Madoff fraud exposes the asset management industry [updated]

Lots of articles have appeared on the web about the Madoff fraud/ponzi scheme. Below a few links.

This whole blow off is another big hit for the financial industry, and more precisely, the asset management world, because the people who have been fooled by Madoff are either incompetent people who just didn't do their job properly, or worse, they were cheaters themselves, who understood that Madoff was a fraud but they wanted to profit from his fraud!

On the other hand, as any crisis, this is good news actually: it will help the competent people to be singled out, as so many incompetents managers are loosing either their shirts or their liberty. Good and competent asset managers will be better off after this.

The major drawback, however, will come from excess regulation being built on top of the current regulatory body. Let's hope this won't happen...

Interesting quotes:
“Whenever a fund had money with Madoff, it raised a red flag,” said Konig [chief investment officer for Artemis Capital Partners LLC in Aventura, Florida, which invests with hedge funds], who said he rejected at least 20 funds of funds as potential investments for that reason alone. “It means that they didn’t do their due diligence they were supposed to and were chasing those returns.” (source: Yahoo via Mish)
The fraudsters united:
We're hearing that the smart money KNEW Bernie had to be cheating, because the returns he was generating were impossibly good. Many Wall Streeters suspected the wrong rigged game, though: They thought it was insider trading, not a Ponzi scheme. And here's the best part: That's why they invested with him.

One Madoff investor, himself a legend, told me that Madoff's performance "just doesn't make sense. The numbers can't be straight." Another sophisticated Madoff investor actually went through trade confirms in order to reverse-engineer the strategy and said, "it doesn't add up."

So why did these smart and skeptical investors keep investing? They, like many Madoff investors, assumed Madoff was somehow illegally trading on information from his market-making business for their benefit. They didn't consider the possibility that he was clean on that score but running a good old-fashioned Ponzi scheme. (Yahoo, via Mish)
Karl Denninger (whole post worth reading):
Yeah, the SEC couldn't see that coming. Uh huh.

Never mind that they were apparently warned several years ago in written communications that Madoff's "returns" were highly abnormal given the published strategies he was using and the numbers he was posting.

Investigate? What's that? Why, that's unamerican!
Another type of fraud is exposed here again:

Dec. 15 (Bloomberg) -- Tremont Group Holdings Inc., a hedge- fund firm owned by OppenheimerFunds Inc., had $3.3 billion invested with Bernard Madoff, according to a person familiar with the matter.

Tremont’s Rye Investment Management unit had $3.1 billion, virtually all of its assets, invested with Madoff, said the person, who declined to be identified because the information is private. Tremont had another $200 million invested through its fund of funds group, Tremont Capital Management.

So they take the money of their investors, put 98% under management by Madoff, do not even carry proper due diligence, but cash in a yearly management fee of 1 or 2%, and maybe even performance fees. It's a great business to be in, isn't it?

Again, this will make the whole industry look very bad on the short term, but on the longer term, competent asset managers with high integrity will benefit from the current situation.


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