Last fall, investors who had lost money -- lots of it -- in the LuxAlpha Sicav-American Selection fund filed lawsuits against E&Y and UBS in Luxembourg.
The reason they had lost so much money in LuxAlpha was that the geniuses managing same had invested 95% of it with Bernard Madoff. Maybe you've heard of him?
Anyway, investors claimed that they were entitled to be made whole by UBS, which was LuxAlpha's custodian, and/or by Ernst & Young, its auditor. Unfortunately for said investors, a Luxembourg court said in a ruling on March 4 [the only date in the year that is also a command -- "march forth!"] that the investors will have to pursue their claims through the liquidator of the fund, some French-speaking equivalent of Irving Picard. The claims are otherwise "irrecevabilites," a French word that literally translates "inadmissible."
This raises an issue about the nature of translation from one language to another. In Ango-American jurisprudence, of course, "admissibility" is an evidentiary principle. A court that wants to say that it can not "receive" a certain lawsuit will call that lawsuit non-justiciable or speak of the absence of subject matter jurisdiction. So, in a translation of the French-language decision of a Luxembourg court, should "irrecevabilites" be rendered "inadmissible" or something more like "non-justiciable"? And if one opts for the latter, is one in effect smoothing out systemic differences? For example, in translating a Dostoyevsky novel that uses the term "borscht," should one render it "Campbell's soup"?
Anyway: the investors will appeal, but for the moment the defendants have won.
You may ask: what the heck kind of name is LuxAlpha Sicav? That one I can answer.
"Lux" of course refers to the Grand Duchy of Luxembourg, an important center for the domicile and for the administration of hedge funds.
"Alpha" is conventional finance jargon for the difference between a particular actively-managed fund's performance and that of the market. A "positive alpha" means that the investors did better than they would have done had they owned a piece of a passively managed fund that was indexed to, say, the S&P.
"Sicav" is a French-language acronym, from "la société d’investissement à capital variable," an open-ended investment company.
As Governor Duke said to Mac, "I'm glad we've had this little talk."
Showing posts with label Bernard Madoff. Show all posts
Showing posts with label Bernard Madoff. Show all posts
19 March 2010
07 March 2010
Selling America Short
Richard Sauer has written a book, published by Wiley, entitled "Selling America Short: The SEC and Market Contrarians in the Age of Absurdity."
The official publication date is late next month, but if you're impatient, you can read large chunks of it via the amazon webpage.
So: who is Richard Sauer? He is a very prominent securities lawyer, a partner at Vinson & Elkins LLP, who is also an adjunct professor at Georgetown Law. Most pertinent perhaps for the book, he was recently on the SEC staff. He was Assistant Director of the Division of Enforcement in the Securities and Exchange Commission.
So should the title of the book be: Why we didn't catch Madoff? Well, no ... his attention is elsewhere, and on another day I'll discuss his thesis. But for today, I'll content myself with quoting a brief passage relating to Bernie.
"Sad to say, it is not realistic to hope we can greatly improve the effectiveness of our regulatory agencies. Talent runs out of the government lke water through a colander, pulled out by the bigger dollars available, or pushed out by administrative folly. ...The SEC's failure to catch Bernie Madoff until he confessed was not a fluke. So poorly do government agencies understand the entities they regulate, they can sometimes be confounded by even thinly disguised frauds."
The official publication date is late next month, but if you're impatient, you can read large chunks of it via the amazon webpage.
So: who is Richard Sauer? He is a very prominent securities lawyer, a partner at Vinson & Elkins LLP, who is also an adjunct professor at Georgetown Law. Most pertinent perhaps for the book, he was recently on the SEC staff. He was Assistant Director of the Division of Enforcement in the Securities and Exchange Commission.
So should the title of the book be: Why we didn't catch Madoff? Well, no ... his attention is elsewhere, and on another day I'll discuss his thesis. But for today, I'll content myself with quoting a brief passage relating to Bernie.
"Sad to say, it is not realistic to hope we can greatly improve the effectiveness of our regulatory agencies. Talent runs out of the government lke water through a colander, pulled out by the bigger dollars available, or pushed out by administrative folly. ...The SEC's failure to catch Bernie Madoff until he confessed was not a fluke. So poorly do government agencies understand the entities they regulate, they can sometimes be confounded by even thinly disguised frauds."
31 December 2009
Top Financial Stories 2009
I generally ask myself at this time of year what were the biggest stories of the past twelve months, in business/financial news.
By "stories," I don't mean themes, such as "Doubts about efficacy of SEC regulation" or "US/EU relations." I mean stories, such as one might have seen in a particular newspaper on some specific day. Of course, I choose the ones I do largely because they illustrate an important theme. But the theme itself isn't the story.
Further, I don't rank them, as in a top ten list. For the first couple of years that I did this I simply gave one "top" story from each of the twelve months of the year now ending. Last year was so wild, especially in its second half that I couldn't stick to the one-a-month presentation. I ended up with a list of 18 big stories, two per month starting with July.
This year, for the sake of balance I suppose, I have produced another list of 18 stories, twice a month this time for the first six months, then just one a month from July.
All that understood: Here we go! The list is dominated this year by a meta-theme. We might call it: the triumph of experience over hope.
January. (a) The inauguration of a new President of the United States, and Barack Obama's choice of Timothy Geithner to head Treasury. Geithner's presence in the new administration is not a sign of change, but one of continuity. During most of the Bush years, Geithner was the very visible President of the Federal Reserve Bank of New York.
(b) Financial crisis in Iceland brings street protests, shake-up in government there. Iceland, on the one hand, has long been a free market economy, with taxes lower than those of most other OECD countries. On the other hand, it has maintained a Nordic welfare system, including universal health care and post-secondary education. Whatever may be true of Las Vegas: what happens in Iceland, is widely watched elsewhere.
February. (a) Obama signs the stimulus act, a/k/a the American Recovery and Reinvestment Act (ARRA). The full title seems better to convey the almost cartoonish Keynesianism involved: "An act making supplemental appropriations for job preservation and creation, infrastructure investment, energy efficiency and science, assistance to the unemployed, and State and local fiscal stabilization, for the fiscal year ending September 30, 2009, and for other purposes."
(b) Zimbabwe asks African states for $2 billion in aid -- Mugabe vows to continue brilliant policies. I'll simply offer a link here.
March. (a) Bernie Madoff pleads guilty without a plea deal, claims to have acted alone. Of course, he did not act alone, but by taking the fall and keeping mum on confederates, he appears to have earned some necessary prison cred.
(b) UK Financial Services Authority adopts new rules on derivatives. In London as in Washington, complicated and insufficiently regulated derivatives are widely blamed for the crisis of 2008. That diagnosis is jejune, but is to be expected. The particular derivatives that draw fire in the UK are known as "contracts for difference."
April. (a) Dow Chemical finally closes on its Rohm & Haas deal. The idea of this merger was to craete a "leading specialty chemicals and advanced materials company." Its logic would have been more powerful, and the deal would have gone through smoothly, had the timing been a bit better.
(b) Chrysler files for bankruptcy This is the first of three headline events on our list of 18 that may stand in for a single momentous theme -- the frog-marched restructuring of the US automotive industry in general. And we won't bother listing separately that GM too passed through a bankruptcy court proceeding.
May. (a) China-Brazil oil/loan deal The Brazilian oil company Petrobras finalized a deal with the People's Republic of China. Petrobras got a (US)$10 billion loan and PRC got a long-term supply of 'black gold.' This is a straw in a lot of different winds -- the rise of China to global prominence on the back of its huge dollar reserves is one of them.
(b) Obama announces new CAFE/ emissions standards. This is our second auto industry headline of the year. The program is projected to reduce oil consumption over the period from the 2012 to the 2016 model years by approximately 1.8 billion barrels. (As you probably would expect, dear reader, I think such projections warrant skepticism.)
June. (a)US Supreme Court decides Traveler's Indemnity v. Bailey. Asbestos is one of the big "mass tort" issues that have rocked our civil legal system in recent decades. Travelers thought it had a deal that limited its exposure via a settlement trust established by order of the federal district court in Manhattan back in 1986. Unfortunately for them, state law claims and "collateral attacks" made that trickier than they had expected.
(b) Elections to Euro parliament strengthen the center-right parties. For purposes of the italicized statement, anyway, we may understand the term "right" to mean the group of parties or factions that are suspicious about the role of the Parliament they are joining, either on behalf of separate sovereign nationalisms or on behalf of EU-regulated global commercial concerns or both. The "left," which lost this round, consists of those that see a need for a more activist EU.
From here on we are presenting just one headline per month.
July. Cash-for-clunkers program in the US. This is our final US-auto-industry headline. There was always an ambiguity to the plan. Was it designed chiefly to stimulate the auto industry, or to improve fuel efficiency? The goals aren't obviously in harmony. Still, any critique of its efficacy in one respect could be deflected by pointing to the other.
August. Settlement of US/Swiss Dispute over UBS Confidential Client Information. The relationship between Switzerland and the US seems to have grown closer in a number of respects over the last year.
September. Target Corp. declassifies its board Reform has come to the field of corporate governance, though what over-all impact such reforms may end up having it is hard to say.
October. Ireland votes in favor of Lisbon Treaty, effectively secures the new continent-wide government It is difficult to tell where Europe is headed. The Lisbon Treaty would certainly seem to be a step toward closer political integration. But the European Parliamentary elections, as noted above, were won by parties skeptical thereof, and there are a lot of centrifugal forces at work.
November. What is patentable? SCOTUS hears arguments. My own expectation is as follows: (a) the Justices will uphold the court below in its finding that Bilski's 'process' is really an abstract idea and thus not patentable; and (b) they will work harder than the court did below in order to define what is or isn't an abstract idea.
December. Two crucial bills advance through the Houses of the US Congress -- the health care reforms and the financial-regulatory system overhaul.
It seems very likely that something will be enacted into law in both of these areas sometime early next year. But I could be wrong even about that.
By "stories," I don't mean themes, such as "Doubts about efficacy of SEC regulation" or "US/EU relations." I mean stories, such as one might have seen in a particular newspaper on some specific day. Of course, I choose the ones I do largely because they illustrate an important theme. But the theme itself isn't the story.
Further, I don't rank them, as in a top ten list. For the first couple of years that I did this I simply gave one "top" story from each of the twelve months of the year now ending. Last year was so wild, especially in its second half that I couldn't stick to the one-a-month presentation. I ended up with a list of 18 big stories, two per month starting with July.
This year, for the sake of balance I suppose, I have produced another list of 18 stories, twice a month this time for the first six months, then just one a month from July.
All that understood: Here we go! The list is dominated this year by a meta-theme. We might call it: the triumph of experience over hope.
January. (a) The inauguration of a new President of the United States, and Barack Obama's choice of Timothy Geithner to head Treasury. Geithner's presence in the new administration is not a sign of change, but one of continuity. During most of the Bush years, Geithner was the very visible President of the Federal Reserve Bank of New York.
(b) Financial crisis in Iceland brings street protests, shake-up in government there. Iceland, on the one hand, has long been a free market economy, with taxes lower than those of most other OECD countries. On the other hand, it has maintained a Nordic welfare system, including universal health care and post-secondary education. Whatever may be true of Las Vegas: what happens in Iceland, is widely watched elsewhere.
February. (a) Obama signs the stimulus act, a/k/a the American Recovery and Reinvestment Act (ARRA). The full title seems better to convey the almost cartoonish Keynesianism involved: "An act making supplemental appropriations for job preservation and creation, infrastructure investment, energy efficiency and science, assistance to the unemployed, and State and local fiscal stabilization, for the fiscal year ending September 30, 2009, and for other purposes."
(b) Zimbabwe asks African states for $2 billion in aid -- Mugabe vows to continue brilliant policies. I'll simply offer a link here.
March. (a) Bernie Madoff pleads guilty without a plea deal, claims to have acted alone. Of course, he did not act alone, but by taking the fall and keeping mum on confederates, he appears to have earned some necessary prison cred.
(b) UK Financial Services Authority adopts new rules on derivatives. In London as in Washington, complicated and insufficiently regulated derivatives are widely blamed for the crisis of 2008. That diagnosis is jejune, but is to be expected. The particular derivatives that draw fire in the UK are known as "contracts for difference."
April. (a) Dow Chemical finally closes on its Rohm & Haas deal. The idea of this merger was to craete a "leading specialty chemicals and advanced materials company." Its logic would have been more powerful, and the deal would have gone through smoothly, had the timing been a bit better.
(b) Chrysler files for bankruptcy This is the first of three headline events on our list of 18 that may stand in for a single momentous theme -- the frog-marched restructuring of the US automotive industry in general. And we won't bother listing separately that GM too passed through a bankruptcy court proceeding.
May. (a) China-Brazil oil/loan deal The Brazilian oil company Petrobras finalized a deal with the People's Republic of China. Petrobras got a (US)$10 billion loan and PRC got a long-term supply of 'black gold.' This is a straw in a lot of different winds -- the rise of China to global prominence on the back of its huge dollar reserves is one of them.
(b) Obama announces new CAFE/ emissions standards. This is our second auto industry headline of the year. The program is projected to reduce oil consumption over the period from the 2012 to the 2016 model years by approximately 1.8 billion barrels. (As you probably would expect, dear reader, I think such projections warrant skepticism.)
June. (a)US Supreme Court decides Traveler's Indemnity v. Bailey. Asbestos is one of the big "mass tort" issues that have rocked our civil legal system in recent decades. Travelers thought it had a deal that limited its exposure via a settlement trust established by order of the federal district court in Manhattan back in 1986. Unfortunately for them, state law claims and "collateral attacks" made that trickier than they had expected.
(b) Elections to Euro parliament strengthen the center-right parties. For purposes of the italicized statement, anyway, we may understand the term "right" to mean the group of parties or factions that are suspicious about the role of the Parliament they are joining, either on behalf of separate sovereign nationalisms or on behalf of EU-regulated global commercial concerns or both. The "left," which lost this round, consists of those that see a need for a more activist EU.
From here on we are presenting just one headline per month.
July. Cash-for-clunkers program in the US. This is our final US-auto-industry headline. There was always an ambiguity to the plan. Was it designed chiefly to stimulate the auto industry, or to improve fuel efficiency? The goals aren't obviously in harmony. Still, any critique of its efficacy in one respect could be deflected by pointing to the other.
August. Settlement of US/Swiss Dispute over UBS Confidential Client Information. The relationship between Switzerland and the US seems to have grown closer in a number of respects over the last year.
September. Target Corp. declassifies its board Reform has come to the field of corporate governance, though what over-all impact such reforms may end up having it is hard to say.
October. Ireland votes in favor of Lisbon Treaty, effectively secures the new continent-wide government It is difficult to tell where Europe is headed. The Lisbon Treaty would certainly seem to be a step toward closer political integration. But the European Parliamentary elections, as noted above, were won by parties skeptical thereof, and there are a lot of centrifugal forces at work.
November. What is patentable? SCOTUS hears arguments. My own expectation is as follows: (a) the Justices will uphold the court below in its finding that Bilski's 'process' is really an abstract idea and thus not patentable; and (b) they will work harder than the court did below in order to define what is or isn't an abstract idea.
December. Two crucial bills advance through the Houses of the US Congress -- the health care reforms and the financial-regulatory system overhaul.
It seems very likely that something will be enacted into law in both of these areas sometime early next year. But I could be wrong even about that.
10 December 2009
The Anniversary of the Madoff Fiasco
It was one year ago today, Dec. 10, 2008, that the two sons of Bernard Lawrence Madoff informed authorities that their father had just admitted to them that his asset management operation was "one big lie." He would be arrested the following day. That makes this an anniversary worthy of some reflection.
Those two sons, Mark and Andrew, worked in the trading operation, not asset management, thus they just might have been innocent of any criminal involvement themselves, though I'm sure investigations are continuing, the books are not closed on that.
This distinction between the trading and the asset management side is crucial to the Madoff saga. Madoff's trading operation, formally known as a "market maker," launched in 1960, was legitimate. It was controversial in some respects (especially among those of us who consider the practice of payment-for-order-flow inherently dubious) but it was legal. It also may have been integral to the success of his ponzi scheme, formally known as an investment advisor (IA), although not integral in the way that was so often suspected.
Madoff was often suspected of attaining the unusually consistent results of the IA operation by "front-running," i.e. by making illegal use of information he acquired as a market maker. The SEC would periodically investigate Madoff, only to find that he wasn't front running, so he must be clean! The truth of course is that he wasn't front running because he wasn't really trading through the IA wing of his company at all. It was all a sham, and those surprisingly consistent results were simply invented. So the possibility of front-runing was serving perhaps two purposes. First, as noted it was a false scent that kept the regulators busy. But, secondly, it may have helped attract investors. "Pssst, this guy is likely front-running the info from his market maker side. We should get us a piece of that action."
Or ... maybe not. But it is an intriguing idea: that the victims were in part victimized by their own desire to get on the winning side of a con game. That con game wasn't happening. So they ended up on the losing side of another one.
Those two sons, Mark and Andrew, worked in the trading operation, not asset management, thus they just might have been innocent of any criminal involvement themselves, though I'm sure investigations are continuing, the books are not closed on that.
This distinction between the trading and the asset management side is crucial to the Madoff saga. Madoff's trading operation, formally known as a "market maker," launched in 1960, was legitimate. It was controversial in some respects (especially among those of us who consider the practice of payment-for-order-flow inherently dubious) but it was legal. It also may have been integral to the success of his ponzi scheme, formally known as an investment advisor (IA), although not integral in the way that was so often suspected.
Madoff was often suspected of attaining the unusually consistent results of the IA operation by "front-running," i.e. by making illegal use of information he acquired as a market maker. The SEC would periodically investigate Madoff, only to find that he wasn't front running, so he must be clean! The truth of course is that he wasn't front running because he wasn't really trading through the IA wing of his company at all. It was all a sham, and those surprisingly consistent results were simply invented. So the possibility of front-runing was serving perhaps two purposes. First, as noted it was a false scent that kept the regulators busy. But, secondly, it may have helped attract investors. "Pssst, this guy is likely front-running the info from his market maker side. We should get us a piece of that action."
Or ... maybe not. But it is an intriguing idea: that the victims were in part victimized by their own desire to get on the winning side of a con game. That con game wasn't happening. So they ended up on the losing side of another one.
03 October 2009
Split Strike
One gets the impression, from the OIG's report on the SEC's decades-long failure to nab Bernie Madoff, that the SEC staff is full of people who don't have any clue what a split strike strategy is, much less what factors rendered such a strategy a highly implausible explanation of Madoff's claimed results.
Indeed, perhaps some of the staff members thought split-strike conversion was a bowler's term.
Well, Bernie got a 7-10 split in the end, but it was because of the rush to redeem on the part of his investors, which rush in turn produced his anguished confession to his sons. It decidedly was not due to any detective work by the SEC.
Speaking of those sons....The financial-industry gossip site Dealbreaker is on their case. I'll just give you a link to that. It is a lazy link farming type of morning.
Indeed, perhaps some of the staff members thought split-strike conversion was a bowler's term.
Well, Bernie got a 7-10 split in the end, but it was because of the rush to redeem on the part of his investors, which rush in turn produced his anguished confession to his sons. It decidedly was not due to any detective work by the SEC.
Speaking of those sons....The financial-industry gossip site Dealbreaker is on their case. I'll just give you a link to that. It is a lazy link farming type of morning.
05 September 2009
On the SEC, Madoff, etc.
The Inspector General of the Securities and Exchange Commission has this week come out with an elaborate (457 pages) report on the failure of the SEC to uncover what Madoff was up to, especially in the period subsequent to 1992.
Nineteen ninety-two is significant because that was the year the SEC investigated and shut down an investment firm known as Avellino & Bienes, which was actually just a feeder fund for Madoff. A more thorough scrutiny into A&B would have led to Madoff, because what they were (accurately) suspected of doing was just a microcosm of the bigger Madoffian picture.
The IG found that "the SEC had sufficient information to inquire further and investigate Madoff for a ponzi scheme back in 1992. There was evidence of incredibly conistent returns over a significant period of time without any losses, purportedly achieved by Madoff using a basic trading strategy of buying Fortune 500 stocks and hedging against the S&P index."
So why did the SEC not inquire further? I see no real effort at an answer here other than a lament about the "inexperience" of the examination and inspection staff members involved.
On another point, the IG's office says that it could find no reason to believe that the romantic relationship between Bernie Madoff's niece and an SEC official, Eric Swanson, did Bernie any good in the later years of the ongoing scheme. There is a brief biography of Swanson on page 89 of the report -- which, due to introductory materials, constitute page 109 of this pdf.
Swanson, who graduated from law school in 1993, joined the SEC staff three years later. He worked within the Office of Compliance, Inspections, and Examinations (OCIE), in particular in an SRO Group. The OCIE's SRO groups oversee the self-regulatory activities of industry organizations.
After working in the SRO Group for about two years, Swanson was promoted to Branch Chief. Thereafter, his career reads like that of a successful climber of such ladders. He became Senior Counsel, and soon thereafter Assistant Director of the OCIE.
Indeed, there's a bit of high-school-gossipy stuff in the interior of the report, since the OIG tracked down two of Swanson's former girlfriends, who apparently knew about each other but did not know about Shana Madoff, during the period when he was most involved in various Madoff-investigating capacities. Apparently Swanson and Jane Doe were set to be married on Florida in October 2005, before a hurricane scuttled those plans. Then they broke up in November.
I would suspect, giving those facts, that there was something other than a hurricane involved there. Its easy enough for two people who love each other to get married regardless of meteorology. But I'll make no hypotheses.
Nineteen ninety-two is significant because that was the year the SEC investigated and shut down an investment firm known as Avellino & Bienes, which was actually just a feeder fund for Madoff. A more thorough scrutiny into A&B would have led to Madoff, because what they were (accurately) suspected of doing was just a microcosm of the bigger Madoffian picture.
The IG found that "the SEC had sufficient information to inquire further and investigate Madoff for a ponzi scheme back in 1992. There was evidence of incredibly conistent returns over a significant period of time without any losses, purportedly achieved by Madoff using a basic trading strategy of buying Fortune 500 stocks and hedging against the S&P index."
So why did the SEC not inquire further? I see no real effort at an answer here other than a lament about the "inexperience" of the examination and inspection staff members involved.
On another point, the IG's office says that it could find no reason to believe that the romantic relationship between Bernie Madoff's niece and an SEC official, Eric Swanson, did Bernie any good in the later years of the ongoing scheme. There is a brief biography of Swanson on page 89 of the report -- which, due to introductory materials, constitute page 109 of this pdf.
Swanson, who graduated from law school in 1993, joined the SEC staff three years later. He worked within the Office of Compliance, Inspections, and Examinations (OCIE), in particular in an SRO Group. The OCIE's SRO groups oversee the self-regulatory activities of industry organizations.
After working in the SRO Group for about two years, Swanson was promoted to Branch Chief. Thereafter, his career reads like that of a successful climber of such ladders. He became Senior Counsel, and soon thereafter Assistant Director of the OCIE.
Indeed, there's a bit of high-school-gossipy stuff in the interior of the report, since the OIG tracked down two of Swanson's former girlfriends, who apparently knew about each other but did not know about Shana Madoff, during the period when he was most involved in various Madoff-investigating capacities. Apparently Swanson and Jane Doe were set to be married on Florida in October 2005, before a hurricane scuttled those plans. Then they broke up in November.
I would suspect, giving those facts, that there was something other than a hurricane involved there. Its easy enough for two people who love each other to get married regardless of meteorology. But I'll make no hypotheses.
05 June 2009
14 May 2009
A Madoff trading slip
Allow me to indulge my continuing Madoff fascination briefly.
His investors/customers/suckers would periodically receive trading slips, confirming a transaction that was supposed to have occurred two to five days before. They looked like the example above. Five days happens to be the spread between the trading date and the settlement date here.
I have to say that had I been an investor, I would have regarded such paperwork as reassuring. It looks official and proper. But then, I was probably the sucker born in that particular minute.
One oddity about the Madoff situation as late as 2007 was that there was no electronic access. Had Madoff been marketing his services as an investment manager to a young tech-savvy crowd, they would have wanted a website to which they could log in to see their results, or e-mailed updates. But his investors were content to receive old-fashioned dead-tree statements like this through the US postal service.
He was sending out a heck of a lot of these things on a regular basis for a long time. Peter Sander, in his recent book on the case, estimates that there were 184 direct victims, i.e. direct accounts receiving slips like this. That number may be a little high -- Sander's compilation might have resulted in some double counting, and only 125 of his names have dollar numbers attached to them.
Still, let's assume the number was 125. That's a lot of juggling. That means he was keeping 125 different balls in the air, so to speak. And he was doing it all himself? No confederates?
Just some random meditations for this morning. Madoff threw a heckof a boulder into the financial waters at a time when they were already roiled, and the good-sized ripples continue their outward spread.
21 February 2009
Madoff wasn't doing ANY trading??
This news comes as a surprise to me, because I thought I had the Madoff situation more-or-less figured out.
I suppose the Socratic virtue, knowledge of my own ignorance, is a product of advancing age.
I thought I had Madoff figured out because I was thinking of him as a ponzi scammer in the line of other recent ponzi scammers, such as the perpetrators of the Bayou funds fraud.
The Bayou funds started out as legitimate investment vehicles. They even started out with a legitimate auditor. But the trading didn't go well, and the managers succumbed to the temptation to pretend they were in fact making money in defiance of the facts. So they started cooking he books, fired their real-world auditor, hired a "new" auditor whom they invented, and the operation evolved by stages into a ponzi scam. But even at the end there was some actual investment going on.
I've covered that and similar episodes in my work as a reporter, and I mentally categorized the Madoff news when it broke in December under the same heading. Bad trader, unwilling to face reality, turned to book-cooker.
That isn't what happened. Or, to be strict about it, if that transition DID take place at some point n Madoff's career, it took place a looong time ago.
Bankruptcy trustee Irving Picard hosted a meeting of the creditors yesterday and gave them the bad, stunning, news. Not only was Madoff making it all up, he had been making it all up since 1994 or thereabouts. He was not only a fraud on a really large scale, which we knew already, he was a fraud through-and-through.
I suppose the Socratic virtue, knowledge of my own ignorance, is a product of advancing age.
I thought I had Madoff figured out because I was thinking of him as a ponzi scammer in the line of other recent ponzi scammers, such as the perpetrators of the Bayou funds fraud.
The Bayou funds started out as legitimate investment vehicles. They even started out with a legitimate auditor. But the trading didn't go well, and the managers succumbed to the temptation to pretend they were in fact making money in defiance of the facts. So they started cooking he books, fired their real-world auditor, hired a "new" auditor whom they invented, and the operation evolved by stages into a ponzi scam. But even at the end there was some actual investment going on.
I've covered that and similar episodes in my work as a reporter, and I mentally categorized the Madoff news when it broke in December under the same heading. Bad trader, unwilling to face reality, turned to book-cooker.
That isn't what happened. Or, to be strict about it, if that transition DID take place at some point n Madoff's career, it took place a looong time ago.
Bankruptcy trustee Irving Picard hosted a meeting of the creditors yesterday and gave them the bad, stunning, news. Not only was Madoff making it all up, he had been making it all up since 1994 or thereabouts. He was not only a fraud on a really large scale, which we knew already, he was a fraud through-and-through.
22 January 2009
Walking in downtown Manhattan
I went into Manhattan yesterday on business.
Specifically, I attended an open house that an accounting firm held for discussion of some of the issues created by Bernard Madoff's giant ponzi scheme and its legal/accounting aftermath.
I walked to the Essex House, where the meeting was held, from Grand Central Station. It was very cold, and I could have gotten a cab, but I felt both cheap and adventurous. Had I been cheap but not so adventurous, after all, I could have taken the subway.
I started walking, said "brrrr" under my breath a few times, looked around at the cabs whizzing by, but didn't hail any. I have a stubborn streak and I had started walking so I was going to finish the walk AS a walk, by god!
Anyway I got there. The meeting was actually more interesting than I had expected it might be. Unfortunately, I don't yet have a set of business cards that identify me in connection with my present employer. This is a severe hindrance at such events. The ritual exchange-of-cards is a necessity if one is going to introduce one's self.
On the way home after the meeting it was dark as well as cold. And I was still feeling cheap, though no longer so adventurous. So I took the subway.
Specifically, I attended an open house that an accounting firm held for discussion of some of the issues created by Bernard Madoff's giant ponzi scheme and its legal/accounting aftermath.
I walked to the Essex House, where the meeting was held, from Grand Central Station. It was very cold, and I could have gotten a cab, but I felt both cheap and adventurous. Had I been cheap but not so adventurous, after all, I could have taken the subway.
I started walking, said "brrrr" under my breath a few times, looked around at the cabs whizzing by, but didn't hail any. I have a stubborn streak and I had started walking so I was going to finish the walk AS a walk, by god!
Anyway I got there. The meeting was actually more interesting than I had expected it might be. Unfortunately, I don't yet have a set of business cards that identify me in connection with my present employer. This is a severe hindrance at such events. The ritual exchange-of-cards is a necessity if one is going to introduce one's self.
On the way home after the meeting it was dark as well as cold. And I was still feeling cheap, though no longer so adventurous. So I took the subway.
31 December 2008
Top Financial Stories 2008
I generally ask myself at this time of year what were the biggest stories of the past twelve months, in business/financial news.
By "stories," I don't mean themes, such as "Bear market in bank stocks" or "volatile crude oil prices." I mean stories, such as one might have seen in a particular newspaper on some specific day.
Of course, I choose the ones I do largely because they illustrate an important theme. But the theme itself isn't the story.
Further, I don't rank them, as in a top ten list. Usually, on this blog last year at this time and at my blog-city home for two years before that, I've simply given one "top" story from each of the twelve months of the year now ending.
This year has been so wild, though, especially its second half, that I haven't been able to stick to the one-a-month presentation. I've ended up with a list of 18 big stories, two per month starting with July.
All that understood, here we go!
January. Frenchman Jerome Kerviel loses 4.9 billion euros for Societe Generale. $7 billion. The story started off the year with a bang. Kerviel leap-frogged past Nick Leeson as the all-time most rogue-ish "rogue trader."
February. A jury in Hartford, Conn. convicts a former AIG exec of skullduggery.
The executive in question was Christian Milton, once AIG's vice-president for re-insurance. He was convicted of an effort to inflate AIG's loss reserve numbers.
March. The Federal Reserve backs a JPMorgan takeover of Bear Stearns. At one point, [i.e. the morning of March 17] the price was actually $2 a share for Bear's stock, although less than a week prior -- at the close of trading Monday afternoon, March 10, the market valuation had been $70.08 a share. It was hard not to think JP Morgan was making off with ill-gotten gains somnehow. In fact, the purchase price didn't stay down at $2. To resolve some problem in the documentation, it was eventually raised to $10. Bully. Still, the value-evaporation was breaktaking.
April. Food price increases cause riots, political crises, worldwide.
There would be a lot to discuss under this heading, were that my goal in this entry. Instead, I'll just ask about the use of foodstuffs as a surrogate for gasoline: what impact did that have in triggering the price increases or the result?
May. Yahoo successful in warding off acquisition attempt by MS.
A victory for Jerry Yang, the founder of Yahoo!, who remains its guiding spirit and has preserved its independence.
June. Voters in Ireland reject the Lisbon treaty, thus slowing Euro unity..
The world continues to wrestle with the whole idea of "sovereignty," in terms of nation-states or of broader or smaller units.
Hereafter we award two biggest-story prizes per month.
July. (a) Israel, of Bayou and Bear Mountain infamy, turns himself in.
The whole Bayou funds meltdown had more than a touch of the bizaare to it. Israel's effort to simulate a suicide on the Bear Mountain Bridge, the failure of authorities to discover a body in the Hudson, and his re-appearance and surrender just added the garnish to that meal of oddities.
(b) Crude oil prices peak near $150 barrel, head down.
Why did it get that high? Why has each barrel lost close to three quarters of that value in the months since? Which one is the anamoly, prices above $140 or around $40? which one will be the norm going forward? Reviewing this year just leaves me full of questions.
August. (a) Second circuit court hears arguments in CSX/TCI dispute.
This is fascinating litigation about proxy votes and the working of the equity swaps market. These aren't issues that will go away anytime soon.
(b) CME, Nymex agree to consolidation -- part of the much broader trend of the consolidation of exchanges worldwide.
September. (a) Bankruptcy of Lehman Brothers, all heck breaks loose re: bank stocks or, for that mnatter, US equities generally.
(b) SEC emergency order bans any short selling of bank stocks .
These two points rather adequately explain themselves. I'll only add that the ban later expired unlamented. Various restrictions of short-selling remain, but a simple ban on it is akin to a ban on pessimism. It is idiotic.
October. (a) Bush and 'leadership' put a TARP over troubles.
The acronym "TARP" stood for the "Troubled Assets Relief Plan," the keystone of the Emergency Economic Stabilization Act of 2008, which became law on OPctober 3, after a turtuous legislative process that re-defined the Presidential campaign to Senator McCain's disadvantage. That isn't all it has redefined.
(b) Waxman hearings excoriate the credit rating agencies I'll just leave a link to my contemporaneous explanation of this hearing and its bovine idiom.
November. (a) Geithner an early cabinet choice of President Elect.
The Republicans during the campaign had sought to tag Sen. Obama a "socialist" (while a President and Treasury Secy of their party were nationalizing industries -- how odd!) Anyway, the Prez-elect's choice of Timothy Geithner as his own Treasuiry Secretary should have re-assured anyone who needed re-assurance on this front.
(b) Paulson completes the bait-and-switch with the TARP.
The outgoing Treasury boss has advertised the TARP as a fund for purchasing troubled assets. Hence, the name. Those purchases were meant to stabilize, without taking over, the banking system. But by one month out, Paulson was acknowledging that the real use of the money would be to make "equity infusions." In other words, takeovers.
December. (a) Bernard Madoff is arrested Dec. 11, one day after his sons had apparently revealed his pyramid scheme to the authorities.
You can't really call Madoff a "rogue trader" in the manner of Kerviel, the rogue with whom the year began. A rogue is a trader who gets a firm in trouble by going behind the back of his bosses there. Madoff was the guy with his name on the door. Call him a "rogue principal" if you like. Still, his fall gives a nice sense of symmetry to the year.
(b) Dec. 16, Federal Reserve lowers federal funds rate to a range between 0% and 0.25%, record territory. Three days later, the Bank of Japan followed suit, lowering its benchmark rate to 0.10%.
Wow. Funds rates are dropping like crude oil prices.
Whew. I'm sooo happy this year is over.
By "stories," I don't mean themes, such as "Bear market in bank stocks" or "volatile crude oil prices." I mean stories, such as one might have seen in a particular newspaper on some specific day.
Of course, I choose the ones I do largely because they illustrate an important theme. But the theme itself isn't the story.
Further, I don't rank them, as in a top ten list. Usually, on this blog last year at this time and at my blog-city home for two years before that, I've simply given one "top" story from each of the twelve months of the year now ending.
This year has been so wild, though, especially its second half, that I haven't been able to stick to the one-a-month presentation. I've ended up with a list of 18 big stories, two per month starting with July.
All that understood, here we go!
January. Frenchman Jerome Kerviel loses 4.9 billion euros for Societe Generale. $7 billion. The story started off the year with a bang. Kerviel leap-frogged past Nick Leeson as the all-time most rogue-ish "rogue trader."
February. A jury in Hartford, Conn. convicts a former AIG exec of skullduggery.
The executive in question was Christian Milton, once AIG's vice-president for re-insurance. He was convicted of an effort to inflate AIG's loss reserve numbers.
March. The Federal Reserve backs a JPMorgan takeover of Bear Stearns. At one point, [i.e. the morning of March 17] the price was actually $2 a share for Bear's stock, although less than a week prior -- at the close of trading Monday afternoon, March 10, the market valuation had been $70.08 a share. It was hard not to think JP Morgan was making off with ill-gotten gains somnehow. In fact, the purchase price didn't stay down at $2. To resolve some problem in the documentation, it was eventually raised to $10. Bully. Still, the value-evaporation was breaktaking.
April. Food price increases cause riots, political crises, worldwide.
There would be a lot to discuss under this heading, were that my goal in this entry. Instead, I'll just ask about the use of foodstuffs as a surrogate for gasoline: what impact did that have in triggering the price increases or the result?
May. Yahoo successful in warding off acquisition attempt by MS.
A victory for Jerry Yang, the founder of Yahoo!, who remains its guiding spirit and has preserved its independence.
June. Voters in Ireland reject the Lisbon treaty, thus slowing Euro unity..
The world continues to wrestle with the whole idea of "sovereignty," in terms of nation-states or of broader or smaller units.
Hereafter we award two biggest-story prizes per month.
July. (a) Israel, of Bayou and Bear Mountain infamy, turns himself in.
The whole Bayou funds meltdown had more than a touch of the bizaare to it. Israel's effort to simulate a suicide on the Bear Mountain Bridge, the failure of authorities to discover a body in the Hudson, and his re-appearance and surrender just added the garnish to that meal of oddities.
(b) Crude oil prices peak near $150 barrel, head down.
Why did it get that high? Why has each barrel lost close to three quarters of that value in the months since? Which one is the anamoly, prices above $140 or around $40? which one will be the norm going forward? Reviewing this year just leaves me full of questions.
August. (a) Second circuit court hears arguments in CSX/TCI dispute.
This is fascinating litigation about proxy votes and the working of the equity swaps market. These aren't issues that will go away anytime soon.
(b) CME, Nymex agree to consolidation -- part of the much broader trend of the consolidation of exchanges worldwide.
September. (a) Bankruptcy of Lehman Brothers, all heck breaks loose re: bank stocks or, for that mnatter, US equities generally.
(b) SEC emergency order bans any short selling of bank stocks .
These two points rather adequately explain themselves. I'll only add that the ban later expired unlamented. Various restrictions of short-selling remain, but a simple ban on it is akin to a ban on pessimism. It is idiotic.
October. (a) Bush and 'leadership' put a TARP over troubles.
The acronym "TARP" stood for the "Troubled Assets Relief Plan," the keystone of the Emergency Economic Stabilization Act of 2008, which became law on OPctober 3, after a turtuous legislative process that re-defined the Presidential campaign to Senator McCain's disadvantage. That isn't all it has redefined.
(b) Waxman hearings excoriate the credit rating agencies I'll just leave a link to my contemporaneous explanation of this hearing and its bovine idiom.
November. (a) Geithner an early cabinet choice of President Elect.
The Republicans during the campaign had sought to tag Sen. Obama a "socialist" (while a President and Treasury Secy of their party were nationalizing industries -- how odd!) Anyway, the Prez-elect's choice of Timothy Geithner as his own Treasuiry Secretary should have re-assured anyone who needed re-assurance on this front.
(b) Paulson completes the bait-and-switch with the TARP.
The outgoing Treasury boss has advertised the TARP as a fund for purchasing troubled assets. Hence, the name. Those purchases were meant to stabilize, without taking over, the banking system. But by one month out, Paulson was acknowledging that the real use of the money would be to make "equity infusions." In other words, takeovers.
December. (a) Bernard Madoff is arrested Dec. 11, one day after his sons had apparently revealed his pyramid scheme to the authorities.
You can't really call Madoff a "rogue trader" in the manner of Kerviel, the rogue with whom the year began. A rogue is a trader who gets a firm in trouble by going behind the back of his bosses there. Madoff was the guy with his name on the door. Call him a "rogue principal" if you like. Still, his fall gives a nice sense of symmetry to the year.
(b) Dec. 16, Federal Reserve lowers federal funds rate to a range between 0% and 0.25%, record territory. Three days later, the Bank of Japan followed suit, lowering its benchmark rate to 0.10%.
Wow. Funds rates are dropping like crude oil prices.
Whew. I'm sooo happy this year is over.
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