From ''Schlub'' to ''Macher'' to ''Goniff.''
Why, Bernie, why?
By all accounts, Bernard Madoff had a successful trading business and was a hitter on Wall Street. Bernard L. Madoff Investment Securities was one of the top three market makers in Nasdaq stocks, had over 600 brokerage clients and claimed to often contribute 10% of New York Stock Exchange trading volume, usually after the 4 p.m. market close.
So why, inquiring minds want to know, did he perpetrate the largest fraud ever on Wall Street, some $50 billion? He had it made, so why risk it?
Most don't set out to be crooks, but Madoff became one when his talents proved lacking.
Well, for starters, if you leave the Tri-State area, very few people know what a market maker is. At the Palm Beach Country Club or the Boca Rio, the preserved specimens at cocktail parties know about cement or paper plants; their brokers at Merrill (or maybe Goldman) are their only ties to Wall Street.
"And what do you do?"
"I'm the third-largest market maker of …"
"Oh, my drink is empty."
Madoff was just another schlub ("worthless oaf" for you Yiddish-challenged) from New York with money. Get in line. Schlubs are a dime a dozen in the Sunshine State, contributors of hanging chads and everything.
So Madoff got the brilliant idea to start a money management
business on the side. He didn't charge any fees, explaining that he
would just make money trading stocks on the securities side of the
business. Merrill Lynch
And the gerries fell for it. Now, all of a sudden, Madoff is a macher (a big shot, a mover). The ability to make someone money moves you to the top of the cocktail-party list. Madoff didn't advertise; he kept it exclusive, adding to its mystery and allure. And he didn't swing for the fences, he "produced" tortoise-like (steady) returns: 13.72% one year, 9.82% another. Goldilocks-esque. Not too hot or cold, just right.
It became known as the "Jewish T bill." Never mind that his option split strike conversion strategy was completely bogus. As everyone on Wall Street should know, you can limit the downside or enhance the upside, but not both--and certainly not for free. There are too many market makers--hey, like Madoff Securities--who will clip you for trading fees and risk premiums for a strategy like this to ever work. It's like putting $10 on red and on black at a roulette table. You win every time, except when 0 or 00 come up, which they do once every 19 spins.
But still, that doesn't explain the fraud.
OK, Madoff has left us some hints as to why. The first clue is that there isn't $50 billion sitting in some numbered Swiss bank account. In fact, it probably isn't a $50 billion fraud. There seem to be lots of problems with Madoff and numbers. The only facts we know are the claims of $17 billion in assets in his money management business, according to his filings with the Securities and Exchange Commission.
The market is down 40%, so perhaps there should be $11 billion left. Some of his customers, mainly hedge fund-of-funds and European banks, would use 3:1 leverage to magnify Madoff's "steady" returns, hence the $50 billion claim. If you're going to go down, you might as well go big and get something named after you. Why should Ponzi keep hogging the limelight?
So as far as we know, he didn't steal the $50
billion/$11 billion--he probably just lost it. He might have built a
trading powerhouse, but he was god-awful as an investor. It happens all
the time (Bear Stearns, Lehman Brothers
My guess is that this is what went down. Even though Madoff Securities was on the leading edge of automated trading, the business itself was becoming less and less lucrative. Everyone had the same computers. Spreads, the difference between the bid price and the ask price that became Wall Street trading profits, began shrinking. And the move to list stocks in penny increments instead of eighths (12.5 cents) whacked trading desks all over Wall Street.
So you make it up in volume. Beyond cocktail parties, Madoff really created the money management business to feed himself trades. But his strategy was garbage. He absolutely bombed as a money manager, but he desperately needed the assets under management to feed his trading operations, so he started to make the numbers up. As is usually the case, most don't set out to be crooks, but Madoff became one when his talents proved lacking. There is your "why."
It's not new. This was the Enron story: They lost tons in water ventures and Indian power plants, so concocted fraudulent entities to cover up their losses. Same for Sam Israel and his Bayou hedge fund. And even (without the fraud) the Citigroup/Wall Street story, too. They tried to be investors to make up the difference of their bread-and-butter business deteriorating and were awful at it, so they levered up in off-balance-sheet vehicles.
Who knows when the fraud started? As early as December of 1990, he was taking money from the Fairfield Sentry fund of funds. The bull market resumed in January of 1991 as Operation Desert Storm commenced. Madoff showed up years, as did most money managers. But 1994 was rough. So were 1996, 1997 and 1998, yet he did have double-digit years.
Since 2001 and 2002 were ugly, and Madoff showed "only" single-digit returns this decade, so my sense is that money kept flowing in and flowing in. The Tremont fund of funds and Nomura and European banks--my partner and I were out raising a hedge fund and couldn't raise a tarnished nickel from these groups. And we tried.
Public begging is humiliating. But funds of funds and banks were steering money into the Madoff machine. (Ah, schadenfreude delayed.) But it went beyond these so-called professionals or even the country club set; lots of great charities fell for his fudged numbers.
As in any classic Ponzi scheme, you pay old investors who redeem with new money. Sounds like not too many wanted out, until 2008. Now, $7 billion in redemption requests since the Credit Crisis began meant Madoff has made a complete circle, from schlub to macher to goniff (a crook, swindler or cheat).
Let that be a lesson. Learn a few jokes to tell at the club. Impressing the highball crowd with your investing prowess is a losing strategy.
Who would have doubted the integrity of one of the most reputable firms on Wall Street run by an individual that was instrumental in framing the structure of the SEC?
Once again, where were the auditors/accountants? Did it not raise any red flags that the company had reported consistent earnings for the past 20 years? And how could this privately-held company managing that amount of money not be regulated, audited, controlled or provide any safeguards to their so called “investors?”
Apparently the SEC had even received numerous letters from investors trying to sound the alarm that something didn’t smell right. Why was no investigation conducted?
Yes, I understand the secretive nature of Hedge Funds, but will this finally be enough to wake up regulators to change these ineffective oversight rules?
I’ve always maintained that the word “investment” is a misnomer. It’s all speculation. Nothing is really safe. Now the search begins to find the gory details of the billions lost. But what has really been lost is more faith and trust in our financial system. Madoff’s firm had been highly regarded on Wall Street, but trust me, this downfall will just be the tip of the iceberg.
The economic downturn has already caused a run on Hedge Funds and the redemptions have been enormous. Investors cashed out a record $130 billion in November alone. In Madoff’s case, he’d only had requests for $7 billion of redemptions but was struggling to find the liquidity to return funds.
We’ll find out in the next few hours just how serious the collateral damages will be. Early indications are that the actual number of clients is few, but each stands to lose billions. This will not do much to bolster the confidence in the rest of the investment world.
It just drives home the point that there are so many weak links in our financial system, so little government oversight, and too many loopholes that invite under-handed deals.
It will take years to revamp the structure of the system. But I still have a hard time understanding how the watchdogs, the regulators, state auditors, private auditors, accountants, and even the investors can be so blind.
There are tough lesson to be learned, and many questions to be answered. One of the most important and relevant questions we have to ask ourselves is posed in the title of our book, “The Big Gamble: Are You Investing or Speculating?”
This comment was posted by Jose Roncal, co-author of "The Big Gamble: Are you investing or speculating?" - For more information, visit www.financialspeculation.com
Posted by: Jose Roncal | December 17, 2008 at 09:25 PM
Jose's Comment:
" ...there are so many weak links in our financial system, so little government oversight, and too many loopholes..."
Hahaha, so little government oversight... ouhuh!
Please, regulators are human beings too, they aren't any better than the rest of us...
Does anyone really think that public servants have a special gene or a lack of such one??
L.Mises or M.Friedman among others pointed that out so damn often, it should be obvious.
My (rhetorical) question is this:
Why does the financial sector beg for ((much) more) regulation?
And we all know the answer!
Regards, Kurt.
Posted by: Kurt Hinz jr | December 19, 2008 at 03:21 PM
"except when 0 or 00 come up, which they do once every 19 spins"
Not quite right is it...
Posted by: Mikey | January 09, 2009 at 08:48 AM
"Yes, I understand the secretive nature of Hedge Funds, but will this finally be enough to wake up regulators to change these ineffective oversight rules?"
What you fail to understand is Madoof did not run a hedge fund, but a ponzi scheme.... BIG difference. I get tired of hearing him called a hedge fund manager, which he was not. You can blame his outside auditing firm (a very small one I might add) that stayed tight lipped more than you can blame the HF industry. Plus letters had been written to the SEC since 1997 requesting them to look into complaints.
The SEC will shut down a small cap very quickly for a couple complaints, yet Madoof had dozen of complaints with evidence filed and SEC turned their head.
Do we really need "more" regulation or the SEC just to do their job? (which is to protect investors)
Posted by: D Smith | January 10, 2009 at 03:51 PM
MADOFF SHOULD BE IN JAIL AND TRIED FOR THE MURDER OF RENE-THIERRY MAGON DE LA VILLEHUCHET. His life was ruined on epic proportions that most of the population can't wrap their puny brains around and they are so ignorant and small as to begrudges this man his success and have no empathy for his plight. He lost everything and could not go on with such a loss. I get it. I too was taken by a ponzi scheme in 2008 my brother in law was part of.........FAMILY! I only lost 35% of my net worth at $500,000. to witch It will be impossible to recover in my lifetime. My life and my kids childhood is forever hugely changed. It was not greed that brought me to it, it too offered 9-12% witch is NOT to good to be true! , it was good business, but with the wrong person! Financial scams of this proportion need to have much more severe punishment for the titanic carnage and number of lives they have ruined and forever changed and not the small slap on the wrists they have received in the past. Villehuchet killed himself over the criminal actions of Madoff stealing his fortune, NO OTHER REASON and they where friends.
MADOFF SHOULD BE HELD RESPONSIBLE FOR HIS DEATH!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
Posted by: Cari | January 16, 2009 at 09:37 AM
I love it how SEC Chairman Christopher Cox is blaming his staff for not taking action when other hedge fund managers told them Madoff was probably running a Ponzi scheme. It happened on your watch, Mr. Cox! We'd like your resignation on our desk in the morning!
Beyond that, we've gotta make it illegal for any regulator to take a job in the industry they've just been regulating for ten years. A top post at the SEC needs not to be just a stepping-stone to a cushy Wall Street job! Why would any regulator do their job under those circumstances???
Posted by: Scott L. Burson | January 17, 2009 at 09:18 AM
I heard that there were 5,000 broker-dealers on Wall Street and 10,000 regulatory staff in government jobs "overseeing" - or should I say "overlooking"? - their activities. But I'm sure President never-run-anything-but-his-mouth will make the regulatory machinery much more effective almost immediately, once he figures out how it should work.
Posted by: Robert Speirs | January 26, 2009 at 10:50 AM
When Paul Newman died, they said how great he was but they failed to
mention he considered himself Jewish (born half-Jewish). When the woman (Helen Suzman) who helped Nelson Mandela died, they said how great she was but they failed to mention she was Jewish.
When Ken Lay, Jeff Skilling, Martha Stewart, Randy Cunningham, Gov Edwards,Conrad Black, Senator Keating, Gov Ryan, and Gov Begoivich messed up, no one told me what religion or denomination they were -- because they were not Jewish.
When Ivan Boesky or Andrew Fastow or Bernie Madoff committed fraud, almost every article mentioned they were Jewish.
This reminds me of a famous Einstein quote:
In 1921, Albert Einstein presented a paper on his then-infant Theory of Relativity at the Sorbonne, the prestigious French university. "If I am proved correct," he said, "the Germans will call me a German, the Swiss will call me a Swiss citizen, and the French will call me a great scientist. If relativity is proved wrong, the French will call me a Swiss, the Swiss will call me a German, and the Germans will call me a Jew."
Posted by: David | February 16, 2009 at 12:25 PM
A lot of specialists tell that business loans help people to live their own way, just because they are able to feel free to buy necessary things. Furthermore, banks offer financial loan for different persons.
Posted by: Ruiz32Carmela | June 05, 2011 at 07:41 AM
Alemanha: o estoque Grupo Timberland foi classificação "outperform"
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