Don’t get me wrong. Madoff himself is a despicable person. Over a twenty-year period, he created the world’s biggest Ponzi scheme worth an estimated $65 billion. Hundreds of individuals, retirees, and charities were hurt or destroyed by Madoff’s deception.

He deserved to get the maximum penalty (150 years).

Nevertheless, I look at all the positive side effects of the Madoff scandal. Here are the three most valuable lessons we can learn from the biggest crime on Wall Street in a hundred years.

Investigate before you invest

Millions have now learned a powerful investing lesson. Don’t blindly turn your hard-earned funds over to a money manager just because he promises great returns year in and year out. Be a skeptic about money managers who insist they can beat the market all the time. Make sure the manager has an independent and reliable auditor. Check the monthly statements to make sure there’s no funny business going on.

“Due diligence” finally means something again when it comes to investing.

A corollary is: Manage your own money as much as possible. Use a discount broker and select your own stocks to buy and sell. Get educated by reading books, attending seminars, subscribing to independent newsletters, and asking a lot of questions.

Take responsibility for your actions; don’t blame others for your mistakes.

If you are still uncomfortable managing your own funds, consider investing in publicly traded mutual funds with good track records that you can value daily in the newspaper or online.

Diversify, Diversify, Diversify

I really have little sympathy with individuals or charities that were wiped out by Madoff’s shenanigans. Only the greedy or stupid would invest their entire fortune or foundation’s whole endowment in a single investment.

It’s time to return to fundamentals, specifically, the “prudent man” rule that used to carry some weight on Wall Street and the New York media.

Always diversify so that no single investment can destroy your financial independence.

There is a great deal of virtue in the old proverb, “Don’t put all your eggs in one basket.” From time to time, you hear some guru suggest a modern alternative: ”Put all your eggs in one basket -and watch that basket!”

In most cases, it’s a recipe for disaster.

Sure, most entrepreneurs have made it big by concentrating in one particular business, and when they get rich, the wise ones always diversify their surplus wealth – stocks, bonds, real estate, gold, and collectibles. To invest all their wealth with one money manager or in one brokerage account, that is pure foolishness.

Don’t depend on the government to protect you

Another investing lesson that many seem to blindly ignore is that you’re on your own.

Government lawyers at the Securities and Exchange Commission (SEC) were hopelessly outwitted by Madoff’s firm. Private financial investigator Harry Markopolos warned the SEC three times about Madoff’s fraudulent activities, but Madoff got a clean bill of health from SEC investigators.

Why?

Because the SEC has a penchant to go after the little guys, such as brokers promoting penny stocks, who are usually willing to settle with a small fine, even when they are innocent. SEC agents are judged primarily by “quantitative metrics” – the number of actions it brings and cases it settles.

Last month The New York Times highlighted the incredible story of a small-time California stockbroker who was investigated by the SEC for promoting a small cap stock.

The broker refused to settle because he knew he had acted ethically within the rules, and didn’t want his good name destroyed with a “consent degree.” Even though he was repeatedly exonerated by the courts, he was left a bitter 72-year old man with $1 million in debt defending himself. “They chose me instead of Bernie Madoff,” he said, and it cost him dearly. (See the June 27, New York Times cover story, “Chasing Small Fry, SEC Let Madoff Get Away.”

On a broader more philosophical basis, the existence of the SEC creates a false sense of security, giving the illusion that somehow the public is protected by the government from frauds, deception and scandal. Now we know better.

Investors must live by the rule, “Caveat emptor.” Let the buyer beware.

Source: Three Investing Lessons from Bernie Madoff

• Declining manufacturing and construction sectors contributed tothe United Kingdom’s gross domestic product to fall by 2.4% in the first quarter, the most in more than 50 years, The New York Times reports. Citigroup Inc. (NYSE: C) economist Michael Saunders said the second quarter, which ended yesterday (Tuesday), would also probably show contraction but the recession should be nearing its end soon. Despite this, he said, “I don’t think the recovery will be strong in the U.K.”

• The hemorrhaging in the housing market is slowing as The Standard & Poor’s/Case-Shiller index of 20 major cities showed the smallest monthly decline in prices since June 2008. The index dropped by 18% in April from the year before, but for the third month in a row it was not a record decline. “It seems that some stabilization may be appearing in some of the regions,” S&P index committee Chairman David M. Blitzer told The Associated Press. A rising unemployment rate and foreclosures could halt any substantial turnaround as the number of homeowners at least two months behind or in foreclosure jumped in the first quarter from the previous quarter, the Treasury Department said yesterday (Tuesday).

• General Motors Corp. (OTC: GMGMQ) was in bankruptcy court seeking approval to sell its best assets to a new, smaller company supported by billions in government loans and unburdened by old debts. Judge Robert Gerber sorted through several motions pertaining to GM’s plan to emerge from bankruptcy as a leaner company, cutting off some arguments with “please do not duplicate any other objections,” according to an AFP report. Should the 850 objections by creditors be dismissed and GM emerges from bankruptcy, creditors can appeal.
• Fears of rising food costs were partially quelled as farmers planted an unexpectedly large crop of corn and soybeans this year, according to an Agriculture Department report. A record 77.5 million acres of soybeans were planted through June, while 87 million acres of corn were planted, up 1 million acres from last year and the second largest corn acreage in more than 60 years. The corn boost is giving new life to ethanol producers, who are slowly starting to ramp up production and look at reopening plants that were shut down last year when grain prices skyrocketed and oil prices fell, Advance Trading Inc. commodity research analyst Brian Basting told The Associated Press. “It appears to be a slow healing process” in the ethanol industry, Basting said. “We’re seeing the (profit) margins creep back into positive territory.”

• American International Group Inc. (NYSE: AIG) got a new board of government-approved directors at its annual meeting yesterday in New York, Reuters reports. The U.S. Treasury Department or the trustees overseeing the government’s stake in the company recommended the election of at least seven board members. Outgoing Chief Executive Officer Edward M. Liddy said he was confident the new board would name a new chairman and CEO. The U.S. government owns an almost 80% stake in AIG.

• Troubled Japanese chipmaker Elpida Memory Inc. has received a $1.7 billion bailout in public and private funds. The move is meant to salvage Japan’s only major maker of dynamic random access memory chips used in PCs, as well as 6,000 workers at Elpida, which suffered record losses last year when semiconductor demand went south. “It’s a fine balance,” Credit Suisse Group AG (NYSE ADR: CS) Chief Equity Strategist Shinichi Ichikawa toldThe New York Times. “Japan has decided it must save Elpida for the sake of Japanese industry,” but “going too far means keeping zombie companies alive.”

Source: Investment News Briefs Wednesday July 1, 2009

Nobody seemed particularly interested in the far greater scam being pulled off on a daily basis by the US government (a scam that, incidentally, pays for Judge Chin’s salary and Madoff’s stay in the “big house”).

But it’s clear to us here at Notes at least that the government’s $15 billion a day borrowing habit dwarfs Madoff’s $65 billion Ponzi scheme.

As of June 18 2009, total US federal debt was $11,342,734,351,973 –  or about $36,989 for every American. This represents 82.5% of one year’s worth of US economic output as measured by GDP. President Obama’s 2010 budget estimates that total debt relative to GDP will rise to 97% by 2010 and stabilize at approximately 100% thereafter.

In other words, this borrowed money cannot be paid back. It is mathematically impossible – even if income taxes rose to 100%, which itself is impossible. Just paying the $260 billion in interest owed on the national debt (just over half what the government spent on defense last year) requires further borrowing. And the more the government borrows, the more it needs to borrow to pay off the interest owed.

It’s a generational Ponzi scheme of truly epic proportions. And one as sure to end in tears as poor old Bernie Madoff’s.

We’d also love to hear from Team Obama what the difference  is between the Madoff fraud and Social Security is. The answer, of course, is coercion. This from Paul Kasriel of Northern Trust (Hat tip, The Business Insider):

Both depend, or in the case of Madoff, depended, on being able to get new contributors into the scheme in order to pay off the previous contributors. The Social Security Administration has the power of the law to force new contributors into its scheme. Madoff did not have the power of the law to force new contributors into his scheme, therefore, he has been accused of breaking the law. Just another example of how it’s good to be the king.

The mainstream media was also strangely silent yesterday on the role Wall Street insiders played in legitimizing Madoff’s scam.

Many big finance insiders knew all too well that Madoff was a crook. Madoff’s returns were simply too good to be true. That’s why they invested in him. Problem is they thought he was inside trading, not a Ponzi scheme. This from ClusterStock.com:

For years and years I’ve heard people say that [Bernie's] investment performance was too good to be true. The returns were too steady – like GE earnings under Welch – and too high given the supposed strategy.

One Madoff investor, himself a legend, told me that Madoff’s performance “just doesn’t make sense. The numbers can’t be straight.” Another sophisticated Madoff investor actually went through trade confirms in order to reverse-engineer the strategy and said, “It doesn’t add up.”

So why did these smart and skeptical investors keep investing? They, like many Madoff investors, assumed Madoff was somehow illegally trading on information from his market-making business for their benefit. They didn’t consider the possibility that he was clean on that score but running a good old-fashioned Ponzi scheme.

• In spite of tense geopolitical situations in the Middle East, light sweet crude for July delivery yesterday (Monday) fell $2.62, or 3.8%, to settle at $66.93 a barrel on the New York Mercantile Exchange (NYMEX). Large and violent protests in Iran over the outcome of its recent election would normally raise concerns about supply disruptions and drive up the price of oil. Instead, the market is looking past this tense backdrop in the world’s No. 4 oil producer because of a large supply worldwide, Alaron Trading energy analyst Phil Flynn told CNN Money.

• The Securities and Exchange Commission (SEC) charged a brokerage firm and several individuals with raising money from investors to feed Bernie Madoff’s Ponzi scheme. Cohmad Securities Corp., its chairman Maurice Cohn, Chief Operating Officer Marcia Cohn and representative Robert Jaffe have all been charged with securities fraud, CNN Money reports. The Cohns and Jaffe allegedly courted investors for Madoff’s grand scheme, which may get Madoff up to 150 years in prison and $170 billion in restitution.

• The chief executive officer and president of the world’s largest third-party video game publisher fired a shot over Sony Corp.’s (NYSE: SNE) bow, taking the electronics giant to task over the high price of its PlayStation 3 console and going as far to say his company may pull its support if a price drop doesn’t happen soon. Activision Blizzard Inc.’s (Nasdaq: ATVI) Bobby Kotick said his company paid Sony $500 million in royalties and other goods last year, according to the Times Online. “They have to cut the price, because if they don’t, the attach rates [the ratio of games purchased to a console] are likely to slow. If we are being realistic, we might have to stop supporting Sony,” Kotick said. “When we look at 2010 and 2011, we might want to consider if we support the console – and the [PlayStation Portable] too.” Activision is the company responsible for the some of the sector’s largest franchises including “Guitar Hero,” “Call of Duty” and the “Tony Hawk” series of skateboarding games. A loss of support from Activision would be a huge blow for Sony’s gaming arm, which lost $597 million last year. Sony’s PlayStation 3 is currently third in a three-horse video game race behind Nintendo Co. Ltd.’s (ADR OTC: NTDOY) Wii and Microsoft Corp.’s (Nasdaq: MSFT) Xbox 360.

• In a sign that may show investors have let their guard down, technology stocks have significantly outperformed the broader market, according to MarketWatch.com. Since its March low, the tech-heavy Nasdaq Composite Index is up more than 40% and nearly 13% for the year. “Technology tends to be a leader in the early stages of an economic turn.,” said Marc Pado, U.S. market strategist at Cantor Fitzgerald. “That’s what we look for as confirmation of a sustainable rally — money rotating into a sector that historically is seen as consumer- and business-sensitive, and requiring more leverage in terms of borrowed money, because it is more sensitive to the economy.” Still, Nasdaq’s notorious volatility was on display yesterday (Monday), as it fell 3.35%, more than both the Dow Jones Industrial Average and the Standard & Poor’s 500 Index.

• Restructuring costs and merchandise markdowns contributed toWalgreen Co.’s (NYSE: WAG) declining profit, which fell by 8.7% in the quarter ended May 31. The drugstore chain reported a net income of $522 million, or 53 cents per share on $16.2 billion in revenue. That compares to a net income of $572 million, or 58 cents per share on revenues of $15 billion in the same period last year. Wall Street was expecting Walgreens to earn 56 cents per share. The company’s shares closed at $29.64 yesterday (Monday), down 5.7%.

• Ford Motor Co. (NYSE: F) and General Motors’ (OTC: GMGMQ) Chevrolet division are close to eliminating a long-criticized quality gap with Toyota Motor Corp. (ADR NYSE: TM), according a closely watched J.D. Power and Associates survey. The top three spots in the survey went to luxury brands, while Chevrolet, Ford and Toyota were in what amounted to a statistical dead heat further down in the rankings, Reuters reported. “Have the leading domestic nameplates caught up with Toyota? The answer is almost,” Dave Sargent, vice president for auto research at J.D. Power said. Toyota’s Lexus brand took the top spot, while Porsche and GM’s Cadillac were Nos. 2 and 3 respectively.

Source: Investment News Briefs Tuesday, June 23, 2009

But are all of them eligible for the $500,000 in SIPC coverage?

Not likely, and here’s why.

The investors parked their money with Madoff for the stable 10-15 percent gains quarter after quarter, year after year, that the fund provided.

Just for the sake of easy math, let’s assume a $100,000 investment was made with Madoff early in 1995. Let’s also assume a consistent 12 percent gain. This would be the total amount ‘spun off’ every year from the return:

End of 1995: Cumulative total $12,000
End of 1996: Cumulative total $24,000
End of 1997: Cumulative total $36,000
End of 1998: Cumulative total $48,000
End of 1999: Cumulative total $60,000
End of 2000: Cumulative total $72,000
End of 2001: Cumulative total $84,000
End of 2002: Cumulative total $96,000

As you can see, by the end of 2002 (eight years after the initial investment) the investor has earned back almost the initial investment, and if they stuck with it, possibly made a handsome profit on the scam.

This is why you will find many supposed ‘victims’ of the Ponzi scheme not file for SIPC protection, or perhaps even take part in the lawsuit against Madoff: they actually profited from the deal.

Of course this assumes that they withdrew profits over time, which who knows how many did, or how many just kept plowing the profits back into the fund. It would also likely apply to investors who have been in the fund for at least eight years, give or take a slight variation in returns that could lengthen or shorten this time span.

Am I saying all investors with Madoff who have invested with him over eight years have profited? Of course not. But I bet there are many who after crunching the numbers are more worried about a call from the regulators who will likely want to know where those ill-gotten profits are, than going after any money left in the fund when the jig was up.

Source: Not So Fast…

We find the report on the front page of the International Herald Tribune:

“More capital injections and guarantees may become necessary to ensure stability and the normalization of credit markets,” said the main man at the Fed, speaking to an audience at the London School of Economics.

He went on to say that he didn’t necessarily like bailing out Wall Street, but it “appears unavoidable.”

Nothing particularly exciting about that. But then we turn to page 12:

“Bernanke warns that bigger bailouts needed around the world,” is the money headline.

And then, the report gets down to business. The world economy is dangerously ill, says Dr. Bernanke, or words to that effect. We’re going to have to try some experimental drugs to rescue it.

“Beyond buying troubled assets from banks, Bernanke said, another option was to provide asset guarantees under which the government would absorb part of the banks’ losses in exchange for warrants and other forms of compensation. [Of course, if the banks had any means of compensating investors they wouldn’t be in this fix.]…

“Bernanke also expressed support for the idea of creating a so-called bad bank that would allow the government to buy financial assets in exchange for cash or equity.”

Here is where we laughed so hard we thought we might damage our midriff.

Create a ‘bad bank?’ Is he kidding? The world’s full of bad banks already – banks that did just what Bernanke is proposing to do; they bought financial assets, notably mortgage market derivatives, for cash. Now, they turn to the taxpayer, desperate for a handout to keep them from going under.

And the baddest bank of all? Next to the Central Bank of Zimbabwe it’s the US Fed. What’s it doing? It’s buying trash and paying cash. In this way, the mistakes of rich bankers are transferred to the people… via the people’s bank – the Fed. Of course, the people don’t know what’s going on. And they won’t notice either when the Fed eventually unloads these toxic assets – in the dark of night.

We have not checked the gold market this morning. Yesterday, gold held steady at $820 and appeared ready to drop into the $700 range. If gold doesn’t go up this morning, investors are not paying attention.

Let’s go back over the fundamentals. The world economy is correcting. The feds are trying to stop it. They tried their Friedmanite monetary stimulation – cutting rates to zero. And they’re sweating like Sisyphus, trying to make Keynes’ fiscal stimulus work too.

Both will fail – for the reasons we explained in these Daily Reckonings. You can’t help an alcoholic by giving him free hooch. And you don’t do a fat man any good by offering him another dessert.

This is all, apparently, part of the new Targeted Investment Program, which is government-speak for “new giveaway program that will end up costing the nation whole multiples of actual dollars expended when measured in the sheer tonnage of misery and suffering, or its equivalent; inflation/loss of buying power that all that new money and credit will create, which is not to mention the further cancerous distortion of the economic fabric by the government being an even bigger piece of the economy, especially now that the total amount of government (local, state and federal) spending is already over half of freaking GDP to start with!”

Of course, the Treasury anticipated that I would make a stink about this new giveaway program, and they are emphatic that this is not a “giveaway”, and that it was a “participation” in getting grubby, incompetent hands on free money, the lucky recipients being “weighed on a case-by-case basis.”

It was here that I initially stopped reading and went off on a loud rant about corruption and stupidity in Congress and the sheer, colossal, towering stupidity of the weird economic theories of the Federal Reserve! And with the fawning endorsement by the overwhelming majority of the nation’s universities and professors, who teach that stupid crap, which is the same staggeringly stupid econometric theories that have gotten us into this mess!

It all became surreal when Madoff – the guy who amassed, so they say, $50 billion worth of losses in a huge Ponzi scheme – was called to testify about it by Congress! Hahahaha!

I can tell you everything you want to know about it; The Federal Reserve created the excess money and credit so that huge amounts of money would be borrowed and spent by the government, which contributed not only a lot of economic activity, tax revenues, and inflation, but which also caused a problem by winding up as a profit in somebody’s pocket, who then has to decide “Where to put all of this damned money?”

Predictably, I spent most of the morning firing off flaming emails to Congress and The Federal Reserve (”Dear halfwit scumbags, You are disastrously wrong and I hate you for destroying us! Signed, Disgruntled in Florida”).

Now I am sorry that I used up all of that time, as the part that I can really use came later in the article, where the “Treasury said it would consider, among other things, whether the ‘destabilization’ of a financial institution could threaten the viability of creditors and others. It also would weigh the extent to which the institution faced a loss of confidence because of the troubled assets it held.” Wow!

At this I yelled, as did Archimedes, “Eureka!” The answer to my troubles at work was right here!

I hastily scrapped all the other “it ain’t my fault” defenses on which I had worked in a feverish attempt to keep from getting fired like I deserved, and now, using this fabulous new TIP scheme to my advantage, I immediately declared my little department to be a bank, and plowed all of the employee pension fund money into it as shareholders of the bank.

Next, I simply – and cleverly – transferred all my department’s losses to the bank as “troubled assets” of the bank, throwing my MasterCard balance in there for good measure so that I can subsequently claim at my trial that this illegal commingling of funds showed it was all obviously a big, tragic misunderstanding, over which I had no control, and therefore I am not guilty of anything, the preponderance of evidence to the contrary notwithstanding.

But my anticipated legal troubles aside, with an entire pension fund invested in a bank that has assets of negative value, at a stroke I have demonstrated a desperate need of money (lots and lots of money!) to prevent “destabilization” of a financial institution which “could threaten the viability of creditors and others.”

It also would weigh in the Heavyweight Class when considering “the extent to which the institution faced a loss of confidence because of the troubled assets it held.”

Now, thanks to my genius, we just sit back and wait for all that lovely money to come pouring in from the Federal Reserve! It’s brilliant!

Alternately, a news item by the Wall Street Journal gave me a backup idea in an embarrassment of riches. The article said, “Cerberus Capital Management suspended withdrawal requests from investors, joining a parade of hedge and private-equity funds that have halted redemptions.”

The actual plan at Cerberus Partners was “to pay 20% of year-end withdrawals in cash and suspend the remaining withdrawals for investors for up to one year.”

Well, this applies to me perfectly, as I would like to have a lot of money without working for it when I can confiscate it from somebody and pay them back at twenty cents on the dollar!

So I ask one of my employees, “Hey! How would you like it if your pension fund returned 20 percent this coming year?” And naturally the guy says, “Sure, I would like that juicy return, but what does that have to do with your rummaging through my lunchbox and stealing pencils from my desk?”

Quickly I say, “Nothing, moron!” and I hustle back to my office to implement Phase 2 of my plan; transfer the money in the employee pension fund into the Mogambo Hedge Fund (MHF), where I can then get my grubby hands on all that lovely, lovely money.

Phase 3 is where I ignore letters, telephone calls, faxes, emails, telegrams, subpoenas, hysterical bankrupted investors banging at the door, and anything concerning the Mogambo Hedge Fund (MHF) until, backed into a corner by the police and their SWAT team goon squads, I send out a letter saying that the MHF will immediately give the employees 20 cents on the dollar, but then the now-world-famous Mogambo Hedge Fund (MHF) is suspending all further payments!

My legal defense is that the employee got what that employee said he wanted; a 20% return on his money! And I got what I wanted; a lot of money without working for it!

So, whee! Innovative financial engineering is so profitable!

For everyone else, of course, they will have to be content to buy gold, silver and oil to capitalize on the stupidity of the Federal Reserve and Congress creating more money and credit, debasing the dollar bit by bit, and everything getting weirder and weirder!

Source: The Troubled Asset Pension Fund

So how does this relate to the markets? According to the same study, Americans are supposed to have one of the lowest PDI’s, meaning that in order to avoid catastrophe, we aren’t afraid to speak up to authority in order to ring the alarms. Gladwell refers to this as “The Ethnic Theory of Plane Crashes”.

Apparently, when it comes to speaking up about potential fraud in the markets, we aren’t so ‘American’. How else can you explain the rampant fraud on Wall Street the last few years? Surely someone, somewhere inside the investment banks knew they were leveraged to the point of collapse. Until the day of reckoning, no alarms were sounded.

How about the situation at Madoff Securities? They were alerted to the situation as far back as 1999. As recently as 2005, they were told by Harry Markopolos that it was ‘highly likely’ that Madoff was running a giant Ponzi scheme. But every time the SEC looked at Madoff’s books, they couldn’t find anything.

Really? The government entity that’s sole responsibility is to find this type of thing was fooled into overlooking one of the simplest frauds known to man?

I find that hard to believe. More likely, those ‘investigators’ didn’t dig too deep for fear of ruining their lucrative Wall Street careers after working at the SEC. Why ruin a huge payday down the road investigating one of the most respected individuals on Wall Street? He was the former chairman of the NASDAQ after all. A pillar of the community. Easier to just slap a few minor penalties on the company and go about your business. Which is exactly what they did, as they found Madoff guilty of a “violation of the registration requirements of the Advisers Act.”

Let’s hope in the future that those tasked with protecting individual investors learn how to speak up. Otherwise, Gladwell may have to add another chapter to his book, entitled “The Promotion Theory of Wall Street Careers”.

Source: The Ethnic Theory of Plane Crashes

U.S. stocks were set for a mixed open on Wednesday, which ends one of Wall Street’s worst years and raises hopes that a new year and fresh policy initiatives will stave off a deepening recession.

The Federal Reserve on Tuesday pushed forward with its effort to drive down mortgage costs, setting a target of buying $500 billion in mortgage-backed securities by mid-2009.

The move could bolster optimism as investors have been heartened by signs that the Fed is fighting aggressively to cushion the downturn, including dropping interest rates to near zero.

“Things haven’t improved but at least the Fed has stopped things from appreciably worsening,” said Barry Ritholtz, chief market strategist at Fusion IQ in New York.

“Clearly most investors this year were not prepared for what happened and I think there’s a sigh of relief from those that were blindsided that the year is finally over.”

The number of workers filing new claims for jobless benefits fell much more than expected to 492,000, but seasonal factors likely contributed to the drop and the labor market remains very soft.

S&P 500 futures rose 3.40 points and were above fair value, a formula that evaluates pricing by taking into account interest rates, dividends and time to expiration on the contract. Dow Jones industrial average futures climbed 14 points, while Nasdaq 100 futures were off 3.25 points.

The broad S&P 500 looks set to end 2008 down about 40 percent for the year, though it has recovered almost 18 percent since hitting an 11-year low on Nov. 20.

Markets around the world have been pummeled as the collapse of the U.S. housing market evolved into a global credit crunch and economic slowdown which infected everything from financials to automakers to retailers.

The U.S. casualties include the bankruptcy, acquisition or government takeover of such household names as Bear Stearns, American International Group , Washington Mutual, Merrill Lynch and Lehman Brothers.

AIG, which was rescued by the government soon after the collapse of Lehman, is prepared to ask the Federal Reserve to relax rules on its more than $60 billion disposals program to allow bidders to use a greater proportion of shares to pay for its assets, the Financial Times reported.

On the housing front, demand for U.S. mortgage applications was unchanged during the Christmas holiday week, holding the highest levels in more than five years with loan rates near record lows, an industry group said on Wednesday.

Bernard Madoff, alleged to have run a decades-long $50 billion Ponzi scheme, faces a Wednesday deadline to tell regulators how much he is worth and where his money and other assets are.

The Madoff scandal, which came to light earlier this month, has added to already negative sentiment in the markets. Scores of wealthy people, banks, universities and charities around the world say they are victims, but so far the exact amount of money lost is not known in what could be the largest fraud in Wall Street history.

On Tuesday, stocks climbed after the government expanded its bailout of the auto industry, encouraging hopes policy-makers will continue to take steps to minimize the severity of the year-long recession.

NEW YORK, Dec 31 (Reuters)

This from Whiskey & Gunpowder:

What if you woke up one day and there was a flying saucer sitting in the middle of Central Park? It would change your view of the world, if not the universe, right? At least that’s the idea behind the newly released remake of the classic 1951 film The Day the Earth Stood Still.

And what if you went to bed one night and thought that you had money on account in a fine silk stocking firm? What if you believed that you and your family were well provided for? What if you were sure that you had made all the right choices and done all the prudent things? You saved your money. You placed it with a reputable outfit. You were in the bluest of blue chips. And you woke up the next morning and it was all gone? Poof. Vanished. You’re broke! It would change your world, right? Maybe your life would fall off a cliff. Your standard of living would crater.

The World’s Largest Ponzi Scheme — $50 Billion

Well, this is exactly what happened to a lot of people a few days ago. These unfortunate souls invested their funds with Bernard Madoff’s firm in New York. Apparently, Madoff (pronounced “made off”) was running what The New York Times said “may be the largest Ponzi scheme in history.” He may have wiped out as much as $50 billion of other people’s money. $50 billion. No typo.

For about 48 years, Madoff took in people’s money and claimed to invest it through his proprietary “split-strike conversion.” What’s that? Actually, I’ve never heard of it. It’s some sort of investment hocus-pocus that promises something for nothing. But Madoff always claimed he was making solid returns, in good times and bad, of 8-12% per year. Like clockwork. Such a deal.

Madoff’s investment firm was not for just anybody. You had to be somebody to be part of this firm. You had to be invited to invest with Madoff. So at fine country clubs up and down the East Coast, people would politely mention that “I invest my money with Madoff.” And other people would say, “Oh? Can I invest with Madoff too?” Then maybe they would get a discrete solicitation in the mail offering the opportunity to open a modest account. Maybe.

Or maybe they wouldn’t get that solicitation. And the people who were rejected wanted to know why. “So how come my money is no good with Madoff?” they would ask. And thus did the cachet grow. People wanted in. “Hey, tell me how I can invest with this guy?” was the topic at many a dinner of lobster Newburg or veal a l’Oscar. Over the years, thousands of people, firms, businesses, charities, pensions, hedge funds and even government entities placed money with Madoff. And Madoff took it. With pleasure.

It was all a swindle. Madoff was taking in the new money and paying it out to the previous investors. He had no real system of investing. Madoff just dabbled in the markets, making some money here and losing it there. He lived well. He owned a yacht. He attended fancy parties. He was a patron of the arts and charity. He contributed generously to politicians in the Democratic Party (Hillary Clinton, Chuck Schumer and Charles Rangel, among others, in recent federal campaign filings). He was polite and distinguished. He was a counselor to many a family, always good for wise advice about how to make the next right move in life.

Financial Sociopath, Money-Murderer

Indeed, Madoff pretended for decades that things were all right. But things weren’t all right. Madoff and his firm just took money from one group of people and paid it to others. He sent out elaborate statements, documenting how well people’s accounts were doing. Yet in the process, Madoff lost billions of dollars. The funds vanished into money heaven. And Madoff did it all under the noses of auditors, lawyers, accountants, tax agencies, the Securities and Exchange Commission (SEC) and a host of other pretend regulators.

In short, Madoff is a financial psychopath. He’s a money-murderer. He is to money management what Ted Bundy was to unsuspecting young women.

“No Innocent Explanation”

Along the way, a few people raised suspicions. They said things like, “No one can deliver those kinds of results year after year. It’s impossible.” But many other people didn’t want to believe anything was wrong. The final whistle didn’t blow until Madoff’s sons turned him in to the FBI last week. (The sons claimed that they “knew nothing” about the scam.) And according to press reports, Madoff confessed everything to the FBI arresting agent, saying, “There is no innocent explanation.”

Many of Madoff’s clients are from the Jewish community. That was Madoff’s heritage, and thus did Jews form much of the clientele that Madoff cultivated. According to The Wall Street Journal, some Jewish investors called Mr. Madoff “the Jewish bond” because of his solid and predictable returns.

The “Old Money” Is Now Gone

Now with Madoff’s demise, there is an entire swath of Jewish “old money” gone down the tubes. There are personal wipeouts that will devastate entire extended families. The legacy economy of many trust fund families is wrecked. A lot of country club bills, condo dues and school tuition statements are about to go unpaid.

This will impact communities from Boston to Palm Beach and even overseas as far away as Buenos Aires and Johannesburg. That is, for some overseas Jewish families, Madoff held the “safe” money, the strategic reserve for when it was time to pack the bags and move away. (An old African expression comes to mind: “When the Jews leave, it’s time to leave. When the Portuguese leave, it’s too late to leave.”)

Some charities are hitting the rocks too, totally wiped out by Madoff. There are several hedge funds going down like the Titanic, with one fund losing nearly $1.8 billion. Just in Geneva, Switzerland, a number of banks reportedly may be out of $4 billion invested with Madoff. French bank BNP Paribas is said to be on the hook. Japan’s Nomura Holdings, which markets Madoff’s funds, also has been swept up in the financial wipeout. HSBC is taking a serious hit. Kingate Management of Bermuda has reportedly invested part of its $2.8 billion fund with Madoff.

How Bad Is It Out There?

So it makes me wonder. How bad is it out there? How many other Ponzi schemes are there besides Madoff’s? How many more financial psychopaths are ginning up fake account statements? How many little old ladies are there out there who think they have money in an account, but it’s all just some big scam? How many more bad banks? How many bad brokerage houses? How many more bad companies with bad stock? How many more bad government entities with bad finances and worse bonds? How many bad pension funds?

It drives home the point of wondering whom you can trust. And how bad is it with even the U.S. government? Do you really trust government statistics, like the one for the rate of inflation or unemployment? And how about the numbers in the national budget accounts? We’re spending how much? Does money even have any meaning to the people who have the power to appropriate it? Our whole national accounting process has turned into an intergenerational Ponzi scheme.

Really, our $10 trillion national debt is not enough? We are looking at trillion-dollar deficits in just the next year or two. How long can it last? And whom can you believe in any position of authority? So Bernard Madoff had a “system” for investing? And Ben Bernanke has a “system” for managing the monetary policy of the country, right? Hank Paulson has a “system” for managing the Treasury accounts? And Congress and the president — G.W. Bush, and after him B.H. Obama — have a “system” for spending the nation’s limited wealth on important things, yes?

Own Gold and Silver – Just Do It!

How do you know that you don’t own a big fat piece of nothing? It’s why I believe you need to own some real gold and silver. I’ve said it before, and I’ll say it again: You need to own some gold and silver in addition to whatever else you own on account. Just do it! Go out and buy some. Today. Now don’t get me wrong, I’m still very positive about the potential in our ESI portfolio — believe me, we hold plenty of quality assets that will soon have their day. But when all else fails, if you have the precious metals, you still have something you can hold in your hand.

And when someone comes along with that great deal that looks just too good to turn down — steady returns forever, with minimal risk — remember what happened with Madoff. He was a pillar of the Jewish community. “Such a nice man.” Now his fraud has collapsed like the temple around the ears of Samson. Let me mix my Old and New Testaments on this one and quote Matthew 10:36, “A man’s foes shall be they of his own household.”

Source: Madoff Makes Us Love Gold Even More