The Wall St Journal has plenty of stories on what’s shaping up to be the largest fraud case of all time:
Bernard L. Madoff, a former chairman of the Nasdaq Stock Market and a force in Wall Street trading for nearly 50 years, was arrested by federal agents Thursday, a day after his sons turned him in for running what they said their father called “a giant Ponzi scheme.”
The Securities and Exchange Commission, in a civil complaint, said it was an ongoing $50 billion swindle, and asked a judge to seize the firm and its assets. “Our complaint alleges a stunning fraud that appears to be of epic proportions,” said Andrew M. Calamari, associate director of enforcement in the SEC’s New York office.
Unlike most corporate fraud cases this one is pretty simple. Madoff’s hedge fund really was a straight-forward ponzi scheme: if you gave him a million dollars to invest he’d simply give the money away to existing clients telling them it was profit. When more clients joined up you’d get a slice of their life savings. As with all ponzi schemes the last people in are the losers. Unfortunately, most of Madoff’s investors recapitalised their profits and handed them back to him to invest (at 10% ROI why wouldn’t you?)
Two of his investors said that among his clients, Mr. Madoff was considered a money-management legend; they would joke that if Mr. Madoff was a fraud, he’d take down half the world with him.
Richard Spring, a Boca Raton resident and former securities analyst, says he had about $11 million — or 95% of his net worth — invested with Mr. Madoff. “That’s how much I believed in him,” Mr. Spring said.
A lot of high net-worth individuals will have woken last week up to find they have almost nothing left – but what’s really frightening is that reputable hedge funds and banks also had large investments with Madoff. These organisations will have charged their customers large fees to carry out risk analysis and due diligence on their portfolios and then just handed all the cash to a con-man to invest on their behalf.
I’m starting to see why crazy people in films keep all their money in a mattress.
No doubt the invisible hand of the free market will find a way to give all those retiree’s their $50 billion dollars back.
I thought the invisible hand of the market was only relevant to a society which obeyed laws? Markets need laws, and if some douchebag operates a scheme illegally I am not sure what the invisible hand of the market would be able to do. But you seem to love taking swipes at capitalism at every opportunity regardless of the relevance of your point.
Comment by chris — December 14, 2008 @ 8:11 am |
You’re right Chris, but I think it’s called ‘taking the piss’
Anyway, the invisible hand worked fine – the scheme collapsed. And everyone stupid enough to put 95% of their savings into a single fund lost all their money. The invisible hand will now provide them with food and shelter, as soon as they go find a job.
Comment by gazzaj — December 14, 2008 @ 8:27 am |
everyone stupid enough to put 95% of their savings into a single fund lost all their money.
I have 95% of all my savings in a single fund – my retirement fund. In theory its supposed to be diversified, which is what I pay fees for. I have no choice in who manages the fund – that’s chosen by my employer and I have no idea – and no way of finding out – whether or not the fund has given all its money to someone like Madoff.
I thought the invisible hand of the market was only relevant to a society which obeyed laws?
I was taking the piss – but this is yet another case in which regulation failed because the government regulation into financial services wasn’t robust enough. Investors and financial journalists have been begging the SEC to investigate Madoff for over a decade.
Comment by danylmc — December 14, 2008 @ 8:46 am |
Tyler Cowen comments at http://www.marginalrevolution.com, ‘That is a scary lesson about the financial sector as a whole (and prudential regulation) but if it is any comfort an unregulated hedge fund could not have done the same. Those funds hold their portfolios at banks and thus you can check as to whether they actually “exist”.’ The mattress still loooks good to me, though.
Comment by Stephen Stratford — December 14, 2008 @ 10:05 am |
It’s a bit risky relying completely on your employer’s super. I once did 2 weeks work experience with an actuarial firm who consulted companies on their funds. They had all these super-intelligent highly-paid maths geeks who would plug the numbers into a spreadsheet, generate an automatic proposal, and then sit in meetings with the clients, letting them argue about irrelevant things for $300/hour. I got in trouble for asking questions and providing solutions because it made the meetings shorter and less lucrative. The geeks spent most of their day making football management games in Excel.
That was the point I realised that I didn’t want to be an actuary, and that I would never trust my entire savings to some chumps in HR. As soon as I actually have any savings I’ll spread them as wide as I can, or put them into a business that I’m running myself.
Comment by gazzaj — December 14, 2008 @ 10:27 am |
I wish these “High Net Worth” folks had used even rudimentary leadership due diligence methods to assess him before handing over billions. These techniques aren’t perfect, but increase your chanced of avoiding false prophet leaders. More here http://blog.scientificleader.com/2008/12/13/madoff-destroys-50-billion-with-giant-ponzie-scheme/
Comment by scientificleader — December 14, 2008 @ 12:33 pm |
but this is yet another case in which regulation failed because the government regulation into financial services wasn’t robust enough
Hedge funds or ‘fund of funds’ that Madoff ran, were unregulated because the bar for entry was very high for investment. The assumption was that you had very high net worth and were a sophisticated investor so no SEC regulation for Hedge Funds.
private nature of hedge funds permits them to operate pursuant to exemptions from the registration requirements…An accredited investor is an individual person with a minimum net worth of US $1,000,000 or, alternatively, a minimum income of US$200,000 in each of the last two years and a reasonable expectation of reaching the same income level in the current year. For banks and corporate entities, the minimum net worth is $5,000,000 in invested assets
http://en.wikipedia.org/wiki/Hedge_fund#US_regulation
aaannnd, Madoff served as its chairman of the board of directors, and on its board of governors on the NASDAQ, so investors in his fund of funds thought he had insider info so invested heavily because the returns of 10% was so consistent. It ends up that people trying to game the system got ripped off (irony alert)!
Comment by andy — December 14, 2008 @ 4:11 pm |
The hand has broken free…
http://www.salon.com/comics/tomo/2008/12/09/tomo/
Comment by SteveB — December 14, 2008 @ 9:48 pm |
I’m pretty sure Dylan Horrocks did a version of that for the Listener in the mid 1990s. Ah, curse my good memory which reminds me of when the Listener was worth reading…
Comment by helenalex — December 15, 2008 @ 12:09 pm |
I think Andy is too optimistic about government stopping any of this malfeasance. Scams have existed with and without governments since the beginning of time. Caveat Emptor will always be prudent, and clearly the SEC is as inefficient and ineffective as any other government agency. Adding more rules and larger budgets to their already large red tape is pointless and unproductive. Sanity checking who we should trust, and what we invest in is a much more prudent step
Comment by scientificleader — December 16, 2008 @ 1:01 pm |
But how would you sanity check Madoff? If your employer matches your super payments you are a fool not to put most of your savings into your work super account. Your employer then picks an investment management firm who charges you fees to perform due diligence on your investment and then gives all your money to Bernard Madoff. I can’t see how people could possibly protect themselves against such an outcome.
Comment by danylmc — December 16, 2008 @ 1:47 pm |
It’d be a pretty rare (and completely irresponsible) company super program that put all its money in a single hedge fund, but I understand your point. There’s no guarantees in any investment and personally I’d hate to have the bulk of my money in one place. If employers are matching payments then it’s probably the best and easiest investment, and should be relatively safe. However I’d at least want to know who was managing it.
Comment by gazzaj — December 16, 2008 @ 4:42 pm |