People didn't question Madoff because he was making money. The entire scandal is a microcosm of the entire financial crisis. As long as the money came in, nobody cared if it was legit or not. Nobody. It was only because the markets bombed and the resulting credit crunch dried up new investment in Madoff's funds that he was caught at all.Beleaguered investors face a "complete loss" from a scheme at the center of a major U.S. fraud case, which is likely to highlight their tendency not to question the legitimacy of big gains and ultimately lead to tighter regulation if the alleged fraud is proved.
A number of prominent funds of hedge funds are believed to have invested money in portfolios established by Bernard Madoff, a securities trader and investment adviser who was arrested yesterday before appearing at a Manhattan court charged with securities fraud.
U.S. authorities claimed Mr. Madoff told employees at Madoff Investment Securities earlier this month that the investment advisory activities of his business had been "a giant Ponzi scheme."
Christopher Miller, chief executive of London hedge fund ratings agency Allenbridge Hedgeinfo, said: "Some very big investor names are involved in this. The scheme could only work if enough investors were subscribing for him to pay money out. Some of the world's biggest hedge funds have been hit by this. There will be a monumental impact for the hedge fund industry, it could be larger then Enron.
"Some investors in Madoff's funds face 100% write-downs on the money they invested, they will suddenly be nursing full write-downs in December. When people realize the magnitude of this it will be fizzing around the stratosphere."
One asset manager based in Switzerland, home to many high-net-worth individuals who invest in funds of hedge funds, said: "Everyone's talking about this in Geneva. Several wealthy investors could be facing big losses."
Funds of hedge funds are already facing losses of 19.1% from their investments this year, according to the non-investible performance index from data providers Hedge Fund Research. This combined with investor withdrawals have left them with 14% fewer assets than they started with this year, and $140 billion, or 17%, less than their peak level in the second half of this year.
Stop and think about how this was allowed to happen: pure, unadulterated greed. Once again the little guy has to foot the bill for the billions lost. Imagine if a terrorist caused $50 billion in damage to the US. No lives lost as a direct result, but the damage would have crippled the economy and wrecked countless lives. Bin Laden himself could not have done a better job.Mr. Miller said: "This is about the credulousness of investors to give the benefit of the doubt to good performance. What has caused all this to come to the surface is really net redemptions from the industry, because Ponzi schemes need net inflows to work. Some investors have the tendency to turn a blind eye to other possibilities when they get good news. But the impact of what has happened will be absolutely huge."
Mr. Miller said tighter regulation of the $1.6 trillion industry could result if the alleged fraud is proven.
Commentators have said losses from the fraud Mr. Madoff is alleged to have conducted could run to $50 billion. This scale of loss would make it the largest in corporate history.
How do you punish a man for causing this much damage? How do you truly punish a crime this large? There's no way Madoff would have been able to perpetrate this without the existing financial system itself, and it's just as corrupt as Madoff apparently is, if not more so. Any system that allows one person to do this much damage is a fundamentally broken system, unrecoverable at its core.
It must be thrown out, jettisoned wholesale into the sun. How many other Madoffs are out there yet to be caught? The entire global financial system is built on lies. The entire system is now coming undone.
What will replace it, and who and what will survive to do so?
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