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HomeBernie Madoff: “This Conversation Never Took Place…”
Posted by Larry Doyle on September 10th, 2009 2:40 PM |
If there was ever a doubt as to whether Bernie Madoff was aided and abetted in his Ponzi scheme, that doubt should now be extinguished. How so? An hour-long discussion between Madoff and executives from Fairfield Greenwich reveals Madoff giving these ‘co-conspirators’ instructions on how to deal with regulators from the SEC.
The conversation is riveting and exposes the calculating mindset of both Madoff and the executives from Fairfield Greenwich. The conversation encompasses a wide array of topics, including:
1. Madoff’s model and strategy
2. Fairfield Greenwich’s model and strategy, in which Madoff was supposedly merely an executing broker.
3. Madoff recommends to Fairfield Greenwich to never reference writing things down “because any time you say you have something in writing, they ask for it.”
4. Fairfield Greenwich should not acknowledge that they knew when Madoff entered and exited the market.
5. Fairfield Greenwich requests info on Chinese walls and controls at Madoff. Bernie acknowledges that the SEC already knows of Chinese walls at Madoff.
6. Bernie talks about funds which promote transparency. Bernie views the flow of information as problematic for managers in regard to accusations of front-running.
7. Bernie acknowledges he knows how to handle regulators based upon his relationship with them.
8. Bernie says, ” . . . the hedge funds operate in totally different ways than they used to . . . it’s changed the landscape and the commission (SEC) has no idea what the hell is going on.”
9. Bernie indicates that he is the only one who pulls the trigger at Madoff. Bernie says the execs at Fairfield Greenwich do not need to know that. The SEC will try to draw information out, but the less the Fairfield Greenwich execs know of Madoff, the better.
In listening to this conversation, there is truly only one conclusion which one can draw:
The Fairfield Greenwich executives on this call were not only stooges for Madoff, but also co-conspirators. Any entity who invested the amount of money Fairfield Greenwich did without fully understanding the trading strategy and model should be exposed. The senior exec at Fairfield, Walter Noel, must have fully known of the Madoff fraud.
Having worked in the industry for 23 years, I have never heard of a conversation in which strict instructions and guidance of this sort was ever provided when it came to regulatory oversight.
If I were an investor in Madoff through the Fairfield Greenwich feeder fund and listened to this audiotape, I would instruct my lawyers to get even more aggressive in seeking damages.
The audiotape embedded in this CNBC story, Madoff, Caught on Tape, Reveals Ways to Dodge SEC, runs 69 minutes. It is well worth a listen.
Shame on every regulator who did not perform in unearthing this greatest of scams.
LD
American Business Needs More Leaders with Unquestioned Integrity
Posted by Larry Doyle on September 10th, 2009 11:38 AM |
Volumes can and will be written about the pitfalls and problems our economy has encountered leading up to our current economic crisis. Regrettably, there are never enough volumes written about those individuals who swim ‘against the tide’ and promote the principles of truth and integrity which are sorely lacking in our country today.
Against this backdrop, I always enjoy reading the commentary of Bloomberg’s Jonathan Weil who digs through the books and records of a wide array of corporations to expose accounting smoke and mirrors. This morning, Mr. Weil profiles 5 individuals who deserve real praise. I reference Weil’s work not only to bring greater adulation to these individuals but also to bring greater attention to the corporations and industries with which they are connected. Weil writes Five People Who Stayed Clean in Banking’s Bilge:
In the year that has passed since Lehman Brothers Holdings Inc. collapsed, there haven’t been many good guys to emerge from the wreckage of the financial crisis. Look hard enough, though, and you will find a few.
It’s a challenge, no doubt. So many people at the highest levels of government and industry blew it, including almost every top banking and securities regulator in Washington. Yet those failings are not what this column is about.
Rather, it’s to introduce you to some of the people I’ve come across over the past year who stuck to their core values in the face of enormous pressure to abandon them.
1. Dick Evans, chief executive officer, Cullen/Frost Bankers Inc. He said no to the government’s bailout money.
Cullen/Frost was profitable and had plenty of capital. Evans and his team concluded that the true cost of the government’s funds was higher than advertised. They thought taking the money would dilute their shareholders’ stake. Throughout the whole mess, the company has reported profits every quarter.
2. Joseph St. Denis, former vice president of accounting policy, AIG Financial Products.
American International Group Inc. hired this former Securities and Exchange Commission accountant in June 2006 to help clean up its financial-reporting systems. Within a year, St. Denis said he had found serious errors. Soon after, the head of AIG Financial Products, Joseph Cassano, began excluding him from discussions about the “super senior” credit-default swaps that ultimately sank the company. Cassano also demoted him. St. Denis did the right thing: He quit, at great personal cost.
3. Charles Bowsher, former chairman of the Federal Home Loan Bank System’s Office of Finance.
Bowsher resigned in March, less than two years into the job and just one week before the government-chartered system’s 12 regional banks were due to file their combined annual report. The reason: As an audit-committee member, he wasn’t comfortable signing off on their financial statements.
Specifically, he was bothered by the accounting standards and processes the banks were using to value their mortgage- backed securities. He also wasn’t about to risk his reputation. Bowsher, 78, was comptroller general of the U.S. from 1981 to 1996, during which time he was among the first to warn the public about the brewing S&L crisis and the need for regulation of derivatives dealers. The shame is that more corporate directors don’t have the guts to do what he did.
4. & 5. Tom Linsmeier and Marc Siegel, members of the Financial Accounting Standards Board.
Last April, the FASB caved to pressure by Congress and changed its rules so that banks and insurance companies could exclude huge unrealized losses on mortgage-backed securities from their earnings and regulatory capital. The decision promises to stain the board’s reputation as an independent standard-setting body for years to come.
The ruling wasn’t unanimous, however. Linsmeier, a former accounting professor at Michigan State University, and Siegel, a longtime forensic accountant, voted against the change. (The measure passed by a 3-2 vote.)
In a joint dissent, they wrote that “investors generally have opined that their preference is for the fair value of financial instruments to be reflected in net income.” Delaying recognition of losses, they said, may result in “a negative effect on investor confidence.” Linsmeier and Siegel emerged with their reputations enhanced.
While government pundits, market analysts, and high profile economists will posture and rationalize about a wide array of programs and policies implemented throughout this crisis, there is no substitute for prioritizing reputation and integrity. In fact, I would maintain that those individuals and corporations that prioritize these intangibles will be the real long term winners. America needs more men like the 5 referenced above . . . it also needs more journalists like Jonathan Weil willing to embrace similar characteristics.
LD
Related Sense on Cents Commentary:
Freddie Mac, Fannie Mae Deja Vu? (May 28, 2009)
The Greatest Risk (December 21, 2008)
Jeff Gundlach of TCW Calling for Deflation and Dollar Rally
Posted by Larry Doyle on September 10th, 2009 8:39 AM |
Jeff Gundlach did not become one of the most highly regarded and respected money managers in the business by accident. His long term track record managing TCW’s Total Return Bond Fund (TGLMX) is nothing short of spectacular. Gundlach presented at a conference yesterday. Inside sources shared with me that he received a standing ovation for his thorough yet sobering commentary. MarketWatch provides a review of this Sense on Cents Economic All-Star’s outlook in which he is calling for a serious bout of deflation and a resulting rally in the dollar.
Alistair Barr of MarketWatch writes:
The stock market’s recent rally is likely to run out of steam soon and equity prices may collapse again, Jeffrey Gundlach, chief investment officer at Los Angeles-based mutual-fund giant TCW Group Inc., said Wednesday.
The benchmark Standard & Poor’s 500 index is “extremely unlikely” to climb above 1,100, before collapsing again, he said during a conference call.
“You’ve made 90% of the money you’re gonna make in this rally,” Gundlach said, advising investors to sell on strength when the S&P 500 is above 1,000.
The S&P 500 closed at 1,033 Wednesday, leaving it up more than 50% since early March.
Gundlach, who also runs TCW’s flagship Total Return Bond Fund (TGLMX 9.98, -0.01, -0.10%), had spotted cracks that subprime mortgages were forming in the financial system by June 2007 and was among the first to warn that an era of easy money would come to a bad end. See full story on Gundlach’s warning.
His new concern is the massive debt being accumulated by the U.S. government as it tries to stimulate an economy that’s been mired in the worst recession since the World War II.
“We’re basically borrowing money and calling it economic growth,” he said on Wednesday. “It’s not real economic activity.”
Debt-fueled government stimulus, such as the “cash for clunkers” program, may keep the U.S. economy growing for one or two years, but then growth will probably “just die,” Gundlach said.
Cash for clunkers, in which the government gave up to $4,500 to new car buyers if they handed in old gas-guzzling vehicles, illustrates another of Gundlach’s concerns, that of deflation.
“Deflation is so strong that you can’t even sell cars unless you slash prices 20% through government subsidies,” he said.
Gundlach is similarly bearish on credit markets and commodity prices, arguing that “a turning point is close at hand in these markets.”
One of the few areas he’s bullish on is the U.S. dollar — but not for good reasons.
Gundlach sees such large debt defaults in coming years that he thinks the trend will cut the supply of dollars, pushing up the currency’s value.
“We’re standing on the edge of a major default wave,” he said. “Defaults are the elimination of dollars. You could eliminate so much actual wealth that this could be the source of a strong dollar rally.”
I wholeheartedly agree with his economic assessment and said as much yesterday in responding to a reader’s comment here at Sense on Cents. I wrote:
How do you fill the gap left by consumers who borrowed too much? Have Uncle Sam step in and borrow too much. One way or the other it’s all borrowed funds which will have to be paid back at some point in the future…
People can call it growth, the appropriate term is leverage. As I wrote above , leverage should not be confused with brains when the market is rising, but it is death when the bull becomes a bear.
In regard to the markets, I view them more as a sideshow while the real action is the race between the Fed and Treasury pumping liquidity into the system to stem the ongoing and increasing wave of defaults. Mr. Gundlach clearly believes this wave will ultimately overwhelm Uncle Sam and our economy.
I respect Mr. Gundlach too much not to give his concerns serious consideration. In fact, I believe the rally in U.S. government bonds over the last few months is sending a warning signal of deflation on the horizon. Recent downward price action in the DJ-UBS Commodity Index may also be an early warning sign. Price action in the equity market would appear to be inconsistent with these markets, but it has been for a while.
For those interested in reviewing Mr. Gundlach’s entire 47-page slideshow, please click on the image below:
Thoughts and comments always welcome.
LD
House Rich but Cash Poor Now Leading to Increased Bankruptcies
Posted by Larry Doyle on September 9th, 2009 3:42 PM |
In the midst of speaking with a wide array of people over the course of the last 6 months, I continue to hear of more and more individuals who fall into the category of “house rich but cash poor.” This phenomena clearly developed over the last 8-10 years given the skyrocketing of home values. As people continued to take equity out of their homes, the home itself was viewed as a provider of wealth rather than a store of wealth. Well, now that the piggy bank that was the home has plummeted in value, many supposed well-to-do Americans are facing bankruptcy.
This unwind has happened so quickly as to leave these ‘successful’ and ‘savvy’ people bewildered. The fact is, a bear market in any segment of the market takes no prisoners.
Bloomberg highlights the explosion in bankruptcies that many high income but overleveraged individuals are facing in writing, Wealthy Families Face Bankruptcy on Real Estate Crash:
Wealthy individuals’ Chapter 11 bankruptcy filings jumped 73 percent in the second quarter from a year earlier, according to the National Bankruptcy Research Center, a research firm in Burlingame, California.
More individuals or families with at least $1,010,650 in secured debt and $336,900 unsecured are using Chapter 11 of the U.S. bankruptcy code typically associated with business reorganizations. Falling U.S. home prices leave them unable to refinance or sell properties when they drop below the value of the mortgage, said Joseph Baldi, a Chicago bankruptcy attorney.
How is this playing out for banks and other credit providers? An ongoing increase in delinquencies, defaults, and foreclosures. Moreover, this segment of the population consumed more high priced items and took more extravagant vacations. The pullback and impact on companies servicing this clientele will continue to be deep and meaningful. (more…)
UN Calls for New Global Currency in Place of Greenback
Posted by Larry Doyle on September 9th, 2009 11:04 AM |
What drove the U.S. dollar dramatically lower yesterday? How about a communique from none other than the United Nations Conference on Trade and Development. UNCTAD recently released a statement in which it proclaims:
Given the prevailing major shortcomings in the international financial and monetary system, UNCTAD draws attention to some elements of reform of the international financial architecture, which is long overdue. These include effective capital account management, strengthening the role of special drawing rights (LD’s highlight), and a multilaterally agreed framework for exchange rate management. These reforms imply a fundamental rethinking of global financial governance to stabilize trade and financial relations by reducing the potential for gains from speculative capital flows. This will reduce the likelihood of similar crises in the future and help create a stable macroeconomic environment conducive to growth and smooth structural change in developing countries.
I purposely highlight the UN’s desire to strengthen the role of special drawing rights. In layman’s terms, that means the UN wants to promote the currency of the IMF at the expense of the U.S. dollar.
When BRIC nations promote a move away from the U.S. dollar, one may view it as the competitive nature of international trade. When an entity such as the United Nations is also promoting a move away from the U.S. dollar as the international reserve currency, we are embarking on an entirely new slope along our economic landscape.
The fact that we have heard little to nothing from our power base in Washington leads me to believe that Obama, Geithner, Bernanke, Summers, et al are comfortable with a decline in the value of our currency.
In my opinion, that comfort can be a very dangerous long term maneuver. How so? Economic growth requires capital. If investors deem our currency to be weakening, the capital will flow elsewhere . . . and elements of our quality of life may go right along with it.
LD
TARP Transparency Is a Joke as Uncle Sam’s $81 Billion Investment in Automakers Unlikely to be Recovered
Posted by Larry Doyle on September 9th, 2009 7:52 AM |
Do the ends justify the means? Is the American taxpayer better off not knowing how his money is being spent when rescuing private corporations? Is the Obama administration’s claim of transparency a mere facade? I believe a strong case could be made that all of these assertions are true in reviewing the likelihood of the American taxpayer recouping taxpayer funds injected into GM and Chrysler.
While government pundits and market analysts will crow about positive returns on TARP funds injected into banks that never truly wanted the money in the first place (Goldman Sachs and JP Morgan amongst others), they have little to say about the TARP money which will not likely be coming back from the automotive industry.
I highlighted this point on June 30th in writing “The TARP Has a $159 Billion Loss”:
Of the $699 billion in total capital, $142 billion has yet to be committed. Of the funds already allocated, Uncle Sam has incurred a total cost of $159 billion. What does that mean?
Recall the number of times that government officials told taxpayers that we would make money on investments in AIG and the like. Well, so far we’ve lost $159 billion dollars across all our TARP investments. The loss is calculated as the difference in funds committed and allocated to securities and the market value of those securities. That loss represents 36% of the funds committed and actually allocated.
Where do a large percentage of the funds unlikely to be recovered reside? Detroit, as in GM and Chrysler.
Bloomberg sheds further light on losses embedded in the TARP in writing U.S. Taxpayers Unlikely to Recover Auto Investment, Panel Says:
U.S. taxpayers are unlikely to recover their $81 billion investment in General Motors Co. and Chrysler Group LLC and were “left in the dark” on specifics of a decision to aid automakers, a congressional panel said.
The report didn’t estimate how much of taxpayers’ aid to the auto industry will be recovered. The panel said GM stock would need “highly optimistic” returns in order for the full investment to be repaid.
The report of the panel, which oversees the Troubled Asset Relief Program, raises questions about the Obama administration’s transparency in aiding automakers and challenges the Treasury Department to make more disclosures about company decisions and the government’s future role.
“Congress and ultimately the American taxpayer have been left in the dark concerning details of Treasury’s review process and its methodology and metrics at a time when Treasury committed additional TARP funds to these companies,” the panel said.
“The Treasury auto team failed to disclose to the public both the factors and criteria it used in its viability assessments, the scope of outside involvement in its evaluations, and its basis and reasoning for selecting particular benchmarks,” according to the report. “Simply, its disclosures did not go far enough.”
As these companies try to recover, taxpayers should not expect a return of any of these $81 billion. Taxpayers should also not expect transparency from Washington. Being truthful and transparent are not exactly consistent with the ‘Washington way.’
LD
The U.S Dollar is Diving
Posted by Larry Doyle on September 8th, 2009 4:32 PM |
Is the U.S. dollar losing its luster as the world’s international reserve currency? If today’s price action is any indication, the greenback is chugging along like a tired old caboose.
The U.S. dollar index is down a full 1% on the day and making multi-year lows against a wide array of other currencies. Our friendly Wall Street Journal Market Data Currency page provides a useful snapshot of our tired old greenback (click on image for larger chart):
Why is the dollar giving so much ground?
1. perception that the U.S. economy is in tougher shape than other economies around the world.
2. perception that these other economies will be forced to raise rates sooner than the Federal Reserve will raise rates here in the U.S.
3. traders are borrowing U.S. dollars at 0-.25% and using them to invest elsewhere in what is known as the ‘carry trade’ otherwise known as utilizing leverage.
4. continued concern about the viability of the U.S. dollar as the world’s international reserve currency.
The Wall Street Journal offers an interesting perspective on this development in writing, Dollar in a Funk as Traders Bet on Slow Rebound:
Currency analysts say the dollar’s slide has room to run now that it has broken free of recent trading ranges. Several are predicting the euro will test $1.50 by the end of the year. Mr. Mackel also sees continued strength, in particular, for the Australian dollar, which is backed by a healthy economy and exposure to a rebounding China. He says the Aussie currency could reach near parity with the U.S. dollar by the end of 2010. Early afternoon Tuesday it was trading at US$0.8641, up from US$0.8560.
Friday’s U.S. jobs report was a significant factor in the dollar’s fall. The U.S. unemployment rate hit 9.7% in August, and that means the Federal Reserve will likely keep interest rates low for the foreseeable future.
I maintain that our leaders in Washington are not unhappy with a weaker dollar. Why? A weaker currency will help promote greater exports as our products appear cheaper. Additionally, it is a means toward generating inflation and effectively monetizing our growing deficit. That said, how do the wizards in Washington stop the slide of the dollar and generate only a whiff of inflation?
The simple fact is a decline in the dollar is a global statement of lessened confidence in the American economy as the driver of global growth.
That is reality.
LD
The Greenback is Getting Some Chinese Competition
Posted by Larry Doyle on September 8th, 2009 12:57 PM |
The BRIC nations (Brazil, Russia, India, China) have certainly not been bashful in promoting the need for some competition in the greenback as the international reserve currency. Is that competition going to escalate as China issues yuan-denominated bonds for the first time? Major high five to MC of Investor Rebellion for bringing this developing story to my attention.
The Business Insider writes, Dollar Threat: China Selling Yuan Bonds for the First Time:
In yet another step to internationalize the yuan as a global currency, China will be selling yuan-denominated bonds on the international market for the first time.
This could be a new option for fixed-income investors, including central banks, who want to diversify away from the dollar.
AP: The 6 billion yuan ($876 million) bond sale is slated for Sept. 28, the ministry said. Hong Kong is Chinese territory but has its own currency and regulatory system and often is used by Chinese companies to deal with foreign investors.
The yuan, also known as the renminbi, or people’s money, does not trade on global markets despite China’s huge foreign trade, but Beijing is gradually expanding its use abroad.
It will be interesting to see what yield these bonds end up offering, and if central banks bite.
Given the consensus view that the yuan is artificially undervalued versus the dollar, longer-term Chinese bonds are likely to be appealing for their currency appreciation potential, in addition to their interest income. We expect a strong a response.
This development is very meaningful and bears watching. Questions and concerns I would have for investors include: (more…)
Did the SEC Have Any Experienced People Looking at Madoff? You Betcha!!
Posted by Larry Doyle on September 7th, 2009 11:24 AM |
While the SEC Inspector General David Kotz would have the American public believe the SEC fell down in its oversight of Bernie Madoff largely due to inexperienced investigators, this claim is very shallow.
Former SEC lawyer Genevievette Walker-Lightfoot was investigating Madoff in 2004 but was reassigned when she started to ask the hard questions. The Wall Street Journal highlights Ms. Walker-Lightfoot’s time working for the SEC in writing, Ex-SEC Lawyer: Madoff Report Misses Point:
A former Securities and Exchange Commission lawyer who investigated Bernard Madoff in 2004 says the new report on how the agency failed to uncover his massive fraud places too much blame on staff examiners and overly generalizes about their “inexperience.”
Genevievette Walker-Lightfoot told Dow Jones Newswires on Thursday the SEC inspector general should have focused more of his attention on how supervisors, rather than the staff examiners and investigators, handled the agency’s many stillborn probes of Mr. Madoff.
SEC inspector general, H. David Kotz, reached by telephone, said he considered it premature for Ms. Walker-Lightfoot to criticize the summary before the full response was released. He described himself as “befuddled” by her remarks. Mr. Kotz noted the decision to release the summary was made by SEC Chairman Mary Schapiro, not by his office.
An executive summary of the report, released on Wednesday, repeatedly emphasized what it described as the inexperience, confusion and limited expertise of staff assigned to at least six investigations involving Madoff since 1992.
Ms. Walker-Lightfoot — who recommended more action in a 2004 investigation that was shelved — said those descriptions were overly simple, and the summary generalized too much.
“My experience is a key example,” she said. “Here was someone who raised red flags and said “We need to look into these things.” But I wasn’t senior management, so it wasn’t my call.”
The full report is expected on Friday, and she said she would reserve final judgment on it until then.
Ms. Walker-Lightfoot, who is now a lawyer for the Federal Reserve Board, was part of a four-person team in the SEC’s Office of Compliance Inspections and Examinations, or OCIE, who investigated Mr. Madoff’s firm in 2004. She informed a supervisor of inconsistencies she learned of during her review and suggested following up.
Instead, her team was ultimately diverted to another case.
Who made this decision? Why? (more…)
Wall Street Meets Main Street at the Courthouse
Posted by Larry Doyle on September 8th, 2009 8:50 AM |
Make no mistake, the slope of the mountain of injustice is quite steep. Furthermore, we are just starting the trek. Little doubt there should be many stops along the way. You can rest assured that the Wall Street lawyers and financial lobbyists are working diligently to put out the smoldering ruins of fires and campsites which wreaked havoc upon our economic landscape. There appears, however, to be mounting evidence that the Wall Street fires were fed by Washington and financial regulators looking the other way.
Bloomberg highlights some initial progress made on behalf of the American public in the fight for truth, transparency and integrity on our financial and economic landscape. This morning Bloomberg writes, Judges Punish Wall Street as Regulators Just Talk About Reform:
I can only hope the momentum in the courtroom accelerates given the slow and painstaking rope-a-dope game being played out between Wall Street and Washington. Wall Street clearly wants a ‘mulligan’ from the excessive improprieties that led to our current economic crisis. The courts are starting to get wise and adjudicating otherwise. Bloomberg highlights some recent rulings for the public and against the Wall Street-Washington cabal including: (more…)
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