Comments on Rick Bookstaber: Reflections on Madoff

What floors me, is that a basic understanding of o...

2009-02-02T01:30:00.000-05:00

What floors me, is that a basic understanding of options theory should have raised alarms when considering his strategy. This wasn't a $100 million scheme. This was $50 billion. The strategy was completely, impossible. I figured out is was impossible in 10 seconds before the Markopolos letter was known and not because I am super smart. A simple understanding of options theory was all that was necessary to tell you those returns are absurd. Which means he needed other skills. But if you have other skills, there's no way they're going to be that absolutely consistent. The fact that the SEC couldn't see anything, or didn't even try, the fact that his brother in law was the auditor, that FOF due-dilligence never fundamentally questioned the strategies or else believed he was *illegally* front running his customers to the *benefit of them* (which I'm sure has a lot of truth to it, but I have to marvel at how absurd that belief is now that I reread it, who'd they think he was, Robin Hood?). And they believed these things enough to put billions upon billions of dollars with him. I think it's comically absurd to suggest that such people would be in the control of such large sums of money to invest. Of course it's not comical at all.

While some of the participants surely had an inkli...

2009-01-06T08:39:00.000-05:00

While some of the participants surely had an inkling that all was not right about the way Madoff earned the money on their investments, there are many who would not have had a clue. The average investor, who could be counted among the investors in Madoff's fund, would not have the slightest idea about the size of the option market and what is reasonable. Nevertheless, there are no doubt some who probably shared backroom laughs with Madoff about his ability to frontrun the market.

Fractional-reserve lending is the largest Ponzi sc...

2009-01-05T18:24:00.000-05:00

Fractional-reserve lending is the largest Ponzi scheme in history, and we're all part of it.

here is one example of a ponzi scheme run by most ...

2009-01-05T04:41:00.000-05:00

here is one example of a ponzi scheme run by most investment banks out there. you enter a structured swap or some other complex structure that your model values at say 100. some arranger sells it to you for "only" 90. you instantly have a profit of 10. of course, you need some reserve against it to keep auditors happy, so you reserve 2, which still leaves you 8. you have complex math to back each of these numbers, but your complex math relies on very weak assumptions on things like correlations and volatilities, but you make up for it making the math even more complex. the more such structures you enter, the more PL, so you and everybody else go for it and write tons of them over the years. the traders and salesmen get themselves promoted and receive million dollar bonuses. share prices go up, happy days. and now the ponzi part. that product is often long term. you need to delta hedge for years that model value that gives you your PL, often in illiquid markets. you and everybody else doing this business start chasing the same hedge at the same time, which makes you lose money steadily over the time. but this is not a problem, you can write more PL by buying at 90 and valuing at 100, easy. and you see where this is going. in case you are wondering why banks have enormous tier 3 asset positions, this is part of the reason. they got taken on because it was an easy way to show profit. so yes, I think there are many ponzi schemes out there, more subtle than madoff though, and interestingly enough, it is all legal under current laws and accounting standards.

Mr. Madoff’s alleged $50 billion dollar Ponzi sche...

2009-01-03T13:13:00.000-05:00

Mr. Madoff’s alleged $50 billion dollar Ponzi scheme lasting for 20-30 years, makes Bernie a big time con man but not a genius, as so many have intoned. Mr. Madoff simply understands human nature, we all want something for nothing and if we feel we are the chosen ones, so much the better. If Bernie can convince America that he was insane during his decades-long financial swindle, I will then consider him a genius and the aggrieved marks, too stupid for words.

On some level the investors absolutely felt that t...

2009-01-03T10:37:00.000-05:00

On some level the investors absolutely felt that there was something illegal, but they cannot and will not admit that to themselves now or ever.

Are we all a Ponzi sceme???? Our global housing market could be the grand-daddy of all Ponzi schemes...from Miami to Greenwich to the Bahamas to Dubai. I am telling you, here in Pennsylvania, people still have their houses marked at 2005 prices in their minds. We have not started to see the house next door sell at 03', 02' 01' prices, or the unimaginable....Y2K prices! Although, the dumpsters have disappeared from all the driveways.

Just think Wang Zhendong!

2009-01-03T09:05:00.000-05:00

Just think Wang Zhendong!

I'm still struck by the story (darned if I can fin...

2009-01-03T06:02:00.000-05:00

I'm still struck by the story (darned if I can find the link) of the two guys in Florida who were busted by the SEC for selling unregistered securities. They were feeding the money to Madoff. This was in the '70's. Madoff's name was redacted from any and all SEC documentation because he convinced them he "had no idea they were raising the money illegally", he was just trading the funds they sent him. Funny thing, to their surprise, when the SEC looked, they found all the money, it hadn't been stolen. Personally, I think decimalization did Madoff in, ruining his money-printing Nasdaq market making capabilities.