$50 Billion Ponzi Scheme Busted
Famous broker Bernard Madoff was arrested yesterday for running what was really a $50 billion pyramid scheme. Slate's The Big Money has insight on how investors can spot an operator like Madoff:
Basically, the problem is investors look for funds that deliver consistent returns. Madoff did that, to nearly-statistically impossible degree. Every year, his funds gave returns of 10-11%. Every month, gains were between 0 and 2 percent. The Big Money writes:
A fund that returns the exact same amount every month is perfectly serially correlated. Madoff's returns were strikingly consistent month after month, year in and year out. That kind of performance—a nice, smooth line going up no matter what the market does—is a really good sign that you should look more closely.What Lo shows from the pattern of historical returns in hedge-fund databases is that when funds' returns grow too consistent, it is a sign that the investments are either very hard to value accurately and the returns are just guesses, or, worse, that they've been manipulated in a way that smoothes them artificially. What Lo creates is a mathematical model for judging what "looks too good to be true."
A high degree of "serial correlation" doesn't prove that a fund is being artificially massaged, but it sure is a warning sign.
Bonus fun fact: With at least $50 billion gone, Madoff's scheme could be the largest investor swindle in history.
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"Bonus fun fact: With at least $50 billion gone, Madoof's scheme could be the largest investor swindle in history."
When do you think the AIG bailout will catch up?
Can we make him return the money? $50 billion would go a long way towards helping fix the economy. Heck, we could give it directly to the Detroit.
For $50B, I think the lexicon should change and it should be a "Madoff Scheme" from now on.
There probably is no $50 billion sitting around. It was no doubt paid out to previous investors to keep the Ponzi scheme going.
I'm concerned this might cause a run on hedge funds. Just what we need now...
Yup, businesses self-regulating? Just the ticket!
Bonus fun fact: With at least $50 billion gone, Madoof's scheme could be the largest investor swindle in history.
I spy a typo, what do I win?
jk, I love you Consumerist.
Don't hedge funds have auditors?
@nytmare: Apparently it was a tiny firm in Rockland County, NY, which, yes, is odd for a hedge fund of this size. source: [www.businessweek.com]
@B: Let's say screw D-Town since they like to floss on corporate jets, and donate it to the homeless and hungry. That could possibly eradicate hunger in America...
Surprised about this ? You shouldn't be.
It wasn't all that long ago that hedge funds were just for the really wealthy. For most of these high rollers,it was "play money" of a sort. Money that they could afford to lose if things went boom and they would be chagrined,but not ruined. Of course, high returns (reported returns,anyway) lured more investors of more modest means while attracting a metric ton of second and third rate managers (as well as outright frauds) because the money is just too damn good to pass up.
If you are not aware of it,the fee structure of most hedge funds is downright confiscatory. Typically,the managers get a slice of the total pie every year,expenses (which can be directed to back scratching confederates at other firms) as well as a huge vigorish of any returns ( 20 % off the top is not uncommon).A dollar has to work frightfully hard to return itself in one of these funds.They work best , and attract the dumb money,when EVERYTHING is going up,up,up.The managers use borrowed money to juice their returns so that while the market as a whole may be up 25%,they are up 35-40 % easy. Makes them look like geniuses.
When the market crashes (like now) these funds are exposed for what they really are-unregulated gamblers playing the casinos with other peoples money,while promising to hand over PART of what they win.While charging a fee to play.
I have no sympathy for these people that are getting cooked by this.They could have invested in perfectly reputable firms (Vanguard,T. Rowe Price ,ETF's etc) and paid next to nothing for professional management of their money.This year Bulls made money,Bears really made money,but these pigs are headed for the smokehouse...
@Snarkysnake: I remember when hedge funds were actually hedges, like a short fund of a certain make-up that helped one offset a long position. Somehow the whole meaning of "hedge" got lost.
Gee, maybe the govt can bail this guy out!
@Snarkysnake: I agree. I'm not going to shed a tear over some hedge fund assholes biting the dust. I was hoping that if we were going to have a recession of this magnitude that it would take a few of those scumbags out.
I'm not saying he was right for what he did, but you have to be pretty smart to pull something this big off, and for so long too.
@Trai_Dep:
Actually it might be a good thing for the long-term. I agree it would suck short-term, but, the benefits might outweigh the negatives.
Should this cause people to view business and government with a heavily jaundiced eye (viewing them as a little untrustworthy) it probably would be a good thing. Too many Republicans screaming that "business is the only way" for too many years and this was overdue. Then again I don't want government to garner too much either, to keep the Democratic party from crowing too much.
The line we must walk to prevent egregious behaviour is thin and easy to stray from.
I wonder if the people whose fortunes were wiped out, and are now flat broke would find that fact very "fun"?
Here are some new casino bets, ur, investments that you can do in your discount brokerage account just like your local ripoff hedge fund:
Here's a quick list of some new ETFs hitting the markets:
* ProShares Ultra DJ-AIG Commodity (UCD)
* ProShares Ultra Short DJ-AIG Commodity (CMD)
* ProShares Ultra DJ-AIG Crude Oil (USO)
* ProShares Ultra Short DJ-AIG Crude Oil (SCO)
* ProShares Ultra Euro (ULE)
* ProShares UltraShort Euro (EUO)
* ProShares Ultra Yen (YCL)
* ProShares UltraShort Yen (YCS)
* ProShares Ultra Gold (UGL)
* ProShares UltraShort Gold (GLL)
* Proshares Ultra Silver (AGQ)
* Proshares UltraShort Silver (ZSL)
@Ninja007: Why? Did Madoff's investors all have decals with his name plastered across the back windows of their Bentleys?
ponzi ≠pyramid.
RTFA if you're linking it.
@Inglix_the_Mad: Well, honestly, the republicans may have a point. Business is probably the best way out of this mess...or any mess really. The problem isn't the businesses that produce things and the businesses that sell things (they are what we need) it's the "businesses" that sell businesses. they haven't been regulated nearly well enough and it's been allowed to get far too complicated for anyone to understand.
Crackle is correct.
A Ponzi scheme allows the operator to pay out old investors with capital from new ones.
A pyrimid scheme is a sales venture where new salespeople pay the upline, then make money by recuiting new marks.
This is a classic Ponzi scheme.
He should have changed his name to "Made-Off"...as in "Made Off with your money."
Oh, but come on..any kind of financial regulation kills the free economy!!!
The way I was raised, you don't trust either farther than you can throw a kiloton of lead. ALWAYS distrust what you're being told from a business or a government. Both allow "absolution in abcissa", the blessed state of being able to say "it's not my fault!"
One thing I was taught from history is that people are in charge of both government and business. People, being people, are okay until they garner any type of power. Corporate officers, board members, government functionaries, and government representatives all have a great deal of power, and most get drunk on it.
The only way to fix that is to keep a tight leash on government and use that tight leash to punish (severely in many cases) poor business behaviour. That's not Socialism or Communism. That's literally saying: "Do as you please but cross the f*cking line in the sand and you are dead meat."
That also means eliminating the false dichotomy of "White Collar" crime. All crime is violent, it's just a matter of the way the force was applied. That also means changing prisons to be something to be avoided (23 hour a day lock down for all, et al). That also means treating CEO's exactly like what they are: people collecting a paycheck unless they own the company.
I could go on, but it's late.
He should be hanged in public.
Does this mean we really only needed $220 Bil for the said bailout?
Is this like that one movie about the stock traders that sell stock to a company that doesn't exist?
Reminds me of the Mona-Vie distribution network.