Bernard Madoff’s Fraud Fallout Continues, Burns Man Group And Many, Many Others

The financial world’s panto villain for this season has emerged in the form of Bernard Madoff, the investment adviser whose investment unit Madoff Investment Securities turns out to have been made from hot air, lolly sticks, and bits of fluff from down the back of the sofa.

The fraud comes to around $50bn, and affects clients worldwide, from individual investors to large banks like HSBC, to charitable organisations owned by the likes of Steven Spielberg; Bloomberg has the whole list here. It was exposed not after some well-aimed sniffing by financial regulators, but after Madoff apparently got bored of maintaining the facade and announced to his sons that his operations were “all just one big lie” and “basically, a giant Ponzi scheme”, ie a pyramid scheme built on sand, that had been insolvent “for years”. The sons are his business partners, and potentially it was one of them who shopped pop to the FBI; any road, Madoff went quietly, saying “There is no innocent explanation”.

The deception is unravelling at pace, with many large firms annoucing their exposure today. Nomura: $303m. Man Group, the UK-based, world’s largest hedge fund: $360m. RBS, for whom life just gets worse: £400m. HSBC: $1bn. None of these are as bad as the US hedge fund Fairfield Greenwich, who estimated a $7.5bn loss at the weekend. The FT is doing a running tally of the fallout, which currently stands at $24.1bn.

Looking back now, you can see giant flashing neon signs reading “SKETCH” above Madoff’s vehicle. He didn’t allow clients access to the digital trading platform, instead providing easily-doctored paper copies of trading records; ran all deals with an inhouse brokerage team; amazingly consistent high monthly returns. But my favourite should-have-seen-it-coming detail is the fact that the companies accounting firm only had three people in it. All we know about them is that one wore “tight pants and tie-dye shirts”, not a look that screams “trustworthy audit”.

He was “very close with the regulators”, and his niece married one, according to some digging by Time. Conspiracy theorists can start getting all sweaty then, but its probably the far more prosaic explanation that firms can be utterly opaque and there’s nothing the regulators can do about it. Madoff says he has no more than $300m left, so it’s not looking good for anyone hoping for reimbursement. Just ask for a bailout guys - the US government’ll do anything these days!

Posted by Ben Beaumont-Thomas in Hot Money | December 15, 2008 2:05PM |