It's a Mad, Mad, Mad Madoff World 28 comments
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The WSJ fills in more details regarding the Madoff case, and it's actually more gobsmackingly unbelievable than it was last night.
For one thing, Madoff didn't invest simply on behalf of a couple of dozen multibillionaires; he had many common-or-garden millionaire clients, many of whom were introduced to him -- I'm not making this up -- through the Boca Rio Golf Club in Boca Raton and the Palm Beach Country Club in Palm Beach. Apparently the ability to invest with Madoff was sold as a side benefit of joining the clubs -- as ever, if you make something seem exclusive, people will clamor to get it.
It gets worse: A chap called Harry Markopolos has been saying that Madoff was a fraud since May 1999 -- almost a decade ago. Obviously, nothing happened, but Markopolos didn't give up: He wrote the SEC in 2005, saying that "Bernie Madoff's returns aren't real". But until Bernie Madoff himself admitted that fact, the SEC was nowhere to be seen. Others saw it too: Cassandra did, and, according to Henry Blodget, many of Madoff's investors reckoned that he must be a crook and that this was a legal way of profiting from fraud.
There was every reason to believe that Madoff was cooking the books. He posted regular small monthly returns, adding up to 10% per year, year in and year out -- essentially the Holy Grail of high returns with almost zero volatility. Even in recent months Madoff perpetuated the fiction:
Mr. Madoff's Fairfield Sentry Ltd., a hedge fund run by Madoff Investment Services to invest in shares in the S&P 100, claimed to be up 5.6% through the end of November, a period when the Standard & Poor's 500-stock index was down 37.65%. In October, Fairfield Sentry was said to be down 0.06%, a month when the S&P 500 lost 16.8%.
Now those kind of returns are very attractive to country-club millionaires: You can see where that part of the fraud came from. But it turns out that Madoff's largest investors were fund-of-funds managers, including huge names like Tremont Capital Management.
Such managers do one thing, first and foremost: They exist as an extra pair of eyes to oversee the actual fund managers; they're a risk control, and they're sophisticated enough to smell impossible returns like Madoff's. I simply can't believe that they funneled billions of dollars of client money to Madoff without ever talking to his chief risk officer (there wasn't one).
There's also the question of the $50 billion number, given that Madoff "only" had $17 billion in assets under management, according to his SEC filings. I see three possibilities which might explain the difference:
- Madoff, falling apart, can't add up, even after including all the fees he extracted from the funds.
- The amount of funds that Madoff reported to the SEC was a fraction of the amount of funds that Madoff reported to his investors.
- Madoff borrowed the extra $33 billion, as Kaja Whitehouse suspects.
I think the second option is the most likely, but insofar as banks lent Madoff anything unsecured, they're feeling really stupid right now.
The one thing I'm sure of is that Tremont and Fairfield Greenwich are going to face some massive lawsuits over this -- and will suffer enormous redemptions. (Does Fairfield Greenwich run non-Madoff money? It's unclear, but it's probably moot; if they did yesterday, they won't tomorrow.) If they're idiotic enough to place billions with Madoff, they have no business running anybody's money.
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This article has 28 comments:
If true, this allegation is shocking.
When the already wealthy and powerful have such disregard for fair play, everything... the legitimacy of the entire system is put at risk.
It matters not who you are, but what you have....and what you can share with them. If you are 'wealthy' you can get away with anything morally, doesn't matter. Women stayed with their powerful cheating husbands to keep the lifestyle.
Give me middle America anyday.
On Dec 13 12:50 PM User 318870 wrote:
> This makes Conrad Black and Bernie Edders look like Saints.
>
FGG's Due Diligence Process
FGG's due diligence process is deeper and broader than a typical Fund of Funds, resembling that of an asset management company acquiring another asset manager, rather than a passive investor entering a disposable investment.
A number of areas of inquiry are examined by a team of FGG professionals who specialize in evaluating respective areas of risk. Typically, a manager has been investigated and monitored for six to 12 months before that firm can be accepted onto the FGG platform. Long negotiating periods enable FGG to be more confident of its decisions before proceeding with a manager. Areas of examination are centered around the following:
1. Portfolio Evaluation, Investment Performance, and Financial Risks:
A core area for further analysis is to attempt to dissect and further understand investment performance, how a manager generates alpha, and what risks are taken in doing so. As portfolio management and risk management incorporate elements of both art and science, FGG applies both qualitative and quantitative measures. FGG:
Examines independent prime broker trading records
Conducts detailed interviews to better understand the manager's methodology for forming a market view, and for selecting and exiting core positions
Analyses trading records
Conducts a number of qualitative and quantitative tests to determine adherence to risk limits over time
Confirms portfolio loss risk controls, diversification and other risk-related control policies, as well as any experience regarding unexpected or extreme market events
Reviews the risk and return factors inherent in the strategy
Evaluates capacity issues, which may affect alpha, as well as expected opportunities going forward within each candidate's strategy
Analyses the various drivers underlying a particular portfolio's risk
Evaluates credit risk and market risk both at the instrument and portfolio level
Assesses the extent to which leverage is used by a manager, as well as how it is used, the funding sources, and the impact on the risk profile of the fund
Investigate whether or not private or special registration securities are held, and determine how the daily trading volume and inventory held compares to the float and/or daily trading volume for a given security
FGG also conducts many quantitative reviews of investment performance in light of:
Fees and fee structure
Historical draw-downs
Return volatility
Commissions earned
Performance return in calm versus volatile markets
Current/historical correlation of the fund under consideration with standard industry benchmarks, peer groups, and other FGG or competitor funds used as benchmarks
FGG attempts to understand the return attribution for individual securities in the portfolio, and conducts a full suite of VaR analyses and stress tests to model the loss distribution function under extreme market scenarios. Leverage, concentration limits, and long/short exposures are examined over time to assess whether they have remained within operating guidelines.
Style fidelity is another key area of inquiry; the manager's trading pattern over time and through various market environments, FGG determines whether the manager is prone to trade outside of their area of expertise.
2. Personal Background Investigation:
FGG examines the abilities and personalities of the individuals involved in managing the fund through extensive interviews, as well as background investigations.
FGG verifies:
Education
Personal credit standing
Litigation and regulatory background
Track record
Other indicators
FGG explores the manager's experience and qualifications relative to the strategy being managed. Prior professional associations of a manager's key personnel can be crucial in understanding a person's experience and character and how they run their investment management business.
3. Structural and Operational Risk:
"Operational risk" refers to the risk of loss resulting from inadequate or failed internal processes, human resources, or systems, or from external events. Operational failures, including misrepresentation of valuations and outright fraud, constitute the vast majority of instances where massive investor losses occur. Other operational risks include staff processing errors, technology failure, and poor data.
Pricing models, as well as the adequacy, independence, and transparency of valuation procedures, contingency plans, and other trading and settlement procedures are all matters for close scrutiny by FGG professionals.
FGG seeks a sound understanding of whether a hedge fund possesses key controls in the areas of portfolio management, conflicts of interest, segregation of duties, and compliance. FGG carefully assesses the controls and procedures that managers have in place and seek to determine actual compliance with those procedures, often suggesting modifications, separations of responsibilities, and remedial staff additions.
4. Legal, Compliance, and Regulatory Risk:
FGG's legal, compliance, and accounting teams specialize in investment management regulation, securities compliance, corporate operations, and tax issues. Hedge fund managers function within an ever more complex legal and regulatory landscape, and the role of this part of the diligence exam is to determine the seriousness of any deficiencies in this area which may cause risk of sanction, loss, or reputational embarrassment.
Both in-house and retained legal professionals interview the management and staff of the manager, research regulatory filings, and review corporate organizational documents, as well as fund memoranda and related material contracts.
Nobody, I mean NOBODY, cares about your money more than you. Get educated and handle it yourself. It is not nearly as hard as the "so-called" financial experts want you to believe.
1. It's exceptionally difficult to consistently beat the market over an extended period of time. Be suspicious of anyone who claims to do so.
2. Don't invest in anything you don't understand.
About a year ago, a broker pitched me some great sounding fixed income instruments that "beat Treasury and muni bonds but were just as safe". I couldn't understand how that could be or how they really worked, so I didn't invest in them.
They were auction-rate securities.
For most people, the implication of (1) and (2) is simple: put your portfolio into a basket of index funds.
I do feel some shame for the way for our country which has let all this happen over the last eight years of Bush Republican rule. Why anyone should trust wall street or investment advisers is beyond understanding. They do not know anything more than us poor Joe main street individuals who work hard try to save something for retirement and or a rainy day, what happens we lose our shirts, our 401's disappear and we get 0% on our savings accounts, at the same time that our Gov. is out there shelling out money to the same people who got us to this state of affairs in the first place.
Unfortunately, we are fast becoming or have reached the classification of what we used to call "a banana republic".
Just wait until our government destroys the value of our currency leaving most Americans destitute. Our corrupt politicians are going to make Mr. Madoff look like an angel.
What on Earth makes you think that the wealthy and powerful have an interest in fair play? Most people get rich by establishing some sort of monopoly or having a lobbyist push through a law that gives them some sort of unfair advantage or excessive pay for what they do.
If a crooked system is how you got rich - because you had it rigged to benefit you - then why would you have a problem with a scumbag like Madoff?
After all - he's just like you!!
Yes, Bernie is in the House of Corrections. Along with Skilling et al.
May he someday be joined by Paulson, Madoff, and all the other outrageous Wall Street crooks!
It's funny, because banks (and business) do not like the fact that the consumer has taken a play from their game book, i.e.; if you get into a contract and later it's not working in your favor...YOU GET OUT...IT'S A BUSINESS DECISION. It use to be that banks, credit card companies and the like played on consumer "morality"....i.e.; you took out the loan and if you don't pay it...you are morally deficient/flawed. Now, consumers are just as IMMORAL as business, banks, government....and THEY ARE BACKING OUT OF THEIR CONTRACTS leaving these greedy industries screaming FOUL!!
I just loved listening to Jamie Dimon of Chase talking about the borrowers who "lied" on their loan applications - blaming them for the problem. WHAT ABSOLUTE ASS!! The fact of the matter is that BORROWERS COULD BEG, LIE, ETC. all they want.....but it was the LENDERS THAT CREATED THESE PROGRAMS (FULLY KNOWING) the problems....WHERE WAS THEIR DUE DILLIGENCE. There was no due dilligence...THERE WAS ONLY GREED & PROFITS. Just like those that subscribed to Madoff and left their money in WANTING MORE PROFIT & MORE GREED....
All I can say is that YOU CAPITALISTS are going to get ALL THE IMMORAL decisions that you have been dealing to society for decades. Not much will change for the poor....they will still be poor, but you will be jumping for the from the top stories of office buildings by the droves...AND YOU WON'T BE MISSED (LARRY KUDLOW TYPES)!! It's not the poor that will suffer a difference of lifestyle...IT'S YOU (NO MORE HANNAH MONTANA TICKETS AND CELL PHONES FOR THE KIDDIES). And if you destroy the middle class....you are ASKING FOR ONE HECK OF A CLASS WARFARE. Get your guns & safeS KIDDIES...you are going to need them!!!!!!!!!!!
I would agree that people whom are defined by their wealth have a unique stench.
The good news is that rich will be out of vogue as multitudes of new wealthy have nothing secondary to define themselves with.
I really enjoy talking money with "old-money" or generational wealth. The perspectives from those individuals tend to revolve around thrift and solvency -- not the quick fix of buying something.