Category: Biographies

Bernie Madoff Ponzi Scheme
BiographiesFinancial News

Madoff, “Hmm.. let’s report 36.2% gains “

Bernie Madoff

“I really think very highly of him, people make mistakes,” wrote a Madoff confidant and NYSE broker. At a party over the weekend I met a nice girl from Boston University, and I forgot to ask for her number when I left. THAT was a mistake.

Bernard Madoff, former chairmain of the board at the NASDAQ stock exchange stealing $50 billion through a Ponzi scheme is no mistake. The losses stem from a deliberate and deceitful crime of a magnitude only rivaled by Ken Lay and his chefs that cooked Enron’s books in 2001. The day before his arrest, Madoff told his sons that his investment firm “is all just one big lie.” And with great deciet, comes a captivating storyline including big name victims, a surfacing video of Madoff claiming an “impenetrable regulatory system”, a decieving investment strategy, and another SEC failure.

Mr. Madoff initially used his Wall Street reputation as a former chairmain of the NASDAQ board to recruit early investors at the finest country clubs around the country. He then created fictional returns that attracted more investors….investors who would eventually tell their friends, “I’ve got my money invested with Madoff and he’s doing really well. You can’t get in unless you’re invited…but I can probably get you in.”

Whenever a firm or individual requested money, Madoff would pay them with principal from other investors. Even though Madoff claimed gains throughout this 2008 financial crisis, many of his clients asked to withdraw their stock investments, until the withdrawls got overwhelming and he wasn’t getting new investors to furnish the old.

Blockbuster Names Go Bust With Madoff Securities

Among the big names with considerable investments in Madoff Securities were international banks, hedge funds, and wealthy private investors; some of whom invested 50-95% of their assets. New York Mets owner Fred Wilpon invested tens of millions of dollars of both his and the Mets organization’s money with Madoff. Other notables include Steven Spielberg’s charity, real estate magnate Mort Zuckerman, the Elie Wiesel Foundation for Humanity (Why couldn’t Madoff just say no to charities? Does he have no heart?) and Norman Braman, the former owner of the Philadelphia Eagles. Investment firms taking the biggest losses include Spain’s Gruopo Santander, France’s BNP Paribas, and Fairfield Greenwich Advisors.

Jeff Fischer, a top divorce attorney in Palm Beach, says many of his clients were also Mr. Madoff’s clients. “Every big divorce that came through my office had portfolio positions with Madoff,” he says.

Two of his investors said that among his clients, Mr. Madoff was considered a money-management legend; they would joke that if Mr. Madoff was a fraud, he’d take down half the world with him.

WSJ.com: Fund Fraud Hits Big Names, December 13, 2008

Watch A Video of Bernard Madoff Lying Through His Teeth

Mr. Madoff’s words to his sons “it’s all just one big lie,” is definitely not an understatement..

Madoff’s Proposed Investment Strategy

Older, Jewish investors called Mr. Madoff ” ‘the Jewish bond,’ ” says Ken Phillips, head of a Boulder, Colo., investment firm. “It paid 8% to 12%, every year, no matter what.” Mr. Madoff explained his smooth returns by claiming that he bought baskets of stocks, and in case the market crashed he placed put-options. Hedging with options is a pretty damn common practice, but it never delivers small gains for dozens of consecutive quarters of changing market environments the way Madoff’s fund did.

“He was a low-key guy,” said Ms. Manzke of Maxam Capital Management, “he would say, ‘Look, I’m a market-maker, and I don’t want anyone to know I’m running money.’ It was always for select people. He was always closed, he wasn’t taking new money.”

The SEC Is Inept

I’m going to go on a limb and assume that no one at the SEC has heard of Frankie Valli or his hit lyrics, “you’re just too good to be true, can’t take my eyes off of you.” Clearly Madoff’s 1% monthly gains every month should have set off flags – either he was cheating the market or he was cheating his clients.

“Madoff Securities is the world’s largest Ponzi Scheme,” Mr. Markopolos, wrote in a letter to the U.S. Securities and Exchange Commission in 1999.” Markopolos was one of many members of the investment community baffled by Madoff’s returns, see: “Madoff tops charts, skeptics ask how” from a 2001 hedge fund magazine.

The SEC investigated Madoff Securities when they last filed in 2006 and the commission didn’t find any reason to further their investigation.

I thought the SEC was asleep at the wheel when it missed a decade of banks overleveraging and designing fantasy CDOs, but I’m getting the feeling they’ve been wide awake, just inept.

Conclusion

I need your help, I can’t remember the phrase… something about “good” and “true”? No one beats the stock market, not even Madoff the “market maker.” For every trade their is a buyer and a seller; both of whom might be the most “sophisticated” of investors, but only one will have made the right decision a year from now. Thousands of speculative investors may be early buyers into the next hot industry, but its doubtful they will be correct for years in a row. There is no game if someone always wins.

Sources:

Timothy Geithner
BiographiesMacroeconomy

Who is Timothy Geithner?

Is the 47 year old Timothy Geithner prepared for arguably Barack Obama’s most important appointment? The first decisions made by Mr. Geithner will clearly be crucial to the U.S.’s economic future, as Harvard economist Kenneth Rogoff emphasized, “the decisions that are going to be made in the first 100 days of this administration could have an imprint on the economy for three or four decades.” Man.. I hope Mr. Geithner exceeds expectations if his first decisions will affect the unborn grandchildren of my unborn children.

This article covers Geithner’s resume, including his involvement at the Federal Reserve, participation in recent bailouts as President of the NY Fed and history at the Federal Open Market Committee.

Timothy Geithner’s Resume

I am happy to report that I can at least sleep at night knowing that Geithner’s will need no introduction on Wall Street or in Washington. He has worked for the Treasury Department since 1988, and served directly under Robert Rubin (when he was Secretary) and Larry Summers (when he was Deputy Secretary) from 1999-2001. In the late 1990s he collaborated with Summers on the highly-successful, internationally-funded, $100 billion bailout of Brazil, South Korea, and Thailand; so he has 10+ years of experience for his new post as “Secretary of Baillouts” as the WSJ called it. He was Director of policy development and review department at the IMF, so we can assume he is well versed in the world’s exponential level of globalization and the affect the U.S. currency has on the world. Finally, he has been President of the New York Federal Reserve since 2003 and is Vice-President of the Federal Open Market Committee (FOMC).

President of the New York Federal Reserve

Mr. Geithner role at the epicenter of the Wall Street crisis may raise eyebrows. How prepared the President of the New York Federal is to be Treasury Secretary can be seen in varying lights. At best, it has made him capable of reversing the financial toilet flush in the U.S. with his relationship with the crisis’ players and major events. At worst, he was a Wall Street watchdog who sat on the sidelines while financial institutions took bigger bites of risk than they could handle. Refuting the the latter assessment, Gary Weiss wrote “The Fed, despite its broad financial oversight, does not have authority over investment banks—either to audit their books or lend them money. The day-to-day task of overseeing investment banks falls mainly to the S.E.C.”

What we can judge is the rescue packages the New York Fed was involved in: Bear Stearns and AIG, and he was one of the fingers on the Government’s hand that smacked Lehman Brother’s.

The Bear Stearns negotiations were held in the Fed’s office where he represented New York taxpayers and served as a medium for Bear Stearns and JP Morgan. I’d rather not imagine what would have happened had the big Bear fallen. –  point to him.

Mr. Geithner’s work on the AIG bailouts is a mixed bag. The Wall Street Journal described the original September 16th bailout package as ” rescue medicine (that) was killing the patient.” The WSJ article notes that the bailout would have forced the insurer to sell assets into weakness, pay back the loan with a high interest rate whether they used the money or not, and was drastically undersized. Even on the new AIG bailout plan the government is demanding a 79% equity stake. Do we really want the government to run another financial company after the Fannie Mae and Fredie Mac disaster? – minus one.

Finally, Geithner didn’t extend a hand to Lehman Brothers as it free-falled off the solvency cliff. Lehman’s chapter 11 filling it took over $600 billion of assets down the drain with it. When the Treasury and Fed was handing out money faster than it can be printed, why overlook Lehman Bros? – minus one.

Overall, Mr. Geithner’s scores a negative one, but clearly he believes in responding to the economic crisis with agressive government intervention, which brings a huge wave of confidence to the markets.

FOMCVice President

Timothy Geithner’s experience as VP at the FOMC is welcomed in his new role. The major issue that can be taken with his actions as VP is not being a dissenter in Bernanke’s sluggish reaction time in cutting the federal funds rate . Cramer, take it from here…

In His Own Words…

“What you want to do is design a system that doesn’t prevent people from losing money and making mistakes … because that is inevitable. What you want to do is make sure you run a system where the consequences of those mistakes are less damaging and consequential for the more prudent and for the economy as a whole. And that balance is very hard.”
– Timothy Geithner, July 2008

Conclusion

Mr. Geithner is undoubtedly qualified to be the new Treasury Secretary. He will be a stark contrast to Hank Paulson, he is a lifetime public servant, and has never been a wall street executive.

Larry Summers described Geithner by saying “the ego is disengaged, but he’s very comfortable with himself and very direct—not promoting himself, but just concerned with doing the right thing.”

Geithner faces gargantuan and unparalleled challenges to effectively implement the trillions of the treasury’s bailout dollars effectively and reform government regulations. I hope the WSJ headline for their article on Geithner and Summers –  “Duo Has Proved More Pragmatic Than Ideological” will still be an apt description in the coming years. At least there is comfort in knowing that Timothy Geithner will avoid making the mistakes of Treasury Secretary Andrew Mellon (1921-1932) when he refused to lend money to banks during the Great Depression.