Posts filed under “Legal”
MIT’s Andrew Lo:
The key concept here, developed by MIT professor and noted hedge-fund theorist Andrew Lo, is “serial correlation.” Simply put, serial correlation is the degree to which each month’s returns in a fund mirror the results of the month before. A fund that returns the exact same amount every month is perfectly serially correlated. Madoff’s returns were strikingly consistent month after month, year in and year out. That kind of performance—a nice, smooth line going up no matter what the market does—is a really good sign that you should look more closely.
The extraordinary thing that Lo does in the third chapter of his book Hedge Funds, published earlier this year, is to demonstrate mathematically that an excessive degree of serial correlation is a powerful indicator that the holdings of a fund aren’t being reported realistically. What Lo shows from the pattern of historical returns in hedge-fund databases is that when funds’ returns grow too consistent, it is a sign that the investments are either very hard to value accurately and the returns are just guesses, or, worse, that they’ve been manipulated in a way that smoothes them artificially. What Lo creates is a mathematical model for judging what “looks too good to be true.” Lo’s work turns a lot of the conventional thinking about what’s safe on its head. It shows that the evenness that investors have traditionally been taught indicates safety and reliability can actually be the best sign risk is being hidden or that the data are unreliable.
Madoff Dilemma: How Can You Spot A Wall Street Crook?
Big Money, Friday, December 12, 2008 – 3:57pm
Andrew W. Lo
Princeton University Press (May 18, 2008)
> Go to NakedShorts and read the entire 2001 article of the various ways some people challenged the Madoff story: > If it sounds too good to be true… > UPDATE: Paul points to this Barrons story from 2001 Don’t Ask, Don’t Tell Barron’s MAY 7, 2001 http://online.barrons.com/article/SB989019667829349012.html >
Howard Husock has an exercise in cognitive dissonance in today’s NYT Op-Ed pages titled Housing Goals We Can’t Afford, and it begins: “The national wave of home foreclosures, many concentrated in lower-income and minority neighborhoods, has created a strong temptation to find the villains responsible.” What can you say about an Op-Ed whose very first…Read More
In what I can only type with a combination of disgust and astonishment, SEC Chairman Christopher Cox blames the current crisis on the “boom-and-bust cycles” of markets. “Financial markets, of course, are not perfect. In particular, they are susceptible to boom-and-bust cycles. Cycles of this sort have been a hardy perennial over the past 400…Read More
Astounding: Orson Benn, once a vice president at the nation’s largest subprime lender, spent three years during the height of the housing boom tutoring Florida mortgage brokers in the art of fraud. From his office in New York, he taught them how to doctor credit reports, coached them to inflate income on loan applications, and…Read More
These Minimum Advertised Prices — floors under which retailers cannot drop a product price — always struck me as anti-competitive, and well, just wrong. The Supreme Court has been all over the map with them. Why not simply let retailers and manufacturers compete in the marketplace? “A group of major discounters, including eBay Inc. and…Read More
Chrysler has hired bankruptcy firm Jones-Day, sources say. WSJ: Chrysler several weeks ago hired the prominent law firm of Jones Day as bankruptcy counsel, suggesting the auto maker is preparing for imminent financial failure should its efforts to obtain federal rescue funds fall short. Gee, I wonder if that will put any pressure on Congress…Read More
Here is a question that I have been wrestling with: What exactly did the repeal of the Glass-Steagall Act accomplish? Were there positives as well as negatives? Should the Gramm-Leach-Bliley Act be repealed, and Glass-Steagall reinstated? > ~~~ What say ye? >