Monday, December 29, 2008

YouTube Trailer - Broke: The New American Dream - film by Michael Covel

For a review of this film, see "New Movie Challenges Biz Pundits", by Jonathan Hoenig, of SmartMoney.


More Entities with Exposure to Madoff

SmartMoney's Interactive TreeMap: Map of the Market, created by Martin Wattenberg

Interactive TreeMap: Map of the Market
(Created by Martin Wattenberg)

This interactive map was developed in 1998, but still is very useful today. It has been following the market over the past ten years or so on the SmartMoney website.

For more information about how to understand and use the map, read "Instructions: Map of the Market", and "Secrets to Using the Map of the Market"

Sunday, December 28, 2008

Financial Planning Application on a Microsoft Surface Multi-Touch Table

This is an interesting interactive application to assist with financial planning tasks. The application, developed by Razorfish, utilizes the multi-touch capabilities of Microsoft's Surface comptuting table.

Microsoft Surface Financial Services Application - Razorfish Demo from razorfish - emerging experiences on Vimeo.

Unfortunately, there are some problems with this application, as pointed out by Jonathan Brill in his recent Point & Do blogpost. In this application, coins are used as part of the interaction. It is not clear why this approach would be useful. It might be fun to play with if you had lots of time to kill in a bank's lobby.

Friday, December 19, 2008

SEC Charges Wall Street Professionals and Others with Widespread Insider Trading: Matthew C. Devlin and other representatives of Lehman Brothers.

"Defendants Devlin, Bouchareb, Daniel Corbin, Bowers, Faulhaber, Holzer, Glover, Corbin Investment Holdings, LLC and Augustus Management, LLC are charged with violating Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 and Exchange Act Rules 10b-5 and 14e-3. The SEC seeks injunctive relief, disgorgement of illicit profits with prejudgment interest, and civil penalties. Defendants Checa, Checa International, Inc. and Lee Corbin are charged as relief defendants and the SEC seeks their trading profits."

US Securities and Exchange Commision's Complaint (pdf)

It's not such a great time to be a "greed is good" type, is it?

Economic Sounds: Madoff Was Magnet For Some, Not All, Investors- Audio from NPR

Madoff described his system as a split strike conversion strategy?

New York Law School invested some money with Madoff, and now is preparing a lawsuit against this money manager. In this broadcast, Millicent Holmes discusses the concerns she had about Madoff's system a few years ago, and her surprise at how long it took regulators to go after Madoff after an article in Barrons brought up doubts about his system's methods.

Listen to the interview.

On-line article

MAR/Hedge no.89 May 2001 "Madoff top charts; skeptics ask how" (pdf) (Michael Ocrant)

Barron's 5/7/2001 Article about Bernie Madoff: "Don't Ask, Don't Tell"

SMF Blog Post: Don't Ask, Don't Tell: Barron's 2001 Madoff Article

"....But Madoff's investors rave about his performance -- even though they don't understand how he does it. "Even knowledgeable people can't really tell you what he's doing," one very satisfied investor told Barron's. "People who have all the trade confirmations and statements still can't define it very well. The only thing I know is that he's often in cash" when volatility levels get extreme. This investor declined to be quoted by name. Why? Because Madoff politely requests that his investors not reveal that he runs their money."

From the Wall Street Journal Online documents:

The World's Largest Hedge Fund is a Fraud
pdf (11/7/2005 Submission to the SEC)
Suggests that Madoff Securities "is the world's largest Ponzi scheme".

Thursday, December 18, 2008

Blinded by Truthiness: NY Times Article: On Wall Street, Bonuses, Not Profits, Were Real

Looking at the various entries I've posted to this blog, I've noticed a common thread. Much of our financial system is built on something that is fake. Hedge funds. Short selling. Bonuses for CEO's running companies that are not all that sound.

Many people followed the herd mentality. Groupthink. A recent example is all of the people who lost money investing with Bernie Madoff, or trusted financial advisers who funnelled some of their funds into Madoff's Ponzi scheme.

Trust has been lost.

Our system has rewarded perceived movers and shakers in the financial industry. Just think about the huge amount of money that people made from selling mortgages and mortgage-back securities! What about the CEO's who earned large bonuses, even though their companies weren't doing so well, were not run well, or were tanking behind the scenes?

A recent article in the New York Times, On Wall Street, Bonuses, Not Profits, Were Real (12/17/08 - Louise Story). According to the article, in 2006, Dow Kim, at Merrill Lynch, had a salary of $350,000, but received a bonus of $35 million, for overseeing his company's mortgage business traders.

"...Merrill's record earnings in 2006 - $7.5 billion - turned out to be a mirage. The company has since lost three times that amount, largely because the mortgage investments that supposedly had powered some of those profits plunged in value.... Unlike the earnings, however, the bonuses have not been reversed."

Fueled by greed? Yes. But also blinded by "truthiness".

Truthiness" is a term that sprung from the head of comedian Stephen Colbert's head.

According to Colbert, Truthiness is 'What I say is right, and [nothing] anyone else says could possibly be true.' It's not only that I feel it to be true, but that I feel it to be true. There's not only an emotional quality, but there's a selfish quality."

New York Times Series: The Reckoning (Articles exploring the causes of the financial crisis)

New York Times Reader's Comments

Graphic from the New York Times:

How will trust be restored in our financial markets? There is a long road ahead.

Financial Meltdown 101: Interactive Multimedia timeline by TruthDig on Capzles.

(The above screen is interactive. You can slide the photos back and forth, and select one to see the the content on the screen.)

Capzles is an interactive multimedia story timeline that I found when looking for timelines about the financial crisis. Meltdown 101 was created by TruthDig, a member of the Capzles community. Capzles can contain audio, video, blog post, photos, and other forms of content. More information can be found on the Capzles website.

Tuesday, December 16, 2008

Fakin' it: IT Factory's Stein Bagger, fooled banks, KPMG, Deloitte, and Ernst & Young

There has been quite a bit of discussion about the concept of trust in the financial world. As the world-wide economy continues to struggle, the fakes are like cockroaches scurrying about to get out of the light.

A recent article in the Wall Street Journal reveals that Denmark's Entrepreneur of the Year, Stein Bagger, was a fake. Bagger's "fake" company, IT Factory, was audited by Deloitte, and later KPMG, and even was named as IBM's Best Partner for software. According to the article, Bagger's company owes IBM about $23 million dollars.
Danske Bank may be out $64 million.

Bagger's academic credentials were fake, too. Apparently he hired an artist/actress to "play the role of an official at San Francisco State University, and institution that does not exist", just in case anyone became suspicious.

"The gist of the allegations is that Mr. Bagger used a web of phantom firms to get money from banks and then used these same companies to place big purchase orders for IT Factory software and services. He was buying from himself using other people's money."

For Denmark's Entrepreneur of Year, Something Was Rotten: Stein Bagger Pleads Guilty to Faking Software Deals; His Ph.D. Was Phony, Too. -Andrew Higgins, WSJ 9/17/08
Emails From Bo Svensson to IBM Management
Email to Actress Hired to Play Role of University Official

One good thing about the struggling economy is that the cockroaches will have nowhere to hide when their houses of cards tumble down around them!

Francine McKenna's Blog: Re: The Auditors "Madoff and Blagojevich: Stealing - Easier When No One is Watching"

Francine McKenna's blog, re: The Auditors, is a great place to get good information regarding topics related to finance, accounting, and the economy. One of her recent posts sheds some light on the latest scandals in our society:

Madoff and Blagojevich: Stealing - Easier When No One Is Watching

I was delighted to discover that McKenna had posted a video of musicians performing a song related to her topic, also in keeping with the theme of the Economic Sounds and Sights blog.

Jane's Addiction's Been Caught Stealing, via Terranaomi

Quotes from McKenna's blog post:
"Ethical relativism is alive and well. The extreme sense of entitlement and unadulterated self-interest inherent in some of the worst offenders is an example of pure evil...I see bad people...."The smart money KNEW Bernie had to be cheating, because the returns he was generating were impossibly good. Many Wall Streeters suspected the wrong rigged game, though: They thought it was insider trading, not a Ponzi scheme.
And here's the best part: That's why they invested with him." "


Naked Capitalism: SEC Skipped Normal Inspection of Madoff Hedge Fund

Monday, December 15, 2008

Unregulated Funds of Funds & Bernie Madoff: Videos from CNBC

SIPC Liquidating Madoff Securities' Assets

Future of Hedge Funds

Revealing Video: Madoff
(Bernie Madoff- In his own words)

Zuckerman on Madoff
Zuckerman did not know that 30 Million of his charitable funds were funneled by a fund manager into Madoff's scheme. It was part of another fund that put 9 billion with Madoff. This calls into question the "fund-to-fund" methods of fund management, without due diligence.

Madoff Fallout

Sunday, December 14, 2008

The Walking Zombies of Wall Street: Video Discussion by WSJ's Evan Newmark and Dennis Berman

The problem? How will Wall Street bankers make money? What jobs will they do?

"They just don't have much work. Debt and stock markets are virtually shut, merger volume is down by 28%, and whole lines of structured finance are closed for good"

Saturday, December 13, 2008

From Ponzi to Madoff: Interactive Graphic from the Wall Street Journal

Here is the link:

From Ponzi to Madoff

"The arrest of investment manager Bernard Madoff for allegedly running an ongoing $50 billion swindle is the latest scam of the kind made famous by Charles Ponz in the 1920's. In these schemes, early participants are paid returns from the principle received from later and different investors." -Wall Street Journal

Friday, December 12, 2008

Market Wizards or Wizards of Oz? Bernard Madoff, hedge funds, and loss of trust.

Market wizards, or Wizards of Oz?

Right now there is a discussion on CNBC about Bernard Madoff's fraud/ponzi scheme.
"Low volatility, with consistent growth of 8-10 percent every year, quick liquidity... Put it all in there!".

People with millions listed to the wizard and put most of their money in
Madoff's funds. And now the money is gone, and trust is lost.

Some of Madoff's clients:
Sterling Equities, owned by Fred Wilpon (NY Mets owner)
Benedict Hentsch (Swiss private bank)
Bramdean Alternatives (U.K. asset manager)
Fairfield Greenwich Group - Fairfield Sentry Ltd.(Hedge fund firm)
Kingate Management -Kingate Global Fund Ltd.
Fix Asset Management
Pioneer Alternative Investments- Primeo Select Fund
Union Bancaire
Optimal Investment Services SA
For more information, see "Factbox-Firms exposed to Madoff's alleged fraud"

Wizards of Oz = Hedge Fund Managers?

Kenneth C. Griffin, founder of the Citadel, has been called a hedge-fund wizard. According to an article in the NY Times (10/7/08), "Between 1998 and 2007, he handled investors an average annual return of 20 percent, more than three times that of Standard & Poor's 500-stock index."

An article in the Chicago Tribune (12/12/08), mentions that quite a few smart people work at the Citadel..."generous payouts helped Citadel recruit a stable of PhDs, market wizards and computer gurus who could engineer a recovery."

I guess things were too good to be true. According to CNBC, Citadel's funds are down about 50%, and the company will not allow investors to withdraw funds for several months.


Hedge Fund Wizards (Washington Post, 12/19/07)
Nearly one year ago, Dean P. Foster, a professor of Statistics at the Wharton School of Business, and H. Peyton Young, a professor of Economics at the University of Oxford, wrote this article. Here is a quote that foreshadowed the current crisis:

"Hedge funds are risky for another reason. It is extremely difficult to tell, based on past performance, whether a fund is being run by true financial wizards, by no-talent managers who happen to get lucky or by outright scam artists... Although individual hedge fund managers may drag their feet, it is actually in the industry's best interest to encourage greater regulation and transparency. Otherwise, a rising tide of failed funds could cause a collapse in investor confidence, putting both the good and the bad wizards out of business."

Top Broker Accused of $50 Billion Fraud (WSJ)

Fees, Even Returns and Auditor All Raised Flags (WSJ)

Fund Fraud Hits Big Names (WSJ)

Hedge Funds Mystify Markets, Regulators: Deeply Powerful, Largely Unchecked (David Cho, Washington Post, 7/4/2007)

Stockbroker Fraud Blog
(Attorneys: Shepherd, Smith & Edwards)

Thursday, December 11, 2008

How do we invest in "real" when it has been "all one big lie'? What to make of Bernard Madoff

Do you remember the story, "The Emperor's New Clothes"? All of the adults in the story were convinced that the Emperor had wonderful clothes, and that the clothes were REAL. The only problem was they didn't seem to realize that the emperor was really NAKED. Just one little boy noticed that it was all fake.

Like the little boy in the story, we are now discovering that the trappings of many Wall Street investment companies are fake, and have been so for a very long time. The emperor is really naked. How could so many of us let ourselves become bamboozled?

Here is an excerpt from today's New York Times:

"Prominent Trader Accused of Defrauding Clients"
Diana B. Henriques and Zachery Kouwe

"Bernard L. Madoff, a legend among Wall Street traders, was arrested on Thursday morning by federal agents and charged with criminal securities fraud stemming from his company’s money management business."

"The arrest and criminal complaint were confirmed just before 6 p.m. Thursday by Lev L. Dassin, the acting U.S. attorney in Manhattan, and Mark Mershon, the assistant director of the Federal Bureau of Investigation."

"According to the complaint, Mr. Madoff advised colleagues at the firm on Wednesday that his investment advisory business was “all just one big lie” that was “basically, a giant Ponzi scheme” that, by his estimate, had lost $50 billion over many years."

"....The senior employees understood him to be saying that he had for years been paying returns to certain investors out of the principal received from other, different investors. Mr. Madoff admitted in this conversation that the firm was insolvent and had been for years, and that he estimated the losses from this fraud were at least $50 billion, according to the regulatory complaint."

"Andrew M. Calamari, an assistant director in the S.E.C.’s regional office in New York, said the case involved “a stunning fraud that appears to be of epic proportions.”"

A visit to the Madoff Securities website provides a quick snapshot of what an investor sees at first glance:

A Global Leader in Trading US Equities

"With more than $700 million in firm capital, Madoff currently ranks among the top 1% of US Securities firms. Our sophisticated proprietary automation and unparalleled client service delivers an enhanced execution that is virtually unmatched in our industry."

An Intricate Interweaving of Advanced Technology and Sophisticated Traders

"Madoff Securities also utilizes its computers to seek out opportunities for hedging its inventory of securities. The firm uses a variety of futures, options, and other instruments to hedge its positions and limit its risks. While these hedging strategies are an important tool in protecting the firm's financial position, ultimately,these highly prudent risk management policies protect the interests of clients as well."

The Owner's Name is on the Door

"In an era of faceless organizations owned by other equally faceless organizations, Bernard L. Madoff Investment Securities LLC harks back to an earlier era in the financial world: The owner's name is on the door. Clients know that Bernard Madoff has a personal interest in maintaining the unblemished record of value, fair-dealing, and high ethical standards that has always been the firm's hallmark."

The "unblemished" record was fake.... Maybe it is time we invested in something real.


Interactive Map of Bernard L. Madoff Investment Securities

via Muckety "Exploring the paths of power and influence"

Saturday, December 6, 2008

The Rise of the Machines & another look at the role of "quants" in the current financial downturn.

I came across an article on-line from the New York Times, written by Op-Ed Contributor Richard Dooling, "The Rise of the Machines",

Dooling mentions at the beginning of the article that Warren Buffett called derivatives "weapons of mass destruction". I guess time will tell. The article was published on October 11, 2008. Nearly two months later, things continue to combust.

"Somehow the genius quants — the best and brightest geeks Wall Street firms could buy — fed $1 trillion in subprime mortgage debt into their supercomputers, added some derivatives, massaged the arrangements with computer algorithms and — poof! — created $62 trillion in imaginary wealth. It’s not much of a stretch to imagine that all of that imaginary wealth is locked up somewhere inside the computers, and that we humans, led by the silverback males of the financial world, Ben Bernanke and Henry Paulson, are frantically beseeching the monolith for answers. Or maybe we are lost in space, with Dave the astronaut pleading, “Open the bank vault doors, Hal." '

Richard Dooling is the author of "Rapture of the Geeks: When AI Outsmarts IQ"

I've assembled a few related articles that focus on the role of the quant and some additional information that might assist in our understanding of what has been unfolding during the current economic recession:

Quants Gone Wild - The Subprime Crisis (3/27/08; A.W. Bodine and C.J. Nagel)
"The “best & brightest” quantitative analysts on Wall Street became so technologically advanced that many of the principals running investment firms simply didn’t understand the arcane risk models their “quants” developed – and sadly neither did the quants. We recall the comment made during a recent presentation at Concordia College by Don Gogel, President and CEO of Clayton, Dubilier and Rice. He noted that this “toxic cocktail” was something that even the “mixologists themselves didn’t understand” let alone those trading in them. Bryant Urstadt writing in MIT’s Technology Review in December 2007 also notes, “The more quants learn, the farther away a unified theory of finance seems. Human behavior, as manifest in financial markets, simply resists quantification, at least for now.” We should here also do homage to the investing approach of the sage Warren Buffet—that he does not invest in anything he doesn’t understand. Investment houses should note this simple truth."

On Becoming a Quant (pdf) May 2008; Mark Joshi

Hiring the Next Generation of Quants, Finance Tech, 3/31/2006; Ivy Schmerken

""An MBA does not cut it because operating in today's markets requires more quantitative skills than a typical MBA can offer," contends Linda Kreitzman, director of the Masters in Financial Engineering (MFE) program at the Haas School of Business at the University of California at Berkeley. "Trading is getting more complex, especially in structured products," she adds, citing as examples fixed income, mortgage-backed securities and asset-backed securities, as well as credit and equity derivatives and volatility trading. ""

Here is an article, written by Tom Davenport, in the Discussion Leader, Havard Business Publishing, that offers a a few ideas for solutions:

10 Principles of the New Business Intelligence

"I've argued for a while that organizations need to increase their focus on decision-making. In particular, they need to think again about the relationship between information and decision-making."