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Who is the next billion-dollar fraudster?
Peter J. Cooper's Weblog 14/12/2008 06:40 peterjcooper Gold & Silver Oil Prices US Dollar US Stocks Comments
It is a feature of financial crashes that fraudsters and embezzlers emerge. As Warren Buffett put it: ‘When the tide goes out you see who has been swimming naked’.
Before that it can be hellishly difficult spotting them. Who would have though 70 year old, ex-Nasdaq excutive and highly respected Wall Street trader, Bernard Madoff was masterminding a $50 billion Ponzi scheme as he admitted last week.
Ponzi returns
Madoff says he is guilty of orchestrating a multi-year fraud that produced generous returns for sophisticated investors.
As BreakingViews.com explained: ‘The technique was the usual Ponzi scheme. Old investors were paid off by the new funds lured into to Madoff’s art-laden New York headquarters.’
This probably makes Madoff the biggest fraudster in history and knocks the Asian Financial Crisis’s Nick Leeson into the margins.
The historian and economist JK Galbraith has noted that throughout history speculative periods have allowed dishonest people to prosper, and the better the times the worse the outcome in terms of fraud and embezzlement.
Who is next?
You have to wonder if this will be the last such case. Hedge funds with their huge borrowings and opaque financial techniques have provided a legion of opportunities for malpractice.
The problem is also that frauds act as a downward pressure on legitimate investment activity. Presently US investors are buying zero-coupon t-bonds because they trust the US Government and not the banks that pay interest.
Confidence is pretty shot to pieces which is why I wonder if the current stock market rally has much life in it, and whether we will not see new lows in the first half of next year, as well as more cases like Madoff.
What will it take to make investors stop sitting on their cash? Inflation perhaps, but then deflation is the more immediate prospect, and inflation might send them into gold and not stocks.
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From The Sunday Times
December 14, 2008
10 years of equity gain could be wiped out
Even people who bought 10 years ago should not be complacent in the slump
Elizabeth Colman
Millions of homeowners who have been climbing the property ladder since 1998 could find themselves unable to “trade up” by the end of this downturn, new figures show.
Brokers are urging those who have bought in the past decade to take urgent steps to bolster the equity in their homes as the housing downturn threatens to strip hundreds of thousands of pounds in value from properties in the next two years.
Exclusive research by estate agents Savills for The Sunday Times has charted the journey of homeowners at various stages over the past 25 years — looking at those who started with a new-build flat and bought larger properties at five-year intervals.
The results show that while most homeowners will still have sizeable equity in their homes this year, the picture changes dramatically as the downturn gathers pace. The research assumes prices fall 25% from peak to trough.
Most surprisingly, those who bought in 1998 are perilously close to the mortgage “danger zone”, which brokers say applies to anyone with less than 25% equity in their home.
This group will have £74,762 or exactly 25% equity in their home by 2010, tumbling from 51% this year.
Those who bought at the top of the market in 2003 will be deep in negative equity, owing 115% of the value of their home — a huge fall from the 17% equity they hold now.
Lucian Cook of Savills said: “Those who bought since 2003 will suffer greater pain, being left with much the same feeling as those who first bought in 1988 — whose housing cost them substantially more than those who remained in the rented sector for longer, but who also suffered the curse of negative equity for a five-year period from 1990 to 1995.”
Most economists believe that house prices will fall 25% from peak to trough while some are even predicting prices could drop as much as 35%.
According to the Halifax house-price index, prices have fallen nearly 15% in the past year.
Homeowners who bought in the 1980s and 1990s are more insulated than those who bought recently — for example, someone who bought in 1988 will suffer an 11% drop in equity compared with a 22% fall for those who bought in 1993.
However, the precarious position for those who bought in 1998 reveals the extent of the downturn.
Richard Morea of London & Country (L&C), the broker, said: “It is surprising to see that those who bought in 1998 — despite a decade of home ownership — could be discouraged from remortgaging because they don’t have a desirable amount of equity in their homes.”
Brokers warn that mortgage deals have become scarce for those with a deposit of less than 25%.
Even those with a 25% deposit are cut off from the best deals, which now tend to apply to those with a 40% deposit.
For example, a homeowner with a 25% deposit will pay on average £48 a month more than a homeowner with 40% equity in their home.
Morea said: “A fall in equity from 51% to 25% could have a tremendous impact on whether a family decides to take advantage of lower house prices over the next few years by moving to a bigger house.”
The Savills’ research also compares ownership costs — including mortgage interest payments, repairs and insurance — with the equity that homeowners have built up over time.
It shows that people who got on to the property ladder in 1998 are out of pocket by almost £70,000 after the costs of ownership are taken into account.
For example, the same homeowner who bought in 1998 and “traded up” four times by 2010 will have spent nearly £140,000 on home ownership costs — yet they will have accumulated only £74,762 equity in the home.
In almost all cases, renting would have been more expensive than owning at any point over the past generation.
We offer some advice on avoiding the traps.
SAVE RATE CUTS
The Bank of England has cut Bank rate by 3 percentage points from 5% to 2% since October. However, brokers are advising homeowners to save the reduction in their mortgage repayments — rather than spend them. If possible, it is best to reinvest the savings in the mortgage.
By maintaining your repayments at existing levels, even as mortgage rates fall, you could overpay your debt and boost your equity.
A homeowner with a £200,000 mortgage who maintains repayments despite the 3% Bank rate cut since October can boost their equity by 4% in the next two years, according to figures from L&C.
TIME YOUR MARKET RETURN
Surveyors are reporting a rise in inquiries, while the Council of Mortgage Lenders reports a 14% jump in lending — dismissed by some commentators as a blip.
Capital Economics, the consultancy, said: “Sharp interest-rate cuts, coupled with the growing acceptance among sellers that they need to lower asking prices significantly, appear to have sparked new buyer interest. Yet, as these buyers are likely to be looking for properties at knock-down prices, we doubt that this heralds the start of a recovery.”
According to Nationwide, it took five years for last decade’s housing market downturn to reach a trough — which means that borrowers could do well to sit tight until 2013.
Lucian Cook said: “It is likely that longer-term homeowners will initially drive the housing recovery. There will also be a few lucky first-time buyers able to buy at the bottom of the market.”
He added: “They will be hoping to eventually be in a similar position as the lucky generation who first bought in 1993 and for whom over the past 15 years owning has consistently been cheaper than renting.”
WILL I GET A MORTGAGE?
Experts predict that lenders are unlikely to relax their criteria and return to pre-credit crunch lending levels until at least 2010 — so those who have a deposit of less than 25% could find they are left out in the cold when they come to remortgage or buy a new house in 2010.
Halifax has 64 mortgage deals available for those with a deposit of 25% or more — compared with 16 for those with smaller deposits, according to Moneyfacts, a financial-data firm.
The best deals are available for borrowers with bigger deposits — the average two-year fix is 4.98% for a borrower with a 40% deposit, compared 5.27% for those with a deposit of 25%.
BOOSTING VALUE
Banks report a near 20% jump in the number of people who want to borrow money to improve their home compared with last year.
According to figures from Abbey, cosmetic improvements can be the most profitable. For example, painting and decorating a home costs £1,330, but adds £3,557 to its value. However, avoid big renovations such as a new kitchen, which can cost £18,700 but will add less than £5,000 to the value of a home.
A loft conversion will cost £22,000 but add £13,000 in value, Abbey said.
Caught in the equity trap
Tanya Burgess, 42 and husband Paul, 45, of Yatton Keynell, Wiltshire, want to upsize but face a dilemma that is typical of those who stepped onto the property ladder in the 1990s.
The couple live in a four-bedroom home they bought five years ago for £275,000 with a deposit of 35%. Tanya, an IT services manager, said: “We have been watching the housing market with a view to buying a bigger house. We could then sell it and use the profit for our retirement.”
Owing to falling house prices, however, their equity will have shrunk to about 20% at best.
Tanya added: “We are avidly watching the housing market to see if we can realise our plans. We’ve lost money in this house, but hopefully the houses we want to buy will have come down, too.”
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Western governments think green was last year’s colour
John Redwood's Diary 14/12/2008 07:28 John Redwood Blog Comments
Green is so much last year’s colour for western governments. Now they have stumbled into a policy which will cut carbon emissions sharply, their policy of falling living standards and recession, they are all rightly trying to run away from it. So are their voters, who might tell pollsters they want to live in a lower carbon world, but not if it means they have no car and have lost their job.
Let me make it clear. I see myself as a sensible green. I want to stop overbuilding, leaving some green gaps and lovely countryside between English settlements. I want to clean up the water and air through better technology and some regulation. I think the biggest domestic policy error of the Bush regime was the failure to work away at energy self sufficiency, to cut dependence on unreliable supplies from elsewhere, and see the UK government’s failure to find new, more fuel efficient home grown energy solutions as one of its more important mistakes.
What I dislike are the authoritarian greens, who see the cause of lower carbon as a means to try to stop personal transport, who wrongly think trains and buses do not cause some of the problem, and who refuse to look at the audit of where the carbon comes from. They do not accept that for some journeys the car is the lower carbon alternative to the nearly empty bus or the inconvenient train. They never tackle the carbon excesses of the public sector – all that air conditioning and over heating in bureaucratic offices, and all that travel on “fact finding” and “diplomatic” junkets, whilst condemning the commuter who dares to try to get to work through their congestion loaded streets by car. It seems to be freedom they want to stifle, rather than carbon.
The German government has faced a dilemma. Representing a car ridden economy, where the automotive industry is a very important part of their activity, the government has lobbied and argued for less onerous carbon regulation at the EU level. They have decided automotive jobs matter more than the latest fashion in carbon targets.
The US government faces a dilemma. President Obama is not yet in office, elected on a green ticket, before he is letting it be known that saving the gas guzzling car makers of Motown is important to him. Yes, he will dress up help with programmes to encourage them to make more fuel efficient cars, but in the meantime he accepts the reality that too many jobs are riding on making grossly inefficient vehicles to be a rigorous green. He is not about to say “thank goodness these makers of fuel wasting cars are about to go bust or slim down. That will help me to hit the new targets I want to impose”. Once again in the USA we see those two bank nationalising, war fighting, high spending and high borrowing advocates of big government, George Bush and Barak Obama, united in their approach.
In the UK we have come to expect contradictory responses, and differing language depending on the day of the week and the nature of the audience. One day we are told in the House that tougher carbon targets are the order of the day. The next we are told that propping up the auto industry and trying to get the banks to lend more money to the companies that make the cars and the individuals who might buy them is crucial to our future success. Meanwhile, in Labour inclining Manchester they vote by 4 to 1 against Labour’s mistaken green policy of trying to switch people from carbon emitting cars to carbon emitting public transport at a £1.6 billion cost of borrowed taxpayer money, and £5 a day for those who still want to use a car.
The Manchester defeat should be seen as the end of an era. Labour’s whole transport strategy was based on the premise that if they spent more on trams and trains, and taxed people more for using cars, they would achieve a “modal shift” . Only the rich would be able to drive their own personal transport, alongside the Ministers in their chauffeured limos. The rest of us would willingly take the shiny new trams or crowd onto the already full peak hour trains, saving the money on the Congestion charge to pay the extra taxes for the losses the public transport systems usually make.
This policy has recently suffered a defeat in London. Some Londoners voted Boris in to get rid of the anti car policies, and to scrap part of the Congestion zone. The consultation the new Mayor carried out was clear. The voters wanted the western zone scrapped, and he has said he will do so. Now it is defeated in Manchester.
The people are right. This very expensive switch will not make a huge difference to carbon output, but it will cost large sums of money and may make the journeys of many even more inconvenient. We need instead a positive policy of sensible investment in the railways to get more capacity out of them, and road improvements to cut congestion and improve the safety and flows at junctions. Motorists have had enough of taking all the blame for carbon output, when there are so many other sources of it from the inefficient domestic boiler to the old fashioned power station. The government needs to work away at improving the capacity and technical performance of much of the infrastructure, without inventing new taxes for people already groaning under the burden of wasteful government. 11 years have failed to deliver the modal shift, and the modal shift was not going to solve the carbon problem anyway.
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From The Sunday Times
December 14, 2008
Prize Draws: The innovative way to defy the housing market
Raffles are becoming more popular but have pitfalls
Brian and Wendy Wilshaw?s attempt to sell their home through a prize draw was brought to a standstill by the Gambling Commission
Elizabeth Colman
Homeowners are turning to innovative ways to beat the property downturn, though experts warn that buyers and sellers could be left in limbo if they fall foul of murky competition rules.
Brian and Wendy Wilshaw’s home in Devon had been on the market for five months when, after receiving no offers, they launched a competition to sell the property.
By October they had sold 46,000 tickets at £25 apiece, raising the £1.15 million price they wanted for their 11.5 acre estate, and were even able to bring forward the date of the prize draw.
However, before the draw could take place, and following coverage in the media, the Gambling Commission contacted them to say the competition was potentially illegal and they risked prosecution if the draw went ahead.
Property raffles became popular in America as desperate homeowners attempted to defy the housing crash. The fad is catching on in Britain as well, where not everyone has fallen foul of the Gambling Commission.
An unfinished block of 11 flats in Whitechapel, east London, worth £8.25 million, is the grand prize in a competition to “win a London pad” organised by property developer MIA Developments.
The organisers are giving away 200,000 tickets to people who answer three questions correctly and buy a £60 MP4 player from the developer.
MIA will donate £600,000 from the proceeds to the Great Ormond Street Hospital Children’s charity.
The developer has sold 2,247 entries ahead of a newspaper and television advertising campaign planned for next year.
The competition, which is to be drawn next March, is also backed by HSBC and Alliance & Leicester, who are offering tickets to customers who open a current account.
Rafik Patel of MIA said: “The draw ensures that someone wins some fantastic flats and we make a profit in this difficult economic climate.”
He added: “It’s a great concept and I think it will be huge, especially as it looks like it will take years for the housing market to recover here.”
Patel said the competition is within Gambling Commission rules because those who enter do not find out if they have answered the question correctly until after the prize draw. He said he had not been approached by the Commission, which in turn said it did not comment on individual cases.
An announcement on the Commission website in October simply said attempts to sell homes using “prize competition schemes” could fall foul of the Gambling Act 2005.
Commission deputy chief executive Tom Kavanagh said: “In response to the downturn in the housing market, a growing number of homeowners have recently opted to use a prize competition as a method of realising the value of their homes.
“The Commission has been keeping a close eye on such house competitions and warns potential organisers to take independent legal advice before proceeding.”
Entrants in the competition for the Wilshaw home had to answer a question — about the price of a fishing licence — but the question might have been perceived as being too easy.
According to Gambling Commission rules, competitions that do not require a degree of “skill” may be construed as a “lottery” — these are illegal if they are for “private gain”.
Wendy Wilshaw said: “We have been thwarted by the Gambling Commission making a very specific interpretation of guidelines that are vague and imply that there is a degree of flexibility and tolerance to be allowed, although apparently there is not.”
Donna Werbner, of financial advice website Fool.co.uk, said: “The rules are strict and, as such, competitions are only worth it if you’ve got the time, money and energy to run a nationwide PR campaign — or it will be a struggle to attract enough people to participate.”
Buyers also need to watch out for the small print as the rules can change at the homeowner’s discretion.
Wayne Crowsley, 42, and David Davis, 36, have been unable to sell the Andalusian property they spent three years restoring and have decided instead to offer it as a prize in a lottery.
They need to sell about 60,000 tickets at €25 (£22) each to raise the €1.5m they want for the property. The prize draw is scheduled for May 9, though the competition terms and conditions state that this can be delayed if not enough tickets have been sold. Last week they had sold only 1,709.
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SEC Skipped Normal Inspection of Madoff Hedge Fund
naked capitalism 14/12/2008 07:31 Yves Smith noreply@blogger.com http://www.blogger.com/profile/03506020285476330865 Hedge funds Legal Regulations and regulators Investment management
So how did Madoff get away with his $50 billion fraud? Time will tell when and how it started, although I'd hazard the dot com bust. Madoff may have been unwilling to report losses, and assumed (initially) that no one would be hurt if he fibbed if he could eventually trade his way out of trouble. But given the freakish consistency of his returns, it could have been phony from the get go.
The critical bit was that Madoff's firm executed its own trades. No nasty third-party records to diverge with what the customer statements showed.
But another shocker came to light today: the SEC, via its own protocols, should have inspected the Madoff Ponzi operation prior to the end of 2007 and failed to. Why? Evidently, due to Madoff's good reputation in the industry.
What is particularly curious (if my assumptions are correct) is that Madoff kept his registered status, which meant he would at some point have the SEC knocking on his doors. I am assuming he registered in 2006 because that is when the SEC has an initiative underway to register hedge funds with over $25 million in assets under management. Some evaded it by getting investors to agree to 2 year+ lockups (that put them in a different category). But the registration requirement was nullified when a hedge fund manager sued successfully, claiming that the SEC was misusing its statutory authority under the Investment Advisers Act of 1940. Most hedge fund then removed themselves from registration; for some reason Madoff did not. Did he somehow think he could bluff the SEC, or did he have a death wish? (Note: I am assuming the Madoff investment operation was considered to be a hedge fund, otherwise, it should have been registered as an investment adviser long ago).
In any event, that particularly day of reckoning did not come to pass.
A former Madoff employee called me, in many ways as gobsmacked as everyone else about the massive fraud. He said that the firm was very compliance oriented in the other aspects of its business, and was if anything overly zealous. That squeaky-cleanness in the activities visible to the marketplace in retrospect served as useful cover.
But the former employee also said that even at the time, some things that did not add up, although since the rest of the firm was on a separate floor from the investment operation, they didn't think about them too deeply.
1. The returns were too good, too consistent. "it meant Bernie was either a genius or a crook." Since Bernie had been an innovator and was genuinely (by appearances) a really nice guy, it was hard to see him as a crook.
2. The operations types in the investment arm were way way overpaid (someone had seen the pay stubs) and seemed not very smart and not very good. Many were related (ie, family members, but not the Madoff family)
3. The investment arm was peculiarly secretive and what they said about its strategy did not mesh with the returns.
The former employee is also pretty certain that the Madoff family members were in the dark and not part of the fraud.
From Bloomberg:
Bernard Madoff’s investment advisory business, alleged to be a Ponzi scheme that cost investors $50 billion, was never inspected by U.S. regulators after he subjected it to oversight two years ago, people familiar with the case said.
The Securities and Exchange Commission hasn’t examined Madoff’s books since he registered the unit with the agency in September 2006, two people said, declining to be identified because the reviews aren’t public. The SEC tries to inspect advisers at least every five years and to scrutinize newly registered firms in their first year, former agency officials and securities lawyers said....
“Given what the SEC claims is the magnitude of the fraud, this is something you would hope an inspection would have uncovered,” said Mercer Bullard, a University of Mississippi law professor and former mutual-fund attorney at the SEC. “It’s hard to imagine a fraud of this alleged size not being accompanied by significant and pervasive compliance problems.”...
More than a decade earlier, in 1992, Madoff faced regulatory scrutiny as part of a lawsuit the SEC brought against two Florida accountants, whom it accused of raising $441 million while selling unregistered securities over three decades, according to SEC statements and a press report at the time.
Madoff told the Wall Street Journal at the time that he had managed the funds unaware they had been raised illegally. The SEC determined that the investors’ money was all accounted for, and didn’t accuse him of wrongdoing, according to the report....
Such a large Ponzi scheme -- in which early investors are paid with money raised from subsequent victims -- should prompt lawmakers to review how the U.S. polices brokerages, wealth managers and unregistered advisers, such as hedge funds, said James Cox, a securities law professor at Duke University in Durham, North Carolina....
Barry Barbash, a former head of the SEC’s investment management division, said the agency has tried to focus its inspections on money managers who pose the biggest risks. The regulator uses criteria such as which securities a firm is buying and who its clients are, said Barbash, a partner at Willkie Farr & Gallagher LLP in Washington.
“Given the state of SEC resources and given the way that they go about determining whether an inspection is necessary, it wouldn’t surprise me that a newly registered firm wasn’t inspected,” Barbash said.
Any suspicions about Madoff may have been dampened because of his association with industry groups, watchdogs and politicians.
He sat on a committee of academics, regulators and executives formed in 2000 by former SEC Chairman Arthur Levitt to advise the agency on new stock-market rules in response to the growth of electronic trading. Madoff has led the trading committee at the Securities Industry Association, Wall Street’s biggest trade group, and served as chairman of the Nasdaq Stock Market.
Since 2000, he has given at least $100,000 to the Democratic Senatorial Campaign Committee and more than $23,000 to the party’s candidates, including Senator Charles Schumer of New York and Senator Frank Lautenberg of New Jersey, who leads a charitable foundation that invested with Madoff.
“You can see where people would pull the shades down over their eyes in terms of recognizing what could be one of the great frauds of our time,” Levitt said in a Bloomberg Television interview. “I’ve known him for nearly 35 years, and I’m absolutely astonished.”
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