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Madoff discussion
This thread with continuing comments on the Madoff matter, first posted two days ago, has been updated to keep it near the top of the main page.
By the way, I would not say that the Madoff fraud has any particular relevance to traditionalism. But notice the first half of the description of VFR in the masthead: “The passing scene and what it’s about…” Which would mean, in practice, anything in the universe that VFR’s editor has something to say about or thinks will be of interest.
Buddy in Atlanta writes:
You quoted the Times and replied:
“And that fit with his rate of return, which was never attention-grabbing, just solid 12-13 percent year in, year out. [LA asks again: HOW was this possible? How could new investments have been plentiful enough to keep paying off existing investors so steadily, and for so many years? It defies belief.]”
The way institutional money management works, very few investors take their return as an annual cash dividend. It’s much more typical to roll the return into the existing account. So the size of the account, in this case, would increase by 12-13 percent a year.
Some investors might take redemptions at irregular intervals—either because they need some cash or because they want to shift their asset allocation.
Redemptions from Madoff’s firm were probably small and manageable. But the volume of redemptions shot up because of the current financial crisis, and that was the source of the problem.
LA replies:
Well, if very few investors asked for their dividends in cash, then Madoff’s achievement in keeping the scam going so long stops seeming so remarkable.
I return to an earlier question: didn’t everyone in his firm have to be in on it?
A. Zarkov writes:
I suspect that most of Madoff’s investors elected to have their dividends reinvested, and that’s one reason he was able to keep the scam going for so long.
One surprising thing I learned from the WSJ: some of the investors who bailed out early might have to give the money back. Thus, Madoff’s fund was a tar baby as well as a Ponzi scheme. But a frightening prospect that seems to have evoked little or no comment. The possibility exists that many other funds are also little more than Ponzi schemes and will start to blow up all over the place next year. Madoff was not particularly clever because his returns were stable through bull and bear markets—a real tip off that something was fishy. Real world returns don’t behave that way, and the SEC was warned, but did nothing.
From today’s Wall Street Journal:
Harry Markopolos, who years ago worked for a rival firm, researched Mr. Madoff’s stock-options strategy and was convinced the results likely weren’t real. “Madoff Securities is the world’s largest Ponzi Scheme,” Mr. Markopolos, wrote in a letter to the U.S. Securities and Exchange Commission in 1999. Mr. Markopolos pursued his accusations over the past nine years, dealing with both the New York and Boston bureaus of the SEC, according to documents he sent to the SEC reviewed by The Wall Street Journal.
In a statement late Friday, the SEC said “staff from the Division of Enforcement in New York completed an investigation in 2007, and did not refer the matter to the Commission for enforcement action.
Another instance of regulatory failure, if not out and out corruption at the highest levels of government. It seems to me that liberals have been working for a long time to make the US look like a Latin American country, and they’re succeeding. We have high debt, a weak currency and a corrupt government.
LA replies:
It’s inconceivable that the Ponzi scheme was suspected and even investigated for nine years by the SEC itself, and yet not definitively determined to exist in all that time. How could this be? All they had to find out was that Madoff was not actually purchasing the securities for his clients that he told them he was purchasing. How hard would that be to find out?
Harry the Horse writes:
“When someone told me today what Bernard Madoff had done, I couldn’t understand how such a thing was possible.”
I’m surprised you are surprised. The (federal) gubmint are masters.
Econ is just a subdivision of sociology, and we all know how much heavier the job of evil men would be if it weren’t for the ignorant, stupid, and willfully delusional. The untethered and Godless, complicit with their federal overlords, are very much interested in the continued liberalism of America and the world.
Regardless, have I given you the opportunity to invest in the cutting-edge medical imaging centers we are putting up in Orangeburg?
Evan H. writes
The phenomenon in which a person’s name matches his vocation (or criminal activities in this case) is called an aptronym. See this page for a list of examples.
LA replies:
You mean like, a federal prosecutor named Benjamin Civiletti?
Mark P. writes:
The WSJ reports:
Harry Markopolos, who years ago worked for a rival firm, researched Mr. Madoff’s stock-options strategy and was convinced the results likely weren’t real.
“Madoff Securities is the world’s largest Ponzi Scheme,” Mr. Markopolos, wrote in a letter to the U.S. Securities and Exchange Commission in 1999.
Mr. Markopolos pursued his accusations over the past nine years, dealing with both the New York and Boston bureaus of the SEC, according to documents he sent to the SEC reviewed by The Wall Street Journal.
In a statement late Friday, the SEC said “staff from the Division of Enforcement in New York completed an investigation in 2007, and did not refer the matter to the Commission for enforcement action.” The SEC said it reopened the investigation Thursday. It’s not clear what the focus of the 2007 investigation was, or why it was closed. A person familiar with the matter said it related to issues raised by Mr. Markopolos.
LA replies:
The item was so amazing it was worth posting twice.
N. writes:
Some of Madoff’s clients tried to reverse-engineer his trades., and they could not see how he obtained his results. Therefore, they likely assumed he was engaged in insider trading, and _invested with him in order to share in his profits. That’s right, some of Madoff’s clients gave him money to invest, on the assumption that he was going to make more money back by breaking the law on their behalf.
Daniel H. writes:
The first stories on Madoff last week reported that when confronted by his two sons (officers in the company) Madoff ‘fessed up and said that before he turned himself in he wanted to distribute the $200-300 million remaining in the corporate accounts to family, friends and colleagues as bonus payments. So, Madoff’s impulse was not to preserve as much capital as possible to be returned to his victims but to spirit off what little remained of his victims’ assets and distribute it to his colleagues. Typical of Wall Streeters. In proposing this, I am sure, Madoff thought of himself as gallant. For many on Wall street, their ethical compass is guided by what is good for themselves and, importantly, their colleagues. By rewarding their colleagues and employees well they can justify their own extravagance. As long as Madoff can see himself as having done well for his employees he does not see himself as a bad man. I will bet money that he will make such professed concern as an argument for clemency when he is ultimately convicted.
My brother works on Wall street and he cannot understand why Wall Streeters whose trades were not directly attributable to the financial crisis that we are now experiencing shouldn’t still receive outsized bonuses. “Equity derivatives was profitable,” he will say, “They should get bonuses for that profit.” Leave aside the fact that the firms are essentially bankrupt and are only kept afloat through the interests of 300 million Americans. He still demands that bonus. My brother and his colleagues perceive themselves as “entrepreneurs” (they have invested or risk nothing. Not capital. Not real estate, not insurance, not infrastructure. Nothing.) and thus should be guaranteed a percent of all revenue. Their geniuses. They can sell air if they wished. It’s their due.
They have internalized the notion that if they flick a few keys on a keyboard, make a trade through an electronic market place and realize a net profit on a transaction (on the firm’s behalf and with the firm’s capital and liability, of course) then they should receive a guaranteed percentage of that profit. Of course all trades are aggregated for the year and they demand their bonus on net profits, but that doesn’t lessen the absurd perspective from which they view the idea of just compensation. In general, Wall Streeters are childish. They have a (spoiled) child’s view of ethical matters. They are all appetite, with little sense of duty and moderation. It is a vile system. I can’t see any good that it does. I am hoping that this last over-reaching may have finally done them in.
December 15
Karen writes from England:
I suppose there are two options. The fund was a scam from the start, which is most likely, or it started as a genuine business and Madoff made losses, perhaps at the time of the dot com bubble in 2001, and tried to conceal these by fraud, eventually being overcome by the 2008 stock market crash. However his admission that it was a scam makes it seem more likely that it was a fraud from commencement. His selection of private client investors clients also makes it probable that it was a deliberate fraud. I guess he selected clients for their combination of gullibility, greed and naivety shunning those who might ask questions about his trading strategy, ask for evidence of his trades or try to get hold of any regulation details. Eliminating potential troublemakers allowed the fraud to run for longer.
It seems improbable that he was doing this alone. The failure of the SEC to investigate his firm despite finding two trade violations and several complaints against him suggests that some persons in the regulatory body must have been complicit with him. I wonder where the money is? Maybe with Mossad.
A. Zarkov writes:
Balzac anticipated Madoff. From Balzac’s Le Pere Goriot:
“Le secret des grandes fortunes sans cause apparente est un crime oublie, parce qu’il a ete proprement fait.” This translates to “The secret of a great success for which you are at a loss to account is a crime that has never been found out, because it was properly executed.” Thus Balzac didn’t quite say, “Behind every great fortune lies a great crime.” The accurate quote describes the Madoff crime exactly. Unfortunately few people these days have any kind of worldly perspective. They don’t seem to understand that wealth is not easily acquired without extraordinary skill, very good luck, influence, or resorting to a crime. When I found I could not get the kind of investment returns that hedge funds seemed get, I wondered just what they do. Leverage and crime was my answer. Now we really see that a fool and his money are soon parted.
A. Zarkov writes:
Early on in a 2007 video, Madoff tells the viewer that “It’s impossible to violate rules,” and that “it’s impossible for a violation to go undetected.” He’s asked how he makes money? He answers, “By taking risks.” It seems to me that this man is a sociopath. He’s not a basically good man who went bad in a moment of weakness. We can understand and perhaps even forgive that. He also polished his image by giving to charity and appearing to do good works. This is an old trick. Al Capone ran soup kitchens. Armand Hammer appeared to be a philanthropist supporting causes related to education, medicine, and the arts. Scoundrels often come across as charming and generous. Later we find out that it was all an act to cover their nefarious deeds.
Anyone who listens to him carefully, and knows something about finance, should smell a rat, even without the benefit of hindsight. He starts right off with two errors. First he tells us that each party in a transaction thinks he know something the other doesn’t. This is not always true. Someone might sell because he needs the money, wants to consume, or prefers a more liquid position. In other words, he’s not necessarily selling to disadvantage the other party, although this is frequently the case. Then Madoff immediately says, “There’s no zero-sum game in Wall Street.” He’s just contradicted himself because he just described the essence of a zero-sum game—one person’s gain is another’s loss. Thus in his first few sentences, Madoff betrays a lack of understanding of the business he’s in. He and his assistant go on to say that they are market makers. In other words, they take the other side of the transaction on a buy or sell order from a broker. But this is nothing unusual as there are many market makers out there, and we know they earn their profits from the spread between bid and ask. But they don’t earn the fabulous profits Madoff claimed for his firm. He also seems confused between what traders do and what quants do. You hire MIT guys to be quants, not traders, yet Madoff tells us the reverse. We now see that all this fancy talk was a smokescreen for plan old fashioned fraud. The interviewers on the video seemed unable to catch any of this. Evidently so did his investors, many of which think of themselves a shrewd businessmen.
Mark P. writes:
I’m still amazed that a handful of Jews managed to amass $50 billion…
It’s like some kind of…overclass…
(wink) (wink)
Jack R. writes:
I get the feeling that the thousands of wealthy, well connected , left leaning Jewish investors in Madoff’s fund will demand and get a government bailout from Obama, while the Big (?) Three automakers continue to beg for a handful of dimes.
Endless bailouts will go to their logical end—the reward of reckless foolishness.
LA replies:
Your second paragraph contradicts your first: his investors weren’t reckless and foolish, they were investing their money through a respected investment councilor.
Ben W. writes:
I’m curious why the Madoff story has had such significance at VFR. We’ve had scams for ages; people have lost their life savings before.
What is it about Madoff that merits so many entries at VFR? Is it purely rachmones?
There seemed to be an implicit trust that a Jew by virtue of being a Jew could be trusted with all of one’s financial resources. It reminds me of something a friend once told me, “Every time I see a Hassid boarding the same plane I’m on, I feel safe.”
Is the deeper dimension of this story that Jewishness in and of itself does not preclude heinous crimes—even Jews committing evil against Jews? That in fact Jewishness does stop short of ultimate virtue for man, which is why God sent his messiah into the world to show the real virtue to empower man.
LA replies:
I’ve never heard of a fraud of this nature, size, and duration, as I wrote in the first entry about this on Saturday. It’s not just astonishing and appalling, it’s uncanny, mythic in its scale. I write about things that interest me.
“There seemed to be an implicit trust that a Jew by virtue of being a Jew could be trusted with all of one’s financial resources.”
No, nothing like that had occurred to me. Of course, the Jewish angle is a dramatic part of it, and has been discussed here a lot, but not for the reason you suggest. It hadn’t occurred to me that a Jew could not be a crook and a deceiver, which is what you’re suggesting.
December 16
John Hagan writes:
I have always considered the act of handing over your life savings to these private fund managers curious. You see it all the time. People competent enough to amass millions of dollars in assets who seem to go weak in the knees, and want nothing more than to hand off millions of dollars to complete strangers. And then allow these strangers to make trades for them, and give them unfettered access to buy and sell their assets at will. Common sense should tell you that this behavior is dangerous ?
I find it highly unlikely that Madoff could have pulled this off alone. He had hundreds of personnel working for him doing something ? His whole family seemed to be involved in the business. His son-in-law is a well known figure in Boston social circles who was involved in his business. Are we to believe that none of these people knew anything was amiss ? Or were the people that worked for Madoff just as caught up in this cognitive dissonance that his investors were involved in ? This willful suspension of belief ?
Madoff seemed to be not so much an individual, but a facilitator, an intersection of of every slightly distorted, unhealthy impulse that makes up our national story. A story of a nation out of tune with itself. So much so that it can no longer see this parade of naked kings before it…. when if they just stepped back they would see the absurdity clearly. Of course there were people who warned the government about him, but they were ignored.
LA replies:
Yes, we don’t just have a naked emperor, but a whole parade of naked kings.
And I repeat Mr. Hagan’s point that it seems impossible that this scam could have been perpetrated without the knowledge and involvement of most of Madoff’s employees. What else were they doing in their jobs? Discussing with Madoff which securities to invest in? Whoops, they’re weren’t investing in securities. Contacting brokers and making trades? Whoops, but they weren’t contracting brokers and making trades. Receiving notices of quarterly dividends and passing this information on to clients and then either re-investing the dividends in the clients’ accounts or making out checks to the clients for the dividend amounts? Whoops, they weren’t receiving notices of quarterly dividends because there were no dividends because there were no investments.
For no one but Madoff to know about the fraud, would be as likely as that no one at Microsoft except for its president knows that Microsoft designs software, or that no one at U.S. Steel except for its president knows that U.S. Steel produces steel.
A. Zarkov writes:
Continuing the Madoff saga, this other video features Jim Vos, due diligence expert, who recommend to his clients that they not invest with Madoff. Vos found out that investor money entered Madoff Securities through a series feeder funds each audited by a well known firm. But 100 percent of assets were held by a single broker. Checking into who audited this broker Vos found out that it consisted of a three-person group in a 13 x 8 office. One was an 78 year old in Florida, the another a secretary, and the last a young CPA. This audit firm was too small to audit the Madoff broker. Moreover the feeder funds served no legitimate business purpose.
Other red flags. Madoff claimed to use “split strike conversion” as an investment strategy. This is appropriate for market makers. But it produces highly volatile returns and Madoff’s returns were highly stable. So he was obviously lying. Thus it was certainly possible to avoid getting taken my Madoff. I can see individuals not putting the necessary amount of due diligence, but banks have no excuse as they have ample resources. They could have hired Vos or someone like him before they invested huge amounts of money,
Your are right to give Madoff this much attention. This fraud goes far beyond than anything the famous Charles Ponzi ever did. I don’t understand why you are getting criticism for your focus on this historic fraud.
LA replies:
Yes, I was taken a bit aback by Ben W.’s comment, as he seemed to suggest there was something inordinate and peculiar in my focus on Madoff. But VFR is always like that; when there’s a development of particular interest I post a bunch of entries on it. Further, it’s not as if I’ve been focusing on Madoff to the neglect of other issues.
N. writes:
Here again we can see the failure of liberalism. Where to begin?
How about with “prudence.” There is a very old saying, “Don’t put all your eggs in one basket,” and I recall well relations who always kept their money divided between two or even three banks, because of experience in the 1930s with bank failure. Putting all of one’s capital into the hands of one man, or even in one fund, is just imprudent. It is not a conservative thing to do. The conservative thing? No more than half in any one fund, investment, or under one manager. More conservative? No more than 1/3, and always 10 percent in gold.
Moving a bit further into philosophy, we come to the issue of self-reliance. Few of us are going to learn to be stock pickers, but at the very least we can learn to be skeptical. My father told me more than once “If something seems too good to be true, it is” along with “You can’t get something for nothing” and “you can’t cheat an honest man.” Madoff got some amazing return, I think it was 15 percent, year after year, and always consistent results. Nobody gets results that consistent, or that high, year in, year out.
The self reliant person, the skeptical person, would ask questions, and it is notable that some number of those interviewed now were not Madoff’s clients, they were too skeptical for his taste. I already pointed out that some clients were convinced his returns were due to insider trading, which is illegal in the U.S. That’s the “can’t cheat an honest man” part.
Furthermore, there’s more than a little bit of the “cult of the expert.” Liberals are notorious for worshipping “The Expert,” the super-enlightened, Ubermensch who can do some thing mere mortals can never hope to do, and rarely is it some solid achievement such as a neurosurgeon, or rocket engineers, but rather it’s some nebulous thing like “community organizer.” I believe that some of these people who gave all their money to Madoff were convinced they could never take care of themselves, and had to have someone else do hard things for them.
It would be interesting to get a full list of Madoff’s suckers, and examine their political positions via donations, voter registration, etc. I wager the majority are liberal Democrats.
One last point: for decades there has been this claim of the GOP as the party of the rich. If nothing else, the sheer number of wealthy Democrats that we’ve seen giving large sums of money to Obama, getting fleeced by Madoff, etc. should surely provide facts to demolish that shibbolith.
Robert B. writes:
Did you notice that an awful lot of his victims were leftists and their foundations?
Maybe he had it in for them.
A. Martin writes:
Apropos the current economic situation and the Madoff affair: Jay Leno had a joke about it the other night (I paraphrase): “Bernard Madoff, the former chairman of NASDAQ, was charged with running a Ponzi scheme. The name of the Ponzi scheme……………NASDAQ.”
I laughed at that. My 401k cried, but I laughed.
Here is Steve Sailer’s theory:
Bernie Madoff as an “affinity scam”
Because it’s so much work to be a Mormon in good standing, Mormons tend to trust other Mormons, making them famously vulnerable to large scams operated by the small number of conmen self-disciplined enough to have spent years piling up credentials as good Mormons.
Bernie Madoff’s $50 billion Ponzi scheme was rather like the kind of “affinity scams” that have plagued Mormons. Madoff joined all the right Jewish country clubs and gave to all the right Jewish charities, allowing him to fleece some very deep Jewish pockets.
But the sophistication level of the victims is rather different. While there are rich Mormons, overall Mormons are pretty middling in wealth (depending on whether you measure per capita or per family), while Madoff’s victims weren’t middling.
Why did members of the Palm Beach Country Club, various hedge fund managers, and major league sports franchise owners fall for what appears to have been a simple, old-fashioned scam in which implausible returns are seemingly delivered, but only by using new investors’ cash to pay off old investors? (By the way, the golf scores Bernie reported to the USGA for handicapping were all in the eighties, as remarkably consistent as his reported return on investment.)
One theory (and it’s only a theory) is that more than a few of these sophisticated clients assumed Bernie was cheating—either through insider trading or “front-running”—and they wanted in on his illicit profits.
They just never dreamed Bernie was cheating them.
And why did Bernie cheat them in particular? Because, these days, as bankrobber Willie Sutton replied when asked why he robbed banks, “That’s where the money is.”
Posted by Lawrence Auster at December 16, 2008 09:00 PM | Send
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