Bernie Madoff

Guys, can we just get one thing straight about Bernie Madoff?

Yes, I know he lost $50 billion, he\’s bankrupted an awful lot of people with his Ponzi scheme.

But, contrary to what Richard Murphy is saying this does not show that hedge funds need more regulation.

Because, you see, Bernie Madoff wasn\’t running a hedge fund.

No, this isn\’t trivial pendantry.

Mr. Madoff was not running an actual hedge fund, but instead managing accounts for investors inside his own securities firm. The difference, though seemingly minor, is crucial. Hedge funds typically hold their portfolios at banks and brokerage firms like JPMorgan Chase and Goldman Sachs. Outside auditors can check with those banks and brokerage firms to make sure the funds exist…

If he had been running a hedge fund then he wouldn\’t have been able to do what he did do as a result of the regulations about the way that hedge funds operate.

As Brad Delong says:

Surely this is an argument for more hedge funds? For more separation of portfolio and custodial functions?

From what we know so far Madoff was running one of the simplest (if on a massively large scale) financial scams known, the pyramid scheme. This has precisely sweet fuck all to do with hedge funds or any need for greater (or indeed lesser) regulation upon them.


10 thoughts on “Bernie Madoff”

  1. It wasn’t a pyramid scheme, it was a ponzi scheme. I’m writing a post on this as we speak…

    But yes. It doesn’t stand up as an argument for more regulation, seeing as the SEC completely failed to see it!

  2. Roger, indeed, though I think every western country with the possible exception of Norway is in the same boat. I’m with Jackart in looking forward to it all collapsing and taking big government with it for good…

  3. Actually, it wouldn’t surprise me at all to learn that there were some aspects of a pyramid here., whether in the form of specific generosities to selected participants already “in” or even a more outright gratuity or payment of some sort.
    Those aren’t inconsistent with Ponziness, though the mechanics of each fraud are distinct.

  4. It beggars belief that with all the noise from financial markets over the past decade or more about the importance of “transparency”, “compliance”, etc, that this character was able to get away with stuff on this scale. Incredible.

  5. Jonathan:

    Transparency and compliance aren’t really relevant issues. If, as I understand the firm was set up, it was essentially just a vehicle for his own activities, more or less as if you sold widgets or performed consulting services.

    As long as he paid taxes on some sort of income, to whatever activity attributed, there’d be no reason for any investigation into “compliance.” He might have been in some sort of technical violation of laws concerning acceptance of funds for investment but, if he didn’t advertise such services and there were no complaints from customers, again–there’d be no reason to look at his activities any more closely.

    I’m a bit curious as to whether he provided his customers–those to whom he repaid “investment” together with “profit”—any record of said profit for tax purposes. I think there’s a good chance that those who received such distributions and some of the charities he funded may be obliged to disgorge those amounts for a sharing of the losses.

    There’s no way to prove it–but I’d suspect very strongly that at least some of his suckers thought he was “getting away with something” and they were right–with their dough!

  6. Also–I should remark that, when the digging gets going, I wouldn’t be surprised if they’re able to trace a good portion of that total, though recovery may be more problematic. Hard to get rid of that much very quickly, I’d think.

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