Ponzi 2.0; to the next level
Who would have thought that it was still possible in the world of haute finance? A classic Ponzi scheme on Wall Street. All ‘post Enron’ tough regulations, laws and regulatory efforts apparently could not prevent this; a $50 billion investment fraud.
Wall Street legend, former NASDAQ chairman Bernard Madoff shook the financial markets this week. The Madoff funds attracted investors with the promise of high returns and low fees. One of Mr. Madoff’s more prominent funds, the Fairfield Sentry fund, reported having $7.3 billion in assets in October and claimed to have paid more than 11 percent interest each year through its 15-year track record. Competing hedge fund managers have wondered privately for years how Mr. Madoff generated such high returns, in bull markets and bear, given the generally low-yielding investment strategies he described to his clients. “The numbers were too good to be true, for too long,” said Girish Reddy, a managing director at Prisma Partners, an investment firm that invests in hedge funds. “And the supporting infrastructure was weak.” Mr. Reddy said his firm had looked at the Madoff funds but decided against investing in them because their performance was too consistently positive, even in times when the market was incredibly volatile.
The story will one day be stuff for books, but these are the details that were uncovered. Apparently Madoff could no longer meet the demands from clients. Clients wanted $7 billion in withdrawals, which demand could not be met. When executives of his firm asked for an explanation why that was a problem, Madoff admitted that he had been defrauding his clients for years. By the way; these fellow executives were his sons.
This by the way is an interesting side note; his sons were in the company all that time, never knew that this was going on? Could this be a scheme in a scheme to keep the rest of the family out of the prosecutor’s way? Father to take all the blame ? We’ll see..
Madoff estimated the extent of the fraud to a staggering $50 billion. According the recent SEC filings, his firm had $17 under management. The difference could be explained by the Ponzi character; all money that was invested was paid as so called returns to other investors. In a good market with money flowing in, that can go on for a while. With markets going down and clients making withdrawals, the end of the line is near very soon.
Madoff was arrested on Thursday and released on bail. The impact of the fraud has yet fully to be determined. Charity funds have collapsed because they had invested their money with Madoff. Banco Santander lost $3 billion. BNP Paribas, Swiss private banks, and hedge funds lost billions; some of the global financial giants were shaking.
Aside from financial institutions having to explain this bad news to some of their clients and shareholders, the SEC and FINRA are in for some scrutiny as well according to several sources.
Nothing but losers; I can only guess how Madoff must have felt during his Ponzi years.
As always; if it sounds to good to be true, it probably is.
Any projections for Ponzo 3.0 ?
http://news.yahoo.com/s/afp/20081213/ts_alt_afp/usfinancecrimefraudvictims_081213164831
http://www.sec.gov/news/press/2008/2008-293.htm
http://news.yahoo.com/s/ap/20081213/ap_on_bi_ge/madoff_regulatory_failure
http://www.nytimes.com/2008/12/12/business/12scheme.html?em
http://www.nytimes.com/2008/12/13/business/13fraud.html?ref=business
