Information Arbitrage - Latest Comments in The Real Take-away from the Madoff Scandal

Re: The Real Take-away from the Madoff Scandal

becky lang — Sun, 21 Dec 2008 13:44:13 -0000

How many point did investor who got new investors make. Someone once approached me and I actually fear putting his name in this comment because he has guns at home. I believe the people that got other people invloved are guilty too. They claim to be victims but I don't believe all of them. Anyone who made money from selling these funds is guilty.

Re: The Real Take-away from the Madoff Scandal

stone — Mon, 15 Dec 2008 19:42:59 -0000

Wall Street shouldn't exist anymore after all fo this nonsense. Regulation cannot prevent crooks from being crooks and it seems to me that way too many on Wall Street are crooked.

Re: The Real Take-away from the Madoff Scandal

csertoglu — Mon, 15 Dec 2008 10:11:34 -0000

Interesting point. Thanks, Roger.

Re: The Real Take-away from the Madoff Scandal

joel eisenberg — Sun, 14 Dec 2008 23:20:51 -0000

it reported carl shapiro.lost 400 million
he is dead 15 years...
do you know who is behind that its important to me thax je

Re: The Real Take-away from the Madoff Scandal

dfriedman — Sun, 14 Dec 2008 17:09:28 -0000

I agree that transparency is important, but how do you have transparent markets if regulations are not effective? Transparency does not arise from nothing; there has to be an effective regulatory structure which creates transparency.

Re: The Real Take-away from the Madoff Scandal

michael_webster — Sun, 14 Dec 2008 16:17:55 -0000

I don't think that this is problem for regulators. BM through a variety of techniques was engaged in the standard something for nothing gambit.

Greed is neither necessary nor sufficient, in my view.

What is necessary is that the mark never thinks: "what is in it for the other guy?".

If BM was touting an 10-12% return with no volatility, he didn't need private money. BM could have established a new savings and loan system: lend at 2% and earn 10-12%, borrowing from public banks and "earning" from his "trades".

A private lender to BM made no sense, if the private lender thought "what it is in it for BM?". The only sensible conclusion was that there was something screwy with the economics of the deal.

{Kid Yellow used to say that he was happy to take money from marks that thought they had tumbled to a fixed race: the mark was happy to think he was screwing the horse operators, public, and track. The Kid was happy to offer the other side of that bet.)

Re: The Real Take-away from the Madoff Scandal

Ajay Shah — Sun, 14 Dec 2008 13:18:19 -0000

I wrote a blog post linked to this: See http://ajayshahblog.blogspot.com/2008/12/goodbye-great-moderation-hello.html.

Re: The Real Take-away from the Madoff Scandal

amsterdamjimmy — Sun, 14 Dec 2008 05:32:36 -0000

If you want to have a real laugh, please read the exact text copied from Fairfield Greenwich´s website about their excellent due diligence process..... Now you know how to loose USD 7.5 bln in Madoff´s ponzi scheme...... And these guys charge management fees ?????

FGG's Due Diligence Process

FGG's due diligence process is deeper and broader than a typical Fund of Funds, resembling that of an asset management company acquiring another asset manager, rather than a passive investor entering a disposable investment.

A number of areas of inquiry are examined by a team of FGG professionals who specialize in evaluating respective areas of risk. Typically, a manager has been investigated and monitored for six to 12 months before that firm can be accepted onto the FGG platform. Long negotiating periods enable FGG to be more confident of its decisions before proceeding with a manager. Areas of examination are centered around the following:

1. Portfolio Evaluation, Investment Performance, and Financial Risks:

A core area for further analysis is to attempt to dissect and further understand investment performance, how a manager generates alpha, and what risks are taken in doing so. As portfolio management and risk management incorporate elements of both art and science, FGG applies both qualitative and quantitative measures. FGG:

Examines independent prime broker trading records
Conducts detailed interviews to better understand the manager's methodology for forming a market view, and for selecting and exiting core positions
Analyses trading records
Conducts a number of qualitative and quantitative tests to determine adherence to risk limits over time
Confirms portfolio loss risk controls, diversification and other risk-related control policies, as well as any experience regarding unexpected or extreme market events
Reviews the risk and return factors inherent in the strategy
Evaluates capacity issues, which may affect alpha, as well as expected opportunities going forward within each candidate's strategy
Analyses the various drivers underlying a particular portfolio's risk
Evaluates credit risk and market risk both at the instrument and portfolio level
Assesses the extent to which leverage is used by a manager, as well as how it is used, the funding sources, and the impact on the risk profile of the fund
Investigate whether or not private or special registration securities are held, and determine how the daily trading volume and inventory held compares to the float and/or daily trading volume for a given security
FGG also conducts many quantitative reviews of investment performance in light of:

Fees and fee structure
Historical draw-downs
Return volatility
Commissions earned
Performance return in calm versus volatile markets
Current/historical correlation of the fund under consideration with standard industry benchmarks, peer groups, and other FGG or competitor funds used as benchmarks
FGG attempts to understand the return attribution for individual securities in the portfolio, and conducts a full suite of VaR analyses and stress tests to model the loss distribution function under extreme market scenarios. Leverage, concentration limits, and long/short exposures are examined over time to assess whether they have remained within operating guidelines.

Style fidelity is another key area of inquiry; the manager's trading pattern over time and through various market environments, FGG determines whether the manager is prone to trade outside of their area of expertise.

2. Personal Background Investigation:

FGG examines the abilities and personalities of the individuals involved in managing the fund through extensive interviews, as well as background investigations.
FGG verifies:
Education
Personal credit standing
Litigation and regulatory background
Track record
Other indicators

FGG explores the manager's experience and qualifications relative to the strategy being managed. Prior professional associations of a manager's key personnel can be crucial in understanding a person's experience and character and how they run their investment management business.

3. Structural and Operational Risk:

"Operational risk" refers to the risk of loss resulting from inadequate or failed internal processes, human resources, or systems, or from external events. Operational failures, including misrepresentation of valuations and outright fraud, constitute the vast majority of instances where massive investor losses occur. Other operational risks include staff processing errors, technology failure, and poor data.

Pricing models, as well as the adequacy, independence, and transparency of valuation procedures, contingency plans, and other trading and settlement procedures are all matters for close scrutiny by FGG professionals.

FGG seeks a sound understanding of whether a hedge fund possesses key controls in the areas of portfolio management, conflicts of interest, segregation of duties, and compliance. FGG carefully assesses the controls and procedures that managers have in place and seek to determine actual compliance with those procedures, often suggesting modifications, separations of responsibilities, and remedial staff additions.

4. Legal, Compliance, and Regulatory Risk:

FGG's legal, compliance, and accounting teams specialize in investment management regulation, securities compliance, corporate operations, and tax issues. Hedge fund managers function within an ever more complex legal and regulatory landscape, and the role of this part of the diligence exam is to determine the seriousness of any deficiencies in this area which may cause risk of sanction, loss, or reputational embarrassment.

Both in-house and retained legal professionals interview the management and staff of the manager, research regulatory filings, and review corporate organizational documents, as well as fund memoranda and related material contracts.

Re: The Real Take-away from the Madoff Scandal

Guest — Sun, 14 Dec 2008 02:26:04 -0000

Madoff did all this right under the SEC's nose

Re: The Real Take-away from the Madoff Scandal

dfriedman — Sun, 14 Dec 2008 00:08:41 -0000

The financial markets have a PR problem right now, which is that everyone involved in them appears to be unscrupulous and taking advantage of "unregulated" or "deregulated" markets.

Financial market participants and financially literate people understand this not to be true; markets cannot function if all participants are dishonest. This would be why drug cartels always collapse under their own weight.

But, as with most things, appearances matter, and Madoff, Dreier, and, no doubt, more such scandals, feed the fires.

The case needs to be made that effective regulation is not simply more regulation but rather the right kind of regulation. Optimists see in Obama's economic team and Rahm Emannuel a group of people who can beat back the lunatic left wing of the Congressional Democrats. I hope that these optimists are correct.