Saturday, December 13, 2008

Art Imitates Life

(hat tip Barry)

Dilbert once again nails it in three simple frames: if you're missing the reference, the cartoon is mocking the mortgage backed securities market, where slices of subprime loans were repackaged into new securities which somehow attained a AAA top tier rating.

More on Madoff: The Bernie Madoff Ponzi Scheme story is really remarkable and tragic. Naked Shorts has a link to a story from 2001 questioning how Madoff achieved his incredible numbers. That piece seemed to spark an inquiry from Barrons, which Paul Kedrosky summarized nicely. Clusterstock also has a summary of how Madoff pulled off the biggest Ponzi scheme in history. Aksia Advisors wrote a letter yesterday explaining how they managed to detect the fraud in advance and avoid placing their clients' money with Madoff. One group that has no excuse, again, is the SEC, who was warned as far back as 1999 that Madoff, who was registered with the SEC, was up to something nefarious.

The SEC boggles my mind. I wrote months ago about how they had to close their broker-dealer oversight division because, well, they failed in their oversight and all the broker-dealers (BSC, LEH, MER, MS, GS) blew themselves up and ceased to exist! In the Madoff case, someone gave it to them on a silver platter almost ten years ago yet they STILL failed to detect any foul play. Incredible. The simple maxim: "if it looks too good to be true, it probably is," is something well within the SEC's powers to deconstruct, even mathematically.

When someone achieves returns that seem remarkable and unexplainable, some people ask questions (as highlighted above) and some people skip the questions and look for ways to make more money. In the case of Madoff, how do you take exceptional returns and make them better? Simple: Leverage! Nomura sold a 3xLevered version of Madoff's fund to investors. This is the best part of the whole story. Figure out how he's making the money? Nah... just LEVER IT UP BABY! As Clusterstock points out, incredibly, the leveraged fund in this case ended up doing no worse than the regular fund: they are both worth zero now.

I've written previously about our treatment of this debt crisis being a Ponzi scheme. Sure, maybe the intent of the government isn't to steal and defraud, but in any case, the music will stop at some point - Bernanke will stop throwing money at the problems, and our day of reality (I was going to say "reckoning" but it's really just reality: home prices must fall, we must lower our debt load, we can't spend our way out of this problem) will come.

Maybe then Madoff will slip to number 2 on the list of greatest Ponzi schemes in history.


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