A friend in money management wrote the following re Madoff. He asked that I keep his name off it:
There have been several red flags along the way that
Madoff's investors have ignored. I want to highlight these signs that
not all was above board, for they reflect a set of practices that
diverge widely from the ones good money managers adhere to:
1. Madoff had custody (physical possession) of his
clientsâ assets. Thus he had complete access and control over his
clientsâ funds.
In a proper relationship, a money manager does not hold any of his clients' investment assets. Instead, these are held by third-party financial institutions. The manager has authority only to "trade" in these assets; not to
withdraw funds from any client's account.
2. All the
investment reports to Madoffâs clients were created by his own firm –
not by a third-party — and that made fraudulent activities easier to
cover up.
In a proper relationship, the financial custodian provides a client with regular
reports — monthly statements, trade confirmations and other formal
documentation — as well as on-line access. You thus have the assurance
of being able to track and monitor the activity in an investment accounts. Madoffâs clients did not have that ability.
3.
Probably the key factor in Madoffâs appeal to investors was his seeming
ability to provide 10%-12 % returns year in and year out. (Allegedly
since 1990 Madoff lost money only in two quarters!)
Many
investment professionals have scratched their heads over this steady
and most unlikely performance, with doubts raised in Barronâs several
years ago. The market value of investments cannot but fluctuate with
market ups and downs. There is an old adage that warns when
something seems too good to be true, it probably isn't.
Perhaps
the most perplexing aspect of this story is how Madoffâs operations
have escaped exposure for so many years despite these warning signs.
Whether this was attributable more to regulatory failure or to the
blind greed of investors, it is hard to know.
people told themselves that the sec had investigated it and therefore it was okay. good enough for the sec , good enough for me.
Phil,
Your friend spins it like the rest of the Mainstream Media is spinning it. Their spin implies that it was somehow the fault of the investors for placing thier assets with Madoff, or Madeoff (with your cash) as I like to refer to him. There is little or no blame placed on this criminal, the entire upper management of his company, and of course, his sons. You don't think serious investigators and prosecutors are going believe that because his sons made the call to turn him in, they knew nothing. Such an obvious ploy!!! Who can honestly believe that one man was able to run such a Ponzi scam and nobody in his company knew about it??
Put these guys away, for a long time. Take ALL of their assets.
PM
let's just say it out loud: the art of the ponzi operator is letting his investors know that he is gonna rip some OTHER investors, but not the ones he is talking to.
You friend has good advice for people looking for a good money manager.
I have some other advice. Many of the best money managers are based far from Wall Street in places like Minnesota, Maryland, Pennsylvania, Washington State and California. Money Managers that are at some distance from Wall Street often have a more skeptical view of the culture in Wall Street, which is infectuous and often leads people to make decisions that might show short term profits but ultimately are not be in the interest of the investor. It also causes investors to get caught up into bubbles, like the recent commodities bubble. For example, let's say your MM bought Diageo, a blue chip English company that makes spirits, at 50 a few years ago, and he sold it at 90 last November (2007). That's a great return.
He might then have tried to get in on the commodities boom, and bought Petrobras with those profits. Petrobras is a good growth stock and has a lot of potential, but in that time it has gone from about 50 to 24, and Petrobras pays no divdend, wheras Diagio pays more than 5 percent. So if the person had just stayed with Diageo all during that time, the stock would have gone down to 57, where it now trades, but the thing pays more than a 6% dividend there, so it would have been much better for your MM to use the Buffett strategy of just holding the thing and waiting for it to go back up, meanwhile collecting the dividend. These kind of gain-losses are also bad for investor confidence, because what they see on paper is that the MM has bought 20 losers during today's panic, rather than the reality, which is that he bought a winner, got some gains, and then invested the money back into something else that lost. Then the investor does something stupid like taking their money out of the fund, and goes searching for another MM. There are also the capital gains taxes to consider as well, when the MM sold the Diageo for a big gain.
My experience with Wall Street MM's is that they like to trade, not to invest, and that is why they end up getting into trouble. If you buy really solid companies for the long term, you will do better.
That said, one thing about Madoff is that he was known as the conservative investor– 10 percent per anum over the past 20 years (before this crisis) was great, but it wasn't what some hedge funds have promised over that time. I don't think Madoff's fund was simply a ponzi scheme– he may have described it that way in desperation, but he knew too much about the markets not to have some exit plan (that is, using an assumption that the markets would have continued on their upward trajectory). He might have simply pretended over two or three year that he lost 20 percent or something. But there are corporate bonds from companies like Altria that pay 10% per year. It is only surprising that he did it year over year, and that it never varied on the upside or the downside.
Two things to me are very troubling: that Madoff's investors clearly knew he was doing something illegal, and that was precisely why they traded with him. You can look at this blog entry by Henry Blodget (an indicted trader himself):
http://clusterstock.alleyinsider.com/2008/12/i-knew-bernie-madoff-was-cheating–thats-why-i-invested-with-him
It seems like what the more savvy investors thought was that he was simply front-running in conjunction with his brokerage. So what they assumed he was doing was this– when he knew a big order was going through his brokerage, he would order that equity for his fund beforehand. This is illegal, but from his investors comments, they seemed to understand that this is what he was doing. So they invested with him precisely because they hoped he was doing something illegal.
I wondered what the story was on clusterstock and henry blodget. He has some regular trolls sniping at him from within his own comments threads, just like here.
I agree with the poster questioning whether much of these funds haven't already been squirreled away and that the big "confession" is but misdirection in order to provide cover for the rest.
~
The investment principle exposed by the quick fall of the subprime mortgage bubble is that the machers assumed the unethical and or illegal transactions would continue.