$50 billion fraud puts pressure on markets.
13.December 2008, 13:22
www.welt.de/news
Investors scrumbled to assess potential losses from an alleged $50 billion fraud by Bernard Madoff, a day after the arrest of the prominent Wall Street trader. Prosecutors and regulators accused the former chairman of the Nasdaq Stock Market of masterminding a fraud of epic proportions through his investment advisory business, which managed a hedge fund.
"Business as usual? Of course it's business as usual. We're getting screwed left and right."
Hundreds of people, investing with him through the firm's clients, entrusted Madoff with billions of dollars, industry experts said.
"Madoff's investors included captains of industry, corporations -- some of which are publicly traded -- that used Madoff almost as a high-yielding cash management account, endowments, universities, foundations and, importantly, many high-profile funds of funds,“ said Douglas Kass, who heads hedge fund Seabreeze Partners Management.
"It appears that at least $15 billion of wealth, much of which was concentrated in southern Florida and New York City, has gone to 'money heaven,'“ he said.
Federal agents arrested Madoff at his apartment on Thursday after prosecutors said he told senior employees that his money management operations were "all just one big lie“ and "basically, a giant Ponzi scheme.“
A Ponzi scheme is an illegal investment vehicle that pays off old investors with money from new ones, and is dependent on a constant stream of new investment. Because the invested capital is not earning a sufficient return on its own, such schemes eventually collapse under their own weight.
Madoff is the founder of Bernard L. Madoff Investment Securities LLC, a market-making firm he launched in 1960. His separate investment advisory business had $17.1 billion of assets under management.
'BUSINESS AS USUAL?'
About a dozen angry investors gathered on Friday in the lobby of the Lipstick Building in midtown Manhattan, where the market-making firm and advisory business are headquartered, demanding to know the fate of their money.
One woman said that when she called the firm's offices on Thursday she was told it was "business as usual.“
Another investor groused, "Business as usual? Of course it's business as usual. We're getting screwed left and right.“
Police later evicted the small group from the building.
Individual investors were feeling the squeeze elsewhere.
"I expect to get back zero,“ said Floridian Susan Leavitt, who invested through Madoff. "When he tells the feds he has $200 million to $300 million left out of billions, what can you expect?"
Two law firms, Milberg LLP and Seeger Weiss LLP, said Friday they had been retained by "dozens of individual investors“ in Madoff Securities.
The two most prominent hedge funds that invested with Madoff were the $7.3 billion Fairfield Sentry Ltd, run by Walter Noel's Fairfield Greenwich Group, and the $2.8 billion Kingate Global Fund Ltd, run by Kingate Management Ltd.
Fairfield Greenwich Group said it was trying to determine the extent of potential losses and vowed to pursue recovery of any lost assets. The firm said it had been working with Madoff for nearly 20 years.
Fairfield Sentry and Kingate Global were among a small group of hedge funds to report positive returns for 2008; the average hedge fund was down 18 percent, according to data from Hedge Fund Research.
"People who came to us for portfolio construction were often already invested with Bernie Madoff. He had hundreds of clients,“ said Charles Gradante, who invests in hedge funds as a principal at Hennessee Group LLC. "Now his whole legacy is destroyed. He was God to people.“
Not the First Time
History's economic crises and ensuing chaos
Prior to Madoff's arrest, investors had wondered how he was able to generate annual returns in the low double digits in a variety of market environments. Many questioned how U.S. regulators were able to ignore numerous red flags with regard to Madoff's operations.
"Many of us questioned how that strategy could generate those kinds of returns so consistently,“ said Jon Najarian, an options trader who knows Madoff and is a co-founder of optionmonster.com.
In May 2001, Barron's reported that option strategists for major investment banks said they could not understand how Madoff managed to generate the returns that he did.
"We weren't comfortable with Madoff,“ said Brad Alford, president at investment adviser Alpha Capital in Atlanta. "We didn't understand how his strategy could generate the kind of returns it did. We will walk away from things like that.“
MORE TO COME?
U.S. stocks tumbled in early trading on Friday, with some investors citing the Madoff case as well as the failure of talks in Congress on a rescue for the U.S. auto industry. The market later rebounded, with the Dow Jones industrial average closing 0.75 percent higher for the day.
Investors overseas were reeling from the alleged fraud.
Benedict Hentsch, a Swiss private bank, said it had 56 million Swiss francs ($47 million) of exposure to Madoff's investment advisory business.
Italian bank UniCredit SpA's fund management unit, Pioneer Investments, has exposure through its Primeo Select hedge fund, two people familiar with the matter said.
Bramdean Alternatives Ltd said almost 10 percent of its holdings were exposed to Madoff, sending shares in the UK asset manager crashing.
CNBC Television reported that Sterling Equities, which owns the New York Mets baseball team, had accounts managed by Madoff.
'UNFORTUNATE SET OF EVENTS'
Madoff said "there is no innocent explanation“ for his activities, and that he "paid investors with money that wasn't there,“ according to the federal complaint.
Prosecutors also accused Madoff of wanting to distribute as much as $300 million to employees, family members and friends before turning himself in.
Charged with one count of securities fraud, he faces up to 20 years in prison and a $5 million fine. The U.S. Securities and Exchange Commission filed separate civil charges.
A hearing had been scheduled for Friday afternoon in U.S. District Court in Manhattan on the SEC's request to grant powers to the court-appointed receiver to oversee the entire firm, as well as on the commission's request for a firmwide asset freeze.
But the hearing was canceled after the matter was resolved, said a deputy for U.S. District Judge Louis Stanton. No other details were immediately available. The receiver, lawyer Lee Richards, had been appointed by the judge on Thursday to oversee assets and accounts of the firm held abroad.
Madoff's lawyer, Dan Horwitz, said on Thursday: "We will fight to get through this unfortunate set of events.“ His client was released on $10 million bond.
Madoff is a member of Nasdaq OMX Group Inc's nominating committee. His firm has said it is a market-maker for about 350 Nasdaq stocks.
He is also chairman of London-based Madoff Securities International Ltd, whose chief executive, Stephen Raven, said the firm was "not in any way part of“ the New York-based market-maker.
All equity trades involving the market-making firm will be processed as usual, the Depository Trust Clearing Corp told Reuters on Friday.
Saturday, December 13, 2008
Madoff fraud case raises questions about SEC
Madoff fraud case raises questions about SEC
By MARCY GORDON –
Saturday December 14, 2008
16 hours ago
WASHINGTON (AP) — The stunning fraud Wall Street pillar Bernard Madoff is accused of has raised questions about whether federal regulators were lax in failing to scrutinize his operations and respond to alarms raised about them.
Securities and Exchange Commission enforcement attorneys were in federal court on Friday to seek emergency relief for investors, including an asset freeze and the appointment of a receiver for Madoff's firm, in an alleged $50 billion fraud that could be the largest ever pinned on an individual.
Federal prosecutors in Manhattan charged Madoff with a single count of criminal fraud, while the SEC accused him of civil fraud.
Madoff, a former chairman of the Nasdaq Stock Market, was influential and his self-named securities firm cut a high profile in Wall Street circles. SEC inspectors would have performed regular inspections of his securities brokerage operations as part of the agency's oversight program.
SEC officials stress that it was Madoff's separate and secretive investment-adviser business that was used to perpetrate the scheme, and that examinations of the securities operations wouldn't necessarily have detected irregularities. The hedge fund business didn't register with the SEC until September 2006.
"If the SEC didn't come in and inspect (the Madoff hedge fund), then they have a hell of a lot to answer for," said James Cox, a Duke University law professor and securities law expert.
Other SEC critics questioned how Madoff could pull off, without the agency's notice, such an audacious fraud that amounted to a giant Ponzi scheme.
"The agency can't help but look bad," said Barbara Roper, director of investor protection at the Consumer Federation of America. "It does raise questions ... about the quality of the enforcement division generally. It's obviously something that the new (Obama) administration has to get to the bottom of."
A wrinkle in the case is the complaint dating back nine years to the SEC by a securities industry executive named Harry Markopolos. He contacted the agency's Boston office in May 1999, telling SEC staff they should investigate Madoff because it was impossible for the kind of profit he was making to have been gained legally.
The SEC's Boston office has been accused in the past of brushing off a whistleblower's legitimate complaints, in a case that brought the resignation of the head of that unit in 2003.
Markopolos's intervention was first reported in Friday's editions of The Wall Street Journal.
"There's no question the SEC had the authority to investigate fraud" in the investment adviser part of Madoff's business as well as the securities operation, William Galvin, Massachusetts' secretary of state and its top securities regulator, said in a telephone interview Friday.
Galvin, like other state regulators, has been pushing for tighter government supervision of hedge funds, vast pools of capital holding an estimated $2.5 trillion in assets that are opaque, scantly regulated and partly blamed for the global financial crisis.
The SEC has been "somewhat bureaucratic" and less than fully effective in its enforcement efforts, Galvin said. Still, "they've made a lot of progress" in recent years, he added.
In 2003, Galvin pointedly criticized the SEC's handling of the case of Peter Scannell and his allegations against mutual fund giant Putnam Investments.
Scannell has said he went to the agency's Boston office that year with evidence of trading abuses at the firm and was met with disinterest from the SEC investigators there. It took seven exchanges with his lawyer before the SEC staff met with him, for about 90 minutes, Scannell told Congress in 2004.
He later got a hearing from Galvin's office, which acted on his disclosures. Enforcement actions eventually were brought against Boston-based Putnam by the state regulators and the SEC.
It wasn't immediately known whether the SEC had looked into Markopolos's allegations and drawn conclusions about them. Agency spokesman John Nester declined to comment on the matter Friday.
"Someone should have asked harder questions, but I'm not really sure" it was the SEC, said Peter Henning, a law professor at Wayne State University who was an SEC enforcement attorney. "Their hands were tied" by not initially having oversight of the Madoff hedge fund, he said.
The investors in Madoff's business were not asking questions while the fabulous returns were coming in — and maybe they should have, Henning said.
By MARCY GORDON –
Saturday December 14, 2008
16 hours ago
WASHINGTON (AP) — The stunning fraud Wall Street pillar Bernard Madoff is accused of has raised questions about whether federal regulators were lax in failing to scrutinize his operations and respond to alarms raised about them.
Securities and Exchange Commission enforcement attorneys were in federal court on Friday to seek emergency relief for investors, including an asset freeze and the appointment of a receiver for Madoff's firm, in an alleged $50 billion fraud that could be the largest ever pinned on an individual.
Federal prosecutors in Manhattan charged Madoff with a single count of criminal fraud, while the SEC accused him of civil fraud.
Madoff, a former chairman of the Nasdaq Stock Market, was influential and his self-named securities firm cut a high profile in Wall Street circles. SEC inspectors would have performed regular inspections of his securities brokerage operations as part of the agency's oversight program.
SEC officials stress that it was Madoff's separate and secretive investment-adviser business that was used to perpetrate the scheme, and that examinations of the securities operations wouldn't necessarily have detected irregularities. The hedge fund business didn't register with the SEC until September 2006.
"If the SEC didn't come in and inspect (the Madoff hedge fund), then they have a hell of a lot to answer for," said James Cox, a Duke University law professor and securities law expert.
Other SEC critics questioned how Madoff could pull off, without the agency's notice, such an audacious fraud that amounted to a giant Ponzi scheme.
"The agency can't help but look bad," said Barbara Roper, director of investor protection at the Consumer Federation of America. "It does raise questions ... about the quality of the enforcement division generally. It's obviously something that the new (Obama) administration has to get to the bottom of."
A wrinkle in the case is the complaint dating back nine years to the SEC by a securities industry executive named Harry Markopolos. He contacted the agency's Boston office in May 1999, telling SEC staff they should investigate Madoff because it was impossible for the kind of profit he was making to have been gained legally.
The SEC's Boston office has been accused in the past of brushing off a whistleblower's legitimate complaints, in a case that brought the resignation of the head of that unit in 2003.
Markopolos's intervention was first reported in Friday's editions of The Wall Street Journal.
"There's no question the SEC had the authority to investigate fraud" in the investment adviser part of Madoff's business as well as the securities operation, William Galvin, Massachusetts' secretary of state and its top securities regulator, said in a telephone interview Friday.
Galvin, like other state regulators, has been pushing for tighter government supervision of hedge funds, vast pools of capital holding an estimated $2.5 trillion in assets that are opaque, scantly regulated and partly blamed for the global financial crisis.
The SEC has been "somewhat bureaucratic" and less than fully effective in its enforcement efforts, Galvin said. Still, "they've made a lot of progress" in recent years, he added.
In 2003, Galvin pointedly criticized the SEC's handling of the case of Peter Scannell and his allegations against mutual fund giant Putnam Investments.
Scannell has said he went to the agency's Boston office that year with evidence of trading abuses at the firm and was met with disinterest from the SEC investigators there. It took seven exchanges with his lawyer before the SEC staff met with him, for about 90 minutes, Scannell told Congress in 2004.
He later got a hearing from Galvin's office, which acted on his disclosures. Enforcement actions eventually were brought against Boston-based Putnam by the state regulators and the SEC.
It wasn't immediately known whether the SEC had looked into Markopolos's allegations and drawn conclusions about them. Agency spokesman John Nester declined to comment on the matter Friday.
"Someone should have asked harder questions, but I'm not really sure" it was the SEC, said Peter Henning, a law professor at Wayne State University who was an SEC enforcement attorney. "Their hands were tied" by not initially having oversight of the Madoff hedge fund, he said.
The investors in Madoff's business were not asking questions while the fabulous returns were coming in — and maybe they should have, Henning said.
No Question We’re in a Financial Pickle. What Do We Call It?
December 12, 2008
No Question We’re in a Financial Pickle. What Do We Call It?
By BRIAN STELTER
nytimes.com
The economy is formally in a recession, as the National Bureau of Economic Research and President Bush said last week. But the current crisis lacks a capital-letter name.
Then again, the Great Depression did not become “great” immediately, and World War I wasn’t known as No. 1 at the time. While the “economic crisis” — a term often used by journalists — has also been called the “credit crunch” and the “Wall Street crisis,” it remains the rare major news event without a defining logo, one that crystallizes attention and acts as shorthand for reporters.
“When you’re in the middle of something, it’s hard to brand it,” the NBC anchor Brian Williams remarked last month in a blog post.
One day, perhaps, the slow-motion downturn of the economy will receive the same one-name treatment as Vietnam, Watergate and Iran-Contra. But for now, the language of the current economic woes remains understandably murky, despite the impulses of journalists.
“The news always feels the need to name everything,” Jonathan Wald, the senior vice president for business news at CNBC, said. “If it’s not branded, it doesn’t exist in modern television.” He observed that the television channels in India quickly labeled last month’s militant attacks in Mumbai as the “War on Mumbai” and “India’s 9/11.”
CNBC, which has seen sharp ratings gains in recent months, initially called the economic situation a “credit crisis.” Eventually it became a “Wall Street crisis,” and before long it was a “Wall Street/Main Street crisis.” In the last week, “Great Recession” has become a popular phrase.
“Sometimes there are no easy names for things that are this big and important,” Mr. Wald said. CNBC used a temporary title, “Is Your Money Safe?,” for special reports from 7 to 9 p.m. in March when Bear Stearns collapsed, and again in September and October when other investment banks folded or revamped. But in mid-November, the network renamed its 7 to 9 p.m. hours “CNBC Reports,” partly because the other title was “asking a question no one could really answer,” Mr. Wald said.
The titles and logos that news organizations bestow upon major events, unseemly as they sometimes are, can affect public opinion. Already, language has influenced the debate about the economy: the depiction of the government’s $700 billion “troubled assets relief program” as a bailout helped inflame opposition to the proposal. More recently, Democrats have moved to call their stimulus plan an “economic recovery program.”
The art of language did not go unnoticed during the 1930s, either. Eric Rauchway, a professor of history at the University of California, Davis, and the author of “The Great Depression and the New Deal: A Very Short Introduction,” said that by 1932, Americans were already referring to the economic downturn as a singular event. By 1933, the Stuart Chase book “A New Deal” had used the phrase “Great Depression,” and in 1934, the British economist Lionel Robbins had published a book titled “The Great Depression.”
The label indicated that the downturn was “qualitatively different” from previous economic contractions. “Regarding it as exceptional probably helped people think a bit about exceptional solutions — although, you know, the problem with the New Deal was basically that it wasn’t exceptional enough,” Mr. Rauchway said in an e-mail message.
Wars also receive capital-letter titles, although sometimes only with the passing of time. World War I was called The Great War and “the war to end all wars,” Mr. Williams wrote, “until we learned there would be another.”
As for the current economic crisis, he added, “Sadly, we’ll come up with something to call it, soon enough ... just as soon as we figure out what it is, exactly.” Other journalists agree. “Crisis” is the most common term being used by the news media, said Ali Velshi, the chief business correspondent for CNN, but a full accounting of the story will require some distance.
“We need some time to go by before we know what the turning points are and what actually happened,” he said. Mr. Velshi, whose book about the crisis, “Gimme My Money Back,” will be on bookshelves in January, says he believes that a title like the Great Intervention may suit the story. “It’s the defining characteristic,” he said. “This is the greatest intervention of the government since the Depression.”
That said, assigning a name and a logo to a news event runs the risk of devaluing it in the public’s mind. The propensity to name every potential scandal a “gate,” in an allusion to the Watergate break-in that led to Richard Nixon’s resignation, “tends to cheapen it,” Mr. Wald said.
Moreover, he said, reporters, editors and anchors also have a responsibility, one often discussed within news organizations in the last months, not to overreact or offer an undue sense of panic about the economic situation, whatever history winds up calling it. “Nobody wants to title it worse than it is,” Mr. Wald said.
No Question We’re in a Financial Pickle. What Do We Call It?
By BRIAN STELTER
nytimes.com
The economy is formally in a recession, as the National Bureau of Economic Research and President Bush said last week. But the current crisis lacks a capital-letter name.
Then again, the Great Depression did not become “great” immediately, and World War I wasn’t known as No. 1 at the time. While the “economic crisis” — a term often used by journalists — has also been called the “credit crunch” and the “Wall Street crisis,” it remains the rare major news event without a defining logo, one that crystallizes attention and acts as shorthand for reporters.
“When you’re in the middle of something, it’s hard to brand it,” the NBC anchor Brian Williams remarked last month in a blog post.
One day, perhaps, the slow-motion downturn of the economy will receive the same one-name treatment as Vietnam, Watergate and Iran-Contra. But for now, the language of the current economic woes remains understandably murky, despite the impulses of journalists.
“The news always feels the need to name everything,” Jonathan Wald, the senior vice president for business news at CNBC, said. “If it’s not branded, it doesn’t exist in modern television.” He observed that the television channels in India quickly labeled last month’s militant attacks in Mumbai as the “War on Mumbai” and “India’s 9/11.”
CNBC, which has seen sharp ratings gains in recent months, initially called the economic situation a “credit crisis.” Eventually it became a “Wall Street crisis,” and before long it was a “Wall Street/Main Street crisis.” In the last week, “Great Recession” has become a popular phrase.
“Sometimes there are no easy names for things that are this big and important,” Mr. Wald said. CNBC used a temporary title, “Is Your Money Safe?,” for special reports from 7 to 9 p.m. in March when Bear Stearns collapsed, and again in September and October when other investment banks folded or revamped. But in mid-November, the network renamed its 7 to 9 p.m. hours “CNBC Reports,” partly because the other title was “asking a question no one could really answer,” Mr. Wald said.
The titles and logos that news organizations bestow upon major events, unseemly as they sometimes are, can affect public opinion. Already, language has influenced the debate about the economy: the depiction of the government’s $700 billion “troubled assets relief program” as a bailout helped inflame opposition to the proposal. More recently, Democrats have moved to call their stimulus plan an “economic recovery program.”
The art of language did not go unnoticed during the 1930s, either. Eric Rauchway, a professor of history at the University of California, Davis, and the author of “The Great Depression and the New Deal: A Very Short Introduction,” said that by 1932, Americans were already referring to the economic downturn as a singular event. By 1933, the Stuart Chase book “A New Deal” had used the phrase “Great Depression,” and in 1934, the British economist Lionel Robbins had published a book titled “The Great Depression.”
The label indicated that the downturn was “qualitatively different” from previous economic contractions. “Regarding it as exceptional probably helped people think a bit about exceptional solutions — although, you know, the problem with the New Deal was basically that it wasn’t exceptional enough,” Mr. Rauchway said in an e-mail message.
Wars also receive capital-letter titles, although sometimes only with the passing of time. World War I was called The Great War and “the war to end all wars,” Mr. Williams wrote, “until we learned there would be another.”
As for the current economic crisis, he added, “Sadly, we’ll come up with something to call it, soon enough ... just as soon as we figure out what it is, exactly.” Other journalists agree. “Crisis” is the most common term being used by the news media, said Ali Velshi, the chief business correspondent for CNN, but a full accounting of the story will require some distance.
“We need some time to go by before we know what the turning points are and what actually happened,” he said. Mr. Velshi, whose book about the crisis, “Gimme My Money Back,” will be on bookshelves in January, says he believes that a title like the Great Intervention may suit the story. “It’s the defining characteristic,” he said. “This is the greatest intervention of the government since the Depression.”
That said, assigning a name and a logo to a news event runs the risk of devaluing it in the public’s mind. The propensity to name every potential scandal a “gate,” in an allusion to the Watergate break-in that led to Richard Nixon’s resignation, “tends to cheapen it,” Mr. Wald said.
Moreover, he said, reporters, editors and anchors also have a responsibility, one often discussed within news organizations in the last months, not to overreact or offer an undue sense of panic about the economic situation, whatever history winds up calling it. “Nobody wants to title it worse than it is,” Mr. Wald said.
Credit Crunch Unmasks Madoff
Credit Crunch Unmasks Madoff
Posted by: Matthew Goldstein on December 12
For years there were whispers on Wall Street about Bernard Madoff’s hedge fund. The cynics said the returns were too good, too steady and Madoff’s operation always looked too slim for the tens of billions of dollars it was managing. But given Madoff’s more than four-decades of experience as trader and past service as chairman of the Nasdaq Stock Market the wealthy kept giving him their money.
Well, it looks like those concerns were right all along now that federal prosecutors have charged the 70-year-old Madoff with securities fraud, in what could amount to one of the biggest Wall Street scams ever. Securities regulators, in a civil complaint, say Madoff’s scheme may have cost investors up to $50 billion—although that figure appears to be based on Madoff’s own bravado. At a minimum, it appears the $17 billion Madoff was managing earlier this year may be gone.
The allegations against Madoff describe a classic Ponzi scheme, in which money is taken in from new investors to pay out money to earlier investors. Madoff, authorities allege, even told his sons earlier this week that the hedge fund was nothing more than “a giant Ponzi scheme.’’
It didn’t take long for investors in Madoff’s fund to begin crying foul. Hours after the news of Madoff’s arrest broke, investors were contacting lawyers to determine how they can get their money back—assuming there is any money left over. The Securities and Exchange Commission is moving to appoint a receiver to take control of the Madoff fund to protect whatever assets remain. Scott Berman, a lawyer who represents a number of Madoff investors, says the fear in a case like this is that the investors will be left “fighting over the crumbs.”
Many of the investors in Madoff’s hedge fund were so-called fund of funds, investment vehicles that invest in a wide array of hedge funds to spread around the risk of anyone hedge fund collapsing or incurring steep losses. But fund of funds, which often juice their returns with leverage, are getting hit hard in the market plunge. On average, fund of funds have suffered greater losses this year than the average hedge fund.
It’s way to soon to know how long the alleged scheme had been going on, although authorities allege it began years ago, after Madoff tried to cover up for past losses. But it appears Madoff ultimately was unmasked by the worst financial crisis since the Great Depression. Just like many hedge fund operators, Madoff received a wave of redemption notices in recent months, from investors looking to preserve cash. Authorities say investors sought to pull-out some $7 billion from the fund—money Madoff apparently did not have.
In the end, most Ponzi schemes collapse when too many investors seek to pull their money out at the same time, and the operator doesn’t have the cash on hand. Many a scheme has failed when the markets turn south. One potential red flag that investors failed to notice along the way is that the hedge fund was being audited by a small outfit in Rockland County, NY—not one of the large accounting firms.
But the financial crisis appears to be hastening the unwinding process of potential scams, as it has dried-up all sources of liquidity. Banks are unwilling to lend and investors are fleeing hedge funds, stocks, bonds, commodities and other asset classes for the safety of cash.
In September, another alleged Ponzi scheme collapsed, when federal prosecutors arrested Minnesota businessman Tom Petters. Federal prosecutors allege that much of Petters’ empire, which consisted of buying up distressed businesses, was based on a series of lies. He’s been charged with bilking some six-dozen hedge funds out of $3 billion. Petters’ alleged scheme came undone when some of the hedge funds that lent him money had gotten redemption requests from their investors and began asking Petters to pay-off his debt. Just like Madoff, Petters apparently couldn’t come up with the cash. Several of the hedge funds that lent money to Petters are in tatters, and some are shutting down.
A lack of liquidity may have been behind the bizarre scheme involving New York attorney Marc Dreier. Earlier this week, federal prosecutors charged the high-profile attorney with allegedly scamming several hedge funds into giving him up to $100 million by selling shares in what appears to be a fraudulent real estate venture. It appears Dreier’s 250-lawyer firm was running low on cash and had failed to make payments on a bank loan.
As the financial crisis deepens, don’t be surprised if other scams get flushed out in the coming weeks and months.
Update — Dec. 13, 2008
The Madoff scandal beyond causing pain for the investors in these hedge funds is causing some discomfort for securities regulators. Late Friday, the Securities and Exchange Commission, in response to questions about its past oversight of Madoff’s operatoin, says it twice investigated his firm but apparently found no wrongdoing. Over the years, the SEC had received a number of tips of potential problems at the Madoff fund. Now, uncovering fraud is no easy task. But this episode raises new questions about just how aggressive regulators are when they conduct periodic examinations of the brokerages they oversee.
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Posted by: Matthew Goldstein on December 12
For years there were whispers on Wall Street about Bernard Madoff’s hedge fund. The cynics said the returns were too good, too steady and Madoff’s operation always looked too slim for the tens of billions of dollars it was managing. But given Madoff’s more than four-decades of experience as trader and past service as chairman of the Nasdaq Stock Market the wealthy kept giving him their money.
Well, it looks like those concerns were right all along now that federal prosecutors have charged the 70-year-old Madoff with securities fraud, in what could amount to one of the biggest Wall Street scams ever. Securities regulators, in a civil complaint, say Madoff’s scheme may have cost investors up to $50 billion—although that figure appears to be based on Madoff’s own bravado. At a minimum, it appears the $17 billion Madoff was managing earlier this year may be gone.
The allegations against Madoff describe a classic Ponzi scheme, in which money is taken in from new investors to pay out money to earlier investors. Madoff, authorities allege, even told his sons earlier this week that the hedge fund was nothing more than “a giant Ponzi scheme.’’
It didn’t take long for investors in Madoff’s fund to begin crying foul. Hours after the news of Madoff’s arrest broke, investors were contacting lawyers to determine how they can get their money back—assuming there is any money left over. The Securities and Exchange Commission is moving to appoint a receiver to take control of the Madoff fund to protect whatever assets remain. Scott Berman, a lawyer who represents a number of Madoff investors, says the fear in a case like this is that the investors will be left “fighting over the crumbs.”
Many of the investors in Madoff’s hedge fund were so-called fund of funds, investment vehicles that invest in a wide array of hedge funds to spread around the risk of anyone hedge fund collapsing or incurring steep losses. But fund of funds, which often juice their returns with leverage, are getting hit hard in the market plunge. On average, fund of funds have suffered greater losses this year than the average hedge fund.
It’s way to soon to know how long the alleged scheme had been going on, although authorities allege it began years ago, after Madoff tried to cover up for past losses. But it appears Madoff ultimately was unmasked by the worst financial crisis since the Great Depression. Just like many hedge fund operators, Madoff received a wave of redemption notices in recent months, from investors looking to preserve cash. Authorities say investors sought to pull-out some $7 billion from the fund—money Madoff apparently did not have.
In the end, most Ponzi schemes collapse when too many investors seek to pull their money out at the same time, and the operator doesn’t have the cash on hand. Many a scheme has failed when the markets turn south. One potential red flag that investors failed to notice along the way is that the hedge fund was being audited by a small outfit in Rockland County, NY—not one of the large accounting firms.
But the financial crisis appears to be hastening the unwinding process of potential scams, as it has dried-up all sources of liquidity. Banks are unwilling to lend and investors are fleeing hedge funds, stocks, bonds, commodities and other asset classes for the safety of cash.
In September, another alleged Ponzi scheme collapsed, when federal prosecutors arrested Minnesota businessman Tom Petters. Federal prosecutors allege that much of Petters’ empire, which consisted of buying up distressed businesses, was based on a series of lies. He’s been charged with bilking some six-dozen hedge funds out of $3 billion. Petters’ alleged scheme came undone when some of the hedge funds that lent him money had gotten redemption requests from their investors and began asking Petters to pay-off his debt. Just like Madoff, Petters apparently couldn’t come up with the cash. Several of the hedge funds that lent money to Petters are in tatters, and some are shutting down.
A lack of liquidity may have been behind the bizarre scheme involving New York attorney Marc Dreier. Earlier this week, federal prosecutors charged the high-profile attorney with allegedly scamming several hedge funds into giving him up to $100 million by selling shares in what appears to be a fraudulent real estate venture. It appears Dreier’s 250-lawyer firm was running low on cash and had failed to make payments on a bank loan.
As the financial crisis deepens, don’t be surprised if other scams get flushed out in the coming weeks and months.
Update — Dec. 13, 2008
The Madoff scandal beyond causing pain for the investors in these hedge funds is causing some discomfort for securities regulators. Late Friday, the Securities and Exchange Commission, in response to questions about its past oversight of Madoff’s operatoin, says it twice investigated his firm but apparently found no wrongdoing. Over the years, the SEC had received a number of tips of potential problems at the Madoff fund. Now, uncovering fraud is no easy task. But this episode raises new questions about just how aggressive regulators are when they conduct periodic examinations of the brokerages they oversee.
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Friday, December 12, 2008
Bernard Madoff held for $US50bn pyramid fraud
The former chairman of the US Nasdaq was arrested for fraud, after allegedly admitting to running a $US50 billion pyramid scheme.
Bernard L Madoff, founder of Bernard L Madoff Investment Securities, was released on a $US10 million ($14.99 million) personal recognisance bond overnight in the US, after having made an initial court appearance on charges that he had participated in a “giant” $US50 billion pyramid, or ponzi, scheme.
Mr Madoff, who was charged under a criminal complaint, didn't enter a plea at the hearing. The bond will be secured by his apartment in Manhattan. In a ponzi scheme, new investor funds are typically used to pay distributions and redemptions to existing investors.
Mr Madoff, 70, was arrested by the FBI early yesterday in the US and charged with a single count of securities fraud. He faces up to 20 years in prison and a maximum fine of $US5 million on the charge. Prosecutors and the FBI have alleged that Mr Madoff told senior employees at a meeting at his apartment the night before his arrest that his investment advisory business was "basically, a giant ponzi scheme", according to court documents.
He told them the business was insolvent, and had been for years. The investment advisory business is separate from the firm's market-making and proprietary trading operations. In a January filing with the US Securities & Exchange Commission, Mr Madoff reported that the investment advisory business served between 11 and 25 clients and had about $US17.1 billion in assets under management. Mr Madoff also allegedly said that the losses from the fraud were at least $US50 billion, according to the criminal complaint. He told the employees he was "finished", and that he had "absolutely nothing" and "it's all just one big lie". He told the senior employees that he planned to surrender to authorities in about one week, but wanted to use the $US200-300 million he had left in his possession to make payments to certain selected employees, family and friends, according to court documents.
The meeting at his apartment occurred after Madoff, who appeared to be under great stress in recent weeks, told senior employees earlier this week that he had recently made profits through business operations and that now was a good time to distribute it, which was earlier than employee bonuses are traditionally paid, according to the criminal complaint.
Mr Madoff had told employees the week before that there had been requests for clients to redeem about $US7 billion and that he was struggling to obtain the liquidity necessary to meet those obligations, but thought he would be able to do so, according to court documents. In a meeting with a FBI agent on Thursday, the agent asked Madoff if there was an "innocent explanation" for what happened.
Mr Madoff reportedly said: "There is no innocent explanation." He also said he had personally traded and lost money for institutional clients and that it was all his fault, according to the complaint. He further stated that he "paid investors with money that wasn't there", according to the charging document.
Mr Madoff’s lawyer, Dan Horowitz, said: "Bernard Madoff is a long standing leader in the financial services industry with an unblemished record.
"He is a person of integrity. He intends to fight to get through this unfortunate event." Neither Mr Madoff nor his lawyer would comment after the hearing. A preliminary hearing is set for January 12, 2009.
Bernard L Madoff, founder of Bernard L Madoff Investment Securities, was released on a $US10 million ($14.99 million) personal recognisance bond overnight in the US, after having made an initial court appearance on charges that he had participated in a “giant” $US50 billion pyramid, or ponzi, scheme.
Mr Madoff, who was charged under a criminal complaint, didn't enter a plea at the hearing. The bond will be secured by his apartment in Manhattan. In a ponzi scheme, new investor funds are typically used to pay distributions and redemptions to existing investors.
Mr Madoff, 70, was arrested by the FBI early yesterday in the US and charged with a single count of securities fraud. He faces up to 20 years in prison and a maximum fine of $US5 million on the charge. Prosecutors and the FBI have alleged that Mr Madoff told senior employees at a meeting at his apartment the night before his arrest that his investment advisory business was "basically, a giant ponzi scheme", according to court documents.
He told them the business was insolvent, and had been for years. The investment advisory business is separate from the firm's market-making and proprietary trading operations. In a January filing with the US Securities & Exchange Commission, Mr Madoff reported that the investment advisory business served between 11 and 25 clients and had about $US17.1 billion in assets under management. Mr Madoff also allegedly said that the losses from the fraud were at least $US50 billion, according to the criminal complaint. He told the employees he was "finished", and that he had "absolutely nothing" and "it's all just one big lie". He told the senior employees that he planned to surrender to authorities in about one week, but wanted to use the $US200-300 million he had left in his possession to make payments to certain selected employees, family and friends, according to court documents.
The meeting at his apartment occurred after Madoff, who appeared to be under great stress in recent weeks, told senior employees earlier this week that he had recently made profits through business operations and that now was a good time to distribute it, which was earlier than employee bonuses are traditionally paid, according to the criminal complaint.
Mr Madoff had told employees the week before that there had been requests for clients to redeem about $US7 billion and that he was struggling to obtain the liquidity necessary to meet those obligations, but thought he would be able to do so, according to court documents. In a meeting with a FBI agent on Thursday, the agent asked Madoff if there was an "innocent explanation" for what happened.
Mr Madoff reportedly said: "There is no innocent explanation." He also said he had personally traded and lost money for institutional clients and that it was all his fault, according to the complaint. He further stated that he "paid investors with money that wasn't there", according to the charging document.
Mr Madoff’s lawyer, Dan Horowitz, said: "Bernard Madoff is a long standing leader in the financial services industry with an unblemished record.
"He is a person of integrity. He intends to fight to get through this unfortunate event." Neither Mr Madoff nor his lawyer would comment after the hearing. A preliminary hearing is set for January 12, 2009.
Bernard Madoff arrested over alleged $50 billion fraud
Bernard Madoff arrested over alleged $50 billion fraud
By Edith Honan and Dan Wilchins
Fri Dec 12, 12:40 am ET
NEW YORK (Reuters) – Bernard Madoff, a quiet force on Wall Street for decades, was arrested and charged on Thursday with allegedly running a $50 billion "Ponzi scheme" in what may rank among the biggest fraud cases ever.
The former chairman of the Nasdaq Stock Market is best known as the founder of Bernard L. Madoff Investment Securities LLC, the closely-held market-making firm he launched in 1960. But he also ran a hedge fund that U.S. prosecutors said racked up $50 billion of fraudulent losses.
Madoff told senior employees of his firm on Wednesday that "it's all just one big lie" and that it was "basically, a giant Ponzi scheme," with estimated investor losses of about $50 billion, according to the U.S. Attorney's criminal complaint against him.
A Ponzi scheme is a swindle offering unusually high returns, with early investors paid off with money from later investors.
On Thursday, two agents for the U.S. Federal Bureau of Investigation entered Madoff's New York apartment.
"There is no innocent explanation," Madoff said, according to the criminal complaint. He told the agents that it was all his fault, and that he "paid investors with money that wasn't there," according to the complaint.
The $50 billion allegedly lost would make the hedge fund one of the biggest frauds in history. When former energy trading giant Enron filed for bankruptcy in 2001, one of the largest at the time, it had $63.4 billion in assets.
U.S. prosecutors charged Madoff, 70, with a single count of securities fraud. They said he faces up to 20 years in prison and a fine of up to $5 million.
The Securities and Exchange Commission filed separate civil charges against Madoff.
"Our complaint alleges a stunning fraud -- both in terms of scope and duration," said Scott Friestad, the SEC's deputy enforcer. "We are moving quickly and decisively to stop the scheme and protect the remaining assets for investors."
Dan Horwitz, Madoff's lawyer, told reporters outside a downtown Manhattan courtroom where he was charged, "Bernard Madoff is a longstanding leader in the financial services industry. We will fight to get through this unfortunate set of events."
A shaken Madoff stared at the ground as reporters peppered him with questions. He was released after posting a $10 million bond secured by his Manhattan apartment.
Authorities, citing a document filed by Madoff with the U.S. Securities and Exchange Commission on January 7, 2008, said Madoff's investment advisory business served between 11 and 25 clients and had a total of about $17.1 billion in assets under management. Those clients may have included other funds that in turn had many investors.
The SEC said it appeared that virtually all of the assets of his hedge fund business were missing.
CONSISTENT RETURNS
An investor in the hedge fund said it generated consistent returns, which was part of the attraction. Since 2004, annual returns averaged around 8 percent and ranged from 7.3 percent to 9 percent, but last decade returns were typically in the low-double digits, the investor said.
The fund told investors it followed a "split strike conversion" strategy, which entailed owning stock and buying and selling options to limit downside risk, said the investor, who requested anonymity.
Jon Najarian, an acquaintance of Madoff who has traded options for decades, said "Many of us questioned how that strategy could generate those kinds of returns so consistently."
Najarian, co-founder of optionmonster.com, once tried to buy what was then the Cincinnati Stock Exchange when Madoff was a major seatholder on the exchange. Najarian met with Madoff, who rejected his bid.
"He always seemed to be a straight shooter. I was shocked by this news," Najarian said.
'LOCK AND KEY'
Madoff had long kept the financial statements for his hedge fund business under "lock and key," according to prosecutors, and was "cryptic" about the firm. The hedge fund business was located on a separate floor from the market-making business.
Madoff has been conducting a Ponzi scheme since at least 2005, the U.S. said. Around the first week of December, Madoff told a senior employee that hedge fund clients had requested about $7 billion of their money back, and that he was struggling to pay them.
Investors have been pulling money out of hedge funds, even those performing well, in an effort to reduce risk in their portfolios as the global economy weakens.
The fraud alleged here could further encourage investors to pull money from hedge funds.
"This is a major blow to confidence that is already shattered -- anyone on the fence will probably try to take their money out," said Doug Kass, president of hedge fund Seabreeze Partners Management. Kass noted that investors that put in requests to withdraw their money can subsequently decide to leave it in the fund if they wish.
Bernard L. Madoff Investment Securities has more than $700 million in capital, according to its website.
Madoff remains a member of Nasdaq OMX Group Inc's nominating committee, and his firm is a market maker for about 350 Nasdaq stocks, including Apple, EBay and Dell, according to the website.
The website also states that Madoff himself 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."
By Edith Honan and Dan Wilchins
Fri Dec 12, 12:40 am ET
NEW YORK (Reuters) – Bernard Madoff, a quiet force on Wall Street for decades, was arrested and charged on Thursday with allegedly running a $50 billion "Ponzi scheme" in what may rank among the biggest fraud cases ever.
The former chairman of the Nasdaq Stock Market is best known as the founder of Bernard L. Madoff Investment Securities LLC, the closely-held market-making firm he launched in 1960. But he also ran a hedge fund that U.S. prosecutors said racked up $50 billion of fraudulent losses.
Madoff told senior employees of his firm on Wednesday that "it's all just one big lie" and that it was "basically, a giant Ponzi scheme," with estimated investor losses of about $50 billion, according to the U.S. Attorney's criminal complaint against him.
A Ponzi scheme is a swindle offering unusually high returns, with early investors paid off with money from later investors.
On Thursday, two agents for the U.S. Federal Bureau of Investigation entered Madoff's New York apartment.
"There is no innocent explanation," Madoff said, according to the criminal complaint. He told the agents that it was all his fault, and that he "paid investors with money that wasn't there," according to the complaint.
The $50 billion allegedly lost would make the hedge fund one of the biggest frauds in history. When former energy trading giant Enron filed for bankruptcy in 2001, one of the largest at the time, it had $63.4 billion in assets.
U.S. prosecutors charged Madoff, 70, with a single count of securities fraud. They said he faces up to 20 years in prison and a fine of up to $5 million.
The Securities and Exchange Commission filed separate civil charges against Madoff.
"Our complaint alleges a stunning fraud -- both in terms of scope and duration," said Scott Friestad, the SEC's deputy enforcer. "We are moving quickly and decisively to stop the scheme and protect the remaining assets for investors."
Dan Horwitz, Madoff's lawyer, told reporters outside a downtown Manhattan courtroom where he was charged, "Bernard Madoff is a longstanding leader in the financial services industry. We will fight to get through this unfortunate set of events."
A shaken Madoff stared at the ground as reporters peppered him with questions. He was released after posting a $10 million bond secured by his Manhattan apartment.
Authorities, citing a document filed by Madoff with the U.S. Securities and Exchange Commission on January 7, 2008, said Madoff's investment advisory business served between 11 and 25 clients and had a total of about $17.1 billion in assets under management. Those clients may have included other funds that in turn had many investors.
The SEC said it appeared that virtually all of the assets of his hedge fund business were missing.
CONSISTENT RETURNS
An investor in the hedge fund said it generated consistent returns, which was part of the attraction. Since 2004, annual returns averaged around 8 percent and ranged from 7.3 percent to 9 percent, but last decade returns were typically in the low-double digits, the investor said.
The fund told investors it followed a "split strike conversion" strategy, which entailed owning stock and buying and selling options to limit downside risk, said the investor, who requested anonymity.
Jon Najarian, an acquaintance of Madoff who has traded options for decades, said "Many of us questioned how that strategy could generate those kinds of returns so consistently."
Najarian, co-founder of optionmonster.com, once tried to buy what was then the Cincinnati Stock Exchange when Madoff was a major seatholder on the exchange. Najarian met with Madoff, who rejected his bid.
"He always seemed to be a straight shooter. I was shocked by this news," Najarian said.
'LOCK AND KEY'
Madoff had long kept the financial statements for his hedge fund business under "lock and key," according to prosecutors, and was "cryptic" about the firm. The hedge fund business was located on a separate floor from the market-making business.
Madoff has been conducting a Ponzi scheme since at least 2005, the U.S. said. Around the first week of December, Madoff told a senior employee that hedge fund clients had requested about $7 billion of their money back, and that he was struggling to pay them.
Investors have been pulling money out of hedge funds, even those performing well, in an effort to reduce risk in their portfolios as the global economy weakens.
The fraud alleged here could further encourage investors to pull money from hedge funds.
"This is a major blow to confidence that is already shattered -- anyone on the fence will probably try to take their money out," said Doug Kass, president of hedge fund Seabreeze Partners Management. Kass noted that investors that put in requests to withdraw their money can subsequently decide to leave it in the fund if they wish.
Bernard L. Madoff Investment Securities has more than $700 million in capital, according to its website.
Madoff remains a member of Nasdaq OMX Group Inc's nominating committee, and his firm is a market maker for about 350 Nasdaq stocks, including Apple, EBay and Dell, according to the website.
The website also states that Madoff himself 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."
Thursday, December 11, 2008
Four Financial Horsewomen Who Warned of the Apocalypse
Four Financial Horsewomen Who Warned of the Apocalypse
wowowow.com
Readers, stop sharpening your pitchforks for a moment because here, just in time for your year-end 401K reports to arrive, is a little story about four women who not so very long ago caused eyeballs to roll and brows to knit among the Wall Street and Washington Testosterone Teams, but who, if they had been listened to by the reigning Masters of the Universe, might have either prevented the economic Armageddon we are in … or at least caught it in time to prevent some its more pernicious collateral damage.
Who are these women? Two accomplished regulators and two prescient financial industry employees who saw that the toxic brew of sub-prime mortgages, derivatives and lack of government oversight was bubbling up the greatest destruction of wealth in the history of the world.
That they were ignored and in some cases ridiculed by the very perpetrators of this global White Shoe Financial Ponzi Scheme makes this a tediously familiar tale to many women who have worked in proximity of the polyglass ceiling, especially on Wall Street.And here’s the remarkable news: some of the Big Boyz who ignored these women?
They’re part of the new Obama financial team.
Horsewoman #1: Brooksley Born, chair of the U.S. Commodity Futures Trading Commission from 1996-99, a Federal agency that regulates commodity options and futures trading
What she said: Ten years before the collapse in the derivatives market became front-page news, and five years before Warren Buffett famously called them "weapons of financial mass destruction," Brooksley Born warned in Congressional testimony that these complex, opaque and unregulated financial instruments could “threaten our regulated markets or, indeed, our economy, without any federal agency knowing about it.” She wanted her commission to provide governmental oversight of the derivatives market.
Who tried to screw her: Claiming that she did not understand the markets, a triumvirate made up of former Federal Reserve Chairman Alan Greenspan, then-Treasury Secretary (and current controversial Citibank Director) Robert Rubin and his deputy and new Obama appointee Lawrence Summers (he late of the Harvard University dust-up where he claimed that women were intrinsically deficient in math) prevailed upon all who would listen to prevent Born’s agency from regulating the derivatives market. In their recent story on the Alan Greenspan legacy, The New York Times recounts the measures these three went to circumvent a woman who, if she had been listened to, could have prevented much of the current financial collapse.
The result: Derivatives remained unregulated, and Born left the CFTC in 1999. In the fall of 2007, the worst financial tsunami since the 1930s began to roil both Wall Street and Main Street, with derivatives based on now-failed sub-prime mortgages at its very core.
Quote to set your teeth on edge: “Brooksley was this woman who was not playing tennis with these guys and not having lunch with these guys. There was a little bit of the feeling that this woman was not of Wall Street.” —Michael Greenberger, a senior director at the Commission to The New York Times.
Horsewoman #2: Sheila Bair, chairman of the FDIC
What she said: Back in 2007, seeing that the escalating number of home foreclosures threatened the entire banking system, Bair called for Ben Bernanke’s Fed to require banks to tighten lending standards and to convert their adjustable-rate sub-prime mortgages into traditional fixed-rate mortgages. This fall, Bair criticized Treasury Secretary Henry Paulson’s $700 billion bailout plan in a Wall Street Journal interview, suggesting that more of the money be earmarked for struggling homeowners rather than banks. "Why there’s been such a political focus on making sure we’re not unduly helping borrowers but then we’re providing all this massive assistance at the institutional level, I don’t understand it. It’s been a frustration for me."
Who is trying to screw her: Her tendency to speak truth to power has provoked the New York Fed Chair Timothy Geithner, Obama’s nominee for Treasury Secretary, who according to a story on Bloomberg.com last week, is maneuvering to force her to resign before her 2011 term is over.
The result: The Fed ignored her 2007 call to tighten lending standards until 2008, and has just in the last weeks finally proposed banks convert toxic mortgages to more traditional fixed-rate ones. So far, the popular Bair is hanging tough, with both Democrats in Congress and journalists singing her praises as an independently minded regulator, and she still speaks out about moving more of the Paulson Plan’s $700 billion away from Wall Street and toward Main Street.
Quote to set your teeth on edge: “I think part of the problem now, to be honest, is Sheila Bair has annoyed the ‘old boys’ club. To some extent, bank regulation and mortgage foreclosure have made a situation where we have several regulators up in the tree house with a ‘no girls allowed’ sign — and it’s aimed at Sheila Bair — who’s been really good.” —Congressman Barney Frank to Bloomberg.com
Horsewoman #3: Meredith Whitney, Managing Director and Analyst, Oppenheimer & Co.
What she said: On Halloween 2007, she became the first analyst to call out Citibank on their toxic mortgage derivatives, claiming that the bank was under-capitalized and would be forced to cut its dividend. She downgraded its stock to "market underperform," setting off a firestorm.
Who tried to screw her: She received death threats in the days after her Citibank call, and thousands of hate e-mails.
The result: While Citi declined to specifically comment on Whitney’s analysis, four days later, Citibank’s CEO Chuck Prince resigned. The bank maintained that it could rebuild its capital ratio by the middle of 2008 without a dividend cut. In late November 2008, Citibank was the latest bank to seek a government bailout, the terms of which slashed its dividend to a penny a share. The stock price slid from $41.90 on 10/31/07 to $7.40 on 12/5/08. As a result, Whitney has been hailed as the most prescient and influential financial analyst to emerge in the meltdown.
Quote to set your teeth on edge: Thomas Brown, blogger, BankStocks.com, called Whitney "incredibly arrogant" and in his August 2008 post states: "Every cycle there’s one analyst who races to be the most bearish, and this time it’s her. Honestly, I think we’ll look back and see that Meredith Whitney’s credibility peaked on July 15 (2008)," a date he believed "financials had made their bottom." Two months later, Lehman Brothers collapsed, and the current financial emergency was on.
Horsewoman #4: Tanta, the screen name for the prescient commentator Doris Dungey, on Bill McBride’s influential financial blog, Calculated Risk
What she said: In December 2006, Tanta, with no prior journalistic experience and having just quit her 20-year career in the mortgage business after being diagnosed with ovarian cancer, began her bitingly humorous and exquisitely literate blog postings that presaged the sub-prime mortgage debacle and the crashing housing and equities markets. In her first post, she gained wide notice by sharply criticizing a Citibank report that predicted that the mortgage market would improve in 2007 to the benefit of highly leveraged banks such as Citi. Tanta was one of the first to suggest that Citibank, the country’s largest bank, was at fundamental risk because of mortgage-backed derivatives.
The result: Tanta became one of the most influential financial writers online and off, and one of the first to see the impending financial storm. While banks continued to make risky loans and Wall Street continued to trade derivatives, and politicians such as George Bush and regulators such as Henry Paulson continued to say the economy was "fundamentally sound," Tanta fearlessly used her deep understanding of mortgages, a fearless turn of phrase and the power of new media to warn others of the coming storm.Condé Nast Portfolio called her "one of the best financial writers in the world." She was quoted by Nobel Laureate Paul Krugman in his New York Times blog. According to The Wall Street Journal, hers was "one of the smartest and most influential blogs on the mortgage meltdown and resulting financial crisis."
Quote to set your teeth on edge: "You must understand that someday, quite possibly sooner than you’d expect, you will just not get an answer from an e-mail to me, and that might mean I’m in the hospital, it might mean I’m in the hospice and it might mean that God is my mail drop from now on."
Doris Dungey, Tanta, succumbed to ovarian cancer on November 30, 2008 at the age of 47.
wowowow.com
Readers, stop sharpening your pitchforks for a moment because here, just in time for your year-end 401K reports to arrive, is a little story about four women who not so very long ago caused eyeballs to roll and brows to knit among the Wall Street and Washington Testosterone Teams, but who, if they had been listened to by the reigning Masters of the Universe, might have either prevented the economic Armageddon we are in … or at least caught it in time to prevent some its more pernicious collateral damage.
Who are these women? Two accomplished regulators and two prescient financial industry employees who saw that the toxic brew of sub-prime mortgages, derivatives and lack of government oversight was bubbling up the greatest destruction of wealth in the history of the world.
That they were ignored and in some cases ridiculed by the very perpetrators of this global White Shoe Financial Ponzi Scheme makes this a tediously familiar tale to many women who have worked in proximity of the polyglass ceiling, especially on Wall Street.And here’s the remarkable news: some of the Big Boyz who ignored these women?
They’re part of the new Obama financial team.
Horsewoman #1: Brooksley Born, chair of the U.S. Commodity Futures Trading Commission from 1996-99, a Federal agency that regulates commodity options and futures trading
What she said: Ten years before the collapse in the derivatives market became front-page news, and five years before Warren Buffett famously called them "weapons of financial mass destruction," Brooksley Born warned in Congressional testimony that these complex, opaque and unregulated financial instruments could “threaten our regulated markets or, indeed, our economy, without any federal agency knowing about it.” She wanted her commission to provide governmental oversight of the derivatives market.
Who tried to screw her: Claiming that she did not understand the markets, a triumvirate made up of former Federal Reserve Chairman Alan Greenspan, then-Treasury Secretary (and current controversial Citibank Director) Robert Rubin and his deputy and new Obama appointee Lawrence Summers (he late of the Harvard University dust-up where he claimed that women were intrinsically deficient in math) prevailed upon all who would listen to prevent Born’s agency from regulating the derivatives market. In their recent story on the Alan Greenspan legacy, The New York Times recounts the measures these three went to circumvent a woman who, if she had been listened to, could have prevented much of the current financial collapse.
The result: Derivatives remained unregulated, and Born left the CFTC in 1999. In the fall of 2007, the worst financial tsunami since the 1930s began to roil both Wall Street and Main Street, with derivatives based on now-failed sub-prime mortgages at its very core.
Quote to set your teeth on edge: “Brooksley was this woman who was not playing tennis with these guys and not having lunch with these guys. There was a little bit of the feeling that this woman was not of Wall Street.” —Michael Greenberger, a senior director at the Commission to The New York Times.
Horsewoman #2: Sheila Bair, chairman of the FDIC
What she said: Back in 2007, seeing that the escalating number of home foreclosures threatened the entire banking system, Bair called for Ben Bernanke’s Fed to require banks to tighten lending standards and to convert their adjustable-rate sub-prime mortgages into traditional fixed-rate mortgages. This fall, Bair criticized Treasury Secretary Henry Paulson’s $700 billion bailout plan in a Wall Street Journal interview, suggesting that more of the money be earmarked for struggling homeowners rather than banks. "Why there’s been such a political focus on making sure we’re not unduly helping borrowers but then we’re providing all this massive assistance at the institutional level, I don’t understand it. It’s been a frustration for me."
Who is trying to screw her: Her tendency to speak truth to power has provoked the New York Fed Chair Timothy Geithner, Obama’s nominee for Treasury Secretary, who according to a story on Bloomberg.com last week, is maneuvering to force her to resign before her 2011 term is over.
The result: The Fed ignored her 2007 call to tighten lending standards until 2008, and has just in the last weeks finally proposed banks convert toxic mortgages to more traditional fixed-rate ones. So far, the popular Bair is hanging tough, with both Democrats in Congress and journalists singing her praises as an independently minded regulator, and she still speaks out about moving more of the Paulson Plan’s $700 billion away from Wall Street and toward Main Street.
Quote to set your teeth on edge: “I think part of the problem now, to be honest, is Sheila Bair has annoyed the ‘old boys’ club. To some extent, bank regulation and mortgage foreclosure have made a situation where we have several regulators up in the tree house with a ‘no girls allowed’ sign — and it’s aimed at Sheila Bair — who’s been really good.” —Congressman Barney Frank to Bloomberg.com
Horsewoman #3: Meredith Whitney, Managing Director and Analyst, Oppenheimer & Co.
What she said: On Halloween 2007, she became the first analyst to call out Citibank on their toxic mortgage derivatives, claiming that the bank was under-capitalized and would be forced to cut its dividend. She downgraded its stock to "market underperform," setting off a firestorm.
Who tried to screw her: She received death threats in the days after her Citibank call, and thousands of hate e-mails.
The result: While Citi declined to specifically comment on Whitney’s analysis, four days later, Citibank’s CEO Chuck Prince resigned. The bank maintained that it could rebuild its capital ratio by the middle of 2008 without a dividend cut. In late November 2008, Citibank was the latest bank to seek a government bailout, the terms of which slashed its dividend to a penny a share. The stock price slid from $41.90 on 10/31/07 to $7.40 on 12/5/08. As a result, Whitney has been hailed as the most prescient and influential financial analyst to emerge in the meltdown.
Quote to set your teeth on edge: Thomas Brown, blogger, BankStocks.com, called Whitney "incredibly arrogant" and in his August 2008 post states: "Every cycle there’s one analyst who races to be the most bearish, and this time it’s her. Honestly, I think we’ll look back and see that Meredith Whitney’s credibility peaked on July 15 (2008)," a date he believed "financials had made their bottom." Two months later, Lehman Brothers collapsed, and the current financial emergency was on.
Horsewoman #4: Tanta, the screen name for the prescient commentator Doris Dungey, on Bill McBride’s influential financial blog, Calculated Risk
What she said: In December 2006, Tanta, with no prior journalistic experience and having just quit her 20-year career in the mortgage business after being diagnosed with ovarian cancer, began her bitingly humorous and exquisitely literate blog postings that presaged the sub-prime mortgage debacle and the crashing housing and equities markets. In her first post, she gained wide notice by sharply criticizing a Citibank report that predicted that the mortgage market would improve in 2007 to the benefit of highly leveraged banks such as Citi. Tanta was one of the first to suggest that Citibank, the country’s largest bank, was at fundamental risk because of mortgage-backed derivatives.
The result: Tanta became one of the most influential financial writers online and off, and one of the first to see the impending financial storm. While banks continued to make risky loans and Wall Street continued to trade derivatives, and politicians such as George Bush and regulators such as Henry Paulson continued to say the economy was "fundamentally sound," Tanta fearlessly used her deep understanding of mortgages, a fearless turn of phrase and the power of new media to warn others of the coming storm.Condé Nast Portfolio called her "one of the best financial writers in the world." She was quoted by Nobel Laureate Paul Krugman in his New York Times blog. According to The Wall Street Journal, hers was "one of the smartest and most influential blogs on the mortgage meltdown and resulting financial crisis."
Quote to set your teeth on edge: "You must understand that someday, quite possibly sooner than you’d expect, you will just not get an answer from an e-mail to me, and that might mean I’m in the hospital, it might mean I’m in the hospice and it might mean that God is my mail drop from now on."
Doris Dungey, Tanta, succumbed to ovarian cancer on November 30, 2008 at the age of 47.
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