Madoff Scam: "He’s a person of integrity..."
A: Waking up this morning here to plenty of news; Senate votes down auto bailout as Harry Reid states "No more talks on auto bailout..." & Bernard Madoff admits to employees of running a $50Bln Ponzi Scheme, using new principal from new investors to pay out returns to existing investors. The shame of wall street continues and the lack of trust, confidence, and transparency is certainty going to be very difficult to reclaim down the road. Absolutely amazing. When the tide goes out and the money stops flowing, the scams are ultimately revealed.
The Madoff 'lie' is going to directly impact other hedge funds with investments held there. Its another sore on the toe for an industry already reeling with losses; expect 2009 to see many Manhattan based hedge funds close their doors. A report by Morgan Stanley expects assets under management at hedge funds to shrink to $900Bln by the end of 2009, down about 50% from peak levels earlier in the year (source).
Bloomberg's "Madoff ‘Big Lie’ Hits Fairfield Sentry, Kingate Funds" discusses:
Hedge funds, already heading for their worst year on record, may lose at least $10 billion from investing with a New York firm that founder Bernard L. Madoff called "a giant Ponzi scheme."As this news breaks, Madoff's defense lawyer states, "...Bernard Madoff is a longstanding leader in the financial services industry,we will fight to get through this unfortunate set of events. He’s a person of integrity.". Yea right. Person of integrity my ass! The guy just admitted to the biggest ponzi scam in US history, and yet he is still a person of integrity. If it smells like shit, and it looks like shit, then it's probably shit! This is shit and I'm getting more and more ashamed at wall street, the markets that I grew up admiring and loving, as these scams reveal themselves.
Investors, ranging from hedge funds that depend on outside managers to wealthy individuals, entrusted their money with the 70-year-old Madoff, who told employees before his arrest yesterday that his firm was "one big lie" and may have cost clients as much as $50 billion. His confession comes with hedge fund assets poised to fall as low as $1.1 trillion by Jan. 1 from $1.9 trillion in June, reflecting market losses and customer redemptions, analysts at Morgan Stanley estimate.
"If the losses were $50 billion or even half that amount, it would be the biggest Ponzi scheme in history," said Mark Schonfeld, the former head of the U.S. Securities and Exchange Commission’s New York office, who is now a partner at Gibson Dunn & Crutcher LLP.
This whole mess is a complete farce and blame lies everywhere:
a) wall street innovation that failed the test
b) flawed ratings models and turning a blind eye
c) ignored warnings on use of leverage
d) deregulation and allowing leverage to get to 30:1 or even 40:1
e) subsidizing rates/affordability and promoting a housing bubble
f) 'everybody should own a home' policies enabling GSEs to take on leverage up to 120:1 and buy up bad loans as the secondary market froze over
g) fee based securitization model that rewarded quantity over quality
i) exotic loan products designed to make higher purchase prices more affordable for the short term
j) loan fraud on behalf of both lenders and consumers; deceptive loan tactics
k) bloated appraisals to get the # where it needed to be so the deal would go through
l) clueless NAR statements on the state of the housing market and Brokerage Agencies pushing sales and higher purchase prices to take advantage of vested interest via commissions collected at closings
m) lack of oversight from SEC on ratings agencies wrapping subprime junk as AAA structured investment products
n) cashing out of equity and use of home as ATM for consumption, pinning more into debt as housing market collapsed; many homes now have negative equity
o) fractional reserve banking system; encouraged to take on risk to get bigger returns
the list can go on and on....It is a sad day for America. As a debtor nation, a nation of non savers, a nation of 'buy now/worry later', we enter this dark period with consumer balance sheets in deep need of repair.
The other sobering piece of news today is that the Senate voted down the auto bailout bill that would have provided a 'bridge loan to nowhere' and kept the Big 3 automakers alive for a bit longer; until they needed more funds that is. The business model of the Big 3 is inefficient and not successful, period. Letting the companies fail, go into bankruptcy, and be restructured will do the dirty work that needs to be done for a more successful and efficient model later on. But the side effects of a credit event will hurt, many jobs will unfortunately be lost, and the supply chain shock will hurt not only the US, but global economies as well. Pain today and tomorrow, for a brighter future.
Bankruptcy now looms for GM, F & Chrysler unless the gov't comes out with a new way to get funds to keep these troubled businesses alive for a bit longer. While I was against any bailout for these guys, I honestly thought the gov't would not allow them to fail because of the jobs involved. At least the system of checks & balances is working, Mish will be very proud today; but it wont be because of the pain associated with these firms failing. It will be because these companies should not exist in their current form, or be bailed out to maintain their current form. Perhaps a restructuring was shown to be impossible in the time period allotted by the bailout terms. Who knows. With Obama (for a bailout) taking office next month, it will be interesting to see if he pulls something out. Bloomberg discusses one reason why the talks may have stalled:
Connecticut Democrat Christopher Dodd, who helped lead the negotiations, said the final unresolved issue in the Senate talks was a Republican demand that unionized autoworkers accept a reduction in wages next year, rather than later, to match wages of U.S. workers at foreign-owned companies, such as Toyota Motor Corp.It seems both the Unions and the Bondholders were unwilling to take haircuts. So be it. You play tough, you got to be prepared to have your bluff called. The Senate called the bluff and voted it down.
The Senate failure came when a bid to cut off debate on the bill the House passed Dec. 10 fell short of the required 60 votes. The vote on ending the debate was 52 in favor, 35 against. Earlier last night, negotiations on an alternate bailout plan failed. A plan offered by Tennessee Republican Senator Bob Corker, which served as a basis for a possible compromise yesterday, would have required automakers to offer bondholders 30 cents on the dollar. Automakers would also have had to convince the United Auto Workers to take half of the $23 billion it’s owed for health care as GM stock instead, and eliminate a program in which UAW workers are paid not to work if there are no tasks for them.