is why a good attorney is a necessity.  A lazy, incompetent, but otherwise honest man can do little for restitution sitting in jail.  I hope I am wrong, but I bet these advisors don't have the insurance or assets to make Madoff's "victims" anywhere close to whole.

Richard Choi,

I could not disagree with you more vis-a-vis the present level of regulation.  It is not Madoff's fraud that collapsed Fanny and Freddy or that drove gasoline prices to unsupportable levels.  It is the noise that government creates in each and every transaction, big and small, which eventually overwhelmed us.

Adding to this noise is the new administration's promises to increase taxes on the productive, force trillions of dollars of additional costs on our economy (to prevent purported modeled/theoretical consequences of global warming), and placing nearly a third of the economy (health care) in the hands of the government.  If you think that the path to salvation is paved by government programs you may wish to heed Senator Clinton's advice about suspending disbelief.  It is all about the math and human nature. 

[John Kirk]

Lou,

Fair enough.  I agree.

The best way for a broker/manager to work in your best interests is to take a percentage of your net worth, regardless of transaction fees.  It would still be difficult to verify they were doing what they said they did.

[Lou_Duran]

Lou,

Fair enough.  I agree.

The best way for a broker/manager to work in your best interests is to take a percentage of your net worth, regardless of transaction fees.  It would still be difficult to verify they were doing what they said they did.

Huh?

I think an investor and advisor/broker best work together if they have a clear and reasonable understanding of each other's objectives and capabilities.  There are hedge funds where the principals invest most of their own personal money right along with their clients.  No one can have even a near perfect record.  And if anyone tells you that they have it all figured out, run the other way.  Today, with governments becoming so active in support of key industries throughout the world (e.g. Germany and VW), even the very best financial people are recalibrating.  Unfortunately, the lessons from the new realities can be very expensive.  Exciting times, wouldn't you say? 

[Jeff Goldman]

George,

The panics in the 1800s came every 15-20 years or so, and the ones in 1873 and 1893 lasted 4-5 years each.  The depression was longer and harsher, but these were bad enough.  Note that since the great depression, we've had bad recessions in 1972-3 or so (though that was really a different phenomena), and 1980-1982 or so, which was necessary, unfortunately, to ring inflation out of the economy.  I would say that the economic stabilizers resulting from the New Deal have been pretty effective.  Nobody has banned the business cycle (no matter what the supply-siders say), but recessions since the Keynes era began have been less harsh.

Lou,  the least government intervention is best; it should create a level playing field, and let the market do its work.  It must be involved when information costs and other friction can cause really bad things, and that's why we need regulators to do their job.  However, it by definition has a huge influence because it prints the money, and there is no getting away from that.  Decent monetary policy can also help let the market do its work.  However, now we are in a situation where it appears that the market is frozen, and nothing that the fed does will have any influence.  Interest rates are already basically zero, and nobody wants to invest in anything.  That's understandable--when there is this much excess capacity, why create more?  Same goes for tax cuts--folks will just take the money and put it under the bed.  We have already had in effect a huge tax cut with the decline in the price of oil, and its done zippo.  Therefore, in this case, government must make up the difference between output and potential output by spending.  A huge lot.  Quickly.  If it employs folks to do stuff, they will get money, get confidence, and buy things, and those folks will buy things etc. etc.  

[Richard Choi]

As to brokers not being able to beat the market, you can believe what you want, but given that the maket is an average which reflects both good and bad picks, I think it is reasonable to conclude that there are some brokers who pick more winners than losers and beat that average.  To believe otherwise would lead one to only buy index funds or, as in current times, to remain highly liquid.  But, as I am sure you know, there is even considerable risk in just sticking your money under a matress.

Nobody is saying that there aren't any money managers out there who cannot "beat the market". What math and statistics tells us, however, is that people who are "beating" the market are just lucky, not skilled.

Let me put it in a simple way. If you have 1,000 people flip a coin 10 times and have people call it while in the air, you are going to have a few people who will correctly predict the results all 10 times just by the odds. However, those people may believe that they have an uncanny ability to predict the coin flip instead of realizing that they were just lucky.

That is exactly what happens in the Wall Street. If you have enough money managers, you are going to have many who are very successful and few who are extraordinarily successful. But that is not because they are skilled, it is just a by product of the odds. But I am sure if you interview those money managers, they believe they have an uncanny ability to predict the market.

I will put a caveat that there may be people who are truly talented that they can beat the market average over the long run. However, if you look at the numbers and statistics, these kind of people do not exist more than what statistics would predict (based on random chances). So, far as anyone is concerned, they might as well not exist (because you will never be able to distiguish them from those who are just lucky).

And it is also very naive to believe that just because the money manager takes a percentage of your total net worth, their objective lines with yours. Their objective is to make themselves rich, not you. Making you money is just a byproduct of him getting rich, not his major focus.

Even if those money managers have significant amount of their own money in the game, they may still take WAY too much risk than what they really should take. This is exactly what happened with LTCM. Even though, most of the executives at LTCM had their own money in LTCM, they leveraged 40 to 50 times of their holdings because if they were right, they gained to make 40 to 50 times of their money while if they lost, they only lost what they had. And most of the LTCM customers had no idea that their money was at such risk because all they saw was consistent returns for 4 or 5 years (until it all came crashing).

Index funds are a GREAT way to invest. Certainly better than rolling a dice and getting a money manager. If you figure in the extra cost involved with money managers, 95% of the money managers cannot beat the Index Fund returns. And I will take 95% sure thing over 5% maybe.