1 Boring Old Man

The master is eriposte, but his offerings are rare and almost too dense to follow without another translation or two.

Madoff tops charts; skeptics ask how
By Michael Ocrant May 2001

Mention Bernard L. Madoff Investment Securities to anyone working on Wall Street at any time over the last 40 years and you’re likely to get a look of immediate recognition. After all, Madoff Securities, with its 600 major brokerage clients, is ranked as one of the top three market makers in Nasdaq stocks, cites itself as probably the largest source of order flow for New York Stock Exchange-listed securities, and remains a huge player in the trading of preferred, convertible and other specialized securities instruments.

Beyond that, Madoff operates one of the most successful “third markets” for trading equities after regular exchange hours, and is an active market maker in the European and Asian equity markets. And with a group of partners, it is leading an effort and developing the technology for a new electronic auction market trading system called Primex.

But it’s a safe bet that relatively few Wall Street professionals are aware that Madoff Securities could be categorized as perhaps the best risk-adjusted hedge fund portfolio manager for the last dozen years. Its $6–7 billion in assets under management, provided primarily by three feeder funds, currently would put it in the number one or two spot in the Zurich (formerly MAR) database of more than 1,100 hedge funds, and would place it at or near the top of any well-known database in existence defined by assets.

More important, perhaps, most of those who are aware of Madoff’s status in the hedge fund world are baffled by the way the firm has obtained such consistent, nonvolatile returns month after month and year after year…

Says eriposte: "Well, he certainly used another type of ‘option’ called fraud – aka ‘operational infrastructure’."

The inability of other firms to duplicate his firm’s success with the strategy, says Madoff, is attributable, again, to its highly regarded operational infrastructure. He notes that one could make the same observation about many businesses, including market making firms…

Says eriposte: "Ahh, yes, the ‘independence’. The punch line is at the end of the article."

Madoff, who believes that he deserves “some credibility as a trader for 40 years,” says: “The strategy is the strategy and the returns are the returns.” He suggests that those who believe there is something more to it and are seeking an answer beyond that are wasting their time…

The original "Don’t ask, don’t tell" Madoff story
Barrons had this story in 2001 but no-one wanted to listen:

Two years ago, at a hedge-fund conference in New York, attendees were asked to name some of their favorite and most-respected hedge-fund managers. Neither George Soros nor Julian Robertson merited a single mention. But one manager received lavish praise: Bernard Madoff.

Folks on Wall Street know Bernie Madoff well. His brokerage firm, Madoff Securities, helped kick-start the Nasdaq Stock Market in the early 1970s and is now one of the top three market makers in Nasdaq stocks. Madoff Securities is also the third-largest firm matching buyers and sellers of New York Stock Exchange-listed securities. Charles Schwab, Fidelity Investments and a slew of discount brokerages all send trades through Madoff.

But what few on the Street know is that Bernie Madoff also manages $6 billion-to-$7 billion for wealthy individuals. That’s enough to rank Madoff’s operation among the world’s three largest hedge funds, according to a May 2001 report in MAR Hedge, a trade publication.

What’s more, these private accounts, have produced compound average annual returns of 15% for more than a decade. Remarkably, some of the larger, billion-dollar Madoff-run funds have never had a down year.

When Barron’s asked Madoff Friday how he accomplishes this, he said, "It’s a proprietary strategy. I can’t go into it in great detail"…

Says eriposte: "Clearly, there were obvious warnings back in 2001 and the SEC did nothing. Mark Gimein has an article at Slate’s The Big Money discussing how one might detect these types of fraud… but there are many other approaches that one might potentially use to detect fraud. At Big Picture, Barry Ritholz provides links to various articles discussing ways to detect fraud and observes:

I would suggest to the incoming head of the SEC to put together a blue ribbon of math professors, quant scientists and algo specialists to develop a few basic programs that ferrets thru market, options, and perfromance data looking for aberrational data series, and leading to criminals and fraud artists.

Sounds like a very good suggestion to me."

So much for Bernard Madoff. Nothing complicated here – he’s been a crook for a very long time. The question is how did he get away with it for such a long time? eriposte mentions two articles about how it could’ve been detected at the end which I did not quote. They are mathematical instruments for detecting such things. But I can summarize what they are getting at [which is what the articles I did quote said in words seven years ago] – if it’s too good to be true, it probably isnt! In fact, that’s a good way to say what this and every other stock market crash or scam is about, so I’ll say it again: if it’s too good to be true, it probably isnt!