De Graaf

Lessons From Madoff: You Would Have Missed Buffett Too

When you listen closely to the two hour interview with Bernard L. Madoff and Josh Stampfli, you come to a viewpoint of the puppetmeister. The master Madoff himself controlling the strings of the market maker puppets.

He even explains how the regulations (Chinese walls) between broker divisions in one company are so strict, that the only way to make money is taking risk. Well we know now he did that without any scrutiny.
He knew all the market algorithms were lined up with eachother and therefore the market was being 'made of' these trading mechanisms.

With these automated IT market making systems, the market had to go up as long as liquidity remained available. And the Bush government made that possible, by supplying of low lending rates and deregulations. That same government made the bubble unsustainable, and the bubble came off.

The innovation in automation IT business is always ahead of the regulatory curve, so like Madoff basically said; Foul play will surely happen. The answer thats missing is advanced oversight.
The free market has been overly innovated, in a way that safety, in the form of regulation and overisight by the SEC, is way behind the curve.
Excesses granted and being uncovered in times of economic downturn like we see today. The Madoff scheme. Ponzi is out, Madoff is the new name of the game in the 21st century.

The need for immediate returns, like Madoff says; 'everybody wants' is spurring the need for faster markets. Automation was a wonder system that Madoff's LLC company grabbed with both arms to keep ahead of the regulatory curve. His brand name was also the driver in market acceptance over time being chairman of Nasdaq etc.

Its show how people truly are and greed in finance is always a factor. The needs for regulation and especially oversight in-line with market innovation is essential for the future of finance.

I surely hope the new financial system being formed in the coming years will make sure, innovation stays on top of the curve with regulation just behind the curve, instead of following at the trough of the curve where it is right now.

That is my Christmas wish. Happy holidays to everyone.