Posts filed under “Regulation”

Blame the Enablers

I couldn’t agree with this article more: Madoff Enablers Winked at Suspected Front-Running. I look at Madoff as a Sociopath — he is a sick individual. The enablers, on the other hand, were simply greedy hacks who didn’t, (and probably couldn’t) do the suitable investigation and due diligence into Madoff’s asset management business.

Were they Corrupt? Incompetant? Both? Who is to say. The bottom line is they lost all of their clients’ monies, and need to be held accountable.

Excerpt:

If the 70-year-old money manager was running a con, then his marketers like Access International, wittingly or not, were part of the scam.

The purported mission of such feeder funds was to vet hedge funds for wealthy clients. Instead, the line between victim and perpetrator was blurred. Middlemen like Littaye funneled billions of dollars to Madoff, even, in some cases, when they suspected he was engaged in questionable trading practices. In return, they reaped hundreds of millions of dollars in client fees.

Lower Returns: Wolfer says he heard of traders trying to replicate the split-strike conversion strategy Madoff told investors he used — buying shares of large U.S. companies and entering into options contracts to limit the risk — and getting far lower returns. He also says he heard Littaye and other middlemen talk about how Madoff may have used the knowledge he gained from his market- making firm, New York-based Bernard L. Madoff Investment Securities LLC, to get in and out of stocks ahead of market swings.

That’s front-running, a term usually applied to brokers’ trading for their own account — and profit — ahead of clients. It’s also applicable to Madoff’s purported practice, says Peter Henning, a law professor at Wayne State University in Detroit and a former federal prosecutor.

“Front-running isn’t who’s getting the benefit; it’s who’s paying the price,” says Henning, noting that Madoff’s market- making customers expected the firm to obtain the best price available when buying or selling stocks. Instead, their interests were apparently subordinated to those of Madoff’s investment clients.

Front-Running: While front-running is illegal, it didn’t horrify Madoff’s champions.

“They were convinced that the risk was only that the Securities and Exchange Commission would do something about breaches of the Chinese wall in the Madoff organization,” Wolfer says. In the worst case, he says, “what could be expected was that at a certain point the SEC could say stop.”

Weasels all. I sincerely hope that the Trustee looks to confiscate the Funds of Fund managers’ houses, cars, watches, jets and boat — as the illegal proceeds of a crime. Auction ‘em off, put the proceeds into a fund for the scam’s victims.

The Madoff investors themselves aren’t blameless — as Paul Kedrosky asked, “why so many smart people get suckered into losing billions on an implausible con” remains a mystery of the Madoff affair. But they are far less culpable than the Do-No-Due-Diligence fund of fees funds managers . . .
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Source:
Madoff Enablers Winked at Suspected Front-Running
John Helyar, Katherine Burton and Vernon Silver
Bloomberg, Jan. 27 2009

http://www.bloomberg.com/apps/news?pid=20601109&sid=au4Y7Cudw2Xo&

They Knew What They Were Getting Into
Paul Kedrosky
Daily Beast, December 16, 2008 | 7:36am

http://www.thedailybeast.com/blogs-and-stories/2008-12-16/how-madoff-made-off-with-the-money/

Category: Finance, Investing, Legal, Regulation

Geithner, Obama and China

Geithner, Obama and China by David Kotok
January 24, 2009

David R. Kotok co-founded Cumberland Advisors in 1973 and has been its Chief Investment Officer since inception. He holds a B.S. in Economics from The Wharton School of the University of Pennsylvania, an M.S. in Organizational Dynamics from The School of Arts and Sciences at the University of Pennsylvania, and a Masters in Philosophy from the University of Pennsylvania. Mr. Kotok’s articles and financial market commentary have appeared in The New York Times, The Wall Street Journal, Barron’s, and other publications. He is a frequent contributor to CNBC programs. Mr. Kotok is also a member of the National Business Economics Issues Council (NBEIC), the National Association for Business Economics (NABE), the Philadelphia Council for Business Economics (PCBE), and the Philadelphia Financial Economists Group (PFEG).

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Following Treasury Secretary designee Tim Geithner’s public confirmation hearing, an extensive Q & A occurred in writing. We have posted a copy of the US Senate Finance Committee’s 100-page text on our website. See: http://www.cumber.com/special/geithnerquestions2009.pdf . This is must reading for any serious investor, economist, strategist, analyst, or observer. In this text you will find what is on the minds of the Senators, and you will gain insight into the polices that will be forthcoming from the Obama administration.

One telling example is found in the following quote that has already created international consternation. Geithner twice answered questions about currency and China. In so doing he has placed the Obama administration squarely in the middle of the tension between the United States and the largest international buyer and holder of US debt: China. This happened as the same Obama administration is unveiling a package that will add to the TARP financing needs and the cyclical deficit financing needs and cause the United States to borrow about $2 trillion this year. Two trillion dollars of newly issued Treasury debt – and this is how the question was answered. Not once but twice.

Geithner (on page 81 and again on page 95) answered: “President Obama – backed by the conclusions of a broad range of economists – believes that China is manipulating its currency. President Obama has pledged as President to use aggressively all the diplomatic avenues open to him to seek change in China’s currency practices.”

“Manipulation?” “Aggressively?“ This is strong language. Geithner did not do this on his own authority. These are prepared answers. He is citing the new President, not once but twice.

China’s response was fast and direct. China’s commerce ministry said in Beijing that China “has never used so-called currency manipulation to gain benefits in its international trade. Directing unsubstantiated criticism at China on the exchange-rate issue will only help US protectionism and will not help towards a real solution to the issue.”

Are we seeing the world’s largest and third largest economies calling each other names in the middle of a global economic and financial meltdown?

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Category: Bailouts, BP Cafe, Markets, Regulation, Taxes and Policy

A conversation with Senator Chuck Schumer

Charlie Rose has a conversation with Senator Chuck Schumer

Category: Bailouts, Politics, Regulation, Video

Good-Bye and Good Riddance to Chris Cox

“Chairman Cox has increased to 34 percent of the S.E.C. work force from 32 percent in 2005 and 29 percent in the 1990s. This investment in investor protection already is paying significant dividends.” The baldfaced lie above was issued under SEC Chairman Cox about how he had improved the agency enforecement staff to protect investors….Read More

Category: Bailouts, Investing, Legal, Markets, Regulation

Volcker Report

Be sure to check out the Volcker report we published over the weekend . . . Paul Volcker / Group of 30 Report on Reform

Category: Bailouts, Credit, Regulation

Bush’s Economic Mistakes

With all inauguration coverage, all the time today, I thought we might try to keep the focus on erconomic/market related matters. Time magazine has an article on Bush’s economics mistakes that I would direct you to except for the annoying 9 page clicks required (click whores!). Rather than send you there, I’ll give you the…Read More

Category: Economy, Financial Press, Markets, Politics, Regulation

More Cablevision Redirect Nonsense

In September, I mentioned that my internet provider, Optimum OnLine by Cable Vision, was hijacking my typos and searches via their DNS Redirect. The company line is that this is a form of search assistance — but that’s transparent bullshit. I didn’t ask for search, and I know how to use Google. Besides, this defeats…Read More

Category: Legal, Regulation, Web/Tech

Madoff Never Traded?

Alternative title: The End of Self-Regulation A Boston Globe article today reveals that Madoff’s firms may never have traded — despite NASD/FINRA audits every 2 years since 1960. “As investigators try to untangle the scheme that Bernard L. Madoff hid from investors and regulators for a decade or more, one basic fact is emerging: He…Read More

Category: Legal, Markets, Regulation

No, Madoff Never Turned Down Money

Part of the story about the Madoff Ponzi scheme was that Madoff created this elusive, difficult-to-become-a-member club. The exclusivity and rejections made membership all the more desirable to greedy investors. That actually is turning out to be somewhat of a myth. There is much more to his canny trick of rejecting investors than initially meets…Read More

Category: Hedge Funds, Investing, Legal, Really, really bad calls, Regulation

Cumberland on Currencies; Gartman on Geithner; Kotok postscript on Geithner by David Kotok

January 14, 2009

David R. Kotok co-founded Cumberland Advisors in 1973 and has been its Chief Investment Officer since inception. He holds a B.S. in Economics from The Wharton School of the University of Pennsylvania, an M.S. in Organizational Dynamics from The School of Arts and Sciences at the University of Pennsylvania, and a Masters in Philosophy from the University of Pennsylvania. Mr. Kotok’s articles and financial market commentary have appeared in The New York Times, The Wall Street Journal, Barron’s, and other publications. He is a frequent contributor to CNBC programs. Mr. Kotok is also a member of the National Business Economics Issues Council (NBEIC), the National Association for Business Economics (NABE), the Philadelphia Council for Business Economics (PCBE), and the Philadelphia Financial Economists Group (PFEG).

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What were formerly viewed as wild currency fluctuations are becoming more accepted in this post-Lehman failure period of the global financial crisis. Lately the strength has been in the yen. Many ask why?

We know that the economic situation in Japan is weak and the outlook is poor. We know that the Japanese exporters need a weaker yen not a stronger yen to help their business models. And we know that Japan has been mired in a deflationary recession for over a decade and the outlook for substantive reforms which would enable it to exit this quagmire seems to be elusive.

So why the yen and what will happen next?

We believe that the global mix of assets boils down to just four currencies. Most of the $85 trillion of bonded debt in the world is denominated in these four currencies: euro (30%), dollar (39%), pound (4%), and yen (13%). Most of the other currencies in the world (not all) are managed in one way or another or are tied directly to one of these four. Hong Kong, for example, runs its policy so that the Hong Kong dollar is fixed in a link to the US dollar. In Europe most of the non-euro countries in the European Union are managing their currencies in a narrow band so as to eventually gain entry into the euro system. Freer floating currencies like the Aussie, Kiwi, Krona or Loonie are important but are also relatively small portions of the globe’s total.

Let’s look at the big 4.

The dollar story is widely known. We have a huge developing federal deficit now measured in the trillions. And the Federal Reserve has rapidly expanded its balance sheet to more than triple the size of the pre-Lehman failure period. See www.cumber.com for a graphic illustration of the Fed’s balance sheet. Remember that when the Fed enlarges its holdings of assets (loans in the “lender-of-last-resort” role) it is also expanding the liability side of the balance sheet (printing money electronically) in order to pay for those loans. Many conclude this will lead to a disastrous decline in the value of the dollar and a fierce inflation explosion. We are not as sure about this outcome as are the detractors; readers will see why below.

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Category: BP Cafe, Markets, Politics, Regulation