The Madoff Double-bluff

[KeepTheGazeDown]

THE MADOFF DOUBLE-BLUFF
by Muhammad Rafeeq (18th-Dec-08)

http://www.iamthewitness.com/news/20...ble-Bluff.html

At first sight it was extremely refreshing. A white-collar financial crook raising his hands and pleading guilty to his financial crime. Th is has to be almost a first. Usually financial criminals when caught in the most obvious of wrong-doing plead 'not guilty'. The criminal can be caught boarding the plane, with a suitcase containing US$100mn of someone elses cash, with his mistress holding on to his arm, he will look into the camera with his most genuine 'Tony Blair look of sincerity' and say "What we have here is a misunderstanding.... " You make up the rest of the excuse, there is a million of them.

So yes, an outright confession, "It was me, I chopped down the apple tree" is so against the current socio-political culture it was almost too good to be true. Especially given the pedigree of this perp, the CEO of one of the busiest and most prominent financial exchanges in the world. After his confession the world goes into shock, especially the Jewish world, since affluent members of this community had previously flocked to his door, seeking his world famous high returns. Since his arrest the press is full of people extolling his virtues as a decent human-being and "who would ever of believed it?". It would be so easy for this man to deny any wrongdoing because he could bring out an army of good character witnesses and he could just point at some suspect-looking goy in his hedge fund organisation to lay the blame on.

So a truly heartwarming confession. And it was apparently made to his 2 sons, both of whom who worked for the fund and who had absolutely no idea that this fraud was being perpetrated, until such time as this astounding confession.

But then I sta rted to look more closely at the mix of investors who have lost money. About half of them are professional investing institutions. Look at this quote from the UK's Daily Mail newspaper (online http://www.dailymail.co.uk/money/art...-lawsuits.html)

"Full details of the exact losses are yet to emerge. Hedge funds and banks have so far admitted to having around £16billion with Madoff - only half of the total that is reckone d to have been lost. Some of the biggest casualties are Swiss private banks, which have taken hits amounting to about £2.5billion. Spanish bank Santander had £2.1billion of client money with Madoff. HSBC has admitted to lending about £600million to funds who wanted to use debt to gear up their positions with Madoff. RAB capital, the hedge fund that lost huge sums on investing in Northern Rock, has revealed that it is exposed to Madoff to the tune of around £6million."

Now the confession does not look right at all.

It is possible to accept the idea of a Ponzi scheme be played on members of the public, who are ignorant of how such schemes are worked, in fact the schemes are targetted specifica lly at such people. Yet Madoff would have us believe that he managed to convince professional investment companies to put their funds with him without any due diligence being performed. This is clearly nonsense.

I have a cted as a professional consultant to major EC and US financial institutions on corporate and institutional credit risk and the idea that anyone in HSBC or Santander could authorise large investment without the internal checks and controls being employed is almost impossible. To try and believe that EVERY institution that invested in Madoff circumvented their internal control procedures IS impossible.

Why is this important? Simple. If someone approaches the HSBC credit risk team, for instance, with a view to making a loan or investing a sum as large as £600m to what is ultimately a single institution (therefore a single counterparty credit exposure) a significant number hoops would have to be jumped through. Firstly there is the credit officer competence limit, which is the maximum amount that a single credit officer may be allowed to authorise. More than his/her limit must be referred up the credit approval food chain. In an institution like HSBC or Santander etc, £600bn or US$1bn will have been referred to the very top of the food chain, the banks' credit committees at the board level. This is an enormous sum and no lacky is going to be able to approve this by themselves, ever.

When the credit committee are called together to review an application, everything is ready prepared for them, so they can cut to the chase . The lower levels of the credit approval process will have prepared a summary of all the application documentation, included in the meeting bundle, with the strengths, weaknesses, and other important credit risk points. This application will usually contain a set of audited accounts going back a minimum of 3 years and most likely 5 years. There will be a full credit breakdown of the investment profile of the business, Madoff's hedge fund, looking at how the fund obtains its returns; investment assets and investment methodology. After the committee is satisfied that all the issues and concerns have been addressed they will vote on the approval or otherwise.

So there is no way that Madoff could have been pulling a scam. It would have stood out as clear as day to professional financial analysts, whose only job in life is to examine the management of companies and their reports and accounts, to make sure that all is in order. Its their job, its what they do. They are the world experts in spotting anomalies. The idea that all these professionals in all these companies were all duped is absolute nonsense. It is highly improbable that one such evaluation process could have been fooled, but all of them, never. A Ponzi scheme is easy to spot when you have the audited accounts and the full range of investment assets and investment metodologies employed.

Also, this scam avoided the attention of all the funds employees; accountants, traders, auditors and the US regulators, all of whom are also financial professionals.

This again is absolute nonsense. A ny company that I have ever worked for would have known internally that such business was being done, because they are all involved. For instance, a trader goes on buying equities from the worlds stock exchanges that go down in price for 5 continuous years, but the company just keeps giving him more money to top up the trading, continues paying his salary and even annual bonus. Absolute rubbish. But assuming this actually did happen, the market risk team would have been watching these losses, as would have the accountants. It is not possible to hide things like this internally for very long, months at the most; 20+ years, NEVER.

So why plead guilty? The answer is simple. Look on the net and you will see that because this case is being labelled a fraud, it would appear that investors are going to be able to claim their investment back under the US government's financial fraud protection scheme. A judge has already given his approval in principle for compensation, w ithout any evidence having been presented and financial fraud being demonstrated in a court of law. And it would appear that there will never be such a demonstration in a court of law. Why? It would appear that all the funds financial records are mostly "missing" (rather like Dov Zakheim's US$1.4tn) and those few records that do survive are in a terrible mess.

However, since the guy has pleaded guilty we do not need to demonstrate the fraud, because he says he is guilty.

And look further on the net and you will see that these "victims" have also been told by the US tax authorities that they will probably also be entitled to claim back some taxes on these defrauded sums.

Rather than saying this hedge fund has gone bust, due to its choice of investment assets and investment methologies, a scenario which is highly probable in the current financial paradigm, since all the professionals are predicting that at least 30% of all hedge funds are about to fail, more than 700 of them, the CEO chooses to fess up to fraud. If the CEO admits the fund has gone bust, then all those wealthy members of the Jewish community get nothing, but if the CEO admits to fraud they get their money back as compensation from the US tax payer, just as they are also drawing money back from the tax payers with the other hand.

And, as can be seen at the Daily Mail link above, the investors in this fund only get to litigate the fund directors against Lloyds insurers in London for even more compensation. Done properly the compensation could end up paying out far more than the original fund returns (yes this is sarcasm, it was bound to creep in eventually in yet another swindle like this).

Would that I could believe that Madoff were a good guy who slipped and then became repentant. But given the facts, this simply cannot be true.

[KeepTheGazeDown]

The daily mail link has been removed, I guess no surprises there.

[snassirnia]

Assalam Alaikum wa rahmat Allah,

fifty Billion and may be more. Amazing. And what is more unbelivable is the support and sympathy he is getting from the jewish control Media. every article about this crook is filled with his donation and other helpful gestures. But if you add up those moneys that he contributed it is very little despite so much money he was a stingy animal.
the other thing, his jewish clients loosing money seems to be a myth. Just Look at the amounts that the jewish clients had invested . It add up to few millions. It is all noise and damage control. I think his money is hidden in Isreal .

[abd ul jabbaar]

Dear brothers and sisters,

Asalaamu alayikum.

Firstly the daily mail link worked for me. So not sure why "keepthegazedown" had a problem?

Its worth checking out the audio files about this issue on www.iamthewitness.com. Both Daryl and his guest Muhammad Rafeeq are discussing the subject. They also intend to do some more on the same subject, so its worth keeping an eye on the most recent audio files.

There are lots of interesting audio files on this site. Certainly worth a visit!

Peace be with you,
Abdul Jabbaar.

[Tom Dennen]

I was taken by a story about an Arab who sold some camels. He took only the money he paid for them "plus the cost of the rope" he purchased to get them to market.

The kicker in the Madoff scandal is the financial repairs paid for by American taxpayers if the scam is indeed taken forward as admitted fraud, precluding audits into some very suspicious international oversight failings.

In both east and west, matters of money, interest and profit are discussed and we are all learning about our own systems as we enter into this 'global meltdown', which is uncovering some very interesting pieces of both theory and knowledge.

This may be part of the western financial paradigm:

THE HIDDEN HAND MOVED ON

And We Didn’t Even Notice.

Tom Dennen

“But the free market is not primarily a device to procure growth. It is a device to secure the most efficient use of resources.” — Henry C. Wallich, a Governor of the Federal Reserve System from 1974 to 1986.

Researching inflation has been an eye-opener because with all this meltdown stuff going on, every even half-baked student of basic systems wants to work out the who, what, where, when, and why of money systems.

I started with the question, “Is there a definition, say of ‘inflation’ given that the basics of supply and demand are common cause?”

Either we’ve lost the plot or there isn’t one, just some platitudes that do not lend themselves to anything but involutions:

Inflation:

“The overall general upward price movement of goods and services in an economy, usually as measured by the Consumer Price Index and the Producer Price Index.”

“A persistent increase in the level of consumer prices or a persistent decline in the purchasing power of money, caused by an increase in available currency and credit beyond the proportion of available goods and services.”

‘A sustained, but sometimes rapid increase in general price levels.”

What causes it? Now, that’s the toughie.

“There is no one single, universally accepted cause of inflation” … So the modern economist gives us three:

1. Cost-push inflation, which is due to wage increases that cause businesses to raise prices to cover higher labor costs, which leads to demands for still higher wages to pay for the increase in prices, called the wage-price spiral. Duh.
2. Demand-pull inflation which results from increasing consumer demand financed by easier availability of credit – a little greed here – and,
3. Monetary inflation caused by the expansion in the supply due to printing of more money by a government to cover its deficits.

All of the above are pure hogwash especially the obvious wage-price spiral.

Adding pewter to Roman gold coins (monetary inflation) didn’t fool the merchants then, and economists today generally agree that printing lots of paper money (adding pewter) causes high growth rates (inflation) in the money supply but merchants just charge more for the same goods if there’s more money in the system.

Duh – but why do it?

(Just incidentally, reading through Book 6 of Tacitus’ Annals, does anyone agree that he implied a certain regulatory indifference at that time by the government toward the systems that were collapsing pretty much the same as today’s for similar reasons?)

Because economic reality is so simple when viewed in relation to broader historical events – which it isn’t – it has to be fed to us in ‘economic theories’ that have to sound complicated but look circular in nature. Because so far, no cause, no cure, I have to either invent or find one for myself and ask for some criticism on it:

THE STORY SO FAR:

Before Zero Population Growth (ZPG), manufacturers had to make more goods every year because there were more people every year.

So from the beginning of the Industrial Revolution every commercial enterprise linked to population growth – the lot – expanded, and ‘growth’ over many years, generations even, was an invisible source of expansion, eventually an integral part of the general western economic paradigm – common cause: you ‘grow’ a business, you don’t just sustain it.

So it wasn’t ‘good business practices’, centralization, decentralization or the creation of profit centers – or thrift or fiscal generosity or Scroogeisms, just more people being born.

Tom Peters said something like this on his 90’s lecture tours: In the sixties and seventies: you couldn’t run a Fortune 500 company into the ground if you tried.

‘Growth’ insidiously assumed itself into all western economies and had become as necessary as air.

But the basic source of growth – population expansion – had dried up without it being noticed – what I think may have been Smith’s ‘Hidden Hand’ having writ, moved on.

And what we lost sight of is the fact that when the population stopped growing at the rapid rate western economies were used to, demand for growth-generated profits didn’t.

Now we had a problem.

We couldn’t grow a business in the traditional way because the population wasn’t cooperating so it very soon became obvious that we were all competing for the same stable, non-growing market and still driven by the ‘necessity’ for increased profits!

Time-And-Motion specialists in full fiscal drag disguised as economists appeared and told us to “Get lean and mean.”

Well, it got more sales … and growth in profit through efficiency but not through more customers because First World populations stayed celibate in economic terms and Zero Population Growth (ZPG) became a buzzword.

We became so lean and mean we could keep up with shareholders’ demands for MORE PROFIT! Even in a stagnant market.

Crunch time: Computers arrived and took over middle management functions – compiling quarterly pie-chart reports worked for a while, but plugging into the factory floor in real time 24/7 was huge.

And saved enough in wages to continue posting annual profit growth over the ten years up to the early nineties during which time populations expanded in microns.

The first world became host to fifteen million ex-middle managers who it would seem, had turned to running small, medium and micro enterprises (SMMEs) which also appear to be a Whole New Resource-based Sustainable Economies on their own!

But still just guys scratching for a mortgage, education for the kids and this outrageous (to management) new-fangled thing called a pension which appeared for the first time about a generation ago and will certainly not survive into this current Boomer generation..

THE ‘HIDDEN HAND’ HAS LEFT THE BUILDING

“Growth’ was generic to industrial revolution- population growth-geared economy.

Today it’s a completely different ball game, of course, except for pork bellies, sorghum, wheat and genetically modified corn.

For more customers = population growth, the First World has turned to the developing, high population growth Third World for the embedded ‘necessity’ for profit growth.

After the computer age put middle management out to work and before Third World intervention the Age of Leveraged Buyouts, Hostile Takeovers and Mergers came upon us as the only way to satisfy the ubiquitous (and now labeled ‘greedy’) shareholders’ demand for annual profit increases.

“Sustainable” is still waiting in the wings with the SMMEs.

Back home in the early ‘30s we saw foreclosures, expensive labor outsourcing, cheap labor brought in and price fixing so bad Woody Guthrie made note of a truly unbelievable economic ‘solution’ to the starvation caused by The Great Depression: destroy food.

“The crops are all in and the peaches are rott'ning,
The oranges piled in their creosote dumps …”

Right now, with my take on short-term economic pocket history in mind, take note of what the American banks are doing with the ‘bailout’ money given to them by taxpayers to lend back to taxpayers – if they’ll let you see the books.

I say creating an even Greater Depression, but then so say all the other new students of economics, all reaching the same conclusion from different routes.

[jobmaster]

Hi


his jewish clients loosing money seems to be a myth. Just Look at the amounts that the jewish clients had invested . It add up to few millions. It is all noise and damage control. I think his money is hidden in Isreal and i thank u........


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[AmatullahxXx]

Such crooks are the major cause of this recession.idiots making the world suffer! Serves maddof right.now he gotta be up by 5 have his breakfast by 6 and stay in a room smaller than his bathroom!

SO MANY IDIOTS,SO FEW BULLETS!
By the way, to keepthegazedown, mufti muhd sharif approves öf SF..

[maison09]

Excellent posts. Thanks

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[Beach Resort]

All your stories are inspiring. I just hope that there will more people who understand the reason why we work, we should be able to feed ourselves everyday then.

[habibati]

Don't think I've seen a thread inspire so many new member to join and post, LOL.