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Mad about Madoff -- Musings on hedge funds, the 21st Century robber-barons

madoff.jpg** Jack ** is a friend of mine who sometimes enjoys a darker view of life, and these days life is meeting him more than half-way. How else to explain the fact that the wealthy and powerful have taken it upon themselves to grasp the very fabric of our economic reality and rend it in two? Jack presents an obsessive's review of l'Affair Madoff: J: Yowza! I'd like to think that all of this is just a big housecleaning so Obama can start with a fresh slate- y'know, from the rubble of the rubble. Vanity Fair | Pillars of the Community, Pillage of the Damned
...a family saga that threatens to rock the financial world to its rotten foundation and ruin a lot of lives and fortunes in its wake.
Dec. 12 (Bloomberg) -- Bernard Madoff's sons turned him in to U.S. authorities after he confessed to them that his investment advisory business was "a giant Ponzi scheme" that cost clients $50 billion, a lawyer for the brothers said.
Writing in the New York Post, Palm Beach chronicler Laurence Leamer relays the cemetery mood from the new land of the lost:
I was at a dinner party last night, and one of the guests called on his cellphone, a man whose money Madoff had managed. I know the man, and he is a generous, kind person who recently gave away more than $100 million. He said that both his company's retirement plan and his charitable foundation had been handled by Madoff. He was preparing to fly back to his Boston home to walk among the ruins. It's a story told scores of times yesterday. Bankruptcy. Despair.
But if you listen to talk radio or watch some of the yahoos on Fox, CNBC, and MSNBC, it's supposedly unions like the UAW who are the real bastards bleeding capitalism dry, not the chief execs. But then these are some of the same blowhards who never saw the shitstorm coming.
J: The New York Daily News seems to have the best bunch of stories on Madoff (see related articles box).
He tallied his deals in secret books locked in a filing cabinet a floor away from Madoff Securities' main offices, they said... When Barron's asked Madoff in May 2001, how he engineered such consistent double-digit returns, the man who once ran the Nasdaq was tight-lipped. "It's a proprietary strategy," he said. "I can't go into it in great detail."
Continued... Gawker | Hedge Fund Hustler Roundup: The Rich Now Poor
Who did Madoff's scam really hurt? The rich! And the Jews! And above all, the rich Jews! He may have totally broken most of the Jewish members of the Palm Beach Country Club:
He was a brilliantly successful money manager who may well have handled the assets of a majority of the 300 members, as well as that of those of a largely Jewish clientele across the eastern United States and a number of wealthy WASPs.
J: Wowee! This list should be named "Dead and deader". This will absolutely be reflected in the upcoming weeks Market numbers. Prepare for more divebombing as selloffs attempt to recoup cash losses. Madoff has literally single-handedly (he kept all the books himself) created immense devastation. Clusterstock | Bernie Madoff's Victims: The List summers_javers.jpgJ: The other reason this is so important: The utter collapse of hedge funds

Madoff ran a premier hedge fund. Vanity Fair's excellent Dec. '08 article, "Wall Street Lays Another Egg," detailing the meltdown, also touched on the hedge funds that while seemingly unhit by the recent crisis are based on math that only took 5 years of data into account --- leaving out, say, ALL MAJOR CRASHES. It's a great read, especially in light of Lawrence Summers -- former director of D.E. Shaw, the largest and most successful hedge fund -- being recently named as Obama's new economics advisor. (Read the following, or just look at Summers' picture and know he is a snake and a weasel and a rat.) politico.com | Summers has ties to prominent hedge fund
D.E. Shaw was founded in 1988 by David E. Shaw, a former computer science professor at Columbia University, and is known as a major “quant” fund that specializes in using advanced mathematics and computer software to generate trading strategies....
J: Notice any similarities between Summers and Madoff? This should be sent to everyone and anyone regarding Summers' new position:
...how they make those decisions is very closely held information. “That’s where they get very secretive and squirrely and won’t tell you what they’re doing,” the observer said. A spokesperson for the Obama transition team declined to say what Summers had done for the hedge fund and how much he had been paid."
So, we don't know much, but we do know money buys influence:
The hedge fund also has gotten much more involved in Washington policy making in recent years, contributing to the Managed Funds Association, the trade group that has led the charge on resisting increased regulation and taxation of hedge funds in Washington....
Why on Earth would derivative-based hedge funds -- making full use of "advanced mathematics and computer software," for gosh's sakes! -- require more regulation? Vanity Fair | Wall Street Lays Another Egg
In its brief, four-year life, Long-Term [Capital Management] was the brightest star in the hedge-fund firmament, generating mind-blowing returns for its elite club of investors and even more money for its founders.... The mathematics were reassuring. According to the firm’s “Value at Risk” models, it would take a 10-s (in other words, 10-standard-deviation) event to cause the firm to lose all its capital in a single year. But the probability of such an event, according to the quants, was 1 in 10^24—or effectively zero.... ...on Friday, August 21, 1998, the firm lost $550 million—15 percent of its entire capital, and vastly more than its mathematical models had said was possible... The quants’ Value at Risk models had implied that the loss the firm suffered in August 1998 was so unlikely that it ought never to have happened in the entire life of the universe. But that was because the models were working with just five years of data. If they had gone back even 11 years, they would have captured the 1987 stock-market crash. If they had gone back 80 years they would have captured the last great Russian default, after the 1917 revolution. Meriwether himself, born in 1947, ruefully observed, “If I had lived through the Depression, I would have been in a better position to understand events.” To put it bluntly, the Nobel Prize winners knew plenty of mathematics but not enough history.
BBC News | Buffett warns on investment 'time bomb' | Tuesday, 4 March, 2003, 13:32 GMT
"Berkshire Hathaway, the investment group led by Mr Buffett, is pulling out of the market, closing down the derivatives trading subsidiary it bought as part of a huge reinsurance company a few years ago... Mr Buffett argues that such highly complex financial instruments are time bombs and "financial weapons of mass destruction" that could harm not only their buyers and sellers, but the whole economic system."... WB: "Derivatives generate reported earnings that are often wildly overstated and based on estimates whose inaccuracy may not be exposed for many years...." WB: "Large amounts of risk have become concentrated in the hands of relatively few derivatives dealers ... which can trigger serious systemic problems...."
J: Mind you, that was in 2003. And a letter was sent in 1999 to the SEC stating "Madoff Securities is the world's largest Ponzi scheme." So this might trigger the death of the hedge fund in the same way that Investment Banks all crashed earlier this year. Buffett's long stated distrust of hedge funds along with this should be more than enough to kill the hedge funds completely. But we're not out of the woods quite yet. That'll probably be in 2014. Clusterstock | Stocks To Fall Another 60% And Bottom In 2014 -- Guru
Noted frequently over the past couple of months, the stock market has finally fallen back to its long-term valuation average. Of course, after bubbles like the one we just had, stocks often fall far beyond their long-term average, into severely undervalued territory. Jeremy Grantham and others think the S&P 500 will likely fall to 600 or so (vs. today's 900) before bottoming. This would represent another 35% downside from here.

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