200 Years of Losses?
Posted by admin | Filed under fraud
In calculating Bernie Madoffs’ self admitted $50 billion in losses, I came up with the following:
Assuming 250 trading days per year, and a staggering $1million in losses per day, it would have taken Madoff 200 years to lose $50 billion. In connection with this massive fraud, I have included a link to an incredible document, namely, Harry Markopolos’ written complaint to the SEC in 2005. http://d.scribd.com/docs/1xze9pjljc8zx53bbsbj.pdf
Although it is 19 pages, I would suggest reading it to get a critical view of Madoffs’ strategy. In the complaint, Markopolos lists 29 red flags and states on page 2 of the document that it is highly likely that “Madoff Securities is the Worlds’ Largest Ponzi Scheme”. As we now know, the SEC chose to completely ignore this and any other complaints about Madoff even though according to Bloomberg, the misconduct dates back over 30 years. http://www.bloomberg.com/apps/news?pid=20601087&sid=aj44JrWmAOGA&refer=home
I think much of the investing world is transfixed by this incredible story.
In other news, it seems that the auto industry will receive over $13 billion in loans. It is not immediately clear how and under what terms these loans will be repaid. Thus far, other than emergency assistance, it is difficult for me to see any real improvement in our economy. Banks are still not making loans and investors are still shying away from fixed income investments that are not government guaranteed. I do not see how our country could avoid a severe economic meltdown unless this situation improves soon.
More on Madoff; Interest Rates and the Economy
Posted by admin | Filed under Uncategorized
I will not repeat all the stories on Madoff which readers can find all over TV, newspapers and the internet. However, a few items strike me as significant. First of all, Madoffs’ hedge fund did not utilize the services of a prime broker. A prime broker generally acts as sort of a central clearing agency for all of funds’ trades. In other words, most funds have accounts at several different brokerage forms. It is quite cumbersome to review several brokerage statements; the prime broker consolidates everything for you. In addition, the prime broker can extend credit (i.e. margin) if the fund wishes to utilize it. Most funds, especially those in the billions of dollar range, utilize prime brokers’ services, which are offered by many major firms such as Merrill Lynch, Goldman Sachs and Jeffries. The fact that Madoff did not use one should have raised some major red flags. It is also inconceivable to me that Madoff acted alone. It is known that Madoff kept at least 2 sets of books and records, and sent out regular monthly statements (which supposedly included actual, albeit fictitious, trades) to his clients. It is difficult for me to believe that all this was the work of one senior citizen. In my opinion, several people had to be involved in this scam. I hope the truth will come out soon.
The Fed basically cut their target rate to zero this week. The market jumped several hundred points on this news, and now seems to be slowly giving it back. For the month of December, we are basically flat, which is clearly a lot better than the last three months. In the face of this economic decline, the good news is that the Fed is basically firing every bullet they can at the problem. The bad news is that it doesn’t seem to be working. Even worse, it would seem that the Fed is virtually out of bullets. Last time I checked, zero is the bottom. However, as this has not stimulated lending, overall rates on mortgages and bonds have not declined appreciably. For example, 2 year treasuries yield roughly .68 pct. 2 year A-rated corporate bonds yield around 6.20, or roughly 9 times as much. In other words, if rates remained here, you could earn the same amount of interest on a single A-rated corporate bond in two years that would take you over 18 years to earn on a US treasury. Of course, the rub is that you hope the corporation won’t default. Simply put, investors are unwilling to accept risk. This has major implications for our entire economic system. If companies cannot raise capital, they will have a very difficult time growing. Even worse, may of these companies are going to have a hard time repaying their existing debt. Generally, companies (and municipalities) tend to roll their debt. In other words, they tend to pay off their existing bonds by issuing new ones. In this market environment, this is extremely difficult, if not impossible. I honestly don’t know what else the Fed can do in order to alleviate this crisis. Let’s hope there are some smart people in Washington who can come up with a solution.
The Fed Makes Another Dramatic Cut
Posted by admin | Filed under Uncategorized
In another sign that the economy is continuing to deteriorate, the Fed cut rates to a target of zero to .25 per cent. Although I will speak more about this, I have included the actual statement from the Federal Open Market Committee, which I believe speaks for itself.
“The Federal Open Market Committee decided today to establish a target range for the federal funds rate of 0 to 1/4 percent.
Since the Committee’s last meeting, labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment, and industrial production have declined. Financial markets remain quite strained and credit conditions tight. Overall, the outlook for economic activity has weakened further.
Meanwhile, inflationary pressures have diminished appreciably. In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate further in coming quarters.
The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.
The focus of the Committee’s policy going forward will be to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve’s balance sheet at a high level. As previously announced, over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant. The Committee is also evaluating the potential benefits of purchasing longer-term Treasury securities. Early next year, the Federal Reserve will also implement the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Christine M. Cumming; Elizabeth A. Duke; Richard W. Fisher; Donald L. Kohn; Randall S. Kroszner; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh.
In a related action, the Board of Governors unanimously approved a 75-basis-point decrease in the discount rate to 1/2 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York, Cleveland, Richmond, Atlanta, Minneapolis, and San Francisco. The Board also established interest rates on required and excess reserve balances of 1/4 percent”
