Monday, December 15, 2008

Madoff's (Complete) Madness

As I have been following this story over the past 4 days, I have had to hit the snooze button on my BS detector several times. I will explain.

First of all, let me say that this story is HUGE in my opinion. In fact, if it escalates like I think it could, this scandal could bring us FreeGold earlier than even Mother Nature intended.
This is "a fresh blow to financial confidence", according to one tycoon facing a $9bn loss.
This from an article today. I think this quote says it all. When you consider the elites who have been affected by this, you start to realize that this could be a catalyst for the changing of elite psychology toward our way of thinking.

I remember back... it was a personal loss of net worth that first turned me to the recognition of gold!

So why is my BS detector screaming? Virtually every article about the Madoff crime has used the term "Ponzi scheme". Because that's what Bernie himself called it. But after much deliberation, I believe that once the details come out, his crime will be far more shocking, and the fallout infinitely more widespread than a simple Ponzi scheme would have produced.

You see, Bernie's company was a "market maker" on the NASDAQ!

Follow these snippets:

[Billionaire Bernie] was charged with operating what he told employees was a long-running $50 billion Ponzi scheme...

“It’s all just one big lie,” Madoff told his employees on Dec. 10, according to the government. The firm, Madoff allegedly said to them, is “basically, a giant Ponzi scheme.”

His New York-based firm was the 23rd largest market maker on Nasdaq in October, handling a daily average of about 50 million shares a day, exchange data show. It specialized in handling orders from online brokers in some of the largest U.S. companies, including General Electric Co. and Citigroup Inc.

Madoff ran his investment advisory business from a separate floor of his firm’s office, keeping financial statements “under lock and key,” prosecutors said. Early in December, he told one employee that clients wanted to redeem about $7 billion and that he was struggling to free up the funds, the government said. After he told another staff member Dec. 9 that he wanted to pay annual bonuses before the year’s end, two months early, a pair of senior employees asked to speak with him, prosecutors said.

They had noticed he had been suffering from a “great deal of stress” and wanted to know what was happening, the U.S. said. When one of them challenged his explanations, Madoff invited them to his Manhattan apartment, saying he “wasn’t sure he would be able to hold it together” if they continued talking at the office, the government said.

While meeting the pair at his home yesterday, Madoff conceded that he was “finished,” that his advisory business is “all just one big lie” and “basically, a giant Ponzi scheme,” the government said. The business had been insolvent for years with losses of about $50 billion, he told the employees, according to the criminal and SEC complaints.

Madoff said he had about $200 million to $300 million left and planned to distribute money to select employees, family and friends before surrendering to authorities in about a week, the government said.

The Madoff firm had about $17.1 billion in assets under management as of Nov. 17, according to NASD records.

Okay, so he had his market-maker business, then he had his secretive $17bn investment "advisory". So if it was a straight Ponzi scheme, the losses should not exceed $17 billion, assuming he spent the whole nut. And that's a lot of spending!!
Mr Madoff confessed last week that his business was "all one great big lie". The investment returns were fake, and he had been paying old clients with money from new ones. In its conception, the scam is a classic. In its size, it is breathtaking, eclipsing anything seen before. He personally estimated the losses at $50bn

The feds are now confirming that his estimate of $50bn will probably hold up. So where did the other $33bn come from?

From the NASDAQ!

The way a market maker works is that it takes your bets, on Scottrade, E-trade or whatever, and guarantees your return. It doesn't run down to the floor to sell 25 shares just because you clicked a button. It waits and makes bulk trades to clear the books. But in Bernie's case, my guess is that he thought he knew better than you. So he would guarantee your bet on the books, but take your money and place his own bets.

He probably placed these bets with other people's money, (not money they had entrusted him to bet) on "high return" investments like OTC derivatives of some exotic kind. My guess is that he has been doing this for years with both his Investment Advisory $17bn as well as untold sums from his sons' market maker business. And any return he made above and beyond your bet on, say, Microsoft, he would keep. Then his computers would credit your account for whatever your bet on Microsoft paid.

And because he mixed the money in this way, he generated a very good (11%), but imaginary, return for his IA clients. Then, when the market turned really bad in mid-September, the jig was up. He took huge losses. Perhaps his losses started a year earlier even. Whatever. At that point his crime, his fraud, became a Ponzi Scheme.

He kept both businesses going as long as he had fresh money flowing in. And I have a hard time imagining that he kept this going for 15 months, so I think he probably "hit the wall" this past September.

Of course his market maker redemptions took preference. He wasn't even ALLOWED to touch that money. But once his IA redemptions hit a certain level, he had to give up. He realized this over Thanksgiving weekend. That's probably when he told his sons. Then he told them again in December with a witness present.

So...... this means that money was lost that was invested through OTHER BROKERS, and was traded fairly on the NASDAQ! These losses will be the first that the SIPC will have to cover. And $33bn will clean out the SIPC.

So that's why I say we have only yet seen the tip of the iceberg. And even the tip is pretTy bad!!
They have poured billions of dollars into Mr Madoff's too-good-to-be-true investment fund, which appeared to post double-digit annual returns come rain or shine.

nothing left of the money Mr Madoff had pretended to be investing for many years.

Mort Zuckerman, the owner of the New York Daily News and one of the 200 richest Americans, said "I think we have another break in whatever level confidence needs to exist in money markets."

And from the public comments on one of the article:
Now they're talking about bailing these people out. If they bail out the rich folks and holier-than-thou "charities" who dealt with this thieving bum you can forget about the rule of law. There will be riots.

Well, I think the fallout could actually be WORSE than riots. It could be a complete loss of confidence in all paper investments. I mean, if you can't even trust your online broker, or your safe bank, who can you trust?

Gold! That was the conclusion I came to after the pain of coming to terms with great loss. Loss makes you think in new ways, and it makes you search. I think we must add this (THOUGHT) to the already unfolding FreeGold and realize that the Madoff scandal adds some serious fuel to the fire.

As ANOTHER said, "All paper will burn!"


Postscript: For clarity's sake (my wife says I should be more clear)... I think BB (Billion Bernie, soon-to-be Bighouse Bernie) was definitely engaged in a long term fraud. But I don't think that fraud was a Ponzi scheme. I think it only BECAME a Ponzi scheme recently, when his returns went massively negative. And I think that there is a high probability that this kind of fraud is widespread, whereas, if it were strictly a Ponzi scheme (which is kinda stupid if you think about it), he might be the only one. So that's why I think this is a HUGE story (in the making). It's not about a Ponzi scheme, it's about a money "trustee" trying to earn a higher return (on the sly) so he can pocket the difference. And the only reason BB busted himself was to try and spare his sons.


Anonymous said...

Great work FOFOA !

HUGE you say....?
I think you are even too friendly as the whole "Fiat game" is a Ponzi scheme,

If confidence is lost, the whole game is over.....

Confidence should be replaced asap by a real honest anchor, yes "FREEGOLD"


Randy said...

Excellent Post Fofoa! Learned quite a bit about this unfolding story - thanks for a good read.

Will post a link on my Blog


Anonymous said...

First of all, let me say that this story is HUGE in my opinion. In fact, if it escalates like I think it could, this scandal could bring us FreeGold earlier than even Mother Nature intended.

Can you explain what do you mean by "FreeGold"?

FOFOA said...

Hi Anon,

FreeGold is the economic reality we will all experience once gold is recognized by the mainstream world for what it is, a wealth reserve. This is coming toward us like a train. As paper investments fail and paper fraudster's go to jail, a true wealth reserve with no counterparty risk will rise to the top of all "investments".

On 9/23/08, Ender said:

The concept of Freegold is something that means different things to different people. It is amazingly simple, yet curiously complicated. We are on the path, yet the world races at a snail’s pace.

From my point of view, Freegold is not a “solution for” but will be the “result of” the currently financial mess that we are in today. To better understand what lies ahead, one must be willing to have an open mind and think objectively. More importantly, the seeker must be willing to set aside triggering emotions that prevent thinking as the ‘other’.

FOFOA, as you step into the realm covered by the concept of Freegold, you will be challenged to think about:
- Central Banking
- Spoils of war
- World reserve currencies
- The Strong Dollar Policy
- The political need for fiat
- Debt slavery
- Debt based monetary systems
- Asset based monetary systems
- The process of currency creation/destruction
- The preservation of purchasing power
- Dollar imperialism
- Competitive currencies
- Big Media cooperation
- Etc.
All mixed up like a thousand intertwined strands of yarn.

Ultimately, be careful to not get caught up in the “price of gold” when the ‘function of gold’ is what you’re looking for.

The old saying “He who owns the gold makes the rules” is more applicable then you might think.

Lastly, the concept represented by Freegold is fundamentally in opposition to the Dollar’s position in the world today. You will find no one with ties to the dollar system interested in what Freegold represents. You will also not find any single state or organization willing to stand up against the dollar system, for that would be a critical mistake. Rather, the world has been preparing and we’re now going through the transition process. Hopefully, the world will survive.

The good news is that the way things are structured in our current financial system will force gold’s function. When this happens, the hope that Another penned for us all to see will be realized.

This excellent exchange can be found here.

If you would like to learn more about FreeGold, you should read the source, Another and FOA.

FreeGold is the underlying theme of this blog as it is a tribute to the writings of Another and FOA. But I have tackled the topic of FreeGold in several posts:

FreeGold as a Theory
FreeGold Archaeology
Connecting the Dots
FreeGold is like a Giant Sponge
FreeGold is the Only Solution
FreeGold is in the Works
FreeGold Thread on

Also, if you haven't noticed, will bring you here to this blog!

I may not have answered your question, but hopefully you can find your answer in some of these links.


Anonymous said...

Borrowed snip from Uncle Harry;

Note how quickly such a major change can take place these days; that should prepare U for coming fast changes in major direction shifts. This deflation will demand increasing cash/credit transfusions from govts. This supposed “cure” will create its own collapse as public’s remaining confidence in currencies & govt’s phoney or failed fixes suddenly evaporates, perhaps overnight, & the world leaps not back into inflation, but probably to hyperinflation. U see, if this view is correct, normal inflation gets bypassed because all sense of value at that point is largely gone. The last chicken comes home to roost." unsnip.

Does not need a picture i guess


FOFOA said...

Thanks Shanti. That's just how I see it too.

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