Monday, December 29, 2008

I Am Shocked That You're Shocked...!!

The name Bernard L. Madoff has been upon everyone's lips of late - even those who know nothing about finance, hedge funds, or the subtleties regarding how to execute a good Ponzi. And I can understand the awe at the numbers - even though $50 billion is on the high side given its compounding of non-existent returns, for one cannot lose what they never had. Yet, despite the size, I remain shocked that industry people are "SHOCKED" or even just "shocked. While I will admit to being surprised that of all the possible Ockham-friendly explanations, Ponzi was the culprit, I can say with certitude that it was "relief" rather than "shock" that I felt, since the revelation finally solved a long-outstanding and personally troubling market non-sequitir.

Yet through all the analysis, uproar, indignation, and financial horror, I AM shocked that the media and commentators of all persuasions have left untouched the details that I find most fascinating. These pertain to contemplating Mr Madoff's inner monologue throughout, his relationship with his wife, how (if you believe the sons) he managed to avoid discussing the sordid details in conversations with his sons over Mom's Sunday-evening pot-roast and egg-noodles (did she cook or merely press her speed-dialer to book tables at Le Cirque and Daniel???) . Perhaps this is because I have never taken the study of psychology to any depth; perhaps it is because I myself am such a pathetic liar I cannot countenance a serious confabulation, but neither deters my morbid fascination with what Mr Madoff must have been thinking at various crossroads during the swindle, such as when he went for a slash in the mens room after delivering a congratulatory address to the Hadassah who were amongst the very people he was taking to the cleaners!! Did Mr Madoff go to Synagogue? Might there not have been moments during the one solemn service or another where he felt deep remorse and regret to such an extent he would end the charade there and then? And how many times did his inner-self feel near collapse as the proximity of discovery approached during the numerous occasions over the fifteen years - be Long-Term Capital (many industry redemptions), the Tech Wreck, or the publishing of the Barron's article. How much time did he put into contemplating what P&L would be contextually other words: did he agonize over whether -0.09% would be more reasonable than -0.12%? Did anyone help him in these ruminations? Did he devise a method for fabricating returns in the positive months - e.g. the way Luke Rhinehart did in The Dice Man?? Did he keep a little Black Book of all the lies and half-truths he told to various people in order to keep them straight? Is it really possible that FG's Walter Noel, Andres Piedrahita and Jeffrey Tucker REALLY didn't know what was up? Did he despise himself even more when he read about the "honest" Wall St. fortunes made by Dr Simons and David Shaw? What went through BLMs thinning head when another $100mm hit his account from the wire? Was it celebratory (popping a vintage Krug) or merely a sigh of relief at living to fight another day, to have another pedicure, another meal at Boulud's place, another massage (happy ending?) almost Sisyphusian given the lack of meaning for whatever meaning there might have been (family, love, tzedakah, good works?) would pale in comparison to the scale of what awaited just around the around the corner that would surely shred whatever meaning he might have self-deceived himself into thinking his life possessed.

Perhaps, though, I am getting too cerebral here. Perhaps a sociopath is entirely self-delusional. Perhaps the sociopath believes he has achieved what he has merely conjured and is an equal to Dr Simons and Mr Shaw. I do not know. But I continue to wonder...


arnie draiman said...

very well written.

arnie draiman

(i do the tzedakah angle - believe me, this hurts!)

Anonymous said...

Good points, all, and admirably expressed.

To add to your musings, I also wonder what response he had to the multiple attempts, all sound, made to alert the SEC to the scam, especially the Markopoulos letter and paper, in 1999 and 2005.

Perhaps it was the eventual humiliation and contempt that he wanted, like some Dostoevskian character. Makes about as much sense.


mxq said...

as doug kass pointed out today, the only reason madoff squealed is b/c he is likely suffering from a terminal illness and, similar to ken lay, probably won't even go to the mean time, he will fight to move assets into vehicles that are protected from BK to ensure his family never has to live the lowly life of the middle class.

sc said...

A guy from Knight who has know him over 20 yrs suspects it was a need for attention and recognition.

Anonymous said...

You have way too much respect for the likes of Shaw and Simmons. Yes, these guys are good at making money, but they are not true investors. They do not add value to the real economy and what they do is not productive. I predict their demise will come in time, that I am certain and I for one will not be shocked.

slackful said...

is there no value to the market infrastructure? the market only pays for what it needs, like efficient prices and inventory. I'm not talking about scams, i'm talking about how it happens that when you want 200 shares of IBM, they are instantly available at a reasonably efficient price. It's not correct to say that Shaw doesn't add value to the real economy, unless you think markets arise magically, or markets have no real value. Markets, and the allocation of capital resources in an efficient manner, are among the most productive institutions in the economy. I agree with your narrow definition of investor and the fact that Shaw is not one of them. Shaw is a part of the market infrastructure, not an investor, he facilitates investment through market making and price-affecting trading activities. He may be competitively displaced someday, but he's earning his money.

Anonymous said...

From a selfish gene perspective, Bernard L. Madoff has been quite successful. His left his offspring with extraordinary resources.

"Cassandra" said...

Anonymous 6:46

My comments were not meant to infer respect for Mssrs Simons & Shaw (though I admittedly do for a variety of reasons) as much as they were meant to ponder who Madoff was pretending to emulate, be it Simons, Shaw or Buzzy "Geduld". And I wonder when the first losses manifested themselves and the threshold was crossed from reasonable success to pathetic dishonest felon. I would wager that it was no different than Tom Daniel at Beacon Hill...a little fudge one month and some prayers, but ooops "shit happened: and once ventured down that path...there is no going back. Not ever, not as a fiduciary.

As for the economic value of Shaw & Rentech, despite my respect for their technical accomplishments as entrepreneurs in a tough business (predicting the future consistently), I have a different beef with Simons and Shaw. And here despite the eloquent defense by slackful, I am partial to anon 6:46 for slightly different reasons. First, I think there is some hyperbole in slackful's defense. Times have hanged from the reversion days of warehousing inventory and risk. I have my doubts about the percentage of so-called liquidity -providing market-making activities (the "good deeds") in relation to what I call the parasitic ones which are using the microstructre knowledge and MM activities to predate real investors orders, and intermediate markets making them less efficient, or, if not less efficient, then less rewarding for the true economic risk-takers. A further part (judging by 13Fs has been longer-term momentum which are also divergent in the sense of sending allocation signals in directions away from long-term equilibrium. Both (as they have proved) are profitable in the frames in which they operate, and clearly they;ve managed to wrestle some of the spoils from longer-horizon risk-takers to shorter-horizon ones, but both leave me uneasy. I am more sanguine about forecasting their demise since they have been adept at adapting, and have accrued infrastructural, data and other advantages that in combination are effective (and growing) barriers. Sure competition and upstarts will chip away, but I liken their competitive position more to Oracle than Dell. Both have scale, but one's intellectual property is definitively higher than the other.

bg said...

I can't tell you how little I worry what was in the little mans head. Even with low expectations, I am sure I would still be disappointed.

It is also not so interesting why so many believed. Of course they did. There is a narrative in Wall Street: there are people smarter than me who know how to make free money.

What *is* interesting is how in hell it went on so long? Who were the enablers, and what is there motivation. It is Walter Noel that has some very interesting splaining to do.

slackful said...

Here's a theory. I suspect that Madoff was "legit", in the sense that he was stealing others', not his clients', money, by exploiting the advantages of nasdaq market making for many, many years. There's a story about unregistered securities being sold out of Florida, where the money was effectively being funneled to Madoff, in the '70's. The SEC busted the sellers, but were very surprised to find the money was all there, not stolen. Because Madoff claimed "I didn't know they were raising the money illegally", his name was specifically redacted from any and all SEC documentation of the incident. Madoff had a money machine from his Nasdaq MM perch, and it was scalable, so he paid for flow, he needed it to make more. I personally guess that decimalization was the beginning of his downfall, as it drastically reduced the amount of money he could make. Once he crossed the threshold, as you say, he probably got irretrievably upside down in a relatively short period of time. The rest is history.

Regarding Shaw/Rentech, they make prices more accurately conform to what is knowable (by them, at least, via their intellectual property) but not yet reflected in the current price. This has the effect, in millions of transactions, of buyers and sellers receiving very slightly more accurate prices than they otherwise would have received. I would bet that the money accrued by Shaw/Rentech is a very small fraction of the savings incrementally accumulated by all of the market participants who benefit from these slightly more accurate prices. The market, as a self-organizing system that looks out for its own survival, cannot afford to pay S/R too much, or they will cannibalize the system. Note that S/R's opportunity is vastly different than my guess at Madoff's MM one, because it's not scalable. There's only so much (and it's really not very much at all) predictability in markets, they are already extremely efficient before the entry of the S/R's of the world.

Anonymous said...

Of course, many knew what was going on.

To me the most TELLING EVENT of the whole episode, and totally missed by all the media folk is this.

As related in many news stories I have read the FBI shows up and asks:
"There must be some INNOCENT EXPLANATION." and Madeoff says "NO!"

Of course the FBI and other regulators do not want to hear the truth.

As someone familiar with the corrupt city of Boston and the Whitey Bulger story (search the NET for that) I see eerie similarities in the SEE NO EVIL FBI/regulator disposition.

At the end of the day, the Destruction of the US Financial System was just a mistake----get over it!!!!

Charles Butler said...

Interesting also would be (working on the assumption that it wasn't from the get-go) an idea of how it came to be a Ponzi scheme. Slackful's point about decimalization maybe gives us a hint.

In any regard, the episode speaks volumes about the generation that came into its financial own at the time that Volcker was kicking ass - particularly its religiously blind belief that computer technology would rid us of most of life's inconveniences, like volatility of market returns (to mention only one).

Happy New Year, Cass.

Upandaway said...

I'm not sure its healthy to contemplate the inner lives of sociopaths like Madoff. To be able to lie convincingly to so many people over a stretch of time that long...

And to befriend and charm your victims, as he did! Only a manipulative genious could do such a thing.

Men like Madoff, and organized crime like that at WAMU, show why we can't leave everything to the individual. There are just too many suckers in this world, and too many Madoffs itching to rip off the rest of us.

Anonymous said...

What is most curious is that he did not commit suicide.

Perhaps he fears an afterlife.

Anonymous said...

Very well written.

artichoke said...

He was probably a "real" hedge fund that siphoned off the money. He is a very smart guy. The story about it being just a Ponzi scheme is, to me, not believable (though it's told very colorfully). It's in Swiss accounts or hidden somewhere.

Separate issue: do dealers contribute more to the general welfare than they take? It's something I would like to see studied from an academic perspective, the problem should be tractable. Funny that it hasn't as far as I know, perhaps the answer isn't industry-friendly?

invisigoth said...

Very well written Cass.
I've experienced a couple of sociopaths in life, but low level criminals. They think that no one owns anything anyway, so there is no harm by default. This one guy was habitually justifying his prior actions against, well, everyone he was willing to talk about. No matter how weird, it was a "reason why". I jokingly asked "So what have you done to this jobsite (construction)?" He didn't come back after lunch. I count myself lucky that he was not only a bad liar, but that he couldn't stay cool.
As for Madoff, I think he may have had an angle for making money initially, but that it failed over time. His luck was to have folks who were always willing to rollover the funds. I'm sure he felt justified that he was stealing from those who could afford it.
As for the rest of his family, I have a very hard time believing they weren't clued in on this. Where's the money? I too am surprised with the feds response on this. Bail? Are you kidding? Put his butt in solitary if you're worried about other prisoners hurting him. He is either getting a favor (perhaps laundering for someone) or he screwed someone that's not supposed to be screwed and the feds are there to make that transaction "right" before it goes to trial or is otherwise examined in public. If there were a real reason for Gitmo, it would be to rendition the financial thieves of this land and get them to confess the plans and location of the money they stole.
As an aside to why he didn't commit suicide, it's not because he feels any guilt, because he doesn't. He'd want to "exit" if he were forced to tell the truth in public and be stripped of his ill-gotten gains.

Tahoe said...

love your insightful, well written posts. Thanks for your efforts and for sharing your thoughts.

I am guilty of having put far too much energy and thought into this affair. But I am intrigued. I seem to be jilted to the extent of try and understand - how was this practically possible at so many different levels? Friends, decades, billions, and on and on. how'd me do it? who knew? how was this kept secret for so long? where'd the money go? and like your original posting, the finer details of everyday life - has a meal, goes potty, reads their mail, etc, etc. Was BLM truly living a lie? A most intriguing story for sure.

I have long held that good decisions are aptly rewarded. After the free fall of 2008 I'm not so sure. Is this a cross roads of humanity? What has this done to trust? Trust is given freely. Trust is imperative and unavoidable in everyday life. We must place our trust in others in so many different ways. Our children in school. Ourselves in our partners. With so much trust and confidence broken, where and with what are we left? I have personally been hit by such a deceit and deception so maybe I am not a good judge. I saw a side of human behaviour where embellishment, rationalizing and justification took on stupefying proportions. I suppose that should suggest that nothing should surprise me. Well, I'm floored, again. Sometimes we are forced in a direction we must go.

Michael said...

Thoughtful missive although, what I find more intriguing is why it all began? What was his motivation, simply money or power or peer recognition, or a personal or business event, what? Did he contemplate the ruse extensively before embarking on this cruel deceit? Was it a moment's stupidity that grew, like Topsy. Were other brokers tinkling with this 'mechanism' to defraud already but whilst they absorbed what mess they created into their bona fide operations, did he sip from the poisoned chalice for just a moment too long? Had he tested the scheme already sometime before or, was he just a crook through and through who like so many of his kind end up hoist by their own petard?

RichL said...

I forward this for your consideration-

Rabbi Marc Gellman
A Letter To Madoff
Measuring the toll of the disgraced financier.
Dec 23, 2008

Dear Bernie Madoff,
I don't think you know what you have done.

Life inevitably inflicts upon us different kinds of wounds. Very few people can live connected lives and not occasionally fail those who depend upon them and trust them. However, these are failures not betrayals. They come from trying to do the right thing and not being able to do it.
A betrayal is different than a failure. A betrayal is an intentional wounding. It is born of cruelty, not ignorance. Most of us know of failures and betrayals. What you have done, however, is to radically expand the scope and viciousness of betrayal. You betrayed not just your friends, but your closest friends. You betrayed the trust of those who entrusted you with everything they had saved. You betrayed charities whose good works you have extinguished in an afternoon. These betrayals are epic in their scope and dazzling in their utter lack of remorse or responsibility. There must be some new word invented to describe the way you have redefined betrayal. The Bible calls such things atoevah, "an abomination". It means an act so alien to our values and our natures that it cannot be understood or explained. You have committed an abomination.
This is what you have done.

Another thing you did was make life incredibly more difficult for people who sell real and honorable and legitimate money products. Now every stock broker and money manager and hedge-fund operator and insurance rep who has already had a tough time convincing prospective clients that what they are selling is good and honest must now also convince them that they are not like you. An entire world economy we now know is based to an immense degree on simple trust, and you have done more than any single person to destroy that trust.
You are a financial terrorist. Your attack has toppled the foundations of trust in our financial markets. Although you are not by any means the only financial terrorist, you are its most reviled attacker. What has brought us down are not worthless financial instruments, but worthless people. Many business people have always known and have never forgotten that trust is all the collateral they have ever placed against a loan. Your name is on people's lips now, but the ones out there selling honest products at a fair price ought to push your name into the gutter where it belongs. This is what you have done.

One of the very worst things you did has to do with the Jews. You are responsible for reviving the "Jew game." I heard of the Jew game from a boy who became a man last Saturday. I asked him once if he had ever experienced anti-Semitism in school. That is when he looked at the floor and told me about the Jew game. The game, played by anti-Semitic kids in school, was one in which they would hide around a corner, throw a quarter down the hall, and then when somebody picked up the quarter, they'd run at the person, shouting, "You're the Jew!"
You did not cause the anti-Semitic insults about Jews and money, but you caused them to be revived. Not since Julius Rosenberg spied for the Soviet Union has one person so damaged the image and the self-respect of American Jews. I am not comfortable with the fact that so many of the articles about you specifically identify your prominent place in the Jewish community. Ken Lay of Enron shame was never identified as a "prominent Protestant energy broker." The most aggressive accusers of the governor of Illinois seldom describe him as "the prominent Serbian-American governor of Illinois."
Yes, it is unfair that your Jewishness has become part of the storyline. But you just reminded the bigots who grew up playing The Jew Game that it still strikes a familiar chord. You wiped out Joe Lieberman's accomplishments. You revived ancient bigotry against our people. You gave credence to the horrid accusations about Jews being untrustworthy and greedy. One offensive paper has a column called "Jews in the News," which focuses on some Jewish criminal or other to remind their sickening readers of the legitimacy of anti-Semitism. You are not just one of the "Jews in the news" they seek. You are the apotheosis of their hate-filled world. You have given the Jew-haters material for a decade of hate gardening. You single-handedly revived the Jew game. This is what you have done.

Most of those you've deceived will learn to live and give in new and perhaps more modest ways. Unlike your evil, which has been stopped, nothing will stop their courage and compassion. Some of your victims will no doubt be more severely wounded in circumstance and in spirit, but none of them, I pray, will surrender to your assault. Their friends will not leave them. Their children and grandchildren will not refuse to hug them and kiss them. After their initial trauma subsides, they will, I believe, move on to cling to the blessings that cannot ever be stolen.

You, on the other hand, will lose everything! From this day to the end of your life, there will be none who will trust you. To be mistrusted by everyone is an enormous curse and you have brought this all upon yourself, and for what purpose? You were supposed to be the master of risk and reward and you risked everything from everyone for what reward? You have not just made a bad calculation about how money works, you have made a bad calculation about how life works. You gave no value to what matters and all value to what does not matter at all. This is what you have done.
Shame on you Bernie Madoff. Shame on you.

Anonymous said...

To 9:37, Madoff smiles easily. Dostoevskian characters don't, if at all.

Anonymous said...

It was either an addiction or an OCD gone wrong. How different from alchoholism or drug addiction - everything will be fine after one more hit.

Anonymous said...

Are you always up that late blogging?

Michael Settle

"Cassandra" said...

Michael - I think the time-stamp is a function of what one sets in the blogger preferences and is not meaningful.

Anon 5:26 - OCD perhaps, but most of these things start small - a bad month tweaked to be less bad because the manager thinks "it will come back". This was Leeson, Kerviel and Beacon Hill and others. When it doesn't or gets worse, they are forced to continue or admit guilt. Beacon Hill, Leeson and Kerviel ALL had oversight and independent audits which would eventually hang them. Madoff was able to continue because there was effectively no audit or oversight. Because this structure existed from the get-go, one must ask consider the possibility it was structured as a fraud from the beginning. However, even as a curmudgeon, I stil find this explanation still hard to digest UNLESS Madoff Securities was in deep shit and he need to bail it out somehow. Otherwise, no one would execute a an obvious fraud the would eventually be caught IF one's primary business was profitable and successful.

Michael 11:51 - See comment above

Tahoe - Your question deserves more contemplation than I can give it now. But - many other advanced social democracies (not the anglo-saxon ones interestingly) are NOT in the same place. It is a peculiarly anglo-saxon problem and the answers should be sought within these political-social-cultural contexts. I think that it is possible that the assault upon the State combined with the demise of religion has allowed openings for destructive greed that hasn't been seen in (to the same extent) in societies where the State is respected and hasn't been assaulted in the same way or to the same extent (e.g. Germany, France, Singaore, Scandinavia, Holland, etc.). I do no think it will be resolved either until the americans and UK hit rock-f*cking-bottom and the internal conflict on Public Interest is resolved.

Tahoe said...

Cassandra, thanks for your thoughts again. I appreciate your clarification on other democracies. Much has been written of late on the potential rise in civil disobedience - will this be limited to American shores? What form will this take? Will there be collarteral effects? Maybe my view is on steriods from my own circumstances - what once was, no longer is. My no longer is was a scary path,l an experience I'd rather not have had. My reading continues to support another scary path with some nasty encounters in the uncharted water of 2009. Maybe I need to relocate.

Shairon the Parliamentarian said...

Bernie's made libor + 600 bps a reality for real borrowers.
That's his legacy.

goto100 said...

well, our favourite sociopath may be self-delusional, but he found a kindred spirit in a bail hearing magistrate who let him stay out today!!!

These people can do no wrong. They walk on water.