The Madoff case has become like an Agatha Christie thriller, in which the reader’s willingness to accept new surprises is pushed to the limit by ever more extraordinary twists in the narrative.
This story began (for most of us) with Madoff’s confession. Although the crime took years to prepare, we’re introduced to his tale at its finale – the moment the scam came unstuck.
I mentioned Madoff’s scam last week. What a story! Apparently, the former head of the NASDAQ ran a ‘Ponzi Scheme’ – quite a simple con, really – on a spectacular scale, for years on end.
Bernie Madoff Arrives at Court
We’re introduced to Mr Madoff when he calmly surrenders to the cops, admitting he’s pulled off the biggest fraud in history! He is inconvenienced by being confined to his multi-million dollar appartment, but seems cheerful when he shows up at court.
At first, the mass media seemed slow to report the story. But over time they’ve picked up confidence. By today, I notice Fox News, the BBC and other usual culprits chattering happily about Madoff and his victims.
There are reports of suffering in Israeli soup kitchens – distant ripple effects on the poor and needy. Some Jewish charities have been forced to close. But it’s well accepted that for the most part Madoff’s victims were very well off. Some were Jews; others were not.
There’s much debate about whether the incident is leading to more ‘anti-Semitism’. Deborah Lipstadt fears Madoff is A Gift for the Antisemite. Haaretz Newspaper suggests it’s a case of Life imitating anti-Semitism. Israel Shamir replies in combative mood – see A Guide to the Perplexed Antisemite.
As Ms Lipstadt dreaded, David Irving seems to be having a chuckle. He quotes a letter from an American associate (emphases added):
I was speaking with a friend of mine who works for the FBI and was involved in the apprehension of the wonderful Mr Madoff… when they entered Madoff’s lavish lair to apprehend him, one of the senior agents apparently told him “Congratulations. You’ve ruined more Jews than Hitler.”
Yet a devastating loss – at least half the allegedly missing $50 billion – was reportedly taken by banks and other institutional investors.
It’s this category of victim that raised the suspicions of Muhammad Rafeeq, whom I understand is a Jewish (Update: this is probably incorrect – see comments below) convert to Islam with personal experience of the US financial sector.
Writing in the Sunni Forum, he suggests a solution to the Madoff mystery that Agatha Christie would have relished.
Rafeeq’s theory is that the Ponzi Scheme ‘crime’ probably wasn’t a crime at all. Madoff’s confession is bogus. If Mr Rafeeq is right, there was no Ponzi Scheme. The failure of Madoff’s investment fund is ‘just’ a case of a major hedge fund gone bust. Here’s what Mr Rafeeq says:
It is possible to accept the idea of a Ponzi scheme be played on members of the public, who are ignorant of how such schemes are worked, in fact the schemes are targetted specifica lly at such people. Yet Madoff would have us believe that he managed to convince professional investment companies to put their funds with him without any due diligence being performed. This is clearly nonsense.
I have a cted as a professional consultant to major EC and US financial institutions on corporate and institutional credit risk and the idea that anyone in HSBC or Santander could authorise large investment without the internal checks and controls being employed is almost impossible. To try and believe that EVERY institution that invested in Madoff circumvented their internal control procedures IS impossible.
Why is this important? Simple. If someone approaches the HSBC credit risk team, for instance, with a view to making a loan or investing a sum as large as £600m to what is ultimately a single institution (therefore a single counterparty credit exposure) a significant number hoops would have to be jumped through. Firstly there is the credit officer competence limit, which is the maximum amount that a single credit officer may be allowed to authorise. More than his/her limit must be referred up the credit approval food chain. In an institution like HSBC or Santander etc, £600bn or US$1bn will have been referred to the very top of the food chain, the banks’ credit committees at the board level. This is an enormous sum and no lacky is going to be able to approve this by themselves, ever.
When the credit committee are called together to review an application, everything is ready prepared for them, so they can cut to the chase . The lower levels of the credit approval process will have prepared a summary of all the application documentation, included in the meeting bundle, with the strengths, weaknesses, and other important credit risk points. This application will usually contain a set of audited accounts going back a minimum of 3 years and most likely 5 years. There will be a full credit breakdown of the investment profile of the business, Madoff’s hedge fund, looking at how the fund obtains its returns; investment assets and investment methodology. After the committee is satisfied that all the issues and concerns have been addressed they will vote on the approval or otherwise.
So there is no way that Madoff could have been pulling a scam. It would have stood out as clear as day to professional financial analysts, whose only job in life is to examine the management of companies and their reports and accounts, to make sure that all is in order. Its their job, its what they do. They are the world experts in spotting anomalies. The idea that all these professionals in all these companies were all duped is absolute nonsense.
But why? Why would Madoff confess to fraud, when he’d really been running a legit (although ultimately unviable) hedge fund? Is he on a Jesus trip, perhaps? Is Bernie Madoff atoning for the sins of Wall Street?
Rafeeq suggests a more mudane explanation:
So why plead guilty? The answer is simple. Look on the net and you will see that because this case is being labelled a fraud, it would appear that investors are going to be able to claim their investment back under the US government’s financial fraud protection scheme. A judge has already given his approval in principle for compensation, w ithout any evidence having been presented and financial fraud being demonstrated in a court of law. And it would appear that there will never be such a demonstration in a court of law. Why? It would appear that all the funds financial records are mostly “missing” (rather like Dov Zakheim’s US$1.4tn) and those few records that do survive are in a terrible mess.
However, since the guy has pleaded guilty we do not need to demonstrate the fraud, because he says he is guilty.
And look further on the net and you will see that these “victims” have also been told by the US tax authorities that they will probably also be entitled to claim back some taxes on these defrauded sums.
Rather than saying this hedge fund has gone bust, due to its choice of investment assets and investment methologies, a scenario which is highly probable in the current financial paradigm, since all the professionals are predicting that at least 30% of all hedge funds are about to fail, more than 700 of them, the CEO chooses to fess up to fraud. If the CEO admits the fund has gone bust, then all those wealthy members of the Jewish community get nothing, but if the CEO admits to fraud they get their money back as compensation from the US tax payer, just as they are also drawing money back from the tax payers with the other hand.
Over the last few months, so much money has been swishing around in Washington, with bail outs left, right and center, that for outsiders to keep any kind of track is well nigh impossible. What’s more, the Administration is stubbornly withholding crucial information on bail-out recipients.
USA in late 2008 is like a bank, purportedly run by idiots and drunks, that’s said to be going broke. It’s chaos in the chamber! Money seems to be flying everywhere. In the hallways stand crowds of nervous, chattering customers, gossiping about who just lost the most.
Meanwhile, at the back entrance, away from the public gaze, trucks draw up each hour to quitely remove the contents of the main vault.
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Tom Toles nails it perfectly in the Washinton Post:
The Bank President Has Escaped!
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THE BIGGEST LOSERS (according to The Times)
- Fairfield Greenwich Group (investment management firm) $7.5 billion
- Tremont Group (hedge fund) $3.3 billion
- Banco Santander (Spanish bank) $2.87 billion
- Bank Medici (Austrian bank) $2.1 billion
- Ascot Partners (hedge fund founded by J. Ezra Merkin) $1.8 billion
- Access International Advisors (New York investment advisers) $1.4 billion
- Fortis Bank Nederland (Dutch bank) $1.35 billion
- Union Bancaire Privée (Swiss bank) $1 billion
- HSBC (British bank) $1 billion
- RBS (British bank) $599 million
- Natixis (French investment bank) $554 million
- Carl Shapiro (founder of Kay Windsor) $545 million
- BNP Paribas (French bank) $431 million
- BBVA (Spanish bank) $369 million
- Man Group (British hedge fund) $360 million
- Reichmuth & Co (Swiss private bank) $327 million
- Nomura (Japanese broker) $304 million
- Maxam Capital Management (fund of funds based in Connecticut) $280 million
- EIM (European investment firm) $230 million
