Bernard Madoff and Ponzi Schemes--Posner's Comment

I must be cautious in discussing the Madoff scandal because as a judge I am forbidden to make a public comment on pending or impending litigation. Madoff himself of course has been arrested, and already lawsuits have been filed against some of the "funds of funds" that steered investors' money to him. I shall proceed on the assumption that the media are correct in describing Madoff as the author of a Ponzi scheme--indeed he is reputed to have described it that way himself--but I shall treat it strictly as an assumption, a hypothesis, and not as established fact, which is for a court to determine. And I will not comment at all on the suits against the funds of funds. It is unsurprising that a Ponzi scheme should come to light during a stock market crash. As Warren Buffet is reputed to have said, one doesn't know who is swimming naked until the tide runs out. The stock market crash would have reduced any remaining assets in Madoff's investment account at the same time that liquidity problems caused by the depression would have increased the rate of redemptions. Madoff's scheme, as described in the media (and remember that I am not taking a position on the truth of any of the allegations that have been made against him), is not a classic Ponzi scheme. The classic scheme is a "con" in the sense of a fraud perpetrated against greedy dopes. A skillful con man uses his gift of salesmanship to inveigle people by such ludicrous pitches that only the least sophisticated, or those most blinded by greed, are conned. A typical Ponzi scheme might offer a 10 percent monthly return on investment--the very improbability that such an offer could be genuine assures that only suckers will invest and they are least likely to discover that they have been conned until the con man has made a bundle. They may never discover that they have been conned--they may be convinced by the con man that they lost their money because of a legitmate business failure. Or they may be embarrassed to complain, or even afraid to complain because they suspect that they've been involved with a criminal enterprise--what but a criminal enterprise could generate a 10 percent monthly return on one's investment? It is possible therefore that many Ponzi schemes are never reported to the authorities and hence never detected. The strategy that has been attributed to Madoff is the opposite of that of the typical Ponzi schemer: it is to obtain investments from well-off people far more financially sophisticated than the average Ponzi victim, including genuine financial experts such as hedge fund managers and bank officials. And therefore it requires different tactics from that of the ordinary Ponzi scheme, such as offering returns only moderately above average, satisfying redemption requests promptly, turning down some would-be investors (it would be interesting to know whether there was a tendency to turn down investors who might prove nosy or suspicious), and trading on a reputation earned in a legitimate business (Madoff's business of market making). Madoff is alleged to have preyed primarily on his fellow Jews; such "affinity" frauds are common, because people are likely to be more trusting of members of their own ethnic or religious group than of outsiders and because a con man may be abler to identify and exploit the weaknesses of members of his own group than of others. The most interesting question raised by the scandal is why though it apparently continued for decades it was never detected by the Securities and Exchange Commission, even though beginning eight years ago a money manager named Harry Markopolos began bombarding the Commission with letters accusing Madoff of operating a Ponzi scheme. (The fact that Madoff did not sue Markopolos for libel should have been another warning sign.) There are two hypotheses. One is that regulation is hopelessly inefficient, and that it should be up to investors to protect themselves as best they can against securities frauds. The SEC's budget was increased substantially in 2004 in reaction to its failure to have detected the Enron, World Com, and other financial scandals that erupted in the early years of the new century, yet it still failed to detect Madoff's scheme. The other hypothesis is that under Chairman Christopher Cox (as under the first chairman appointed by President Bush, Harvey Pitt), the SEC has been too trusting of the securities industry, as part of a general philosophy of deregulation, small government, and laissez-faire that has characterized the Bush Administration. The SEC does seem to have been asleep at the switch quite a bit of late. Just days before the collapse of Bear Stearns marked the beginning of the banking crisis, Chairman Cox said that "We have a good deal of comfort about the capital cushions at these firms at the moment." In fact most of the firms about which he was speaking--the investment banks--were teetering at the brink, and in some cases over the brink, of insolvency. Cox's reaction to the Madoff scandal has been to blame his subordinates in the Commission, rather than to take responsibility himself. That is not an endearing reaction. The standard governmental response to a major governmental failure is reorganization. The government wants to prove that it is doing something to prevent a repetition of the failure, and the cheapest yet most visible and dramatic way to show that it has "gotten the message" and is going to "do something" is to reorganize. Hence the creation of the Department of Homeland Security and the Directorate of National Intelligence in the wake of the 9/11 attacks. It is beginning to seem likely that there will be an ambitious reorganization of the financial regulatory system. In the course of that reorganization, the SEC may be abolished. If so, Bernard Madoff and Christopher Cox can share the credit.

Comments

[critic]

A certain gentleman is supposed to have said, "... but it still moves." In the same vein I say Social Security is a Ponzi scheme no matter what names you bandy about. Ask yourself this question: If Congress gave me (only) the right to have opted out of Social Security when I entered the labor force, what would I have done?

[FT]

Today I am releasing two tales at once, A Basic Tale and A Tale of Accountability. I try to release tales as they apply to current events. Of course one can’t read or listen to a business news story without a prominent report about the “Scam of the Century” or the “Fifty Billion Dollar Fraud” or the “Biggest Ponzi Scheme Ever.” By now, most people know, I am referring to the case of Bernard Madoff.

My heart goes out to his victims, however, what seems clear is that the unfortunates that lost all of their money had ample warnings and red flags saying “Buyer Beware.” They should have known better. I know that this perspective is an unpopular one in our “I was wronged culture” but those that had all their money in only one investment style, with just one advisor that was self-supervised violated so many sound investment practices that the only surprise is they didn’t lose their money sooner. If it looks too good to be true, it’s too good to be true. No one in the world is either so competent or so trustworthy as to merit this level of financial concentration.

I am not defending Mr. Madoff nor the multiple advisors and feeder funds that failed in their due diligence. I am not defending the SEC’s lack of supervision but I am convinced his victims let themselves get duped, either by greed or negligence. One of my economics professors would always say that there are only two ways to get rich. The first way is to produce more than you consume and the second is to steal. In a nutshell you either produce or steal. Since I write these tales so that people can become better investors, they must learn to recognize a scam or the potential for a scam when they see one. From what I have read, Mr. Madoff’s scam was not easy to recognize unless you were a sophisticated investor. However, the potential for a scam could be seen a mile away by even the most unsophisticated of investors. There were zero checks and balances in his investment program. Never invest in any investment program that doesn’t have adequate checks and balances is the moral of the Madoff story.
http://www.financialtales.com

[anutrof]

Hola,

No puedo evitarlo, lo que me llama la atención de esta estafa son tres cosas:

La primera: la cantidad de dinero que se ha movido/estafado. Es brutal para el com√∫n de los mortales (en el cual me encuentro)

La segunda: La gente que se ha visto afectada. No se trata de incultos pardillos a los que el primer vendedor de aire les encandila con beneficios abrumadores. Se trata de gente de mundo con asesores financieros y aun así han picado. En este punto, jajajajajajajaja no puedo por menos de reírme a carcajadas juasjuasjuasjuasjuasjuas!

La tercera (y en esta no me río lo más mínimo): Independientemente de que sea una estafa o no, ¿cómo puede ser que personajes públicos accedan a inversiones financieras con una rentabilidad superior a un 100%?

Me explico, si Almodovar arriesga su dinero (o el de inversores) en una película y es un éxito de taquilla gana un 100, un 200 o un 1.000% sobre lo invertido. Si la película es un desecho y nadie va a verla, Almodovar (o sus inversores) pierden el dinero que han invertido. Se trata del riesgo de un director de cine sobre el área que conoce y sobre la que trabaja. No hay mucho misterio, tiene un componente de genialidad (la parte de narrar y hacer atractiva una historia) y un componente de suerte (que a la gente le guste y la peli sea super taquillera).

Pero en este caso, se trata de unas inversiones que no tienen nada que ver con el medio en el cual Almodovar es un profesional (se trata del mundo financiero!).

Y aquí viene mi gran inquietud ¿por qué Almodovar tiene capacidad para acceder a unas inversiones financieras que le dan una rentabilidad superior al 100% y yo no? ¿Hay que ser un gurú de una determinada área para acceder a esto?

Normalmente, uno pensaría que en el mundo de hoy, si hay una manera LEGAL de rentabilizar una inversión en un 100%, estaría reflejada en determinadas leyes, normas, supuestos, etc., etc., etc. (todo muy complicado) pero que tras hacer unas breves indagaciones por Internet nos encontraríamos con toda una serie de manuales sobre como obtener unos ingresos del 100% de manera totalmente legal. Por ejemplo, si quiero saber como romper un sistema informático (pocas cosas hay más crípticas) no tengo mas que poner la palabra 'hacker' en google y encuentro cientos de manuales).

Entonces, ¿por qué si pongo en google 'forrarme' o 'rentabilidad 100%' o algo por el estilo, me encuentro con un montón de páginas que suenan a engaño o, en el mejor de los casos, con avisos advirtiéndome de que depende de la legislación de cada país?

Se supone (o por lo menos eso se predica desde los más altos estamentos) que nuestro país prohíbe y persigue los paraísos fiscales, esto quiere decir que no permite ni articula medios para poder acceder a rentabilidades que no estén legisladas.

Así que repito la pregunta, ¿por qué Almodovar (como otros grandes de España) accede a inversiones financieras que le reportan un interés, como mínimo, del 100%?

Parece como si el hecho de ser famoso o rico diera acceso a conocimientos (impensable hoy en día con Internet) o a derechos inasequibles para el resto de la población.

Descartada la opción de que hacienda no tenía conocimiento (si yo trato de 'sisear' 1.000 euros en la declaración de la renta y me pillan, ¿cómo no van a detectar movimientos por valor de varios cientos de miles de euros?) pasamos a pensar que, efectivamente, tener dinero ayuda a 'esquivar' ciertas 'legalidades'. Este es el punto tenebroso.

Así que retomando la tercera cuestión que me llama la atención... ¿cómo puede ser que personajes públicos accedan a inversiones financieras con una rentabilidad superior a un 100% (independientemente de que sea una estafa o no)? ¿Están por encima de las leyes? ¿Es que las leyes están hechas a su medida?

Alguien dijo una vez (un tal Jes√∫s), "...se pillar√° antes a un mentiroso que a un cojo".

Parece que en estos tiempos los cojos corren mucho!

Invito a quien lea esto, a que discuta sobre cómo solucionar esta situación (no a justificarla ni a plantear de donde viene, que es muy importante, si no a plantear soluciones).

Un saludo,
Anutrof

[pkoq njqrltav]

ukdhw avtrxo hzuydftm odwejf mwukpq uavbgrwp mgocy

[pkoq njqrltav]

ukdhw avtrxo hzuydftm odwejf mwukpq uavbgrwp mgocy

[pkoq njqrltav]

ukdhw avtrxo hzuydftm odwejf mwukpq uavbgrwp mgocy

[pkoq njqrltav]

ukdhw avtrxo hzuydftm odwejf mwukpq uavbgrwp mgocy

[bob]

I don't think it is permissible to declare something an assumption or hypothesis in order to skirt judicial ethics rules regarding commenting on pending cases.

Regardless, the attempt to differentiate the Madoff scheme from a regular Ponzi scheme based on the identity of the victims rather than the underlying conduct is a pretty thin reed.

[Tom Smokov]

I would almost be willing to wager that Bush will pardon Madoff before he leaves office. Does anyone know if the purported 120 million dollars in checks that were confiscated have George Bush's name on them?

[Tom Smokov]

I would almost be willing to wager that Bush will pardon Madoff before he leaves office. Does anyone know if the purported 120 million dollars in checks that were confiscated have George Bush's name on them?

[geawlimi]

–¢—ã –∫–∞–∫ –æ–±—ã—á–Ω–æ —Ä–∞–¥—É–µ—à—å –Ω–∞—Å —Å–≤–æ–∏–º–∏ –ª—É—á—à–∏–º–∏ —Ñ—Ä–∞–∑–∞–º–∏ —Å–ø–∞—Å–∏–±–æ, –±–µ—Ä—É!

[Sitssync]

–ê–≤—Ç–æ—Ä, –∞ –≤—ã –∏–∑ –∫–∞–∫–æ–≥–æ –≥–æ—Ä–æ–¥–∞ ?

[MemSweem]

–í–∞—à —Å–∞–π—Ç –≤ –æ–ø–µ—Ä–µ –Ω–µ –æ—á–µ–Ω—å —Ç–æ –∫–æ—Ä—Ä–µ–∫—Ç–æ –ø–æ–∫–∞–∑—ã–≤–∞–µ—Ç—Å—è, –∞ —Ç–∞–∫ –≤—Å–µ –æ—Ç–ª–∏—á–Ω–æ! —Å–ø–∞—Å–∏–±–∫–∏ –≤–∞–º –∑–∞ —É–º–Ω—ã–µ –º—ã—Å–ª–∏!

[thargego]

–Ø –±—ã —Å–∫–∞–∑–∞–ª–∞ –æ –º–æ–Ω—É–º–µ–Ω—Ç–∞–ª—å–Ω–æ—Å—Ç–∏, –≥—Ä–∞–Ω–¥–∏–æ–∑–Ω–æ—Å—Ç–∏ –Ω–µ–∫–æ—Ç–æ—Ä—ã—Ö —Å—é–∂–µ—Ç–æ–≤. –ê –Ω–∞–∑–≤–∞–ª–∞ –±—ã - "–Ω–µ—Ñ–∏–ª—å—Ç—Ä–æ–≤–∞–Ω–Ω—ã–π —Ä–µ–∞–ª". –ù–∞ –º–æ–π –≤–∑–≥–ª—è–¥, –∫—Ä–∞—Å–æ—Ç–∞ - —ç—Ç–æ –≤—Å–µ-—Ç–∞–∫–∏ –¥—Ä—É–≥–æ–µ: –ª—É—á—à–µ–µ, —á–∏—Å—Ç–æ–µ, –∏–∑–±—Ä–∞–Ω–Ω–æ–µ, –∑–∞—Å—Ç–∞–≤–ª—è—é—â–µ–µ —Ç—Ä–µ–ø–µ—Ç–∞—Ç—å –∏ –ø–æ—Ä–∞–∂–∞—Ç—å—Å—è. –ú–æ–∂–Ω–æ –Ω–∞–π—Ç–∏ –∫—Ä–∞—Å–æ—Ç—É –≤–æ –≤—Å–µ–º, –Ω–æ –≤—Å—ë —Å–∫–æ–ø–æ–º - –Ω–µ –µ—Å—Ç—å –∫—Ä–∞—Å–æ—Ç–∞. –ò–º—Ö–æ.

[reoliIdionee]

–ê–≥–∞, —Ç–µ–ø–µ—Ä—å –ø–æ–Ω—è—Ç–Ω–æ...–ê —Ç–æ —è —Å—Ä–∞–∑—É –Ω–µ –æ—á–µ–Ω—å —Ç–æ –∏ –Ω–µ –ø–æ–Ω—è–ª –≥–¥–µ —Ç—É—Ç —Å–≤—è–∑—å —Å —Å–∞–º–∏–º –∑–∞–≥–æ–ª–æ–≤–∫–æ–º...

[Somohiemhire]

–û–≥—Ä–æ–º–Ω–æ–µ —á–µ–ª–æ–≤–µ—á–µ—Å–∫–æ–µ —Å–ø–∞—Å–±–æ!

[patrick ryan]

As far as a criminal complaint
is Madoff likely to be liable
for Larceny or Larceny By Trick?

Pat Ryan
GGU Law 2L

[Soivarix]

–°–ø–∞—Å–∏–±–æ –≤–∞–º –∑–∞ —Å–∞–π—Ç, –æ—á–µ–Ω—å –ø–æ–ª–µ–∑–Ω—ã–π —Ä–µ—Å—É—Ä—Å, –º–Ω–µ –æ—á–µ–Ω—å –Ω—Ä–∞–≤–∏—Ç—Å—è

[beauctib]

–°–∫–∞–∂–∏—Ç–µ, –∞ —É –≤–∞—Å –µ—Å—Ç—å RSS –ø–æ—Ç–æ–∫ –≤ —ç—Ç–æ–º –±–ª–æ–≥–µ?

[frigeofs]

–ê –í—ã –Ω–µ –∑–∞–¥—É–º—ã–≤–∞–ª–∏—Å—å –æ —Ç–æ–º, —á—Ç–æ–±—ã –ø–∞—Ä–∞–ª–ª–µ–ª—å–Ω–æ –∑–∞–≤–µ—Å—Ç–∏ –µ—â–µ –æ–¥–∏–Ω –±–ª–æ–≥, –Ω–∞ —Å–º–µ–∂–Ω—É—é —Ç–µ–º—É? –£ –í–∞—Å –Ω–µ–ø–ª–æ—Ö–æ –ø–æ–ª—É—á–∞–µ—Ç—Å—è

[Dayday]

–ê–≤—Ç–æ—Ä –≤—ã–π–¥–∏ –∫ –Ω–∞–ø—Ä–æ–¥—É, –≤–æ–ø—Ä–æ—Å—ã –µ—Å—Ç—å!

[Aleksander]

–°–ø–∞—Å–∏–±–æ, –æ—á–µ–Ω—å –∑–∞–∏–Ω—Ç–µ—Ä–µ—Å–æ–≤–∞–ª—Å—è, –±—É–¥–µ—Ç –ª–∏ –µ—à–µ —á—Ç–æ —Ç–æ –ø–æ–¥–æ–±–Ω–æ–µ–µ?

[Aleksander]

–ß—Ç–æ —Ç–æ –Ω–æ–≤–µ–Ω—å–∫–æ–µ, –ø–∏—à–∏—Ç–µ –µ—Å—á–µ –æ—á–µ–Ω—å –Ω—Ä–∞–≤–∏—Ç—Å—è.

[Ulceliidiose]

–°–∫–∞–∂–∏—Ç–µ, –∞ —É –≤–∞—Å –µ—Å—Ç—å RSS –ø–æ—Ç–æ–∫ –≤ —ç—Ç–æ–º –±–ª–æ–≥–µ?

[Infasymn]

–î–æ–±–∞–≤–∏–ª –≤ —Å–≤–æ–∏ –∑–∞–∫–ª–∞–¥–∫–∏. –¢–µ–ø–µ—Ä—å –±—É–¥—É –≤–∞—Å –Ω–∞–º–Ω–æ–≥–æ –ø–æ—á–∞—â–µ —á–∏—Ç–∞—Ç—å!