General Motors, Ford, and Chrysler never really got into the small and efficient
car business. So now they have become mini-minors. And that's the financial
news for the moment.
So even Bernie Madoff has been off the front pages of the financial press. In the meantime, Irving Picard, the court-appointed trustee for the whole
balagan, is meticulously suing everybody who's done dubious rake-in
business with the major financial gangster of our time. But all of the work is
tedious. So Madoff isn't getting that attention that ongoing scandals usually
command.
On the other hand, the great intelligence and financial sleuth, Edward Jay
Epstein, has kept on unravelling the mechanics and meaning of the big and
systematic heist. This piece reads like detective fiction. But it is not
fiction at all. It's actually very clear. And if you think that J. Ezra
Merkin and the other shysters who fed zillions to Madoff didn't know what was
going on, well, you're an innocent. Put your money in the piggy bank or the
pushka.
A missing piece in the Madoff puzzle is the motive
of his early wave of investors in Madoff's operation before he had established an
impressive track record. Why did a dozen or so multi-millionaire businessmen put
both a large share of their personal wealth and that of their tax-exempt
foundation in multiple accounts with Madoff? If these financially savvy investors only
wanted to compound their wealth, other highly-regarded money managers, such as
George Soros, Julian
Robertson and Paul Tudor Jones, then offered better track records over longer
periods as well as much safer financial controls, including outside custodian
and auditing services. Presumably Madoff was able to offer these wealthy investors some
other service they could not obtain elsewhere. But what?
The secretive way in which he personally ran his operation from a small
office in the Lipstick building in New York may well have been part of the
inducement. Since he alone handled each account and determined its profits and
losses from each putative transaction, he was in a unique position to
custom-tailor how they were allocated between a client's taxable personal
accounts and his tax-exempt charitable accounts. In fact, presumably unknown to
these investors, Madoff was running a Ponzi scheme in which he forged the paperwork to
create imaginary profits. Even without such notional book-keeping, it would have
been child's play for Madoff to provide his clients with the results that
helped then minimize their annual tax bills. This service became particularly
valuable to wealthy individuals after Congress in 1982, at the behest of Senator
Daniel P. Moynihan,
amended the Economic Recovery Tax Act to prohibit a common practice in which
wealthy investors used commodity trades to shift their taxable profits into
future years. Madoff's correspondence with his clients, according
to one lawyer involved in the ongoing civil suit, shows that this was precisely
the secret service Madoff was supplying his early clients. "If a client
needed to offset taxable income in a given year," the lawyer explained, "Madoff would give him a
paper loss, and put the off-setting profit in his tax-exempt account and then
presumably return it in the next year, or when he needed it." As far as how he
did this legerdemain he apparently had a "Don't ask, Don't Tell"
policy.
Irving Picard,
the court-appointed trustee in the bankruptcy liquidation of Madoff's firm, found
correspondence in Madoff's files showing that investors specified the
loss that would be helpful. Indeed, he charges in court papers that one of these
early investors, who had $178 million in different Madoff accounts,
requested. , as reported by the Wall Street Journal, "fictitious losses from Mr.
Madoff's firm,
apparently to offset gains he made through other investments in order to avoid
taxes." He cites another early investor, who had nearly a billion dollars in 12
different accounts for his family and foundation, who, according to Picard, had an assistant
at his foundation request a $12.3 gain for his foundation. According to him,
there were wide variations in different accounts. Even though allocations
between accounts might raise tax evasion issues, all the investors cited in the
Trustee's suit deny any wrongdoing, and no charges have been brought against
anyone to date except Madoff himself, who pleaded guilty to fraud in March 2009, and
his firm's auditor, David Friehling, who is out on bail awaiting trial.
The
bespoke tailoring of taxable income was not the only special service. Madoff also provided.
these early clients with a steady increase in the reported value of their total
investments in both good and bad times (such as in the crash of 1987). We now
know that he achieved these results by inventing them. And they provided him
with the sort of enviable track record he needed to attract a second wave of
investors in his Ponzi scheme. As word spread among the rich of Madoff's amazingly steady
returns in both good and bad years, he was approached by numerous"feeder funds."
These are essentially money-raising operations that turn virtually all the money
they raise over to another money manager. As compensation, they usually get a
relatively-small placement fee from the money manager, who then charge the
investors his own performance fee- typically 20 percent of the profits- and an
annual charge- typically one percent of the value of their total
investment.
Madoff offered
these money-raising funds a far more lucrative deal in which he would waive his
fee entirely, allowing the feeder funds to charge the investors a performance
fee as well as asset fee on the profits that Madoff would generate each year. Madoff's explained that he
could afford to provide this zero-fee service to funds because he earned
commissions buying and selling options on the shares. Rather then looking a gift
horse in the mouth, feeder funds eagerly outsource their investors' money into
Madoff. The profits
they earned from these fees were staggering. For example, in 2007 alone, Fairfield Sentry, a unit
of the Fairfield
Greenwich Group, raked in $160 million in fees on the money it had outsourced to
Madoff based. Such
fees of course were based on the fake numbers Madoff supplied. After the Ponzi scheme was exposed
in 2008 by Madoff
himself), many of these funds claim to be victims of his fraud. Perhaps so, but
certainly the investors in these feeder funds qualified as the prime victims. As
law suits brought by bankruptcy trustee Picard and the ongoing federal investigation
proceed, and we learn more about the special services Madoff provided "victims,"
including the bespoken allocations that allowed them to reduce their taxable
income and the zero-fee management that allowed feeder funds to harvest a huge
bounty from his phantom profits, it may be useful to ponder W.C. Fields famous
dictum "You can't cheat an honest man."
Print
COMMENTS (18)
What are the chances that these wealthy clients will also be prosecuted for tax fraud?
What are the chances that these wealthy clients will also be prosecuted for tax fraud?
jackson, how can people be prosecuting for not reporting what was in reality non existent profits, in fact they were in the process of losing everything, not just the fictitious gains or losses. If I were on a jury that is all I would think about and figure they were punished enough. As to the feeder funds, that is over my head. Obviously they were not exercising due diligence but I don't know how the law applies to that. And if they knew about it, then that is obviously fraud, but good luck proving it.
jackson, how can people be prosecuting for not reporting what was in reality non existent profits, in fact they were in the process of losing everything, not just the fictitious gains or losses. If I were on a jury that is all I would think about and figure they were punished enough. As to the feeder funds, that is over my head. Obviously they were not exercising due diligence but I don't know how the law applies to that. And if they knew about it, then that is obviously fraud, but good luck proving it.
by the way, of course you can cheat an honest man. I have been shortchanged enough times to know that, and I also know I haven't caught it everytime and that everytime was inadvertent. I know it sounds picky, but Fields was just being funny, there is a ring of truth to it, but not the whole truth.
by the way, of course you can cheat an honest man. I have been shortchanged enough times to know that, and I also know I haven't caught it everytime and that everytime was inadvertent. I know it sounds picky, but Fields was just being funny, there is a ring of truth to it, but not the whole truth.
blackton, I was thinking of those people who made lots of money and while they may have lost some at the end also helped Madoff with his schemes.
These people need to face charges.
blackton, I was thinking of those people who made lots of money and while they may have lost some at the end also helped Madoff with his schemes.
These people need to face charges.
A lot of these people thought they were in on some sort of scam - it's just that they were a little more "in" than they thought.
A lot of these people thought they were in on some sort of scam - it's just that they were a little more "in" than they thought.
fair enough Jackson. I agree with that, I just don't want to see a witch hunt.
fair enough Jackson. I agree with that, I just don't want to see a witch hunt.
All lies and jest, still the man hears what he wants to hear and diregards the rest.
All lies and jest, still the man hears what he wants to hear and diregards the rest.
MP: General Motors, Ford, and Chrysler never really got into the small and efficient car business.
george:
This is always pointed out as though GM brainwashed their customers into buying SUVs when they really wanted tiny hybrids.
SUVs and pickup trucks were mass produced because that is what American consumers wanted. And had it not been for the huge spike in gasoline prices, that is what they would still be buying.
Someday when a cheap alternative to fossil fuels is invented you will see customers flocking to SUVs all over again.
george
MP: General Motors, Ford, and Chrysler never really got into the small and efficient car business.
george:
This is always pointed out as though GM brainwashed their customers into buying SUVs when they really wanted tiny hybrids.
SUVs and pickup trucks were mass produced because that is what American consumers wanted. And had it not been for the huge spike in gasoline prices, that is what they would still be buying.
Someday when a cheap alternative to fossil fuels is invented you will see customers flocking to SUVs all over again.
george
MP:............systematic heist..........
george:
Nope, it wasn't systematic so much as systemic.
There is an important distinction to be made between the two.
Something done "systematically" can apply to almost anything anyone does in the finance industry...or on Wall Street.
On the other hand, a systemic problem reflects the very nature of Wall Street and the finance industry in our post Glass-Steagall.
Madoff rigged the system by going outside the law. But all the perfectly legal things Clinton, Bush, Geithner, Rubins, Summers, [and now] Obama [along with their Congressional counterparts] legislated into existence since 1999 makes the stuff Madoff did but a drop in the crony capitalis ... view full comment
MP:............systematic heist..........
george:
Nope, it wasn't systematic so much as systemic.
There is an important distinction to be made between the two.
Something done "systematically" can apply to almost anything anyone does in the finance industry...or on Wall Street.
On the other hand, a systemic problem reflects the very nature of Wall Street and the finance industry in our post Glass-Steagall.
Madoff rigged the system by going outside the law. But all the perfectly legal things Clinton, Bush, Geithner, Rubins, Summers, [and now] Obama [along with their Congressional counterparts] legislated into existence since 1999 makes the stuff Madoff did but a drop in the crony capitalist bucket.
george walton
"This is always pointed out as though GM brainwashed their customers into buying SUVs when they really wanted tiny hybrids. "
In fact, the demand for SUVs was almost entirely marketing created demand. Whether you want to label successful marketing brainwashing or not is a judgment call, but when it is a successful MASS marketing campaign, as is the case with the US consumers love affair with big Detroit iron in the 80s, 90s and early 2000s, then I think brainwashing is pretty close to the truth.
Not one in 50 of the consumers of SUVs had any compelling reason to own them beyond the marketing created image of the vehicles.
"SUVs and pickup trucks were mass produced be ... view full comment
"This is always pointed out as though GM brainwashed their customers into buying SUVs when they really wanted tiny hybrids. "
In fact, the demand for SUVs was almost entirely marketing created demand. Whether you want to label successful marketing brainwashing or not is a judgment call, but when it is a successful MASS marketing campaign, as is the case with the US consumers love affair with big Detroit iron in the 80s, 90s and early 2000s, then I think brainwashing is pretty close to the truth.
Not one in 50 of the consumers of SUVs had any compelling reason to own them beyond the marketing created image of the vehicles.
"SUVs and pickup trucks were mass produced because that is what American consumers wanted. And had it not been for the huge spike in gasoline prices, that is what they would still be buying."
Cigarettes are produced and sold because people want to buy them. But, the demand has to be created. GM, Ford and Chrysler created demand for SUVs and to a less extent trucks (some of the people who buy F-350s actually have something they need to haul), because they could make money on them, whereas they were clueless about how to make a living selling equally usefull, but cheaper sedans and compacts. That may have looked smart in 1993, but anyone with a vision beyond the next few years would have known that they were painting their corporations into a corner, by relying on manufactured demand that delivered little added value, and which was at obvious risk of sudden evaporation - the moment the status of the SUV did not outweigh the cost of ownership, the market had to evaporate.
Brainwashed - pretty close.
This approach to "marketing created demand" infantilizes the American public, and is a favorite cop out by ideologues left and right. The lefties tell me that I want an SUV because the evil corporations have brainwashed me. The right wing tells me that the lefty media have brainwashed me into any number of other things.
My message to both: respect other people's choices. If you want to change those choices, either reason with the folks making them or change the factual situation that led to them making the choice in the first place.
This approach to "marketing created demand" infantilizes the American public, and is a favorite cop out by ideologues left and right. The lefties tell me that I want an SUV because the evil corporations have brainwashed me. The right wing tells me that the lefty media have brainwashed me into any number of other things.
My message to both: respect other people's choices. If you want to change those choices, either reason with the folks making them or change the factual situation that led to them making the choice in the first place.
We bought a used Toyota Highlander (my son informs me it is a crossover vehicle rather than a true SUV) even though it does not get great mileage because it is very comfortable for big people-----tall and heavyset. My adolescent sons (one is 6'3"!) can sit in the back without their heads rubbing the ceiling. The fact that the Highlander is a little higher off the ground makes it easier on my aching back and arthritic knees when climbing in and out.
We put very few miles on the car because we chose to live very close to jobs and schools, so the price of filling the tank is not a very relevant issue to us. We were definitely not brainwashed, and are sure that ... view full comment
We bought a used Toyota Highlander (my son informs me it is a crossover vehicle rather than a true SUV) even though it does not get great mileage because it is very comfortable for big people-----tall and heavyset. My adolescent sons (one is 6'3"!) can sit in the back without their heads rubbing the ceiling. The fact that the Highlander is a little higher off the ground makes it easier on my aching back and arthritic knees when climbing in and out.
We put very few miles on the car because we chose to live very close to jobs and schools, so the price of filling the tank is not a very relevant issue to us. We were definitely not brainwashed, and are sure that we did not buy the car as a status symbol since instead we find that we have to justify our choice every time we turn around. We bought the car after SUV's went out of style.
Say, sdemuth, is that the same kind of marketing created demand that compelled so many millions of people to buy Edsels?
This nonsense, which follows on from Vance Packard's "The Hidden Persuaders" and "The Waste Makers," as reinforced by reams of contemporaneous drivel from John Kenneth Galbraith, assumes that the masses are dolts, constantly manipulated by greedy marketers into buying all kinds of things that more intelligent people (like sdemuth) are wise enough to know they neither need nor should they desire.
I found this attitude to be the prevalent conceit at college campuses 40 years ago. I guess it still is so.
As an economist, however, I recognize that it is deman ... view full comment
Say, sdemuth, is that the same kind of marketing created demand that compelled so many millions of people to buy Edsels?
This nonsense, which follows on from Vance Packard's "The Hidden Persuaders" and "The Waste Makers," as reinforced by reams of contemporaneous drivel from John Kenneth Galbraith, assumes that the masses are dolts, constantly manipulated by greedy marketers into buying all kinds of things that more intelligent people (like sdemuth) are wise enough to know they neither need nor should they desire.
I found this attitude to be the prevalent conceit at college campuses 40 years ago. I guess it still is so.
As an economist, however, I recognize that it is demand that creates supply and not the other way around.
Madoff's the obvious big fish. I suspect everyone on wall street is piling on the obvious case to divert attention from the people who should be prosecuted: those who got rich looting 401Ks and 403bs.
Where are the investigtion into the crooked hedge funds; the short-stock colluders? Christopher Cox and those who urged him to dump the no-uptick rule.? You can probably figure out who these guys are by watching CNBC - they are the ones vociferously arguing against putting it back, but the thrust of their argument is 'it didn't make any difference.'...right
The greedy manipulators who got rich off of middle class misery are the ones who belong in the slmmer.
Madoff's the obvious big fish. I suspect everyone on wall street is piling on the obvious case to divert attention from the people who should be prosecuted: those who got rich looting 401Ks and 403bs.
Where are the investigtion into the crooked hedge funds; the short-stock colluders? Christopher Cox and those who urged him to dump the no-uptick rule.? You can probably figure out who these guys are by watching CNBC - they are the ones vociferously arguing against putting it back, but the thrust of their argument is 'it didn't make any difference.'...right
The greedy manipulators who got rich off of middle class misery are the ones who belong in the slmmer.
Dworkinm, there is no doubt that demand creates supply, but marketing also creates demand. If that were not so, then manufacturers would not spend billions of dollars a year on marketing. For example, why do you think the pharmacuetical companies spend many millions of dollars on television advertising? Why is it not sufficient for the drug companies that physicians will prescribe drugs for their patients as needed? Clearly, the television marketing creates a demand that drives patients to their physicians for the express purpose of obtaining the drugs.
Dworkinm, there is no doubt that demand creates supply, but marketing also creates demand. If that were not so, then manufacturers would not spend billions of dollars a year on marketing. For example, why do you think the pharmacuetical companies spend many millions of dollars on television advertising? Why is it not sufficient for the drug companies that physicians will prescribe drugs for their patients as needed? Clearly, the television marketing creates a demand that drives patients to their physicians for the express purpose of obtaining the drugs.
latest on Madoff's associates:
"SEC charges 4 with helping Madoff"
"Agency claims that firms and executives recruited investors and fed money for giant Ponzi scheme". By Aaron Smith, CNNMoney.com staff writer
June 22, 2009: 3:01 PM ET
"NEW YORK (CNNMoney.com) -- The Securities and Exchange Commission on Monday charged a brokerage firm and several individuals with raising money from investors to feed Bernard Madoff's Ponzi scheme.
The SEC brought a civil enforcement action against Cohmad Securities Corp., its chairman Maurice Cohn, chief operating officer Marcia Cohn and registered representative Robert Jaffe with securities fraud. The SEC filed the case in U.S. Dist ... view full comment
latest on Madoff's associates:
"SEC charges 4 with helping Madoff"
"Agency claims that firms and executives recruited investors and fed money for giant Ponzi scheme". By Aaron Smith, CNNMoney.com staff writer
June 22, 2009: 3:01 PM ET
"NEW YORK (CNNMoney.com) -- The Securities and Exchange Commission on Monday charged a brokerage firm and several individuals with raising money from investors to feed Bernard Madoff's Ponzi scheme.
The SEC brought a civil enforcement action against Cohmad Securities Corp., its chairman Maurice Cohn, chief operating officer Marcia Cohn and registered representative Robert Jaffe with securities fraud. The SEC filed the case in U.S. District Court in Manhattan.
The Cohns and Jaffe are accused of courting investors for Madoff's massive scheme, which used fresh investments from unsuspecting investors to make payments to more mature investors and creating the false appearance of legitimate returns.
Separately, the SEC charged California-based investment adviser Stanley Chais with securities fraud. Chais is accused of operating feeder funds that poured money into Madoff's Ponzi scheme.
The defendants helped Madoff "cultivate an air of exclusivity by pretending that he was too successful to trouble himself with marketing to new investors," while providing "a constant in-flow of funds to sustain his fraud," said Robert Khuzami, director of the SEC's enforcement division, in a prepared statement.
Both SEC complaints seek injunctions, financial penalties and court orders requiring the defendants to turn over ill-gotten gains.
Over two decades, the Cohns and Jaffe raised billions of dollars from hundreds of investors for Madoff and were paid $100 million for their troubles, according to the SEC. The SEC accuses the defendants of being fully aware that Madoff was operating a Ponzi scheme.
Defense lawyers for Jaffe called the SEC complaints "baseless."
"The complaint filed today, which we learned about only from the press, smacks of impulsiveness and efforts at self-justification," Jaffee's lawyers at the firm Arkin Kaplan Rice said in a statement. "It is unfair, baseless in the law, and is inaccurate in its understanding of the facts and of Mr. Jaffe."
Lawyers for the other defendants were not immediately available for comment.
The SEC described Chais as an investment adviser for 40 years who "has held himself out as an investing wizard, purporting to execute a complex trading strategy on behalf of hundreds of investors, despite in actuality being an unsophisticated investor who did nothing more than turn all of the investors' assets over to Bernard Madoff."
Between 1995 and 2008, Chais charged $269 million in fees, and withdrew $546 million from Madoff accounts, said the SEC. The government agency said Chais was "a close friend of Madoff since at least the 1960s."
Madoff has been locked up in the Metropolitan Correctional Center since March 12, when he pleaded guilty to masterminding the most massive Ponzi scheme of all time. He orchestrated the scheme through his firm, Bernard L. Madoff, which he founded in 1960.
Madoff's maximum sentence is 150 years in a federal prison, based on his guilty plea to 11 criminal counts, including fraud, money laundering, perjury, false filing with the Securities and Exchange Commission and other crimes. Madoff is set to be sentenced on June 29.
Thus far, investigators have identified 1,341 investors in Madoff's firm with losses exceeding $13 billion. "
dhurtado, you are confusing marketing and misinformation with creating demand.
The demand is for cure, restoration or relief. From that is derived the demand for medications, devices, procedures, surgeries and such to satisfy those demands.
All that you are describing is an effort to persuade people (or misinform them, as the case may be) that particular medications are more effective than alternatives and to ask their doctors to prescribe them. Meanwhile, these very same companies spend even more to persuade physicians to prescribe the very same or competitive products.
Notwithstanding the layman's lack of expertise, in a sense there is a leveling of the playing field here, inasmuch as the pat ... view full comment
dhurtado, you are confusing marketing and misinformation with creating demand.
The demand is for cure, restoration or relief. From that is derived the demand for medications, devices, procedures, surgeries and such to satisfy those demands.
All that you are describing is an effort to persuade people (or misinform them, as the case may be) that particular medications are more effective than alternatives and to ask their doctors to prescribe them. Meanwhile, these very same companies spend even more to persuade physicians to prescribe the very same or competitive products.
Notwithstanding the layman's lack of expertise, in a sense there is a leveling of the playing field here, inasmuch as the patient is less subject to being medicated with a specific product solely because his or her prescribing physician was royally entertained at some golf tourney the week before. That is, the patient has acquired a greater control over what he or she is told to ingest. At bottom, what you are complaining about is the potential for misrepresentation or misinformation affecting the decision-making process. Agreed, that is a danger, but are we worse off or better off when patients are made aware of alternative therapies?
Interestingly, marketing was not much able to persuade people to buy Edsels, as noted, nor was it able to persuade very many folks to wear their automobile seat belts. But it sure has convinced a lot of people that there are product differences between different brands of vodka, when, in fact, by federal law there is no discernible difference between different brands whatsoever.
Which reinforces the assertion of the late Prof. George Katona, the father of the field of psychological economics, who wrote that advertising is most likely to be successful in only the most trivial of decisions.
Here is Edward Jay Epstein's third part of a series on Bernie Madoff and his partners in crime. Part
Here is Edward Jay Epstein's third part of a series on Bernie Madoff and his partners in crime. Part