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Madoff
Deserves Lots of Company
December 13, 2008
by
Janet Tavakoli, president
of Tavakoli Structured Finance
If justice is to be served, Madoff deserves many things, including
many new acquaintances.
A
Giant Ponzi Scheme
Bernard
Madoff confessed—not the securitization “professionals” who
work or worked for famous investment banks, certain CDO managers
and certain hedge funds. On the plus side, U.S. taxpayers are
not bailing out Madoff. News reports indicate he doesn't owe
a certain famous large investment bank any money.
The Wall
Street Journal missed a golden opportunity
(“Top
Broker Accused of $50 Billion Fraud,” December 12, 2008).
It wrote that if Madoff’s alleged losses exceeded $50
billion, it would “dwarf past Ponzi schemes.” Yet,
Madoff is a piker.
The
largest Ponzi scheme in the history of the capital markets is
the relationship
between failed mortgage lenders
and investment
banks that securitized the risky overpriced loans and sold these
packages to other investors—a Ponzi scheme by every definition
applied to Madoff. These and other related deeds led to the largest
global credit meltdown in the history of the world. [For
more, see my new book Dear
Mr. Buffett]
Investment
banks raised money from new investors to pay back old
investors (mortgage lenders' dividends to shareholders and creditors
of mortgage lenders which often included themselves). When
mortgage lenders imploded, investment banks sped up opaque securitizations
to offload worthless tranches of CDOs mixed in with others to
careless so-called sophisticated investors along with naive investors.
Raising money from new investors to pay back old investors, even
if you are the old investor covering up losses is a Ponzi scheme.
[Added May 8, 2009.]
SEC Strategy
The SEC’s enforcement
strategy seems to be 1) ignore the charity of strangers such
as Harry Markopolos: “Madoff
Securities is the world’s largest Ponzi Scheme.” (“Fees,
Even Returns and Auditor All Raised Flags,” Wall Street
Journal, December 13, 2008), 2) “investigate” and
drop the matter, and then 3) wait for the Perp to crack under
the strain of being ignored and confess.
The
SEC employed a similar strategy with respect to the investment
banking securitization activities it “regulated’ over
the past several years. Congress and others agree claiming
there will be time to find out who is responsible later. Bail
now, scapegoat later.
Complicated and Cryptic
Madoff claimed his business was too complicated for outsiders
to understand. He was “cryptic” about the firm’s
business. He ran a secretive business, and kept his financial
statements under lock and key. Just who does Madoff think
he is—the Treasury Secretary or the Chairman of Federal
Reserve? ("Fed
Refuses to Disclose Recipients of $2 Trillion,” Bloomberg
News, December 12, 2008).
Investment banks and other “bailees” have
hundreds of billions of dollars worth of assets in opaque
accounting
buckets known as Level 2 and Level 3. Good luck trying to find
details.
Bonuses
Madoff wanted to pay his employees bonuses, earlier than usual,
right after owning up to his problems.
Troubled investment
banks that engaged in troubling activity want to pay employees
bonuses, too. They have owned up to nothing,
and it looks as if they will get away with it.
Janet
Tavakoli is the president of Tavakoli Structured
Finance, a Chicago-based firm that provides consulting to financial
institutions
and institutional investors. Ms. Tavakoli has more than 20
years of experience in senior investment banking positions, trading,
structuring and marketing structured financial products. She
is a former adjunct professor of derivatives at the University
of Chicago's Graduate School of Business. She is the author
of:
Credit
Derivatives & Synthetic Structures (John Wiley & Sons,
1998, 2001), Structured
Finance & Collateralized Debt
Obligations (John Wiley & Sons, 2008), and
Dear
Mr. Buffett: What An Investor Learns 1,269 Miles From Wall
Street (John Wiley & Sons January
2009)
Clients
of Tavakoli Structured Finance
have the benefit of proprietary consultation, which is
not available in any other paid or public forum. Clients
also commission proprietary research and analysis.
TSF
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