Tavakoli Structured Finance LLC

The Financial Report

By Janet Tavakoli

Madoff Deserves Lots of Company

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.

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.

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.


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.

See also:

Buffett, Tavakoli, Flag Scheme Bigger Than Madoff’s,” by Yalman Onaran, Bloomberg News, March 5, 2009

Bank of America’s (All Wall Street) Shareholders Should Reject Bonus Plans

Repairing the Damage of Fraud As a Business Model

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