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"

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