Who is the next billion-dollar fraudster?
Posted on 14 December 2008 with no comments from readers
It is a feature of financial crashes that fraudsters and embezzlers emerge. As Warren Buffett put it: ‘When the tide goes out you see who has been swimming naked’.
Before that it can be hellishly difficult spotting them. Who would have though 70 year old, ex-Nasdaq excutive and highly respected Wall Street trader, Bernard Madoff was masterminding a $50 billion Ponzi scheme as he admitted last week.
Ponzi returns
Madoff says he is guilty of orchestrating a multi-year fraud that produced generous returns for sophisticated investors.
As BreakingViews.com explained: ‘The technique was the usual Ponzi scheme. Old investors were paid off by the new funds lured into to Madoff’s art-laden New York headquarters.’
This probably makes Madoff the biggest fraudster in history and knocks the Asian Financial Crisis’s Nick Leeson into the margins.
The historian and economist JK Galbraith has noted that throughout history speculative periods have allowed dishonest people to prosper, and the better the times the worse the outcome in terms of fraud and embezzlement.
Who is next?
You have to wonder if this will be the last such case. Hedge funds with their huge borrowings and opaque financial techniques have provided a legion of opportunities for malpractice.
The problem is also that frauds act as a downward pressure on legitimate investment activity. Presently US investors are buying zero-coupon t-bonds because they trust the US Government and not the banks that pay interest.
Confidence is pretty shot to pieces which is why I wonder if the current stock market rally has much life in it, and whether we will not see new lows in the first half of next year, as well as more cases like Madoff.
What will it take to make investors stop sitting on their cash? Inflation perhaps, but then deflation is the more immediate prospect, and inflation might send them into gold and not stocks.
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The London Times: Tim Reid in Washington
Some of America’s wealthiest socialites were facing ruin last night after the arrest of a Wall Street big hitter accused of the largest investor swindle perpetrated by one man.
Shock and panic spread through the country clubs of Palm Beach and Long Island after Bernard Madoff, a trading powerbroker for more than four decades, allegedly confessed to a fraud that will cost his wealthy investors at least $50 billion – perhaps the largest swindle in Wall Street history.
Mr Madoff, 70, a former Nasdaq stock chairman, was apparently turned in by his two sons and arrested on Thursday morning at his Manhattan apartment by the FBI. Andrew Calamari, a senior enforcement official at the US Securities and Exchange Commission, described the scheme as “a stunning fraud that appears to be of epic proportions”.
The FBI’s criminal complaint states that when two federal agents arrived at Mr Madoff’s apartment, he told them: “There is no innocent explanation.” The agents say that he told them “he paid investors with money that wasn’t there”, that he was “broke” and that he expected to go to jail.
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Madoff’s high-profile ‘victims’
Many of his investors came from the enormously wealthy enclaves of Palm Beach, Florida and Long Island, New York, where people had invested billions in Mr Madoff’s firm for decades. He was a fixture on the Palm Beach social scene, and was a member of some of its most exclusive clubs, including the Palm Beach Country Club and Boca Rio Golf Club, where he drummed up much of his business.
The FBI claims that three senior employees of Mr Madoff’s investment firm turned up at his apartment on Wednesday to ask questions about the company’s solvency. Two of them are believed to be his sons, Andrew and Mark, who have worked for their father for two decades.
Mr Madoff told them that he was “finished”, that he had “absolutely nothing”, and that “it’s all just one big lie”. He said the investment arm of his firm was “basically a giant Ponzi scheme”, and that it had been insolvent for years.
A Ponzi scheme, named after the swindler Charles Ponzi, is a fraudulent investment operation that pays abnormally high returns to investors out of money put into the scheme by subsequent investors, rather than from real profits generated by share trading.
The FBI complaint states that Mr Madoff told his sons that he believed the losses from his scheme could exceed $50 billion. If that is the case, his fraud would be far greater than past Ponzi schemes and easily the greatest swindle blamed on a single individual.
There has been scepticism for years on Wall Street over how Mr Madoff managed to pay such consistently high returns. Ponzi schemes inevitably collapse, and Mr Madoff found himself to be no exception. This month, clients asked for $7 billion to be returned, the FBI says.
Mr Madoff ran the scheme separately from his main business and his sons had no involvement in it.
Mr Madoff has been charged with a single count of securities fraud. He declined to enter a plea in Manhattan’s US District Court and was released on $10 million bail. He faces up to 20 years in jail and a $5 million fine if convicted. His lawyer, Dan Horwitz, said that his client was “a person of integrity. He intends to fight to get through this unfortunate event.”
One investor told The Wall Street Journal: “This is going to kill so many people. It’s absolutely awful.” Ira Roth, from New Jersey, said that his family had $1 million invested, and that he was in a state of panic.
According to a report in the Wall Street Journal, Madoff told clients, agents and others that his was an exclusive fund, by ‘invitation only’ because he did not want it to be known that he was ‘running money’ when he was known on Wall Street as a ‘market maker’. Therefore, anyone who ‘invested’ in his operation knew that there was a secretive, possibly illicit, element to it. Secrecy is the fraudsters friend; greed is their targets’ downfall. Twas ever thus. The likes of Bramdean of London who will now bleat that they were cheated are cheaters themselves because their managers like Ms Horlick sought easy money, not enough questions asked. I have no sympathy for any of them.
Peter, I think you are right to quote Galbraith, and Buffet. Fraud exposed is the next, bigger chapter of this oncoming tsunami of debt deflation. The Chinese believe that wealth rarely survives 3 generations because inheritors become complacent, and envious people target them. Just like Madoff. Madoff with how much?! Madoff with fools’ money.
Twas ever thus. To cite an oft quoted Wall Street aphorism, “Pigs get slaughtered.”
Want to know what is next? How about the naked short selling fraud? There is reportedly at least one counterfeit share for every legitimate one. Only the broker-dealers and banks could get away with this not to mention the complicit Depository Trust & Clearing Corporation (DTCC) covering the trail.
When it becomes unraveled, the whole Wall Street under culture will be brought to light and people will stop trusting the market makers and the regulatory overseers. What then? I dread to think of the repercussions.
What next? Good question, Dan. How about this: money will run to gold, and silver for protection from fraudsters including governments; people will run to the streets to protest, violently, against fraudsters including governments. Governments like the one in the UK where self-appointed messiah Gordon Brown is busy piling up debt which the country cannot afford to repay without hyperinflation, major devaluation, and the assistance of the IMF, probably.
I am glad to Dubai audience gave Lord Falconer a good talking to, according to Peter’s report. The arrogance of sycophantic incompetents like him is startling. I hope that the oil producing nations value their ‘black gold’ realistically, and leave flimsy finance to the nitwits of the North; let them bail themselves out. That’s capitalism.
What is this obsession with what we are in is called? Does it matter when you pay your bills? When the government is planning on and has already bailed out those who are not only operating a business by making bad decisions but they are doing things that are against the law. When Maddoff has been stealing for over a decade tally is currently at over 50 Billion, when Dreier has been involved in identity theft and stealing and his firm can file for bankruptcy, when Bank of America who has the top two ranking for identity theft is given bailout money? The bailout money is not free, it is paid for by you and I. The tax payers of this country need to stop this now. We should say no more. What are your thoughts?
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