Madoff: Symbol of the Age of Deregulation

More details have been coming out about the role that giant-scale Ponzi artist Bernie Madoff played in the whole Age of Financial Deregulation (a.k.a. casino capitalism), here in the US.
On Thursday, Madoff was indicted in federal court in New York for having committed securities fraud regarding the $50 billion of other people’s money he lost by running his Ponzi scheme.
Notable among Madoff’s affiliations is that he was a past Chairman of the board of the Nasdaq stock exchange, and treasurer and board member of Yeshiva University in New York. Among the investors whose money he lost were Jewish philanthropic organizations, some of them with strong interests in Israel. (Recently Sheldon Adelson and Sam Zell, who have both been large-scale supporters of Israel’s settler movement, have also lost huge amounts of money. I can’t find out yet whether Madoff supported pro-settler or pro-withdrawal movements in Israel.)
The Seeking Alpha blog had a fascinating post about Madoff yesterday, written by someone described only as “fund manager ‘Cassandra'”.
Cassandra wrote that he (or just possibly she) could never figure out what it was that Madoff had been doing all these years to generate a steady stream of income for his investors. She– yes, thanks to commenter Larry I’ve discovered she is a she— also had never met anyone who had formerly worked as a trader for Madoff, which she found strange.
My understanding is that because Madoff was supposedly executing his own trades, rather than running them through an outside institution, he was able to hide what he was doing– or, as it may turn out, not doing at all– from the scrutiny of everyone except his auditor. And crucially, the auditor used by Bernard L. Madoff Investment Securities LLC was listed as Friehling & Horowitz, who was described in this Bloomberg piece as, “an auditor operating out of a 13-by-18 foot location in an office park in New York City’s northern suburbs.”
The Bloomberg piece noted that investment adviser Jim Vos of Aksia investigated Madoff Securities intensively in 2006 and identified a number of red flags:

    Among the … “red flags” cited by Aksia was the “high degree of secrecy” surrounding the trading of the feeder fund accounts, which provided capital to Madoff Securities, and its use of a trading strategy that appeared “remarkably simple,” yet “could not be nearly replicated by our quant analyst.”
    Friehling & Horowitz operates from a storefront office in the Georgetown Office Plaza in New City, sandwiched between a pediatrician’s office and another medical office…
    A woman who works in a nearby office, who didn’t want to be identified, said Friehling doesn’t come to the office regularly. When he does, he is the only person there…

Not exactly the kind of auditorial capacity one needs, to be able to keep track of $50 billion worth of investments…
Back to Cassandra. She wrote at length about his own, apparently longstanding mystification about the source of Madoff’s presumed ‘success’ as an investor:

    Is he arbing the exchange fee structure? Is he algorithmically scalping cause he’s seeing the order flow before it gets to the exchange? Maybe. Profitably? Who knows? But I didn’t have a problem with an old Jewish guy making markets. This is what we DO. But there are these investment funds – Fairfield Sentry and Kingate, and these are the issue. They are Madoff-only feeders reputed to be $7bn each. Are they funding his market-making? Why does he need so much capital? What the f*ck f*ck f*cking f*ck could he be doing in the equity markets with that much capital and still keep it a secret AND deliver returns? They say they are doing these split strike conversions but I can’t see how the numbers work. Nor can anyone else. The Wall Street Journal raises the red flags in an article, but it’s dismissed as hyperbole disseminated by jealous competitors…
    In 2000, I advised a family-office on their alternative investments and constructed a portfolio on their behalf. I had free rein (thanks! anon). Included in their legacy portfolio was a sizable Madoff position. As a fiduciary – and a conservative one – coming on the heels of LTCM which also lacked transparency and which made it hard for me to raise capital – I dug, asked every well-connected equity-finance, prime-broker, electronic trader and HF allocator type I knew and it still didn’t add up. The best and brightest still had no more insight than I, though the skeptical shared my suspicions. So, I strongly suggested they “dump it”. “One isn’t being compensated sufficiently for not knowing, and something just isn’t right here. Yeah maybe it’s OK, but I think it’s not”. But they liked “it” and they liked “him”. “He’s always paid”, they said. “We’ve been with him a long time”. Old school they were. Trusting. What the f*ck did I know anyway?
    Well it seemed to me that the “split-strike conversions” were profit shifting bookkeeping tools. Money invested in the feeders did obtain split-strike conversion positions on their books that had an implied “yield” equal to their return but it seemed these were pre-arranged combinations that shifted return back to the investment vehicles and were “phantom” positions vs. Madoff securities. In the interim, Madoff presumably has use of the entire pool of capital, to do what he pleased, plus whatever that pool could command in terms of leverage from bank lines and financing sources. It could be in anything and everything. He could be doing mutual fund timing, or mutual fund market impact trades. Credit arbitrage. Funding coup d’etats in Africa. Or buying GSCI commodity swaps. More plausibly, he could be doing option and index-option market impact trades since he was ostensibly at the center of market flow, or he could be at the center of a loan-sharking network across America earning 50%pa, and here he was passing a paltry 9% back to investors. Either he was crooked beyond belief or he was an evil contrapreneurial genius. Who would have have thought he was both??!!
    Some crimes are too perfect. Some facades too well-painted to be original or convincing. A good hustler knows he must lose sometimes in order to win. THAT is the reflection of reality that makes it believable, and gives confidence to the punter who will shortly be taken out. THAT was what was wrong with Bernie Madoff’s Ponzi. The people who were taken – like the Family Office and many other investors who in time will go public on their fleecing – wanted badly to believe they were onto something that was so good that they ignored the most obvious signs of bogusness. It just didn’t make sense. It just didn’t add up. Even Jim Simons earns it. There is no free lunch.
    There is something fitting and just in the timing of this. It is emblematic of America since Reagan and the Great Leveraging. Something for nothing. Thank you Mr Laffer. But as a philosophy and modus operandi it is quite literally, bankrupt and without merit. And Laffer has since been proven to be full of sh*t. Now, Americans will have to confront this, the premise that greed is good and self-guiding and somehow omnisciently beneficial for it has had repercussions down to the core of our society and values. “Sorry everyone….what you’ve been pursuing has all been a lie, a big Ponzi, a rat-hole to nowhere….”. Re-boot.

Well, I almost couldn’t have put it better myself. Except I’d have likely used fewer expletives.
… Earlier today, I was trying to think through how Madoff and his top employees (all or most of whom were, it turns out, his close relatives) got started on his life of crime.
Wow, this would certainly make a great movie.
I’m thinking maybe the guy started out straight… But then at some point maybe he found himself short and he thought, Oh, I’ll just this one time use this new bit of investment to cover my problematic positions in the market and do a bit of creative book-keeping to cover that up… And it worked. So he went on doing it. And he was (obviously) very attentive to his new investors, and potential investors, and their needs… And he had great networking skills… And Ponzi-ing became more than just a habit, it became his SOP, and perhaps the thrill and excitement of deceiving so many people also became more than a little addictive…
And the regulators were nowhere in sight; he was able to keep the financial journalists and other investigators at bay; and his ‘auditor’ had been bought and paid for a long time ago…
And so long as there was plenty of excess money washing around in the New York-based financial system Bernie was just fine.
In a Ponzi scheme, as I understand it, you do generally need to keep on growing in order to cover your commitments.
But the day came there were no new investors. And many of the existing investors needed to liquidate their investment with him to cover positions elsewhere in the troubled markets of 2008… And this time, suddenly, unlike every time in the past, Bernie was unable to give them back their deposits when asked… Enter FBI Special Agent Ted Cacioppi and his sad little account of Madoff’s demise.
Truly an apt story of the Great Age of Financial Deregulation.

13 thoughts on “Madoff: Symbol of the Age of Deregulation

  1. Larry G

    If you’d bothered to follow the link to the original post, you would have seen that Cassandra is a she. Or at least that’s what she says.
    I’m not sure Madoff is such a prime example of deregulation. Many better candidates exist, namely the hedge funds, equity firms, and investment banks that destroyed money legally. As far as I can tell, Madoff was simply a very high-rolling garden-variety fraud, a species that no amount of regulation will ever entirely suppress.

  2. Helena

    Thanks for the gender info, Larry. I’ve amended the post accordingly, w/ atribution.
    “Garden-variety” fraud, though? At those kinds of figures? I’m sure that even a half-way useful regulatory system could have prevented one person from eating $50 billion clean out of the system.

  3. Dorky

    This “deregulatory/free market” mode, since becoming OFFICIAL in 1980 with Reagan, needs to be re-packaged and stored away for another 50-years, as F.D.R did in 1933.
    If we do not control human greed, human greed will control us …

  4. Frank al Irlandi

    I wonder what other entrepreneurial ideas the man spawned in this role.
    On Friday, Madoff resigned from Yeshiva University, where he served as the chairman of the Sy Syms School of Business and treasurer of the board of trustees. Madoff and his wife, Ruth, had also endowed a “Presidential Fellowship” at the university
    http://www.haaretz.com/hasen/spages/1046187.html

  5. johnf

    The deregulated end of the market, rather than “loosening the creative tsunami of capitalism” rather seems to have provided and convenient smoke screen to an immensity of fraud and crime.
    Yet another scamster is revealed today, NY lawyer Marc Drier, presently being charged with scamming $380 million from the rich and the powerful, a sum which is likely to increase considerably since investigations have only just kicked off. Again, hedge funds seem to have been extraordinarily open to scam and will seemingly suffer heavily.
    http://www.nytimes.com/2008/12/14/nyregion/14lawyer.html?_r=1&partner=rss&emc=rss

  6. Frank al Irlandi

    I wonder what other entrepreneurial ideas the man spawned in this role.
    On Friday, Madoff resigned from Yeshiva University, where he served as the chairman of the Sy Syms School of Business and treasurer of the board of trustees. Madoff and his wife, Ruth, had also endowed a “Presidential Fellowship” at the university
    http://www.haaretz.com/hasen/spages/1046187.html

  7. vadim

    Ah, Vadim… He’s been strangely silent these past few days…
    aww you guys miss me? That’s so sweet!
    Although Bernie Madoff and I are old friends through the Vast Zionist Conspiracy, I have no special insights into his business dealings, legitimate or crooked. Unlike ‘Cassandra’ I don’t play the stock market (or the much more “casino-like” housing market at the heart of the whole mess.)
    Still if you feel the stock markets aren’t well-enough regulated, I can only recommend that you not invest in them just like me and countless other people. I can’t understand why handing their operations to any government agency should somehow guarantee their honest operations. Do you honestly suppose the US government is more transparent, scrupulous or responsible than any public company? You’re kidding yourself.
    I also don’t see what Sheldon Adelson or Sam Zell have to do with the Madoff scandal other than being just two other rich Jews whose politics Helena doesn’t like. Haven’t some non-Jews lost money recently?

  8. omop

    Until and unless a listing of individuals and their names is made public under the headings of “winners” [those Bernie was nice to] and “losers” [those Bernie screwed, excuser mon francais] one can only surmise that Bernie was doing the best he could in his line of business one name at a time.
    One has to, not only admire his acumen in the profession is in but his dedication to protecting his two sons whom it is reported have been in the Ponzi business along with their father without even realising it.
    And when they did, according to newsreports they did the only honorable thing they could do. And that is turn their father into the federales asap.
    At the present one can surmise a variety of scenarios including the most obvious one that even Bernie did not know he was involved in a Ponzi scheme and that if truth be known he was just helping out some friends transfer their cash from point A to point B ro evade paying big time taxes. And in the process Bernie ended up with clients demanding “show me my money” and he could not since its all been stashed away in banks in other cash havens,
    Bernie has a chance, if his lawyer can play his cards right by going to trail pronto, get convicted and probably pardoned by the man responsible for putting the USA into a several trillion dollar debt

  9. Larry G

    I said “garden-variety” because it was a Ponzi scheme pure and simple. Only the amount is unusual.
    I suppose my rather testy tone was due to a perceived whiff, whether real or not, of anti-Jewish animus, as exemplified by the reference to Adelson and Zell. What do they have to do with Madoff other than ethnicity? You yourself say that you “can’t find out yet” what Madoff’s politics are.
    I may be paranoid (it comes with the heritage) but I fully expect the unfolding economic disaster to lead to an upswing of anti-Semitism. Already I’ve seen blog comments about the Madoff case along the lines of “I learned long ago never to do business with Jews.” As if being swindled by Christians, Muslims, Buddhists, or atheists was preferable. Ken Lay, anyone? Ahmed Chalabi?
    Regarding Cassandra: I think “her” sex must still be regarded as indeterminate. The photo on the blog is that of the landlady from Kung Fu Hustle, “Cassandra’s” favorite movie–kind of a guy movie, really. Anyway, I liked it too, and I’m a guy.

  10. Frank al Irlandi

    Chaps
    There is one big player who is completely missing from all these recent reports.
    They are commonly known by the gneric name of mafia.
    There was a big financial scandal in 1982 involving the Vatican and an Italian bank called Banco Ambrosiano. It had just about everything including freemasons and italian politicians and priests and archbishops.
    One day a banker who had been involved was found hanging under a bridge in London with bricks in his pockets.
    It was taken as a sign that one had to be careful when dealing with the family money.
    Do you suppose Bernie had any Italian clients?

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