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December 12, 2008 8:50 PM

Wall Street legend Bernard Madoff arrested over '$50 billion Ponzi scheme'. His company's website has a court announcement on the front page, but you can still find the old promises inside.
posted by 445supermag (85 comments total)

But, but, bit, he wuz one of the best and brightest, the people who truly earn multi-million dollar salaries and bonuses and golden parachutes because only they unnerstans the Invisible Hand of the Free Market!

Help me Ayn Rand, your cardboard characters and Sermons Santifying Sweatshops are our only hope! Summon up Zombie Reagan with his +5 Laffer Curve of Welfare Queen Slaying!
posted by orthogonality at 8:59 PM on December 12, 2008 [14 favorites]

According to CNBC, Ira Rennert (once accused of being the world's worse polluter) was "heavily, heavily invested" in Madoff.
posted by 445supermag at 9:07 PM on December 12, 2008

wow, I love Rennert's Wikipedia entry:

Education
Ira Rennert is a graduate of Brooklyn College. He earned his master's degree from New York University's Stern School of Business, where he is currently on the Board of Overseers

Career
Before becoming one of the worst polluters the world has ever seen, Rennert worked as a credit analyst at a Wall Street firm and later as a typewriter company salesman before venturing into the stock brokerage business.
posted by Auden at 9:33 PM on December 12, 2008

But, but, bit, he wuz one of the best and brightest, the people who truly earn multi-million dollar salaries and bonuses and golden parachutes because only they unnerstans the Invisible Hand of the Free Market!

What are you babbling about? He's accused of dishonesty. Is there actually a significant contingent of people who think that outright fraud should be allowed, or are you making fun of a position you made up?

If it's the latter, I'm super thrilled we all got to see you jack off in a thread. Really.
posted by Mr. President Dr. Steve Elvis America at 9:37 PM on December 12, 2008 [1 favorite]

I was trying to relate this story to some friends but I could not explain where the $50 billion went. Did it all go to the early investors? Did Madoff blow some of it on sweet vacations for himself?
posted by Burns Ave. at 9:49 PM on December 12, 2008

Every time one of these things happen, I ask myself, "Where were the auditors?"

Isn't this what auditors are supposed to detect and prevent? There was a big-name accounting firm called "Arthur Andersen" who had several of its clients busted for fraud in just a few years, about 5 years ago, and the sheer stink of it caused all their other clients to dump them like a hot rock.
posted by Class Goat at 9:51 PM on December 12, 2008

Mr. President Dr. Steve Elvis America writes "What are you babbling about? He's accused of dishonesty. Is there actually a significant contingent of people who think that outright fraud should be allowed, or are you making fun of a position you made up? "

You didn't read the article, did you, Steven?

If you had, you'd have seen that:
a) numerous folks on and off Wall Street have expressed suspicion for over a decade that the returns Madoff delivered were impossible, and
b) at least one

executive in the securities industry, Harry Markopolos, contacted the SEC's Boston office in May 1999, urging regulators to investigate Mr. Madoff. Mr. Markopolos continued to pursue his accusations over the past nine years... and according to documents he sent to the SEC that were reviewed by The Wall Street Journal. (emphasis added)

It's not a matter of mere dishonesty. Or at least, not merely Mr. Madoff's.

The real problem is that a near religious belief in de-regulation and market capitalism for over a decade blinded regulators and soi-disant market "experts" to what in retrospect was simply and obviously too good to be true snake oil.

---
The only other arena in which this sort of blatant fraud is not only permitted to continue but is held up as laudable -- or at least beyond regulation and criticism --, is religion. And I submit that Free Marketerism and Wall Street greed has become a kind of religion, a racket that is held to be, among polite people, above criticism. It's Prosperity Gospel for people who have enough money that they can do more than just pray for it, but who still want more.
posted by orthogonality at 9:54 PM on December 12, 2008 [44 favorites]

What are you babbling about? He's accused of dishonesty. Is there actually a significant contingent of people who think that outright fraud should be allowed, or are you making fun of a position you made up?

I think ortho's taking the voice of his defenders, who would, in fact, point to his long and illustrous carreer or downplay it. And sure enough, if you look in the comments section of the WSJ article, you'll see people starting off right off the bat saying "How is what he's doing any different than what the government does? Social Security is the biggest ponzi scheme of them all". Classy.
posted by Marisa Stole the Precious Thing at 9:57 PM on December 12, 2008 [1 favorite]

Every time one of these things happen, I ask myself, "Where were the auditors?"

That's another one of many bizarre parts of this story (like that fact that his sons turned him in): the auditor's company only had three employees: "Another woman in a nearby office, Leslie Cousar, said the man who comes to the auditor’s office does so for 10-to-15 minute periods, and wears tight pants and tie-dyed shirts"
posted by 445supermag at 9:59 PM on December 12, 2008 [1 favorite]

One Madoff investor, himself a legend, told me that Madoff's performance "just doesn't make sense. The numbers can't be straight." Another sophisticated Madoff investor actually went through trade confirms in order to reverse-engineer the strategy and said, "it doesn't add up."

So why did these smart and skeptical investors keep investing? They, like many Madoff investors, assumed Madoff was somehow illegally trading on information from his market-making business for their benefit. They didn't consider the possibility that he was clean on that score but running a good old-fashioned Ponzi scheme.

We may have reached Peak Schadenfreude.
posted by Combustible Edison Lighthouse at 10:03 PM on December 12, 2008 [15 favorites]

Mr. President Dr. Steve Elvis America writes "I'm super thrilled we all got to see you jack off in a thread. Really."

In addition to not reading the article, Steven, you seem not to have read the notice underneath the comment box:

Note: Help maintain a healthy, respectful discussion by focusing comments on the issues, topics, and facts at hand—not at other members of the site.

I'm not going to flag your comment as an offensive vulgar ad hominem attack, but I really should.
posted by orthogonality at 10:03 PM on December 12, 2008 [2 favorites]

i read about this ealier today and all i could think about was that this is going to do wonders for people's confidence in the markets - is it the only hedge fund where funny business has been going on? - how do people tell?

my advice? invest heavily in serta stock because the mattress industry is about to take off
posted by pyramid termite at 10:06 PM on December 12, 2008

"The key concept here, developed by MIT professor and noted hedge-fund theorist Andrew Lo, is "serial correlation." Simply put, serial correlation is the degree to which each month's returns in a fund mirror the results of the month before. A fund that returns the exact same amount every month is perfectly serially correlated. Madoff's returns were strikingly consistent month after month, year in and year out. That kind of performance—a nice, smooth line going up no matter what the market does—is a really good sign that you should look more closely.

The extraordinary thing that Lo does in the third chapter of his book "Hedge Funds," published earlier this year, is to demonstrate mathematically that an excessive degree of serial correlation is a powerful indicator that the holdings of a fund aren't being reported realistically. What Lo shows from the pattern of historical returns in hedge-fund databases is that when funds' returns grow too consistent, it is a sign that the investments are either very hard to value accurately and the returns are just guesses, or, worse, that they've been manipulated in a way that smoothes them artificially." -- The Big Money
posted by netbros at 10:06 PM on December 12, 2008 [4 favorites]

Every time one of these things happen, I ask myself, "Where were the auditors?"

Apparently at the pool in the Florida boneyard.

"Mr. Vos says his firm hired a private investigator and determined that the accounting firm had only three employees, one of whom was 78 and lived in Florida, and another was a secretary, and that it operated in a 13 foot by 18 foot office. His firm felt that was too small an operation to keep an eye on such a large firm operating a complicated trading strategy. A message left for the accounting firm was not returned."
posted by JackFlash at 10:06 PM on December 12, 2008 [1 favorite]

Combustible Edison Lighthouse quotes "They, like many Madoff investors, assumed Madoff was somehow illegally trading on information from his market-making business for their benefit. They didn't consider the possibility that he was clean on that score but running a good old-fashioned Ponzi scheme."

Precisely. Most times people are conned, it's because they're greedy. The "I'm an illegal alien with a winning lottery ticket, give me $100 and I'll give you the winning ticket" works because the guy getting conned is greedy and happy to (he thinks) defraud the "illegal" of 90% of her winnings. The Nigerian email works because the guy getting conned thinks he's taking a gullible Nigerian widow to the cleaners. The guy buying the stereo that "fell off a truck" assumes he's getting stolen goods cheap, only to discover he sent $200 on a box of rocks.

Those cons work too. But the "illegal alien", the Nigerian "widow", the driver of the white van full of "stereos" can't set up a fancy office at the best address and openly go into to business. The regulators, the cops, would bust him the next day. But do the same shit on Wall Street, not Main Street, and even though everyone assumes it's illegal as hell, no regulator does shit, and the investors neither feel shame or are shamed by members of their class, for what everyone realizes is profiting from illegality.

There's no shame in America if you've got money. Even if you got it from illegal insider trading, or through predatory lending to the uneducated and elderly, or by running foreign sweatshops that employ nine-year-olds on 12-hour shifts or local nursing homes that leave someone's grandmother lying in her own feces to save a few bucks and collect more Medicare, or by re-selling tainted Chinese medicine that you carefully made sure not to check for purity. As long as you made money doing it, there's no shame. Because you made money, you're A-OK and God must obviously love you.

All of America claims to love Jesus, but no one will throw these money changers out of the temple. Instead, the counting house has been made the new temple, and instead of Jesus Saves, it's Jesus Profits.
posted by orthogonality at 10:28 PM on December 12, 2008 [37 favorites]

The real problem is that a near religious belief in de-regulation and market capitalism for over a decade blinded regulators and soi-disant market "experts" to what in retrospect was simply and obviously too good to be true snake oil.

I wouldn't jump to the conclusion that a "religious belief in deregulation and market capitalism" is the root problem here. Unlike hedge funds which are by and large unregulated, Madoff was regulated by the SEC. So the questions should be about the failure of regulation, rather than the absence of regulation.

The real moral of this story is that a lot of "sophisticated investors" don't bother with due diligence. Caveat emptor.
posted by blue mustard at 10:35 PM on December 12, 2008 [2 favorites]

Unlike hedge funds which are by and large unregulated, Madoff was regulated by the SEC. So the questions should be about the failure of regulation, rather than the absence of regulation.

In another bit on irony, Madoff was involved with NASD, a Self-Regulatory organization.
posted by 445supermag at 10:40 PM on December 12, 2008

This appears to be one of those rare moments when you can scream "No bailouts!" and not really worry too much about who gets hurt in the process...
posted by markkraft at 11:02 PM on December 12, 2008 [1 favorite]

Huh. This part of the Times article is interesting:

Mr Madoff has been charged with a single count of securities fraud. He declined to enter a plea in Manhattan's US District Court and was released on $10 million bail. He faces up to 20 years in jail and a $5 million fine if convicted.

In other news, a man robbed a gas station at gun point, stealing $500 dollars. He was soon thereafter arrested, and if convicted, will be forced to pay $0.50 in fines.

Sorry, I made that last part up. I couldn't resist.
posted by Marisa Stole the Precious Thing at 11:14 PM on December 12, 2008 [20 favorites]

Mr Madoff has been charged with a single count of securities fraud. He declined to enter a plea in Manhattan's US District Court and was released on $10 million bail. He faces up to 20 years in jail and a $5 million fine if convicted.

It is interesting that they let Madoff out on bail, while Dreier (who's accused of a tiny, piddling $380m fraud) is sitting in a cell. I guess $50b buys better lawyers.
posted by blue mustard at 11:31 PM on December 12, 2008 [1 favorite]

Journalist Amir Efrati makes a good point in the WSJ video on that page, too - frauds like these are always uncovered during economic hardship; not when times are good. When times are good, no one asks questions about what you're up to, and why you're making so much money. That's very true - Nick Leeson's shenanigans didn't become obvious until the Kobe earthquake gave the Asia markets (and his gambles) a serious uppercut.

Today, Leeson is CEO of a football club in Ireland, and still trades stock. According to the WSJ article, there's about $200-300 million in actual assets left at Madoff Sec., and after Madoff had his "I'm ruined, I tells ya, ruined!" moment with his sons, he said he wanted to use part of that money to pay his employees. So it could've been worse - Madoff could have fled to Bermuda with a suitcase full of money. Glad at least he's owning up to his folly.

Oh, and my math was wrong - the gas station robber would be fined $0.05 for stealing $500 dollars, if the same fine-to-crime ratio Madoff is looking at was applied.
posted by Marisa Stole the Precious Thing at 11:46 PM on December 12, 2008 [1 favorite]

the gas station robber would be fined $0.05 for stealing $500 dollars, if the same fine-to-crime ratio Madoff is looking at was applied.

I assume that this is just the criminal penalty, and that Madoff and his firm would also be liable for the face value of the fraud, if not more. (Lawyers out there, feel free to correct me.)
posted by blue mustard at 12:06 AM on December 13, 2008

Precisely. Most times people are conned, it's because they're greedy.

It's that kind of attitude that stops people from coming forward after they've been conned. People get conned over all kinds of emotional states. How many people get conned by fake charities?
posted by Mitrovarr at 12:34 AM on December 13, 2008 [1 favorite]

I wanted to take a moment to focus on a few of the many victims of this latest mismanagement / fraud:

UK firm, Bramdean Alternatives, Ltd., headed by well-known fund manager Nicola Horlick, had almost 10 percent of their holdings exposed to Madoff. A quick look BAL's website indicates that their shares lost 55.56% of their value yesterday, with most of that between 1pm and the market's close. Presumably, today is going to be ugly too... possibly ugly enough to tank the entire company.

The Palm Beach Country Club is a private, members-only club that appears to be pretty much exclusively for Jewish multimillionaires. It costs between a quarter of a million and a million dollars to join the club, apparently depending upon how worthy you are considered. Bernie was a member and apparently made exclusive, invite-only offers to his fellow members... especially to the wealthiest.

Apparently, country club membership was also dependent on having contributed a lot of money to charity... so it's entirely likely that certain charities also had their money invested.

One article reports from Palm Beach:
There was one largely Jewish charity event last evening. "It was like the Titanic," one attendee said. "The ship was sinking, and people were crying, 'I lost this and that.' And everybody was drunk. The Titanic was going down and we might as well carry on."
posted by markkraft at 12:41 AM on December 13, 2008

As a correction, I should say that Bramdean Alternatives will have to wait until Monday to bleed out thoroughly. Perhaps they lucked out in that regard, because investors might not panic further.

Then again... they very well might.
posted by markkraft at 12:46 AM on December 13, 2008

"And I submit that Free Marketerism and Wall Street greed has become a kind of religion, a racket that is held to be, among polite people, above criticism. It's Prosperity Gospel for people who have enough money that they can do more than just pray for it, but who still want more...."

"All of America claims to love Jesus, but no one will throw these money changers out of the temple. Instead, the counting house has been made the new temple, and instead of Jesus Saves, it's Jesus Profits."

*sigh* Look, Orthogonality, I know what you're driving at, but in this case, you're going to have to adjust your overwrought metaphors just a tad -- because a majority of Madoff's clients, maybe a big majority, were Jews, not Randroid fundamentalist Christians (or your iffy parody of Randroid fundamentalist Christians), and a lot of those Jews (and Madoff himself, notably) were Democrats and Democratic Party supporters. Most of the news stories are kind of dancing around this fact, phrasing it euphemistically as "Madoff had strong ties to South Florida" and "served on the board of Yeshiva University" and such, but this is not really a secret. And it has hit the community really hard. So perhaps you'd like to lay the blame for this sorry gawk-worthy mess where it belongs -- at greed, at hubris, at stupidity, at willful blindness, at "this can't happen here" -- and quit trying to stretch this situation to fit your own stale kulturekampf.

Madoff is -- er, was -- a part of the Jewish nexus that runs between Manhattan and Palm Beach / Boca Raton. My parents and grandparents are also a part of that world, and they know several people who have lost money with Madoff. My father told me today, when we talked about the story over the phone, that he and my grandfather had friends telling them just last week how great this Madoff guy was and how they should look into using him as an investment advisor, I shit you not. (They weren't interested, because they distrust hedge funds and always have.) And my sister works at a big ole Jewishy law firm in Manhattan -- yes, that world is often still divided into Jewish and non-Jewish firms too, even today, and though my blonde-haired blue-eyed sister can "pass", she chose not to -- and she says it was a major topic of conversation at the holiday party this week. Some of the partners lost money, some of their clients lost money. In the insular little Jewish community I know, this is going to have a major, major impact: on the people, the businesses, the charities, the schools...and yeah, on the golf clubs too.

But that's soooo not the main issue here, despite all of our snickering "eat the rich" schadenfreude. My family got very lucky. But many other families have suddenly had their life's savings partially or wholly wiped out. Retirements gone, kids suddenly finding themselves without college money, and so on. I can only guess how many heart attacks this nightmarish situation is going to cause, how many divorces, how many bankruptcies, how much misery and finger-pointing. And considering the whole Democratic Party angle and the fact that fact that many of these people are (er, were) rich and powerful folks who know other rich and powerful folks, I have a hunch that the Obama Administration, even in its early days, is going to be turning the SEC into the modern-day Pinkertons and setting them loose among the hedge funds and Wall Street fraudsters, because there is going to be such a cry for blood, it will eventually make Rudy Giuliani's handling of Michael Milken in 1988 look like an episode of Sesame Street in comparison.

This story is just starting...

(Corny joke my dad told me tonight: his name is Bernie Madoff because he Made-off with the money...meanwhile, my husband, the uber-Mets fan, is upset about this news, as well he should be.)
posted by Asparagirl at 1:11 AM on December 13, 2008 [19 favorites]

The Cassandra Does Tokyo blog has some second-hand perspectives on the Madoff fraud: Bernie Comes Out of the Closet.

Some crimes are too perfect. Some facades too well-painted to be original or convincing. A good hustler knows he must lose sometimes in order to win. THAT is the reflection of reality that makes it believable, and gives confidence to the punter who will shortly be taken out. THAT was what was wrong with Bernie Madoff's ponzi. The people who were taken - like the Family Office and many others investors who in time will go public on their fleecing - wanted badly to believe they were onto to something that was so good that they ignored the most obvious signs of bogusness. It just didn't make sense. It just didn't add up. Even Jim Simons earns it. There is no free lunch.

There's an interesting discussion in the comments (I'm in there too, fwiw) as well.
posted by gen at 1:13 AM on December 13, 2008 [1 favorite]

Wow, Asparagirl. Thanks for the perspective. It often is really, really easy to see these situations in monochrome where investors are concerned. What I found pretty disgusting about the story was this guy had this scheme going for years upon years, apparently. So when did his conscience start to bother him, before or after the economy started to tank and he could no longer cover Peter's returns with Paul's investments? Of course, some of the WSJ comments about "Oh well, those poor suckers should've known better" and "This is no different than Soc. Security" are pretty icky, too.

I also noticed the "major Democratic contributor" in the WSJ article and thought, "Oh yeah, heads are going to roll." Wall Street's going to run red with blood.
posted by Marisa Stole the Precious Thing at 1:26 AM on December 13, 2008

Asparagirl writes "because a majority of Madoff's clients, maybe a big majority, were Jews, not Randroid fundamentalist Christians (or your iffy parody of Randroid fundamentalist Christians), and a lot of those Jews (and Madoff himself, notably) were Democrats and Democratic Party supporters."

Look, I knew he was a Jew, I knew his investors were Jews (the "South Florida housewife" and heir to millions, come on). I knew he was a major Dem contributor. I'm not talking about Madoff per se.

But I'm talking about the regulators and the climate on Wall Street as a whole. Madoff was one bad apple.

(And it really doesn't matter that he's a Jew, and I didn't want to get into anything that could be misinterpreted as "Jew Money-Lender, they own all the International Banks" anti-Semitism, to be frank, especially if, as you say, "there's going to be a cry for blood". "It can't happen here" and all that, but I didn't and don't want shoot sparks in a dry season all the same.)

The real question is, where were the regulators?

And the answer is, the general climate on Wall Street, regardless of race or religion, has made the regulators defanged beagles who couldn't even gum anyone's ankle. The systemic problem isn't that one guy or even ten or one hundred are criminals; the problem is the cops are asleep, and the whole village of Wall Street winks, nods, and genuflects to the thieves.


(Speaking of your shiksa-looking sister who can pass but doesn't, I have a funny sad (and true) story about a blond-haired, green-eyed nice Jewish boy ho passed at just the wrong time. I'll tell you sometime.)
posted by orthogonality at 2:32 AM on December 13, 2008 [2 favorites]

Ah yes, hedge funds - what Forbes magazine once famously called The Sleaziest Show on Earth.

Well having run client money before, let me make a few points here.

First, Hedge Funds blow up due to fraud all the time.

Not to discount what's happened here, but based on what we presently know, it seems that the $50B price tag is simply due to how long this scam was running.

No, it's not a single, $50B blow up as the headlines might lead us to think, more the total sum of the fraud as money from new investors was passed along as "returns" to established investors for what would appear to be decades.

As the economy soured new money was increasingly difficult to come by, and that's when the scam collapsed.

But things like this happen all the time.

As the industry is unregulated most of the time these things don't make the news. A few that did (disclaimer: this list is just off the top of my head driven by personal knowledge of the events, is hardly representative and not in any particular order):

Beacon Hill 2002, $400M (sidenote: this was an asset management company, and all losses were realised by their ironically named Safe Harbour Investments fund)

Lancer Management, 2003, $500M

Bayou Group LLC, 2005, $450M

Wood River , 2007, $88M

Sorwood Capital Management, 2007, $1.6 Billion

The reasons why these funds blow up are legion, but I've tried to include only fraud in my list above.

Sometimes the fraud is outright; manager runs a ponzi type scam until, as we're seeing now, events catch up with him (or her!). Other times they abscond to a foreign domicile, cash in hand with the house of cards collapsing behind them as they flee.

Still over instances fraud are more subtle e.g., Beacon Hill, where portfolio valuation was more "interpretive" than quantitative.

In any case, the financial services industry has seen it all and much of the SEC's mandate is to protect retail investors from this crap.




Second, I think we all know that risk & reward are positively correlated; the higher the risk the higher the reward. And reward is assigned both ways; the structures that are in place incentivise managers to take excessive risk, as they benefit the most when they do. Let's take a closer look. For a competitive industry, pricing is fairly homogenous across the board.

Typically the manager will take 20% of any gross profits. This is on top of management fees - 1% to 2% of assets, and perhaps another 0.5% of assets covering administrative fees.

Contrast to a highly regulated mutual fund, where any fees much above 2% can't be justified by performance.

So people who invest in these unregulated vehicles are expecting to get rewarded; it's as simple as that.

They are looking for exceptional rewards, in fact, and if someone offers these they don't ask too many questions.

Only about one third of investors will ask about the firms infrastructure and risk management practices. Only about one eighth will look at the managers strategy; dazzled by the money, no doubt. This quote, by Jackie Mandel from CarbonBased Consulting is telling[ .pdf ]

"There has been such a rush to try and get into the next hot hedge fund that some people are obviously not doing their homework as diligently as they should be."

What else can you conclude? People get greedy, don't do their due diligence and end up losing money.



Third, Hedge Funds are unregulated entities.

By this we don't mean their market activities are unregulated; no, hedge funds - like mutual funds, proprietary trading desks, etc, are all heavily regulated in terms of how they can trade and what information they can use to trade upon.

No, by unregulated we mean the parties they can approach are strictly constrained and such funds are only allowed to accept money from qualified investors; those who meet specific criteria for net worth and liquidity.

Typically, a qualified investor will have a liquid net worth of at least one million dollars, EXCLUDING the value of their primary residence, or an income of at least $250K per year for the past two years with a reasonable expectation of continuing to earn at this level going forward.

Bottom line: these things aren't sold to folks that can't stand to lose sums of a few hundred thousand (or more).

Not trying to minimise anyone's loss, mind you, but just pointing out that if a widow (or orphan) lost a million to this guy then he or she more than likely has plenty more where that came from.


Fourth, when I was running my fund we looked at this guy's strategy and returns.

We were thinking of off loading maybe 20% of our client money so we could focus with the remaining 80%, but passed on this guys strategy.

I grok derivatives at a very low level, and couldn't understand how he was doing it. My partner in our fund came from a compliance background and he didn't like this guys operation from a very high level. So two people analysing the problem from different directions both didn't like what they were hearing.

It really came down to this: if someone won't explain how they generate their returns then there is a problem. If someone explains how they generate their returns and you can't understand what they're saying then there is a problem.

Failed on all counts. We passed on the opp.
posted by Mutant at 3:47 AM on December 13, 2008 [33 favorites]

Mutant: Fascinating, thanks! I do wonder what impact it's going to have on fund redemption calls over this weekend and next month, I could really see some people scared out the market from this.
posted by amuseDetachment at 3:59 AM on December 13, 2008

Mutant writes "Fourth, when I was running my fund we looked at this guy's strategy and returns.

"We were thinking of off loading maybe 20% of our client money so we could focus with the remaining 80%, but passed on this guys strategy. "

Mutant, I have this $50 savings bond, and....
posted by orthogonality at 4:09 AM on December 13, 2008

This is why my future financial success is dependent solely on mayonnaise jars stuffed with crinkled twenties buried in the backyard.
posted by bardic at 4:30 AM on December 13, 2008

"But many other families have suddenly had their life's savings partially or wholly wiped out. Retirements gone, kids suddenly finding themselves without college money, and so on."

You couldn't invest with Madoff with *just* a few spare hundred thousands.... you needed real money *AND* connections to rack up those 30% annual returns... at least until things got to the point that Madoff was desperate to get every client he could get in order to keep the Ponzi scheme going.

Thing is, a lot of these families were really, really very wealthy indeed... and, let's face it, pretty materialistic. And ultimately their greed, materialism, and societal drive to outshine each other was their downfall.

Will it trigger heart attacks, break families apart, cause recriminations? Sure... but I'd argue that's largely because many of these people's values are fundamentally misplaced anyway.

Most of these wealthy families won't be wiped out... most will just wind up noticeably less wealthy.

Maybe they need to reevaluate their values and priorities and what's really important to them. Unfortunately, many won't, but perhaps a few lessons can be learned by the community as to what matters in life... and the cost for this lesson is only a couple billion.

They still have social security and the equity in their properties. They don't need to retire to Florida... perhaps they could mix things up a bit, and try Oregon or Arkansas for a change. Their kids can still go to junior college and get student loans or scholarships to complete their education at a better school, I hear. They're resourceful... and they all still have each other!

Really, it could be worse.
posted by markkraft at 5:43 AM on December 13, 2008 [2 favorites]

It is interesting that they let Madoff out on bail, while Dreier (who's accused of a tiny, piddling $380m fraud) is sitting in a cell. I guess $50b buys better lawyers.

I'm guessing they also have a better idea of where Madoff's assets are. The reason Dreier didn't get bail is because he's apparently been pulling off multiple impersonation schemes for years now, and because they're not sure he doesn't have enough overseas assets to say "the hell with this," leave the country, and move somewhere that won't extradite him.
posted by oaf at 5:47 AM on December 13, 2008

Summon up Zombie Reagan with his +5 Laffer Curve of Welfare Queen Slaying!

Laffer loves Queens.
posted by ersatz at 6:15 AM on December 13, 2008

Just before this story broke, I was writing about an unrelated matter (nomination for drug czar) when I came across a guy who was a campaign donor to the guy I was covering. The contributor is currently facing charges for a $3.5 billion ponzi scheme involving hedge funds.

And I was thinking "Wow, how is it that a $3.5 billion ponzi scheme doesn't even make national headlines? Where's the coverage in the NYT, etc?" I've never heard before of a fraud in the billions-- certainly gotta be one of the largest ever, if not the largest. Oh well, I guess the economic collapse is getting all the attention.

I guess it needs to be $50 billion, but WTF?
posted by Maias at 6:20 AM on December 13, 2008

Sowood wasn't fraud. Just bad investing. Sextant - Icelandic Glaciers, now there is a fraud you missed
posted by JPD at 6:32 AM on December 13, 2008

frauds like these are always uncovered during economic hardship; not when times are good.

"It's only when the tide goes out that you learn who's been swimming naked." - Warren Buffett
posted by deanc at 6:53 AM on December 13, 2008 [4 favorites]

And it really doesn't matter that he's a Jew, and I didn't want to get into anything that could be misinterpreted as "Jew Money-Lender, they own all the International Banks" anti-Semitism,

but it's fine to take a swat at another religious group instead, isn't it? and your average mefite is just itching to have an excuse to quote the protocols, aren't they?

i don't know what's worse - that you take a gratuitous swipe at ideas and beliefs that aren't involved in this or that you think so little of the intelligence of your audience

how wonderful
posted by pyramid termite at 7:32 AM on December 13, 2008 [1 favorite]

So the NYT articles mentions that regulators are just beginning to dig into his books. Serious question - who are these regulators and where do they come from? I understand he was regulated by the SEC, but are these full-time employees of the government, consultants, or what? I ask because I think there might a forensic accountant shortage soon...

Also, pure speculation on my part, I wonder if this is the case of an older guy wanting to take the fall for his sons. If he was investigated and found to be clean in 1992, maybe he handed over the operation after that.
posted by These Premises Are Alarmed at 7:38 AM on December 13, 2008

Two immortal quotes from John Kenneth Galbraith about a previous speculative episode.

"In many ways the effect of the crash on embezzlement was more significant than on suicide. To the economist embezzlement is the most interesting of crimes. Alone among the various forms of larceny it has a time parameter. Weeks, months, or years may elapse between the commission of the crime and its discovery. (This is a period, incidentally, when the embezzler has his gain and the man who has been embezzled, oddly enough, feels no loss. there is a net increase in psychic wealth.) At any given time there exists an inventory of undiscovered embezzlement in - or more precisely not in - the country's business and banks. This inventory - it should be called the bezzle, also varies in size with the business cycle."

""Even in such a time of madness as the late twenties, a great many man in Wall Street remained quite sane. But they also remained very quiet. The sense of responsibility in the financial community for the community as a whole is not small. It is nearly nil. Perhaps this is inherent. In a community where the primary concern is making money, one of the necessary rules is to live and let live. To speak out against madness may be to ruin those who have succumbed to it. So the wise in Wall Street are nearly always silent. The foolish thus have the field to themselves. None rebukes them."

The best book on what's happening today was written by Galbraith, fifty years ago. There are no surprises here.
posted by storybored at 8:20 AM on December 13, 2008 [2 favorites]

There's been an ongoing edit fight on his wikipedia page as to identifying him as a jew (this fact disappeared when the scandal broke). Now his page has a rather large list of those who were defrauded.
posted by 445supermag at 8:24 AM on December 13, 2008

"And the answer is, the general climate on Wall Street, regardless of race or religion, has made the regulators defanged beagles who couldn't even gum anyone's ankle. The systemic problem isn't that one guy or even ten or one hundred are criminals; the problem is the cops are asleep, and the whole village of Wall Street winks, nods, and genuflects to the thieves."

Quoted for truth. That some people like Jim Vos and Paul Makopolous smelled a rat and/or took the time to make formal complaints to the SEC as good citizens, and were apparently blown off and ignored, is unforgivable. The cops aren't just asleep, the cops are gone, and have been for a long time. This has to change, and I think with Obama coming in, it will.

"Maybe [Markoff's victims] need to reevaluate their values and priorities and what's really important to them. Unfortunately, many won't, but perhaps a few lessons can be learned by the community as to what matters in life... and the cost for this lesson is only a couple billion."

Wait a minute, markkraft , are you dissing them because they lost their money in a bad hedge fund, or because they had money, period? Because people sure don't deserve magical bonus points for being rich, but it doesn't automatically make them schmucks either, or mean they karmicly deserve to have all their money stolen by a crook. There's nothing inherently wrong in having someone else manage your money for you, or your family's charitable foundation, or your school's endowment fund, or whatever. There's a fine but important distinction between "fuck 'em, they were careless" and "fuck 'em, they were rich", and I think you're leaning towards the latter here.

And that's kind of the flip side of the SEC's blind eye, discussed above -- it's just as wrong for the SEC to say "who cares what might be going on with such-and-such firm, since they're making money", with the implication that the rich deserve to profit unencumbered by rules, as it is for you to say "who cares what happens to a bunch of rich folks who got snookered" with the implication that the rich deserve to eat crow, or Top Ramen, unhelped by the idea of equal justice before the law, or at least equal outrage about injustice.

And for what it's worth, even a cursory check of Google News stories about this case will find a huge number of charities and hospitals and arts organizations listed in the press that have been wiped out, or forced to fire their employees already, or possibly rescind major gifts. Suddenly wiping out a lot of rich people's money fucks over a lot more people than just Joe Schmoe-witz on the Palm Beach golf course. There's such a thing as a trickle-down effect, alright. but it only works in a negative sense...shit rolls downhill.
posted by Asparagirl at 9:01 AM on December 13, 2008 [3 favorites]

"This inventory - it should be called the bezzle, also varies in size with the business cycle."
The bezzle, fo shizzle.
I had dinner last night at the home of a federal prosecutor. One of the other guests had just heard from his father who had lost a substantial amount in this scheme. He spent the evening looking dazed, shaking his head, and asking "How could this happen?"
I've pointed him to this thread.
posted by Floydd at 9:01 AM on December 13, 2008

Yeah, unfortunately, the size of the bezzle in Bernie "Maddog " Madoff's case would seem to indicate that this is the biggest speculative bubble in history.
posted by storybored at 9:05 AM on December 13, 2008

Does the SEC do Quantitative Analysis? Sadly, just poses the question, doesn't have an answer.
posted by These Premises Are Alarmed at 9:17 AM on December 13, 2008

Charities lose millions in Wall Street fraud case --"Philanthropic groups hit hard by Bernard Madoff's arrest."
posted by ericb at 9:33 AM on December 13, 2008

Reader comments posted to this Palm Beach Daily News story:

"Oh my God Bernie what have you done???!!!!
Why? Why?
You told me to trust you...that this could never happen. You have destroyed the lives of your people."

"Wow, Bernie was a friend of mine. I guess you live life like you're a somebody then when you're 70 you get tired and say April fools."

"Bernie, Bernie, Bernie
how do you get up everyday and deal with your soul. My guess is that you won't live until the trial. I'm guessing you were diagnosed with a terminal disease. There is a special seat in hell for little schmucks like you."

And then there's this lovely tidbit from the Wall Street Journal's FAQ about the case:

"Q: Does SIPC [SIPC is kind of like the FDIC, but for investment portfolios instead of bank accounts, and not an offiicial US government program] have enough money to cover all of the potential claims?

A: It may not if it has to cover losses as high as $50 billion. As of Dec. 31, 2007, the SIPC Fund had about $1.5 billion to cover potential claims. While the Securities and Exchange Commission can make another $1 billion in loans to them, it would probably have to go back to Congress for more money, says Steven Caruso, a partner at Maddox Hargett & Caruso PC, a New York law firm. "We'd be looking at another bailout, only this time it would be SIPC and not the auto industry," he says."

Fuuuuuuuuuck.
posted by Asparagirl at 9:34 AM on December 13, 2008

Asparagirl, SIPC has a maximum cap of $500,000 per investor and only covers investors who are part of an insolvent, or otherwise bankrupt firm. SIPC doesn't cover fraud. The investors of Madoff Securities can sue Madoff, but in reality, their money is as good as gone, and the SIPC and the government will not make anyone whole (i.e. give people their money back in full). The lawyer in that Journal FAQ is trying to appeal to people's sense of decency and fairness to try and get the government to step in, but the reality here is that hedge fund clients are rich enough to appreciate these risks. It's not like auction-rate securities, which were sold as "good as cash" investments.
posted by SeizeTheDay at 9:49 AM on December 13, 2008

I just noticed another angle... Because this was apparently all a Ponzi scheme, the majority of the money that is "gone" was probably not stolen by Madoff for his own gain in the usual sense, but rather was given to his other investors who may have cashed out earlier, before the whole thing fell apart. So if the case of the now-deceased Kirk S. Wright of International Management Associates in Atlanta is anything to go by, Madoff's victims may end up suing the people who managed to cash out from his hedge fund in earlier years, because that money is not technically theirs. I'm not sure they really have a case, but that didn't stop Wright's victims from trying that legal tack to get some of their money back.
posted by Asparagirl at 10:01 AM on December 13, 2008

A question was emailed about this guys' fund and specifically why cash wasn't withdrawn earlier. I thought my answer might be interesting to all:

Most hedge funds have what's called a "lock in period"; in other words, the investor simply can't get access to their cash for a specific period of time, usually one year but sometimes as long as three years.

This is postiive from the hedge fund point of view, as %100 of funds raised are available for investment purposes in their chosen strategy.

Contrast with Mutant Funds which allow for daily redemptions. In order to insure that short term market dynamics won't cause the fund to disinvest at an inopportune price, many funds will maintain a cash position at all times.

Net / net - drop $1.00 into a Mutual and, depending upon the strategy, current market, redemption history (particularly near term) the manager might only invest $0.90 (or less) into the market. Try to tie that back the performance of your fund's benchmark (e.g., S&P 500, retail, etc) and you might be disappointed.

A hedge fund will be capable of investing very close to $1.00 into their chosen strategy.

A good book that looks at the performance of funds with dynamic asset bases is Searching for Alpha: The Quest for Exceptional Investment Performance (Warwick, 2000).

Simple rule of thumb: the more static the asset base the greater the alpha (return attributed to the managers skill) that can be generated. More of the assets can be fully invested at all times.

One final lesson would be that of diversification; nobody should invest all their assets (e.g., life savings as mentioned above) into a single vehicle.

Even before the recent financial crisis you'd be hard pressed to find an advisor who would have advocated investing %100 of ones assets in something as safe as US Treasuries, regardless of the return offered, for example.

While most academic texts on portfolio management suggest a dozen or more carefully chosen assets as optimal (from the point of view as maximising return while minimising variance or risk), some people move out to 25 or so. I've mentioned many times I'm a cash flow investor, going solely for yield.

While some of my peers invest religiously in 40 assets - risking no more than %2.5 of principal in any single security - I go the other way and currently hold but six cash flow generating assets.

If one either can't or won't watch the markets carefully, diversification is essential, as this example shows us.
posted by Mutant at 12:11 PM on December 13, 2008 [4 favorites]

whoops! should read:

Contrast with Mutual Funds which allow for daily redemptions.
posted by Mutant at 12:12 PM on December 13, 2008

There's no shame in America if you've got money.

Please point to the country where there is shame if you've got money. This is a human trait, not an American one.
posted by spicynuts at 12:34 PM on December 13, 2008

I dunno. I'd invest in Mutant funds.
posted by bumpkin at 1:14 PM on December 13, 2008 [4 favorites]

Gen, thanks for the Cassandra link. I liked the closing paragraph after your quote:

There is something fitting and just in the timing of this. It is emblematic of America since Reagan and the Great Leveraging. Something for nothing. Thank you Mr Laffer. But as a philosophy and modus operandi it is quite literally, bankrupt and without merit. And Laffer has since been proven to be full of shit. Now, Americans will have to confront this, the premise that greed is good and self-guiding and somehow omnisciently beneficial for it has had repurcussions down to the core of our society and values. "Sorry everyone....what you've been pursuing has all been a lie, a big ponzi, a rat-hole to nowhere....". Re-boot.

posted by psyche7 at 1:15 PM on December 13, 2008 [1 favorite]

"...are you dissing them because they lost their money in a bad hedge fund, or because they had money, period?"

I'm dissing them because they were more greedy than prudent, because their priorities in life are seriously out of whack, and because their little society of $500,000 memberships to the country club, for starters, is *seriously* out of touch and unjustifiable.

You went way out of your way to jump on Orthogonality for his completely valid critique of a system of blind, unchecked greed, as if the Jewish community were somehow above all that, because many of them are Democrats who donate a lot of money, much of it within their own community.

Nobody is saying that there aren't innocent victims involved at the charities, etc., but the people who enabled Bernie Madoff's Ponzi scheme without due dilligence or even remotely any kind of transparency as to how the money was invested... they're most certainly not the victims in this case.

Want to know how his high-end clients got those 30% annual returns while most others out there were making single digits, if that? They got those returns paid to them out of their own money... and indeed, a lot of the income in question has already been spent by the victims, with many of those at the top of the Ponzi pocketing huge gains!

So, while it's perhaps sad to reflect on the potential good charitable acts that these "victims" would've supported with their endowments had they actually been multimillionaires, instead of defrauded millionaires who were once multimillionaires on paper, it seems to me that they, quite literally in many cases, clearly got what they deserved. (i.e. Huge profits for years, followed by a serious financial reckoning for their irresponsible, greedy behavior.)

It's a shame and a sin that some of them let their charities gamble money in the same way that they did... but it's also a shame and a sin that the people at the bottom rung of the Ponzi scheme -- in many cases, investors in Japan, England, France -- lost their entire life savings on an obscure, opaque U.S. portfolio that they were told was "low risk, high yield" in order to support the fat returns that the people at the top of the Ponzi have been spending for years.

I'm sure there are also a lot of Jewish families who lost everything as well... people who weren't as connected and couldn't afford the country club dues like those at the top of the Ponzi, who were proud and flattered when they finally got the chance to invest. They were lured in by the investment's false promises...

But in what sense are the terms "blind greed" and "social climbing" not applicable here?!

You know, if the world would only see fit to give me a guaranteed 100% return on my investments every year, I really do think I'd have a good shot at wiping out all those pesky childhood diseases... and I'd still have a little left for vacation houses and greens fees!
posted by markkraft at 1:34 PM on December 13, 2008 [2 favorites]

"...are you dissing them because they lost their money in a bad hedge fund, or because they had money, period?"

I'm dissing them because they were more greedy than prudent, because their priorities in life are seriously out of whack, and because their little society of $500,000 memberships to the country club, for starters, is *seriously* out of touch and unjustifiable.

Oh, so the latter, then. Glad we cleared that up.

"You went way out of your way to jump on Orthogonality for his completely valid critique of a system of blind, unchecked greed, as if the Jewish community were somehow above all that, because many of them are Democrats who donate a lot of money, much of it within their own community."

No, I jumped on him for trying to fit the real world scandal into his pre-conceived notion of the religion, party affiliation, and worldview of the majority of the actual victims. And, uh, I'm actually a Republican, and one of the few who will dare admit that on MetaFilter. I don't think Democrats are "above" much of anything. :-)

Want to know how his high-end clients got those 30% annual returns while most others out there were making single digits, if that?

Am I missing something here? Because his firm, for everyone who was invested in it, made the same (fictitious) 8 to 11% returns every year, for all the people invested, up until last week. I haven't read anything in any of the coverage about some investors making more or less based on any kind of criteria, be it length of time invested or amount of funds invested, and indeed that would seem to go against the concept of a hedge fund. So are you pulling this out of your ass, or do you have a cite for this?

"Huge profits for years, followed by a serious financial reckoning for their irresponsible, greedy behavior."

Again, I have to take issue here. It is prudent, not greedy, if you should be so lucky to have a lot of money, to hire an investment manager to help you manage what to do with it. It's the standard response most people here would give to someone over in AskMeFi, for example: hire an adviser. The issue in this case is that these people picked the wrong guy, and they didn't do their own due diligence, and they relied on clubby word-of-mouth and popularity instead of seeing the red flags.

"I'm sure there are also a lot of Jewish families who lost everything as well... people who weren't as connected and couldn't afford the country club dues like those at the top of the Ponzi"

Dude, you are now making shit up. Some of the richest, the most connected people in the world just got fleeced. People who own the fucking country clubs, nevermind the dues. The people on top got fleeced too, that's what every news story is saying, what every list of names is telling you.

You're reading the news as "a bunch of rich people ripped off everyone else, and knew what they were doing, knew they were in a Ponzi scheme and they had to get while the getting was good". But every news story linked in this FPP is saying "one rich guy (and possibly his sons) ripped off hundreds of extremely rich families and organizations, and the damage is extensive".

But whatever, they were all just rich assholes, every last senior citizen, and those charities were all self-serving excuses for benefit parties, and those hospitals didn't really need the money for the new wings, and I'm sure they must have had it coming...
posted by Asparagirl at 2:21 PM on December 13, 2008 [3 favorites]

In this troubled economy, invest in a name you trust. Mutant Funds. Member MFIC.
posted by These Premises Are Alarmed at 2:45 PM on December 13, 2008

A bottom for banking? posted by Mutant at 6:39 AM on September 9, 2008

Are funds calling a bottom to the US housing market? posted by Mutant at 7:14 AM on August 28, 2008

Okay, but don't come crying to us when your trusted financial adviser doesn't make good on your life savings.
posted by TimTypeZed at 4:20 PM on December 13, 2008

No, I jumped on him for trying to fit the real world scandal into his pre-conceived notion of the religion, party affiliation, and worldview of the majority of the actual victims

If anyone is fitting issues about religion and worldview where they don't really fit, it's you.
posted by ROU_Xenophobe at 5:37 PM on December 13, 2008 [1 favorite]

Wait there, that didn't come out right. I honestly don't mean to be snippy. But I think you're reading either your own issues or your posting history with orthogonality, if there is one, into his comments very strongly. There's no reasonable way to read the comment you were replying to as anything other than a rant against deregulation and nonregulation.
posted by ROU_Xenophobe at 5:46 PM on December 13, 2008 [1 favorite]

What impressed me about this story was that it was Madoff's own sons who confronted him about the fund and went to the police after he confessed the true state of things to them. It seems Madoff make a much better father than fund manager.
posted by AndrewStephens at 7:27 PM on December 13, 2008 [1 favorite]

What impressed me about this story was that it was Madoff's own sons who confronted him about the fund and went to the police after he confessed the true state of things to them.

Um, yeah, but then they were also highly placed officers in his enterprise, weren't they? What's the likelihood that these men in their late 40s or 50s, probably, with careers in the fianance industry, just...hadn't noticed that something was amiss?

It reads like familial ass-covering to me.
posted by Sublimity at 7:54 PM on December 13, 2008 [2 favorites]

But whatever, they were all just rich assholes, every last senior citizen, and those charities were all self-serving excuses for benefit parties, and those hospitals didn't really need the money for the new wings, and I'm sure they must have had it coming...

Listen, I know what you're getting at. But if Mutant's characterization of the people who are involved in these kinds of high-flying circles is accurate--surely you have to understand that the 99.9999% of the country that is not directly suffering from Madoff's lies, or even those that will suffer as the effects ripple out, have MUCH LESS of a financial safety net or cushion or whatever to fall back on.

Sucks that the rich people got ripped off. But don't expect the proles to feel especially sorry for them after the shit has rolled downhill...and the rich people still have, say, a mere 500K, or a country club, or a few houses, or a trust fund no matter how diminished, to fall back on. The vast majority of us *do not* and *never will*, no matter how hard we try.
posted by Sublimity at 8:10 PM on December 13, 2008

Sublimity, you may be right about the sons, but this WSJ article claims they weren't involved in this particular scheme.

The two sons, Andrew and Mark, have worked for the securities firm since graduating from college 20 or so years ago. Neither is involved in the asset-management business that their father runs, according to a person familiar with the situation.

But perhaps I am being naïve.
posted by AndrewStephens at 8:35 PM on December 13, 2008

Here is a list of Madoff’s current investors; seems to have had 27, reported sums entrusted range from $8M (the Robert I. Lappin Charitable Foundation) to $7.3B (Fairfield Greenwich Group).

Eleven haven't quantified sums involved yet, so summing what we do know we see losses of about $14.6B.

We can back into a few others as well.

We know what Bramdean lost about 9% of their assets; the last time she raised capital her fund ended up with £131M (July 2007, about $260M US 'cause that was back in the "strong pound" days) so let's call their loss perhaps $23M, probably more but maybe less as we don't really know what happened since then and we're also assuming that only captial from the last time she went to market was invested.

Nina was gushing pretty enthusiastically about Madoff in this May 9th 2008 FT podcast (excerpt: "...This guy has managed to return 1-1.2 per cent PER MONTH, year after year after year."); hopefully her fund drew down original capital and they've lost only a small percentage of profits.

Fairfield seemed to get hit particularly hard, noting on their own web[ .pdf ] site that

"As of November 1, 2008, assets under management at FGG totaled approximately $14.1 billion, of which approximately $7.5 billion was invested in vehicles connected to Bernard L. Madoff Investment Securities."

We call it concentration risk, and presumably Fairfield knew what they were doing. It will be interesting to see how their investors react.

So adding those two in it looks like we're seeing losses of roughly $22.2B, before the eleven "undetermined" speak up.

Gosh.
posted by Mutant at 2:44 AM on December 14, 2008 [1 favorite]

One interesting point of clarification: Madoff was not running a hedge fund.

From NYT:

"Mr. Madoff was not running an actual hedge fund, but instead managing accounts for investors inside his own securities firm. The difference, though seemingly minor, is crucial. Hedge funds typically hold their portfolios at banks and brokerage firms like JPMorgan Chase and Goldman Sachs. Outside auditors can check with those banks and brokerage firms to make sure the funds exist.

But because he had his own securities firm, Mr. Madoff kept custody over his clients’ accounts and processed all their stock trades himself. His only check appears to have been Friehling & Horowitz, a tiny auditing firm based in New City, N.Y. Wealthy individuals and other money managers entrusted billions of dollars to funds that in turn invested in his firm, based on his reputation and reported returns"
posted by storybored at 7:48 AM on December 14, 2008

This shit happens because of assholes like this..

Canada supposedly has one of the best banking systems in the world. It got that way in large part because it was very sensibly regulated for a long time.

All it seems to take, though, is for a pair of idiots (Harper and Flaherty) to come along and untie the strings. Bam! the inevitable happens: amoral corporate behaviour focused solely on short-term gains and a complete disrespect for long-term risk and harm ends up costing all of the country dearly.

An unregulated market does not work. Without enforced regulations checking greed-driven behaviours, the market can not succeed over the long term.
posted by five fresh fish at 10:40 AM on December 14, 2008

Alas, there's more to this than just a question of regulation. According to the same NYT piece linked above, the SEC had had prior suspicions....

"...the S.E.C. had already investigated Mr. Madoff and two accountants who raised money for him in 1992, believing they might have found a Ponzi scheme. “We went into this thing just thinking it might be a huge catastrophe,” an S.E.C. official told The Wall Street Journal in December 1992.

Instead, Mr. Madoff turned out to have delivered the returns that the investment advisers had promised their clients. It is not clear whether the results of the 1992 inquiry discouraged the S.E.C. from examining Mr. Madoff again, even when new red flags surfaced.

According to an S.E.C. statement released on Friday night, the agency looked at Mr. Madoff’s operations twice in recent years — in 2005 and 2007. The 2005 review found only three technical violations of trading rules. The 2007 inquiry found nothing that prompted the regional enforcement staff to take further action by referring the matter to Washington, the statement said."
posted by storybored at 12:37 PM on December 14, 2008

"There's no reasonable way to read the comment you were replying to as anything other than a rant against deregulation and nonregulation."

Well, yeah, but his comments kept using the framework of an explicitly Christian right-wing big-L-Libertarian worldview (or rather the parody of one) to talk about a Jewish mainly-left-wing implosion, and that seemed to be stretching it. I have no beef with the O-Man, and I totally agree with what he's saying about regulation, and the pernicious effects of its lack. We need perp walks and major jail time for a whole lot of people, primarily Wall Street-ers, but also government officialls who should have known what was going on...

And that very subject brings me to the latest outrage in this case! And it's a doozy:

Madoff's niece Shana Madoff worked at the firm as a lawyer, and apparently her husband is Eric Swanson, who -- according to Wikipedia -- "served at the Securities and Exchange Commission from 1996 to 2006, rising to the title of Assistant Director in the Office of Compliance Inspections and Examinations' market oversight unit in Washington. His duties included supervising the Commission's inspection program responsible for regulatory oversight of trading on the securities exchanges and ECNs." (This is apparently him at his new job.)

Okay, so they only got married in 2007, which is not when he was still the AD at the SEC, but come on! The SEC wasn't merely asleep, the SEC was in bed -- literally -- with the crooks!
posted by Asparagirl at 1:12 PM on December 14, 2008 [1 favorite]

Hmmmm. Interesting coincidence, Asparagirl. Madoff investigation in 2005 and 2007 by the SEC found nothing....Swanson was the Assistant Director from 1996-2006. You don't say?
posted by storybored at 1:51 PM on December 14, 2008

Ah Mrs Mutant is doing primary research at University on Hedge Funds, more specifically Information Management and passed along an interesting paper she'd been reading.

Cagan (2007) looked at hedge fund blow ups (told you these happened all the time), and found that out of 94 funds studied

• 7% failed due to disclosure related problems (i.e. conflict of interest)
• 9% failed due to "health and safety"
• 32% went under due to trading errors
• and a whopping 52% collapsed due to internal fraud - sorta the problem we've got here

Cagan, P, 2007, Operational Risk Red Flags: Lessons learned from hedge fund blow ups, Journal of Securities Operations and Custody

Interesting the Basel II moved Operational Risk into the accord starting in 2008 (actually in 2006 we had to begin to accumulate data to calibrate our models, for a January 2008 go live date). BIS seems to have recognised this problem, or at least acknowledged its importance.


Ok, lots of people seem to be yelling out for more regulation as the "solution". But how?

We know these events don't impact retail investors, at least not directly.

And for the various charities, pension funds, etc that were impacted, yeh, very, very bad.

But that's really a problem with corporate governance rather than the hedge fund industry - why on earth is a pension fund or a charity investing in something as wild and wooly as a hedge fund?

But regardless of how blame is apportioned, calls for regulation seem to gloss over the practicality of how?

And more properly, where?

These funds are global beasts, almost always not domiciled in The United States.

Ours was in Grand Cayman. Not for the weather, but for the (at the time) favourable taxation and minimal disclosure requirements. Now things have changed (a little) in response to US pressure, but other domiciles have opened up. And guess what? They are further removed from the US sphere of influence and much, much more wide open (i.e., read that as far, far less disclosure). So there you go.

We've had this conversation on regulation before, and while I'm not a regulatory person and as much as I'm sure that Mr Bush et al would simply love to impose a US style financial services regulatory umbrella on the rest of the planet, it ain't gonna happen.

We all recognise there are simply far too many problems with the US styled, rules based regulatory regimes. As soon as I moved to Europe in the late 90's I could see that the American, Series 7 regulatory exposure I'd had in New York wasn't the only way.

The European system, in many ways, was and still is superior to the American model. Not perfect, mind you, but in several distinct domains better.

And this event is a perfect example. Letter of the law, and such. Not saying it couldn't happen in Europe but that research linked to doesn't contain any non US funds. Curious, to say the least.

I sincerely hope those who lost money can reclaim, but calls for "more regulation" are simplistic and ignore the complexity of effective regulation in a global economy where money can move from point to point, from domicile to domicile in less than seconds, where there are (as of 2007) over SIX THOUSAND HEDGE FUNDS IN EXISTENCE.

There are some solid regulatory people here on MeFi (we've traded emails in the past on this topic), so maybe they'll chime in.

I don't know the answer and neither does anyone else already participating in this thread.

But I've pointed out before that the size and sheer magnitude of assets controlled by Hedge Funds is clearly a big problem.
posted by Mutant at 3:25 PM on December 14, 2008 [1 favorite]

Maybe the answer is to punish hell out of people who are cheats, liars, and crooks. When there are real consequences for misbehaviour, we'll see better behaviour.
posted by five fresh fish at 4:41 PM on December 14, 2008 [1 favorite]

Nomura is claiming over $300 million in assets entrusted with Madoff.
posted by gen at 10:41 PM on December 14, 2008

I just tried to check out that list of alleged victims on Madoff's Wikipedia page. Unfortunately, it currently reads:

(cur) (last) 08:22, 15 December 2008 60.240.37.163 (Talk) (58 bytes) (←Replaced content with ' JEW') (undo)

posted by Sonny Jim at 12:28 AM on December 15, 2008

Most ironic comment?
posted by ejoey at 9:16 AM on December 15, 2008

Bailout Madoff!

How? With the Criminal Reprieve Assistance Program (CRAP), of course.
posted by telstar at 6:13 PM on December 18, 2008

The Madoff scheme hits home Wife's job, entire 401(k) disappear along with a good cause
posted by telstar at 7:45 PM on December 18, 2008

Krugman: The Madoff Economy
posted by homunculus at 12:33 PM on December 19, 2008

Harry Markopolos, contacted the SEC's Boston office in May 1999, urging regulators to investigate Mr. Madoff. Mr. Markopolos continued to pursue his accusations over the past nine years...

Harry Markopolos really did have the goods on Bernie Madoff.

Check out the report Markopolos submitted to to the SEC in November 2005: The World's Largest Hedge Fund is a Fraud.
posted by ericb at 12:24 PM on December 21, 2008

Check out the report Markopolos submitted to to the SEC in November 2005: The World's Largest Hedge Fund is a Fraud.

Wow, he laid it all out back in 2005: the world's largest Ponzi scheme.
posted by 445supermag at 5:00 PM on December 21, 2008

Becker ("most investors looking for exceptional returns are likely to be taken for a ride either by charlatans, or by lucky fund managers whose luck eventually runs out...") and Posner ("As Warren Buffet is reputed to have said, one doesn't know who is swimming naked until the tide runs out...") weigh in, and remind me what a great word 'inveigle' is.
posted by cortex at 6:03 PM on December 21, 2008

Just for this post's posterity, the first, and hopefully only suicide tentatively linked to Madoff's perfidy. Say what you want about the rich, but does anyone think that this person deserved to die for having the money to invest with Madoff?
posted by Purposeful Grimace at 1:30 AM on December 24, 2008

Say what you want about the rich, but does anyone think that this person deserved to die for having the money to invest with Madoff?

Exactly. And it wasn't just his "money to invest with Madoff."

It is being reported that the suicide victim, Rene-Thierry Magon de La Villehuchet, was deeply ashamed of the incredible loss of his clients' money ($1.4 billion) that they had entrusted in him to manage for many years.

"The fraud may not have been the work of Rene-Thierry Magon de La Villehuchet, but it came on his watch. For a man with a deep sense of rectitude, that was shame enough.

Friends and colleagues tried to console the fund manager, the scion of French aristocracy who despaired after losing more than $1 billion of his wealthy clients' money in the Ponzi scheme allegedly run by Wall Street wizard Bernard Madoff.

'Listen, people make mistakes,' Leon Cooperman, founder of hedge fund Omega Advisors, said he told de La Villehuchet in a telephone conversation Monday. 'You're not at fault and you have to pick yourself up from this.'

But when a security guard opened the door to de La Villehuchet's office at Access International Advisors the following morning, he found the businessman dead at his desk, both of his wrists slashed. A box cutter and a bottle of sleeping pills lay nearby. Police say it was a suicide."

NBC reports that 75% of his company's investment fund and strategy was with Madoff in whom he had developed (misguided) trust over the years.
posted by ericb at 4:48 PM on December 24, 2008