Hedgefund Hypocrisy or Madoff's Maneuvers

You know that I just want to post about shopping for the holidays but one again we're dealing with Wall Street Fraud which continues to be a target rich environment.

Bernard Madoff arrested over alleged $50 billion fraud

So now we have the former head of Nasdaq....NASDAQ!!!

accused of running an investment Ponzi Scheme and racking up 50 billion dollars in losses.

50 billion dollars...seriously....this is getting close to being some real money!

On the good side...after being caught with his hand in the honey jar he's manly enough to step up and admit his culpability.

"There is no innocent explanation," Madoff said, according to the criminal complaint. He told the agents that it was all his fault, and that he "paid investors with money that wasn't there," according to the complaint.

The $50 billion allegedly lost would make the hedge fund one of the biggest frauds in history.

While I'm all for limiting the downside risk....his particular strategy for doing this might not be what you or I would do.

The fund told investors it followed a "split strike conversion" strategy, which entailed owning stock and buying and selling options to limit downside risk, said the investor, who requested anonymity.
Jon Najarian, an acquaintance of Madoff who has traded options for decades, said "Many of us questioned how that strategy could generate those kinds of returns so consistently."

This is the part of the story that I really love.

Madoff remains a member of Nasdaq OMX Group Inc's nominating committee, and his firm is a market maker for about 350 Nasdaq stocks, including Apple, EBay and Dell, according to the website.

The website also states that Madoff himself has "a personal interest in maintaining the unblemished record of value, fair-dealing, and high ethical standards that has always been the firm's hallmark."

Oh it's just so good to know that Madoff had high ethical standards.

In the IMF- If You Kahn - You Will

IMF investigates chief for abuse of power in affair

WASHINGTON, Oct. 18, 2008 (Reuters) — The International Monetary Fund said on Saturday it was investigating whether its chief Dominique Strauss-Kahn abused his power in an affair with a subordinate who has since left the global institution.

The subordinate, Piroska Nagy, a former senior economist at the IMF's Africa division, was not given preferential treatment before leaving the IMF in August, her lawyer said.

The London-based European Bank for Reconstruction and Development, where Nagy now works, was not aware of the IMF investigation, a spokesman said. Nagy was a highly qualified senior economist who worked on banking issues, he said.

The Wall Street Journal reported on Saturday that Strauss-Kahn approached Nagy, who is married, in December 2007 and the two exchanged e-mails which led to the relationship early this year.

It said Nagy's husband, Mario Blejer, a highly regarded international economist and former head of the Argentine Central Bank and an advisor to the Bank of England, found e-mail evidence of the affair when it ended.

The investigation of the IMF managing director comes as several countries turn to the fund for financing to help ease the effects of the worst global financial crisis since the Great Depression and politicians consider its role in preventing future crises.

Ok...so let me get this straight.....while the international capital markets are going through a melt down there is an investigation into the affair between Dominique Strauss Kahn aka DSK and senior economist Piroska Nagy, wife of the former head of the Argentine Central Bank.

How can any group waste money trying to make a case of abuse or sexual harassment out of the fact that two highly educated and powerful adults made the decision to send each other some sexy emails and have an affair. Besides, what would you expect from DSK....he's French!

Meanwhile, the real news in my opinion is the fact that DSK, ex Minister of Finance of France and prominent Socialist, is even the head of the IMF at all.

F.A. Hayek and Ludwig von Mises must be turning over in their graves....

Just another step forward on the Road to Serfdom....

A Tale Of Two Cities- London and New York

The Golden Calf by Damian Hirst sold for $18.6 million

New York

Well it's been a roller coaster week in the stock market with the bankruptcy or Lehman Brothers, the bailout of AIG, and continued uncertainty about Washington Mutual, Morgan Stanley and other firms with shaky financials. The SEC has issued a temporary ban against short selling of financial stocks. Long term Lehman employees with mortgages, college tuition's, and basic family living expenses to pay, are now unemployed. Individual investors who had only recently recouped what they had lost in the market crash of 2001, have seen the the value of their investments seriously eroded

London

Meanwhile, this week Contemporary artist Damian Hirst, rumored to be worth a billion dollars, is now some $172 million richer after Sotheby's two day sale of his new works. Lots were sold to Gagosian and White Cube galleries and Russian gazillionaires.

According to the Wall Street Journal:

But the biggest spender -- bidding over the telephone and said by industry insiders to be Christie's owner, the keen Hirst collector Francois Pinault -- paid £13.2 million for three lots. The most expensive, "The Golden Calf," a 20-ton calf with 18-karat-gold hooves and horns in a formaldehyde glass tank, was perhaps the most symbolic work in the sale, representing as it does the idolatrous worship of money. (Note the exquisite irony of this particular work selling for 18.6 million)

And a description of who was at the auction from the Times Online:

But inside the saleroom the drama was palpable - the art auction as high-risk spectator sport. Sir Norman Rosenthal, until recently the exhibitions secretary at the Royal Academy and one of the men who helped to make Hirst’s reputation, was among the onlookers, along with sundry hedge fund managers in open-neck shirts and haughty-looking younger women with big hair and expensive facial features.

While I find the work of Damian Hirst interesting, I can't understand why "The Kingdom", a tiger shark suspended in formaldehyde, could justify a price of $17.2 million.

Is Contemporary Art a con?

One comment that I read referring to this sale is "There is no Contemporary Art, there is only marketing". I couldn't have said it better myself.

Further Fannie and Freddie Fallout

While I'm on the topic of Finance, I'm pissed off that the US Treasury needed to bail out the corrupt and mismanaged Fannie Mae and Freddie Mac.

About Fannie Mae

Johnson received $21 million in his last year as chief executive and a consulting contract worth $600,000 a year.

But when good numbers -- and the bonuses that came with them -- weren't possible anymore, the executives who came after Johnson allegedly rearranged the math and, even after accounting problems were found, used the company's political clout to fend off closer regulation. That was the conclusion of Fannie Mae's chief regulator, the Office of Federal Housing Enterprise Oversight, in a 340-page report that determined the company's $10.6 billion accounting scandal was rooted in a corporate culture that dates back 20 years.

To keep up with Wall Street expectations, however, the company began holding onto more mortgages and mortgage-backed securities for investment purposes. The same practice nearly drove the company into bankruptcy in the early 1980s, when interest rates strayed into the double digits. Its smaller rival, Freddie Mac, copied the strategy. Around the time Freddie Mac's accounting scandal broke in 2003, the companies' combined portfolios totaled $1.5 trillion.

If Fannie Mae could afford a $21 million dollar a year Chief Executive, don't you think they could have found one who wouldn't implement the same risky strategy that almost bankrupted the company some 20 years ago?

From Glenn Reynolds:

HOW WASHINGTON FAILED TO REIN IN FANNIE & FREDDIE: Basically, it was bought off. "Blessed with the advantages of a government agency and a private company at the same time, Fannie Mae and Freddie Mac used their windfall profits to co-opt the politicians who were supposed to control them. . . . Fannie Mae, and to a lesser extent Freddie Mac, became enmeshed in the fabric of political Washington. They were places former government officials went to get wealthy -- and to wait for new federal appointments. At Fannie Mae, chief executives had clauses written into their contracts spelling out the severance benefits they would receive if they left for a government post. The companies also donated generously to the campaigns of favored politicians."

Monday Morning Meltdown

How the day ended

A 500 point drop. The worst drop since 2001

Now...about the CEO

As recently as March, Fuld was awarded a $22 million bonus for 2007 -- a generous pay package to be sure, but one that also reflected a year in which the bank's net profit had risen 5 percent to a record $4.2 billion.

So how does an 158 year old business go from a record net profit in 2007 to a bankruptcy in 2008.

Dow Jones 1 Year Chart

Lehman Brothers 1 Year Chart

Well it's another Black Monday at least as far as the markets are concerned. Triggered by Lehman Brother's inability to find a buyer and subsequent filing for Chapter 11 the Dow is down around 300 points.

In the past 15 months, Merrill and Lehman have both had tens of billions of dollars worth of risky, hard-to-sell assets carried on balance sheets that were piled high with debt. When the credit crunch hit in mid-2007, the assets kept deteriorating in value and couldn't easily be sold, eating into both firms' capital cushions. Recently, Lehman's balance sheet topped $600 billion and Merrill's $900 billion.

Meanwhile Merrill Lynch, also not in stellar shape, is being bought by Bank of America.

The deal shows how the credit crisis has created opportunities for financially sound buyers. At $50 billion, Merrill is being sold at about two-thirds of its value of one year ago and half its all-time peak value of early 2007.

"Why would Bank of America do this?" said analyst Nancy Bush at NAB Research LLC in Annandale, N.J. "Ken Lewis always likes to buy the biggest thing he can. So why not this? You are master of the universe, basically."

Goldman Sachs and Morgan Stanley aren't going bankrupt but...

Both firms are due to report their fiscal third-quarter results in the next few days and are expected to try to make the case that they're very different from Lehman and Merrill. Analysts are expecting each to stay in the black but are bracing for write-downs of $1 billion to $2 billion each at Goldman and Morgan Stanley.

And the good news for the day...

Oil has dropped to below $97.