Monday, December 15, 2008

Madoff Bailout?

Why not? Every other deserving group gets one. Too big to fail! And, according to the WSJ, maybe through the Securities Investor Protection Corporation (SIPC) there may be a back door in covering some of the losses, although the SIPC only has $1.5 billion left in its coffers and there will have to be congressional action to increase the kitty.

When the tide goes out the muck materializes. For years Madoff reported steady returns from the firm’s “split-strike” conversion strategy, one of balancing puts and calls around a basket of large cap stocks and, presto, “steady” returns of some 7-9% no matter what the market does. Hint: when it's too good to be true....

Midas Madoff sucked his friends from the Palm Beach Country Club and Fund of Funds from around the world into the scheme (but, unfortunately many charitable and endowment funds as well). As one skeptical research firm, Aksia, reported to its clients concerning Madoff Securities, “We concluded that Friehling & Horowitz (Madoff’s audit firm) had three employees, of which one was 78 years old and living in Florida, one was a secretary, and one was an active 47 year old accountant (and the office in Rockland County, NY was only 13ft x 18ft large). This operation appeared small given the scale and scope of Madoff’s activities.” The entire audit trail consisted of paper transaction confirmations, which Madoff, himself, closely controlled. It finally took a market downturn of the magnitude of this past year, with redemption requests from Madoff’s clients, to finally expose the Ponzi scheme. The SEC couldn’t see this?

According to the Palm Beach Post, “investors needed at least $1 million to approach Madoff [and] being a member of the [Palm Beach Country] Club also helped. But even with those prerequisites there was little guarantee that Madoff would take the client.” Sort of the same deferential respect as demanded by the Soup Nazi in the Seinfield series.

The incident is yet another regulatory failure and another corrupt Joker in our economic house of cards.