- At first sight it was extremely refreshing. A white-collar
financial crook raising his hands and pleading guilty to his financial
crime. This has to be almost a first. Usually financial criminals when
caught in the most obvious of wrong-doing plead 'not guilty'. The criminal
can be caught boarding the plane, with a suitcase containing US $100mn
of someone else's cash, with his mistress holding on to his arm, he will
look into the camera with his most genuine 'Tony Blair look of sincerity'
and say "What we have here is a misunderstanding.... " You make
up the rest of the excuse, there is a million of them.
- So yes, an outright confession, "It was me, I chopped
down the apple tree" is so against the current socio-political culture
it was almost too good to be true. Especially given the pedigree of this
perp, the CEO of one of the busiest and most prominent financial exchanges
in the world. After his confession the world goes into shock, especially
the Jewish world, (Note: PAUL IS A JEWISH CONVERT TO ISLAM PARTLY
BECAUSE OF THIS KIND OF THING) since affluent members of this community
had previously flocked to his door, seeking his world famous high returns.
Since his arrest the press is full of people extolling his virtues as a
decent human-being and "who would ever of believed it?". It would
be so easy for this man to deny any wrongdoing because he could bring out
an army of good character witnesses and he could just point at some suspect-looking
goy in his hedge fund organisation to lay the blame on.
- So a truly heart-warming confession. And it was apparently
made to his 2 sons, both of whom who worked for the fund and who had absolutely
no idea that this fraud was being perpetrated, until such time as this
- But then I started to look more closely at the mix of
investors who have lost money. About half of them are professional investing
institutions. Look at this quote from the UK's Daily Mail newspaper (online)
- "Full details of the exact losses are yet to emerge.
Hedge funds and banks have so far admitted to having around £16billion
with Madoff - only half of the total that is reckoned to have been lost.
Some of the biggest casualties are Swiss private banks, which have taken
hits amounting to about £2.5billion. Spanish bank Santander had £2.1billion
of client money with Madoff. HSBC has admitted to lending about £600million
to funds who wanted to use debt to gear up their positions with Madoff.
RAB capital, the hedge fund that lost huge sums on investing in Northern
Rock, has revealed that it is exposed to Madoff to the tune of around £6million."
- Now the confession does not look right at all.
- It is possible to accept the idea of a Ponzi scheme be
played on members of the public, who are ignorant of how such schemes are
worked, in fact the schemes are targeted specifically at such people. Yet
Madoff would have us believe that he managed to convince professional investment
companies to put their funds with him without any due diligence being performed.
This is clearly nonsense.
- I have acted as a professional consultant to major EC
and US financial institutions on corporate and institutional credit risk
and the idea that anyone in HSBC or Santander could authorise large investment
without the internal checks and controls being employed is almost impossible.
To try and believe that EVERY institution that invested in Madoff circumvented
their internal control procedures IS impossible.
- Why is this important? Simple. If someone approaches
the HSBC credit risk team, for instance, with a view to making a loan or
investing a sum as large as £600m to what is ultimately a single
institution (therefore a single counterparty credit exposure) a significant
number hoops would have to be jumped through. Firstly there is the credit
officer competence limit, which is the maximum amount that a single credit
officer may be allowed to authorise. More than his/her limit must be referred
up the credit approval food chain. In an institution like HSBC or Santander
etc, £600bn or US$1bn will have been referred to the very top of
the food chain, the banks' credit committees at the board level. This is
an enormous sum and no lackey is going to be able to approve this by themselves,
- When the credit committee are called together to review
an application, everything is ready prepared for them, so they can cut
to the chase . The lower levels of the credit approval process will have
prepared a summary of all the application documentation, included in the
meeting bundle, with the strengths, weaknesses, and other important credit
risk points. This application will usually contain a set of audited accounts
going back a minimum of 3 years and most likely 5 years. There will be
a full credit breakdown of the investment profile of the business, Madoff's
hedge fund, looking at how the fund obtains its returns; investment assets
and investment methodology. After the committee is satisfied that all the
issues and concerns have been addressed they will vote on the approval
- So there is no way that Madoff could have been pulling
a scam. It would have stood out as clear as day to professional financial
analysts, whose only job in life is to examine the management of companies
and their reports and accounts, to make sure that all is in order. Its
their job, its what they do. They are the world experts in spotting anomalies.
The idea that all these professionals in all these companies were all duped
is absolute nonsense. It is highly improbable that one such evaluation
process could have been fooled, but all of them, never. A Ponzi scheme
is easy to spot when you have the audited accounts and the full range of
investment assets and investment metodologies employed.
- Also, this scam avoided the attention of all the funds
employees; accountants, traders, auditors and the US regulators, all of
whom are also financial professionals. This again is absolute nonsense.
Any company that I have ever worked for would have known internally that
such business was being done, because they are all involved. For instance,
a trader goes on buying equities from the worlds stock exchanges that go
down in price for 5 continuous years, but the company just keeps giving
him more money to top up the trading, continues paying his salary and even
annual bonus. Absolute rubbish. But assuming this actually did happen,
the market risk team would have been watching these losses, as would have
the accountants. It is not possible to hide things like this internally
for very long, months at the most; 20+ years, NEVER.
- So why plead guilty? The answer is simple. Look on the
net and you will see that because this case is being labelled a fraud,
it would appear that investors are going to be able to claim their investment
back under the US government's financial fraud protection scheme. A judge
has already given his approval in principle for compensation, without any
evidence having been presented and financial fraud being demonstrated in
a court of law. And it would appear that there will never be such a demonstration
in a court of law. Why? It would appear that all the funds financial records
are mostly "missing" (rather like Dov Zakheim's US$1.4tn) and
those few records that do survive are in a terrible mess.
- However, since the guy has pleaded guilty we do not need
to demonstrate the fraud, because he says he is guilty.
- And look further on the net and you will see that these
"victims" have also been told by the US tax authorities that
they will probably also be entitled to claim back some taxes on these defrauded
- Rather than saying this hedge fund has gone bust, due
to its choice of investment assets and investment methologies, a scenario
which is highly probable in the current financial paradigm, since all the
professionals are predicting that at least 30% of all hedge funds are about
to fail, more than 700 of them, the CEO chooses to fess up to fraud. If
the CEO admits the fund has gone bust, then all those wealthy members of
the Jewish community get nothing, but if the CEO admits to fraud they get
their money back as compensation from the US tax payer, just as they are
also drawing money back from the tax payers with the other hand.
- And, as can be seen at the Daily Mail link above, the
investors in this fund only get to litigate the fund directors against
Lloyds insurers in London for even more compensation. Done properly the
compensation could end up paying out far more than the original fund returns
(yes this is sarcasm, it was bound to creep in eventually in yet another
swindle like this).
- Would that I could believe that Madoff were a good guy
who slipped and then became repentant. But given the facts, this simply
cannot be true.