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".

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.


Related:

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)

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."

Why was so much power given to short sellers?

It has been a while since I last posted. The economic course of events has become so complex, I simply could not keep up! There are so many unanswered questions. Why was so much power given to short sellers? How did so many market manipulators go "unnoticed" for so long? Have we learned from past history?

Here are a few of things that crossed my path tonight:

Manipulation, Short-Selling, Uptics, and Chris Cox:

Stan Yee's post on the Mad Cap Recap (Jim Cramer's Mad Money blog), discusses Cramer's dislike of the US SEC Chairman Chris Cox and his policies that "gave huge power to short-sellers -- power enough to "manipulate stocks down legally through multiple different means."

Yee goes on to say that Cox's worst decision was to eliminate the "uptick rule", a policy put in place during the 1930's to ensure that another great crash would never occur. Accoring to the post, the uptick rule "required short-sellers to wait until a buy could be found to pay an uptick, meaning a higher price, before they could short a stock."


A Brief History of Short Selling

"The first rule of investing: buy low and sell high. If you haven't actually bought anything, get someone to lend it to you first, then sell it high and buy it back once the price has dropped. That's the first rule of short-selling — sell high, buy back low, and pocket the difference — and it's a trick that has been hastening market crashes for at least 400 years." - Claire Suddath, TIME Business and Tech

TIME Covers Wall Street:
A look at some of the magazine's best cover stories on the US economy:

Bankers vs. Panic (11/4/1929)
Business in 1954 (1/10/1955)
Wall Street Bull (1958)
One Hectic Week (6/1/1962)
The Great Mogul (Article about John Kenneth Galbraith) (2/16/1968)
The Rising Risk of Recession (Article about Economist Milton Friedman) (12/19/69)
The Showdown Fight Over Inflation (Article about George Shultz and Arthur Burns)(8/16/1971)
Is the US Going Broke? (1972)
Wall Street's Super Streak (9/6/82)
Predator's Fall: The Collapse of Drexel Burnham (1990)

• "Like the abrupt fall of the Berlin Wall thousands of miles away, the collapse suddenly confirmed what everyone in the financial world could already feel in the wind: a new era had arrived."

Attack of the Data Miners (Derivatives) (4/11/1994)

• "Wall Street's new products are so complicated and interdependent that only the advanced number crunching of the quants can untangle the risks involved; without it, the market crushes you."

• "There is an almost prayerful communion with the computer. They're intense and operate to a rhythm. If you ask them a question, they turn and their eyes are glazed, coming out of whatever cyberspace they are in." In this trance, he says, "they're not really in a world of other people. They think they're in a world of pure technical manipulation, like a chemist creating a molecule. It's as though there are no social consequences."

The Three Marketeers (Rubin, Greenspan & Summers) (2/15/1999)

• "...a hedge fund blessed with two Nobel prizewinners blew up in an afternoon, nearly taking Wall Street with it."

Zap! Looking Beyond the Bear (3/26/2001)

• "Vaporized stock-market wealth is at $4 trillion and counting. The losses have engendered one of the fastest economic decelerations ever--from an annual growth rate last spring of 6% to near zero today."