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The Genius of Madoff
I spent a sad and depressing, but highly instructional evening with Dr. Stephen Greenspan, who had just lost most of his personal fortune with non other than the notorious Bernie Madoff.
The University of Connecticut psychology professor had poured the bulk of his savings into Sandra Mansky’s Tremont feeder fund and received convincing trade confirms and rock solid custody statements from the Bank of New York. It all looked as good as gold.
This is a particularly bitter pill for Dr. Greenspan to take, because he is an internationally known authority on Ponzi schemes, and just published a book entitled Annals of Gullibility-Why We Get Duped and How to Avoid It. It is a veritable history of scams, starting with Eve’s subterfuge to get Adam to bite the apple, to the Trojan Horse and the Pied Piper, up to more modern day cons in religion, politics, science, medicine, and yes, personal investments. Greenspan is a frequent speaker on the lecture circuit offering PowerPoint presentations on how to avoid getting ripped off by investment schemes.
Madoff’s genius was that the returns he fabricated were small, averaging only 11% a year, making them more believable. Some of the other recent high flyers came crashing to ground documenting annual returns in excess of 50% that were never really there.
Madoff also feigned exclusivity, often turning potential investors down, leading them to become even more desirous of joining his club. Some investors pleaded five or six times before he finally took their money. Madoff’s scheme is known by professionals as an “affinity scam,” because the members of a narrow social group are used to convince each other of its merits, and then are taken as a whole. Bernie targeted the Jewish community. The dues Madoff paid to the establishment, such as becoming the chairman of NASDAQ, also paid huge dividends for him.
In 1920, the original Carlo Ponzi promised his Boston area Italian immigrant customers a 50% return every 45 days, or 100% every 90 days. His strategy involved buying discounted postal reply coupons in Italy and selling them at face value. It was an early and primitive form of currency arbitrage. It all sounded too good to be true. The scam lasted less than a year, and at its peak, Ponzi was taking in $250,000 a day. Ponzi spent 3 ½ years in prison for his efforts and went on to commit several frauds in Florida real estate.
I have been investing other people money for nearly 40 years now, and I have lost count of the number of times people of tried to rob me. When considering a new manager, I now hire a private detective to research their backgrounds, going back to their high school days. Private dicks are cheap, performing this service for only $1,000, and will dig into remote county records that are unavailable on the Internet. It’s pennies, really, when multimillion dollar investments are involved. You wouldn’t believe the muck that has floated to the surface over the years; especially involving oil and gas limited partnerships.
For a deeper look into Greenspan’s fascinating, but expensively learned observations and analysis, go to his website at ww.stephen-greenspan.com.
To see the data, charts, and graphs that support this research piece, as well as more iconoclastic and out of consensus analysis, please visit me at www.madhedgefundtrader.com . There you will find the conventional wisdom mercilessly flailed and tortured daily. You can also listen to me on Hedge Fund Radio by clicking the “Today’s Radio Show” menu tab at the left on my home page.
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Yeah, right. A 7% per year return is a doubling time of between 6 and 7 years. That's exponential growth for you. When I started putting money into funds in the late 90s where the return forecasts were at 6%,10% and 14%, I always looked at the LOWEST rate of return. Even that is optimistic now.
Yes, OK we've had a year's rally (new Dow highs today since September 2008), but founded ONLY om MASSIVE pumping of money into the system. It ain't gonna work for much longer.
DavidC
Where are BMs tax returns?
Bernie Madoff will not be taken to open trial any any Federal agency. Any BM public trial will risk exposing the Internal Revenue Service as a great scam on the common wage earner, pandering to the corporate rich, the privileged shelters and trust/foundation schemes.
BM's scheme had no "profits" to tax. He had no direct income over many years from the estimated $50 Billion, taking only the broker commissions [standard or other amounts?] from trading the funds, by which he lived an opulent and jet-set lifestyle. And the commissions were likely laundered through a BM company, not to him directly.
BM "owned" planes, boats, limosines,mansions, real estate, etc., but likely [1] indirectly as perks from companies [who pay no tax on "business expenses"] or [2] under his control by being owned by family/friends/associates or [3] owned via offshore and similar dodges immune to the IRS taxation or reporting.
BM WAS TOO BIG FOR THE IRS TO TOUCH.
DITTO THE SEC...Of course, the Securities and Exchange Commisssion knew something of the scandal and the awesome backfire should they expose it. They flinched hard. They could not honestly investigate without demonstrating their own complicity in creating such financial schemes via deliberate loopholes.
As to the anatomy of loopholes...
Who writes the laws...Who writes the rules...Who interprets them? Who decides what gets investigated? and when? and by whom? Who decides when to enforce...and who does the enforcement? To whom do the staffs of the SEC owe their jobs?.
The answer is..the rich and powerful misleaders of the financial-class and their accomplices. Insiders rule at the Treasury, SEC, NY Stock Exchange, Nasdaq, etc.
BM operated within the deliberate loopholes created by the makers and enablers of finance games.
There is only one remedy. It is a familiar idea long suppressed. It is not a Dept. of Justice or system of justice, judges, lawyers, accountant, trials, juries or police... all those entities are in confusion and riddled with pay-to-play.
The only remedy I know is mastering and applying the simple idea and definition of justice as fairness. Seek justice. Only justice.
The finance-games crowd are allowed to be "self-regulating" because they write the nonsense laws and rules of their own games so that outsiders are hopelessly confused and thus ineffective. For example, who understood that "Credit Default Swaps" were named such for the exact purpose of escaping regulations governing the insurance industry? CDSs masquerade as insurance...what's to worry, these bonds are 100% insured by the Great Fiji Island Assurance Society [which my sister-in-law operates in a 1-room shack in Bangladesh].
They want no effective oversight by outsiders...and there is none.
UPDATE: As of 1-27-09, 2 months after BM's arrest, there still is not 1 piece of evidence that BM made any actual investment of the monies given over to him. If BM for many years only made fictitious account-statements to investors about what trades he had made, this should have been exposed in the first week after his arrest. Likewise, if he had actually made trades ,that would have been exposed. Neither case has been announced by federal investigators. The silence smells very bad for credibility. ..and indicates cover-up of more severe fraud in the global finance worlds.There is also a sense that BM's operations were singularly enabled by the switch to the computer-driven trading that BM advocated and adopted early-on.
BM is a Finance-game insider. He was untouchable until he was forced to give-up because his schemes collapsed.
His game was exposed years ago. Many top-level managers in banking and investment firms, who had insider-experience and abilities in the world of drivatives trading, knew to avoid dealing with him, but they dared not act to "self-regulate" their industry thus BM was untouchable. He could continue to play his game. There was no effort to stop his fraud because he was an insider. ..thus any action to stop him would expose the other insiders who practised their own brands of financial flim-flam.
Where did the money go? How could $10 Billion or $50 Billion disappear?
In a typical Ponzi game, a recruit gives money to a con-man who promises to invest it and pay attractive returns or interest to the recruit...but secretly the money is not invested and there are no profits from actual investments to pay interest to the recruit. The con keeps and uses the money for personal benefit, at the same time using some of it to "pay" interest", so the recruit enjoys apparent success and does not take his money out of the game. BM was "paying" about 16% "interest" to fund managers who recruited the recruits, and the fund managers passed on about 12% to the givers. BM meanwhile made full personal use of the remaining giver-money. A Ponzi-scheme may even have some sources of actual income to prolong the scheme before it collapses, but a Ponzi , by definition, is not sustainable despite having the appearance of sustainability.
Note that when a recruit stays in a Ponzi, he continues to get his 12% on the original money, as long as the scheme can be manipulated to persist...even 10 or 20 years ! [And the recruit often re-invests the 12% payouts to maximize "gains".] But at 16% per year, after only 4 years or so, the con has used up all the original money just to payout the yearly 16%. So he must recruit more and more recruits to hand over their money for him to "invest" so money-in stays ahead of money-out... if it doesn't the con cannot payout the "interest" and the recruits will, too late, ask for their money back [redemptions].Alas, after a recruit has participated, say, 12 years, a con has already paid-out 200% of the recruit's original money, as phantom "gains".
Meanwhile, the recruits falsely "know" their money is still there working and earning the "interest", as the con's "account books" and "statements" show all the monies are there and invested...in BM's case, all $50 Billion... which is only the ghost of all accumulated monies given to the con from the very beginning 20 or 30 years ago.
Works great until money-in does not cover money-out ["gains" or payouts]. Alas, now at end-of-game, the con confesses that only $200-300 million actually remains. The con disbursed the money as payouts and the balance went to subsidise his opulent lifestyle and who knows what else...what price to buy public officials ? Houses? Land? Gold? Favors?
Why did the game end? Why did he confess?
The game ended when, during the recent market losses and drop in value of nearly all kinds of assets and liquidity crisis, some recruits who needed more cash decided to withdraw their money from the funds that recruited them [and who had given it over to BM to invest]. Since BM did not have enough money to cover the redemptions , even though his "account books" claimed it was all there, he could not return the money [principal] shown in the recruits' statements-of-account and was exposed as a fraud. He can confess or disappear. Game-over for BM.
All the taxes never paid on the $Billions spent/consumed by BM are lost and, as usual, the taxpayers always make-up for any taxes not collected [or forgiven or other forms of "tax breaks"]. As long as taxes are levied to meet budget spending, any uncollected taxes must be offset by proportionally higher taxes on those who do pay. [Hmmm, who writes these laws permitting tax-breaks and tax-free Municipal bonds, etc?]
BM can expose the "modern" banking, bond and equities business as flim-flam...if he goes to trial.
BM can give the lie to the SEC, Treasury and the FedReserve as just an old-boy network of confidence-games; Ponzi-schemes; Wizards of Oz behind their curtain of we-know-best-for-you propaganda.
BM will not go to public trial. Plea-bargain, maybe. There is and will be desperate damage-control by the financial game-makers and enablers...the insiders.
Thank you, BM, for your demonstration of "Behind every big fortune is big crime". Should be wonderfully educational. Education, after all, originally meant "to lead out". Perhaps "lead out of whatever you want to be lead out of "...Poverty? Despair? Pain? Confusion? Any trap will do. Eh? ]
And thank you, Mr. Markopoulos, for your integrity that helps educate us.
And thank you, Brooksley Born, for your integrity that confronted the government officials that enabled financial corruption ...before Greenspan, Summers, Rubin ended your Federal Official position.
Seek justice. Only justice.
Mary Schapiro, his regulator, was " a dear friend" - Madoff
All the Woodwards and Bernsteins are never going to figure this out because they're looking in the wrong places. The notion that American jews were recruited aggressively only backs up the notion, that Madoff was running a slush fund for AIPAC, with the full consent of the US government. Bernie Madoff is small potatoes really, in the bigger scheme, (perhaps he too will have a fatal heart attack in prison, a death certificate signed by his personal physician, then slipped out the back way in a coffin, to an austere retirement in one of the new settlements) The only way anyone can run a Ponzi scheme of this scale, for an extended period, is with a lot of help.
Why did the fund implode? Contributors had less money to bolster their ethnic cause, and it seemed evident that the new administration might not play ball. (They put Abramoff in jail). The Bush people were deeply into Israeli politics, ran the Iraq war at their insistence, but stopped short of carrying out the raid on Iran.
Now Ron Paul wants the Fed to open its books, and perhaps that will shed some light on all this. Follow the money, that's the time tested recommendation.
http://www.salon.com/news/israel/index.html?story=/opinion/greenwald/201...
Of course, it was AIPAC, the Mossad and a huge Jewish conspiracy that sustained Madoff's scam. And the Mossad was behind 9/11 too! Give me a break with this utter nonsense! Madoff screwed plenty of Jewish investors. He is the scum of all scumbags, and his Ponzi won't be the last one we hear about. Get your head out of all these silly conspiracy theories and see it for what it was - a sophisticated marketing hoax that thrived until the credit crisis hit, and redemptions overwhelmed the fund, thus exposing the Ponzi scheme.
Whats your take, pablum for the masses? Non conspiracy theories? Mine are better that yours because they take into account the nature of the beast, not merely human greed, that your read about in a Shakespeare play. You probably think Madoff is just like a housewifes club running a gifting scheme. That's zero vision. These people have complex agendas, the Bushes have been globalists since Prescott traded with the Nazis. George ran Iran Contra through the S&L crisis. What do you think Ron Paul is after, Bernankes expense account? He wants to pull the whole thing down, and he can do it if he can get in there, and as it is said a few posts above, get some evidence of the Feds malefeasance (Kissinger coerced then Fed chief Burns to bail out Italy in 74.)
Follow the money,
love, god bless America DT
If you feel you have to defend AIPAC more power to you, they're the most rotten power lobby in the most powerful rotten town in America, but selling America is what Corporate Un-America is all about, (and the Bushes, and the Clintons too, if they had any money) are all about.
Leo is right.
Ned is right about Leo...
"I've always considered a paranoid to be a man with all the facts.." Charles Bukowski
Madoff is a pisher compared to the scams the Greenspan/Bernanke FED and Paulson/Geithner Treasury Department are running.
The bubble or mania that we currently find ourselves in, in the words of our clueless leader "will fundamentally change America".
I agree with Jim Rogers, Marc Faber, Peter Schiff, etc... who have all observed "the emperor has no clothes". I think we are way past the "if", now the question is "what will trigger the crash and when will it happen?"
The Madoff scam pales in comparison to the Pension Ponzi, where your pension dollars go to feed rich hedge fund, private equity, and real estate fund managers and greedy investment bankers. "Money never sleeps" ...it's hard at work making millions of pensioners and workers poorer while the financial oligarchs enrich themselves. What do you expect when pensions have succumbed to Casino Capitalism?
I always wondered about the apparent lack of guilt and remorse exhibited by Madoff, but as he probably knows the whole system is a ponzi scheme and everybody is doing it. The 50B amount seems small now that I know how much the government run ponzi is taking from the taxpayer.
Anyone who promises more than a 'riskless' 2.5% - 3% per year is either running a scam or is a complete fool. Eleven per cent per year is way too high to be honest - either your report came with a "Past performance is no indicator of future performance" disclaimer at the bottom (in very very small type, of course), or they are running a scam, pure and simple.
What was it that Taleb said in that other ZH article? "Never trust an idiot with too much education or information"? That's Dr Greenspan, in a nutshell.
"Never trust an idiot with too much education or information"?
Usually when academic experts misapply their information, we have a problem... I am sure ZH readers have all run across questionable math models and probability distributions in finance.
If the poster is relating this correctly, the first fallacy I see is:
"It is a veritable history of scams, starting with Eve’s subterfuge to get Adam to bite the apple, to the Trojan Horse and the Pied Piper..."
History of scams?
Adam & Eve, the Trojan Horse and the Pied Piper?
They are all FICTION FROM LITERATURE. They are myths. Quite eloquent, but literature none the less. They are not FACTUAL ponzi schemes. Bad example, analogy or research.
Either the poster has faulty logical analysis or the scammed professor does.
The biggest problem currently in US society?
Discerning fact, reality and history from propaganda and the myth narrative. I present the example above, reporting myth as actual history.
The huge fallacy in this, is that 11% a year, every year, is 'small'.
How can anyone claiming to write an authoritative text be that naive to think that 24% (11% in two years plus the compounding)in 2 years for doing nothing, essentially 1% every month for years is small???
The breadth of his (and your) ignorance, the lack of the elemental, fundamental, basics of compound interest is staggering.
Take it back for heaven's sake to salvage your own cred.
I think Leo meant that among the universe of claimed returns during that particular epoch, 11% was comparatively modest and thus helped in seducing the already gullible, unwitting prey.
That's how I read it. Everything's relative . . .
LOL, you could be selling puts & calls every single year until one year KABOOM - disaster strikes. Like I said, hedge funds for dummies is on the menu again. Investors are hard up horny for hedge funds and many of them are going to get burned because they do not understand the investment & operational risks. Worse still, if you're paying 2&20 for alpha, make god damn sure you're getting alpha, not leveraged beta. Sheesh, I feel like a broken record but it pisses me off watching the hedge fund "hypesters" blowing smoke in the face of institutional investors who are asleep at the switch.
In December 2008, I wrote that Madoff mayhem was the tip of the iceberg. Having done my share of due diligence on hedge funds, I would never have invested in Madoff or any other "superstar" hedge fund manager who is elusive and hides things from me. An easy way to detect fraud is to open up a managed account where you have full transparency and full control over the portfolio. If something goes wrong, you can pull the plug (you need to understand the strategy and if it's not liquid, you will still suffer serious losses). Using independent, competent administrators helps, but they too need to be verified. The problem is that too much dumb money is chasing after hedge funds again and very few investors understand the risks, not just investment risks, but operational ones. My advice to all investors is to stop being so enamored by hedge funds and start asking some very tough questions. If it looks too good to be true, walk away. If they pressure you to invest, tell them to take a hike. Been there, done that. In good times hedge funds will act like prima donnas, in bad times they will beg you for money. Finally, Bernie Madoff was no genius. He he was another scumbag billionaire who defrauded investors. Let him rot in jail.