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Dec 12, 2008

Investing with Bernie Madoff

I Invested With Bernie Madoff Because I Knew He Was Cheating
12/12/08 - ClusterStock by Henry Blodget

The Wall Street Journal gives details about renowned broker Bernie Madoff, and his admission that he covered up losses of about $50 billion of his client's money, in Top Broker Accused of $50 Billion Fraud. The colorful information comes from ClusterStock.

[edited] Many Wall Streeters suspected a rigged game, but the wrong one. They thought it was insider trading. Here's the best part: That's why they invested with him.

So why did these smart and skeptical investors keep investing? They, like many Madoff investors, assumed Madoff was somehow illegally trading on information from his market-making business for their benefit. They didn't consider the possibility that he was clean on that score but running an old-fashioned Ponzi scheme.

People see that their associate (or leader) is hiding information and telling each group something different. They assume that the associate is crooked in some way, but not toward themselves. They don't worry about consistency or transparency, because they accept that the crooked part requires secrecy. They assume that the crook is smarter than everyone else because he hasn't been caught, and so they trust him even more, and admire him for his willingness to take risks. This crazy thinking is widespread in business and politics.

The Bernie Madoff I Knew
12/26/08 - PajamasMedia by Laura Goldman

[edited] Known as the Jewish T-bill, Bernie was very charming and low key at the meeting. The former chairman of the NASDAQ stock exchange did not want to answer questions about his investment business and strategy.

He only grudgingly admitted that he employed a split conversion strategy that used both put and call options. I did not know what to make of his opacity. I was discomfited by his saying how lucky I was that he allowed me to invest with him.

The structure of Madoff’s investment also concerned me. Similar investments would have been established as a hedge fund with a separate custodian of the assets. The general partner of a hedge fund takes a management fee and a percent of the profits. Mr. Madoff insisted on keeping the assets in house at his own brokerage firm, but only charged commissions, which meant a lower payout for him. Madoff, always the salesman, assuaged my doubts about the investment structure. “I make up for the lower fees with the additional volume of investments that my fee structure attracts.”

They Told Me That Madoff Never Lost Money
12/26/08 - NYTimes.com by Ben Stein

[edited] I have never gotten a tip from any source that made me money, except for a mention 30 years ago of Mr. Buffett’s company, Berkshire Hathaway.

The same goes for the debacle of subprime mortgages. In essence, it is a much larger version of the Drexel Burnham Lambert junk-bond debacle of the 1980s. Back then, investors were charmed by the idea that the lower-ranked the bond, the more money it would make. It seemed like a great idea: there’s this little corner of the market that the big boys turn up their noses at. But in this little corner, huge money is made. It’s almost like the myth that you get great bargains in poor parts of town.

The Empty Case for More Regulation
01/08/09 - Reason.com by Steve Chapman

[edited] James Hedges IV of LJH Global Investments: Madoff was conspicuously unable to attract many big institutions. There's no Harvard management, Yale, Penn, State of Texas, or Virginia retirement system. By page two of your 30-page due diligence investigation, you have already tripped eight alarms and said "I'm out of here".

The Wall Street Journal: The Securities and Exchange Commission had been suspicious. A competing investment executive sent them a 21-page report in 2005 arguing that Madoff was running a Ponzi scheme. The government had investigated Madoff at least eight times in 16 years, but never came close to uncovering the operation, which may have begun in the 1970s.

Why would future bureaucrats, however vast their authority, do better? The choice is not between imperfect market mechanisms and foolproof government regulations. Governments are staffed by individuals who are fooled as easily as anyone else.

I think government and its regulatory agencies have an overall negative effect. Government agencies are more easily manipulated politically because their executive's careers are subject to political interference. Maybe it is coincidence that Madoff was a big contributor to Democratic politicians.

Government crowds out most of the market for private review, giving a false sense of security to average investors. James Hedges above looks to the actions of private institutional investors for clues about the suitability of investments, not to the approval stamps of government.

It was probably government influence on credit rating agencies that led to AAA ratings on risky mortgage bonds, and our current world financial crisis. ( Write the Rating Agencies Out of Our Law )

Madoff’s World: He also cheated his friends
03/00/09 - VanityFair by Mark Seal

The author gets behind Madoff’s affable façade to reveal his most intimate betrayals. Amid the sobs, screams, and curses in Aspen, Palm Beach, and New York, victims shared their stories.

Among Bernard Madoff’s many dupes were his closest friends, including two tycoons he loved as surrogate fathers, the late Norman F. Levy and the prominent philanthropist Carl J. Shapiro. Levy's girlfriend, supermodel Carmen Dell’Orefice lost her life savings.

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