$50 Billion Con-job

[Tsukiyumi]

Source

NEW YORK (Reuters) - Bernard Madoff, a quiet force on Wall Street for decades, was arrested and charged on Thursday with allegedly running a $50 billion "Ponzi scheme" in what may rank among the biggest fraud cases ever.

The former chairman of the Nasdaq Stock Market is best known as the founder of Bernard L. Madoff Investment Securities LLC, the closely-held market-making firm he launched in 1960. But he also ran a hedge fund that U.S. prosecutors said racked up $50 billion of fraudulent losses.

Madoff told senior employees of his firm on Wednesday that "it's all just one big lie" and that it was "basically, a giant Ponzi scheme," with estimated investor losses of about $50 billion, according to the U.S. Attorney's criminal complaint against him.

A Ponzi scheme is a swindle offering unusually high returns, with early investors paid off with money from later investors.

On Thursday, two agents for the U.S. Federal Bureau of Investigation entered Madoff's New York apartment.

"There is no innocent explanation," Madoff said, according to the criminal complaint. He told the agents that it was all his fault, and that he "paid investors with money that wasn't there," according to the complaint.

The $50 billion allegedly lost would make the hedge fund one of the biggest frauds in history. When former energy trading giant Enron filed for bankruptcy in 2001, one of the largest at the time, it had $63.4 billion in assets.

U.S. prosecutors charged Madoff, 70, with a single count of securities fraud. They said he faces up to 20 years in prison and a fine of up to $5 million.

The Securities and Exchange Commission filed separate civil charges against Madoff.

"Our complaint alleges a stunning fraud -- both in terms of scope and duration," said Scott Friestad, the SEC's deputy enforcer. "We are moving quickly and decisively to stop the scheme and protect the remaining assets for investors."

Dan Horwitz, Madoff's lawyer, told reporters outside a downtown Manhattan courtroom where he was charged, "Bernard Madoff is a longstanding leader in the financial services industry. We will fight to get through this unfortunate set of events."

A shaken Madoff stared at the ground as reporters peppered him with questions. He was released after posting a $10 million bond secured by his Manhattan apartment.

Authorities, citing a document filed by Madoff with the U.S. Securities and Exchange Commission on January 7, 2008, said Madoff's investment advisory business served between 11 and 25 clients and had a total of about $17.1 billion in assets under management. Those clients may have included other funds that in turn had many investors.

The SEC said it appeared that virtually all of the assets of his hedge fund business were missing.

CONSISTENT RETURNS

An investor in the hedge fund said it generated consistent returns, which was part of the attraction. Since 2004, annual returns averaged around 8 percent and ranged from 7.3 percent to 9 percent, but last decade returns were typically in the low-double digits, the investor said.

The fund told investors it followed a "split strike conversion" strategy, which entailed owning stock and buying and selling options to limit downside risk, said the investor, who requested anonymity.

Jon Najarian, an acquaintance of Madoff who has traded options for decades, said "Many of us questioned how that strategy could generate those kinds of returns so consistently."

Najarian, co-founder of optionmonster.com, once tried to buy what was then the Cincinnati Stock Exchange when Madoff was a major seatholder on the exchange. Najarian met with Madoff, who rejected his bid.

"He always seemed to be a straight shooter. I was shocked by this news," Najarian said.

'LOCK AND KEY'

Madoff had long kept the financial statements for his hedge fund business under "lock and key," according to prosecutors, and was "cryptic" about the firm. The hedge fund business was located on a separate floor from the market-making business.

Madoff has been conducting a Ponzi scheme since at least 2005, the U.S. said. Around the first week of December, Madoff told a senior employee that hedge fund clients had requested about $7 billion of their money back, and that he was struggling to pay them.

Investors have been pulling money out of hedge funds, even those performing well, in an effort to reduce risk in their portfolios as the global economy weakens.

The fraud alleged here could further encourage investors to pull money from hedge funds.

"This is a major blow to confidence that is already shattered -- anyone on the fence will probably try to take their money out," said Doug Kass, president of hedge fund Seabreeze Partners Management. Kass noted that investors that put in requests to withdraw their money can subsequently decide to leave it in the fund if they wish.

Bernard L. Madoff Investment Securities has more than $700 million in capital, according to its website.

Madoff remains a member of Nasdaq OMX Group Inc's nominating committee, and his firm is a market maker for about 350 Nasdaq stocks, including Apple, EBay and Dell, according to the website.

The website also states that Madoff himself has "a personal interest in maintaining the unblemished record of value, fair-dealing, and high ethical standards that has always been the firm's hallmark."

The company's website may be found here: http://www.madoff.com/

I noticed no one else has brought this up. I'd love it if they just locked this guy away for the rest of his life, after seizing all of his assets to slightly repay some of the victims, but I doubt either of those things will happen.

[Mikey]

He was getting some big fish, too. Spielberg and that type.

[Captain Picard's Hair]

Yeah, I was wondering why there wasn't any thread about this.

Amazing how he perpetuated this on such a grand scale for so long - people really believed he had some trading secret that always produce exactly 10% returns every year and managed his whole business with only two dozen people. If it sounds too good to be true...

[Tsukiyumi]

...If it sounds too good to be true...

It is. Amen.

[Mark]

This jackass is getting off WAY to easy

[Captain Picard's Hair]

If I may be excused for posting another Times editorial, it seemed apropos:

http://www.nytimes.com/2008/12/17/opini ... an.html?em

Op-Ed Columnist
The Great Unraveling

Article Tools Sponsored By
By THOMAS L. FRIEDMAN
Published: December 16, 2008

Hong KongThe stranger, a Western businessman, slipped into the chair next to me at an Asia Society lunch here in Hong Kong and asked me a question that I can honestly say I've never been asked before: "So, just how corrupt is America?"

His question was occasioned by the arrest of the Wall Street money manager Bernard Madoff on charges of running a Ponzi scheme that bilked investors out of billions of dollars, but it wasn't only that. It's the whole bloody mess coming out of Wall Street - the financial center that Hong Kong moneymen had always looked up to. How could it be, they wonder, that such brand names as Bear Stearns, Lehman Brothers and A.I.G. could turn out to have such feet of clay? Where, they wonder, was our Securities and Exchange Commission and the high standards that we had preached to them all these years?

One of Hong Kong's most-respected bankers, who asked not to be identified, told me that the U.S.-owned investment company where he works made a mint in the last decade cleaning up sick Asian banks. They did so by importing the best U.S. practices, particularly the principles of "know thy customers" and strict risk controls. But now, he asked, who is there to look to for exemplary leadership?

"Previously, there was America," he said. "American investors were supposed to know better, and now America itself is in trouble. Whom do they sell their banks to? It is hard for America to take its own medicine that it prescribed successfully for others. There is no doctor anymore. The doctor himself is sick."

I have no sympathy for Madoff. But the fact is, his alleged Ponzi scheme was only slightly more outrageous than the "legal" scheme that Wall Street was running, fueled by cheap credit, low standards and high greed. What do you call giving a worker who makes only $14,000 a year a nothing-down and nothing-to-pay-for-two-years mortgage to buy a $750,000 home, and then bundling that mortgage with 100 others into bonds - which Moody's or Standard & Poors rate AAA - and then selling them to banks and pension funds the world over? That is what our financial industry was doing. If that isn't a pyramid scheme, what is?

Far from being built on best practices, this legal Ponzi scheme was built on the mortgage brokers, bond bundlers, rating agencies, bond sellers and homeowners all working on the I.B.G. principle: "I'll be gone" when the payments come due or the mortgage has to be renegotiated.

It is both eye-opening and depressing to look at our banking crisis from China. It is eye-opening because it is hard to avoid the conclusion that the U.S. and China are becoming two countries, one system.

How so? Easy, in the wake of our massive bank bailout, one can now look at China and America and say: "Well, China has a big-state-owned banking sector, next to a private one, and America now has a big state-owned banking sector next to a private one. China has big state-owned industries, alongside private ones, and once Washington bails out Detroit, America will have a big state-owned industry next to private ones."

Yes, an exaggeration to be sure, but the truth is the differences are starting to blur. For two decades, a parade of U.S. officials came to China and lectured Beijing on the necessity of privatizing its banks, said Qu Hongbin, the chief economist for China at HSBC. "So, slowly we did that, and now, all of a sudden, we see everybody else nationalizing their banks."

It's depressing because China in many ways feels more stable than America today, with a clearer strategy for working through this crisis. And while the two countries are looking more alike, they appear to be on very different historical trajectories. China went crazy in the 1970s, with its Cultural Revolution, and only after the death of Mao and the rise of Deng Xiaoping has it managed to right itself, gradually moving to a market economy.

But while capitalism has saved China, the end of communism seems to have slightly unhinged America. We lost our two biggest ideological competitors - Beijing and Moscow. Everyone needs a competitor. It keeps you disciplined. But once American capitalism no longer had to worry about communism, it seems to have gone crazy. Investment banks and hedge funds were leveraging themselves at crazy levels, paying themselves crazy salaries and, most of all, inventing financial instruments that completely disconnected the ultimate lenders from the original borrowers, and left no one accountable. "The collapse of communism pushed China to the center and [America] to the extreme," said Ben Simpfendorfer, chief China economist at Royal Bank of Scotland.

The Madoff affair is the cherry on top of a national breakdown in financial propriety, regulations and common sense. Which is why we don't just need a financial bailout; we need an ethical bailout. We need to re-establish the core balance between our markets, ethics and regulations. I don't want to kill the animal spirits that necessarily drive capitalism - but I don't want to be eaten by them either.

[Tsukiyumi]

...we don't just need a financial bailout; we need an ethical bailout...

I couldn't agree more. I've never paid any attention to the mysterious workings of the financial system until recently (mostly because I hate bourgeois capitalism, but that's another story ), but what I've read is disgustingly insidious. This is why I'm against a "free market" system. The idea that greedy scumbags will somehow keep themselves in check is akin to saying that a child molester won't hurt any children because he knows what the "consequences" are.

I think nationalizing certain segments of our economy (manufacturing is a good start - where are the type of factories that helped us win WW2, again? ) is the wisest thing our government could do.

[Mikey]

I agree with you, Tsu, but the factories that helped us win WWII were still private enterprise - Grumman, American Bantam and later Willy's, etc.

[Tsukiyumi]

I agree with you, Tsu, but the factories that helped us win WWII were still private enterprise - Grumman, American Bantam and later Willy's, etc.

Emphasis on "were". Without proper oversight, the vast majority of our manufacturing capability has moved overseas. We need manufacturing plants here, not over in China, or down in Mexico.

[Mikey]

I was responding to the idea of nationalizing manufacturing enterprises.

[Tsukiyumi]

Right. I'm suggesting that limited nationalization is a good way to keep key industries from moving overseas.

Health care is another example of something that should, IMO, be nationalized; they should set it up in similar fashion to the systems in Europe.

[Captain Picard's Hair]

...we don't just need a financial bailout; we need an ethical bailout...

I couldn't agree more. I've never paid any attention to the mysterious workings of the financial system until recently (mostly because I hate bourgeois capitalism, but that's another story ), but what I've read is disgustingly insidious. This is why I'm against a "free market" system. The idea that greedy scumbags will somehow keep themselves in check is akin to saying that a child molester won't hurt any children because he knows what the "consequences" are.

I think nationalizing certain segments of our economy (manufacturing is a good start - where are the type of factories that helped us win WW2, again? ) is the wisest thing our government could do.

I agree with this sentiment. "Free market" people see regulation as hurtful to business, but I see unchecked business practices as being potentially hurtful to people, or the environment, etc. Regulation of various sorts is necessary to keep the dark side of capitalism from running amok, and to ensure that the best interests of the people are served. Generally, the US should also be less concerned with its own enrichment over that of the rest of the world.

[Mikey]

Right. I'm suggesting that limited nationalization is a good way to keep key industries from moving overseas.

Health care is another example of something that should, IMO, be nationalized; they should set it up in similar fashion to the systems in Europe.

Careful. Some of the continental systems are nightmarish. Set monetary values available per fiscal year, etc.