Saturday, December 13, 2008

Hedge Fund $50B Blowup

"I knew he was cheating, That's why I used him" http://globaleconomicanalysis.blogspot.com/ Madoff Madness:

"We're hearing that the smart money KNEW Bernie had to be cheating, because the returns he was generating were impossibly good. Many Wall Streeters suspected the wrong rigged game, though: They thought it was insider trading, not a Ponzi scheme. And here's the best part: That's
why they invested with him.
....
Madoff told senior employees of his firm on Wednesday that "it's all just one big lie" and that it was "basically, a giant Ponzi scheme," with estimated investor losses of about $50 billion, according to the U.S. Attorney's criminal complaint against him.
...
And at least three funds of hedge funds -- which raise money from investors and farm it out to hedge funds -- may have significant losses. Fairfield Greenwich Group and Tremont Capital Management of New York placed hundreds of millions of their investors' dollars into
funds overseen by Mr. Madoff. On Friday, Maxam Capital Management LLC reported a combined loss of $280 million on funds they had invested with Mr. Madoff."

He avoided reporting regulations and oversight by going to cash before the end of a reporting period and using a small accounting firm that no one had heard of....

http://finance.yahoo.com/news/For-Madoff-investors-big-apf-13823443.html

"He only had five down months since 1996," Gradante said. "There's no strategy in the world that can generate that kind of performance. But when people would come to him and say, 'How did I make money this month?' he didn't like it. He would get upset with people who probed
too much."
....
"He described a powerful word-of-mouth allure, where one friend after another recommended Madoff as a sure thing, someone who took on new clients only reluctantly and as a favor."

The best summary of events can be found at wikipedia:

http://en.wikipedia.org/wiki/Bernard_L._Madoff

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Impact:

1. People already hit by the downturn may result in more redemptions for other funds at the worst possible time for themselves and the hedge fund.

2. Increased regulations forcing more hedge funds to close and making it harder for new funds to start and grow.