Monday, December 15, 2008

Slaying the Meme Dragon: Smooth Criminal?

Here comes the excuses. You may find yourself wondering, how did all these rich, sophisticated investors with millions of dollars and access to the best financial advisors, end up falling for an old fashioned Ponzi Scheme to the tune of $50 billion? A former SEC official has the answer (via CNBC):

Madoff Was a 'Smooth Operater,' Former SEC Official

In the wake of the Madoff scandal, former SEC commissioner Laura Unger called for SEC reform on Monday.

"The market has just gotten far too complex, far too fast moving and far too sophisticated for the agency to keep up," she said on "Squawk Box."

While the commission needs to embrace technology as a regulatory tool, said Unger, she cautioned investors that they must do their due diligence.

"The government will help but they’re not going to protect you from losing all of your money," she said.

Unger also said Madoff ingratiated himself with both the SEC and Congress.

"They took great pains to make sure that all the people who had authority of their universe were known to them," she said. "He was a smooth operator; it's a brilliant, criminal mind."
Forgive me for having doubts, but this analysis seems a tad self-serving. A simpler explanation is that the SEC and Madoff's victims were lazy and incompetent. The SEC relied on the man's reputation alone to judge his business, despite years of warnings. The victims allowed greed to trump good judgment and due-diligence.

There is far less here than meets the eye.


Anonymous said...

You're right on the SEC... hedge funds are the definition of leverage.... a giant financial gamble. In my experience, any investment that makes returns more than a few points above CDs or the inflation rate, contains risk, usually exponentially higher than the difference of the 2.

Besides gambling, which involves a win for one party, a loss for one or more parties and a cut for the house, real returns involve some sort of value added, something manufactured, built, streamlined, risk reduced, etc. So, is a hedge fund an investment or a gamble?

RE: your previous post I ran across a quote from Alexis McGee last week ( which I think was in response to the market activity in Sac, Las Vegas, etc):

"The national residential real estate recovery has begun and by next June, the excess inventory of available homes should be absorbed, according to Alexis McGee, president of, a leading real estate and property information specialist.

“Recovery is underway. Affordable is back in the housing market,” says Sacramento-based McGee. “In 2009, housing will not only recover, but we’ll see buyers leap into this market in droves, depleting our housing oversupply, and actually putting higher price pressures on the market.”


Max said...

Yeah, McGee has become a gleeful cheerleader over the last year as foreclosures shot up. I'm sure she'll sell you some "foreclosure secrets" if you attend one of her seminars.

patient renter said...

I'm interested in the question that Barry Rithotlz brought up, that a ponzi schema this large had to involve other parties, the question being, who else was involved?

Alexis McGee is a shill.

Deflationary Jane said...

Hey DT,

Remember this thread and that fishy transaction for 619 Gibson?

It's back on the market.
MLS: 80119077 $195000. So much for the investor buy and hold.

Anonymous said...

DJ, wow good catch! For those wondering what we're talking about:

Title report now reveals that this was actually foreclosed by Deutsche bank for $164K on 07/14/2008. Why they "need" $195K to make them whole is a mystery. I'm seeing this quite often that the bank is asking considerably more than the foreclosure amount. 5% interest rates doesn't hurt the banks much in this scenario.

Anonymous said...

"The government will help but they’re not going to protect you from losing all of your money"

it is indeed true...

- ledz -

patient renter said...

"Why they "need" $195K to make them whole is a mystery"

The bank trying to offset losses on one house by profiting from another house is fair game, in a normal environment, but with all of the bailouts and the blurring of private/public ownership of banks, attempting to profit in this way while exploiting public funding is a slap in the face.

Just another example of the moral hazard of bailouts.

Deflationary Jane said...

A few more of those "mystery" houses are back on the market. I'll go to the top thread to post.