{"id":2703,"date":"2008-12-14T13:25:12","date_gmt":"2008-12-14T18:25:12","guid":{"rendered":"http:\/\/1boringoldman.com\/?p=2703"},"modified":"2008-12-14T13:32:26","modified_gmt":"2008-12-14T18:32:26","slug":"new-rule-if-its-too-good-to-be-true-it-probably-isnt","status":"publish","type":"post","link":"https:\/\/1boringoldman.com\/index.php\/2008\/12\/14\/new-rule-if-its-too-good-to-be-true-it-probably-isnt\/","title":{"rendered":"new rule: if it&#8217;s too good to be true, it probably isnt!&#8230;"},"content":{"rendered":"\n<div align=\"justify\">Recently, I was talking about the future of the blogs, and mentioning <font color=\"#003355\"><strong>emptywheel<\/strong><\/font>&#8216;s facility at document analysis. In the course of that discussion, I also mentioned <a href=\"http:\/\/1boringoldman.com\/index.php\/page\/2\/\" target=\"_blank\"><font color=\"#500050\"><strong>eriposte<\/strong><\/font><\/a>:<\/div>\n<blockquote>\n<div align=\"justify\">The master is <font color=\"#500050\"><strong>eriposte<\/strong><\/font>, but his offerings are rare and almost too dense to follow without another translation or two.<\/div>\n<\/blockquote>\n<div align=\"justify\">I said that because of his series on the <strong>Niger Forgeries<\/strong> and related documents. Before reading <font color=\"#500050\"><strong>eriposte<\/strong><\/font>, I thought I was a sort of smart guy. But after reading them, I wondered. I followed the conclusions and the analysis enough to believe it was right, but I couldn&#8217;t repeat it back. It was too hard for this old man. <\/div>\n<p>                   <\/p>\n<div align=\"justify\">Well, I take it back.This morning, I set out to try to understand how someone [<font color=\"#200020\"><strong>Bernard Madoff<\/strong><\/font>] could pull off a <strong>$50,000,000,000<\/strong> <strong><a target=\"_blank\" href=\"http:\/\/en.wikipedia.org\/wiki\/Ponzi_scheme\">Ponzi Scheme<\/a><\/strong> on the Stock Market without it being detected. I got to <font color=\"#500050\"><strong>eriposte<\/strong><\/font> at <font color=\"#500050\"><strong>the left coaster<\/strong><\/font>, <strong><a href=\"http:\/\/www.theleftcoaster.com\/archives\/013605.php\" target=\"_blank\">Econo Fraud 101<\/a><\/strong>, and felt like I needed to go no further. He quotes extensively from two articles <font color=\"#200020\"><strong>from 2001<\/strong><\/font>.<\/div>\n<ul>\n<blockquote>\n<div align=\"center\"><a target=\"_blank\" href=\"http:\/\/nakedshorts.typepad.com\/files\/madoff.pdf\"><strong>Madoff tops charts; skeptics ask how<\/strong><\/a><br \/>                    By Michael Ocrant May 2001<\/div>\n<p>         <sup>         <\/p>\n<p align=\"justify\"><img loading=\"lazy\" decoding=\"async\" hspace=\"4\" height=\"105\" width=\"100\" border=\"1\" align=\"right\" src=\"http:\/\/tbn3.google.com\/images?q=tbn:kr7_4dNWbdjS0M:http:\/\/www.yu.edu\/uploadedImages\/Sy_Syms\/Dinner_2008\/madoff_web.jpg\" \/>Mention Bernard L. Madoff Investment Securities to anyone working on Wall Street at any time over the last 40 years and you&rsquo;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.<\/p>\n<p align=\"justify\">Beyond that, Madoff operates one of the most successful &ldquo;third markets&rdquo; 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.<\/p>\n<p align=\"justify\">But it&rsquo;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&ndash;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.        <\/p>\n<div align=\"justify\">  More important, perhaps, <font color=\"#200020\"><strong>most of those who are aware of Madoff&rsquo;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<\/strong><\/font>&#8230;<\/div>\n<p><\/sup><\/p><\/blockquote>\n<div align=\"justify\"><em>Says <font color=\"#500050\"><strong>eriposte<\/strong><\/font>: &quot;Well, he certainly used another type of &#8216;option&#8217; called <\/em><em> \tfraud &#8211; aka &#8216;<\/em><em>operational infrastructure&#8217;.&quot;<\/em><\/div>\n<blockquote><p><sup><\/p>\n<div align=\"justify\">The inability of other firms to duplicate his firm&rsquo;s success  \twith the strategy, <strong>says Madoff, is attributable, again, to its highly  \tregarded operational infrastructure<\/strong>. He notes that one could make the same  \tobservation about many businesses, including market making firms&#8230;<\/div>\n<p><\/sup><\/p><\/blockquote>\n<div align=\"justify\"><em>Says <font color=\"#500050\"><strong>eriposte<\/strong><\/font>: &quot;Ahh, yes, the &#8216;independence&#8217;. The punch line is at the end  \tof the article.&quot;<\/em><\/div>\n<blockquote><p><sup><\/p>\n<div align=\"justify\">Madoff, who believes that he deserves &ldquo;some credibility as a  \ttrader for 40 years,&rdquo; says: &ldquo;The strategy is the strategy and the returns  \tare the returns.&rdquo; <strong>He suggests that those who believe there is something more  \tto it and are seeking an answer beyond that are wasting their time&#8230;<\/strong><\/div>\n<p><\/sup> <\/p><\/blockquote>\n<blockquote>\n<div align=\"center\"><a href=\"http:\/\/aaronandmoses.blogspot.com\/2008\/12\/original-dont-ask-dont-tell-madoff.html\">The original &quot;<strong>Don&#8217;t ask, don&#8217;t tell<\/strong>&quot; Madoff story<\/a> <br \/>                   <em>Barrons had this story in 2001 but no-one wanted to listen:<\/em><\/div>\n<p>             <sup>   <\/p>\n<p align=\"justify\">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.<\/p>\n<p align=\"justify\">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.<\/p>\n<p align=\"justify\">But what few on the Street know is that Bernie Madoff also manages $6 billion-to-$7 billion for wealthy individuals. That&#8217;s enough to rank Madoff&#8217;s operation among the world&#8217;s three largest hedge funds, according to a May 2001 report in MAR Hedge, a trade publication.<\/p>\n<p align=\"justify\">What&#8217;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.<\/p>\n<div align=\"justify\">When Barron&#8217;s asked Madoff Friday how he accomplishes this, he said, &quot;<strong>It&#8217;s a proprietary strategy. I can&#8217;t go into it in great detail<\/strong>&quot;&#8230;<\/div>\n<p><\/sup><\/p><\/blockquote>\n<div> <em>Says <font color=\"#500050\"><strong>eriposte<\/strong><\/font>: &quot;Clearly, there were obvious warnings back in 2001 and the SEC  did nothing. <strong>Mark Gimein<\/strong> has an article at Slate&#8217;s <a href=\"http:\/\/www.thebigmoney.com\/articles\/judgments\/2008\/12\/12\/madoff-dilemma\" target=\"_blank\"><strong>The Big Money<\/strong><\/a> discussing how one might detect  these types of fraud&#8230; but there are many other approaches  that one might potentially use to detect fraud. At <\/em><em><strong>Big Picture<\/strong>, <strong><a href=\"http:\/\/www.ritholtz.com\/blog\/2008\/12\/does-the-sec-do-quantitative-research\/\" target=\"_blank\">Barry Ritholz<\/a><\/strong>  provides links to various articles discussing ways to detect fraud and observes:<\/em><\/div>\n<blockquote><p><sup><\/p>\n<div align=\"justify\">I would suggest to the incoming head of the SEC to put together a  \tblue ribbon of math professors, quant scientists and algo specialists to  \tdevelop a few basic programs that ferrets thru market, options, and  \tperfromance data looking for aberrational data  \tseries, and leading to criminals and fraud artists.<\/div>\n<p><\/sup><\/p><\/blockquote>\n<div><em>Sounds like a very good suggestion to me.&quot; <\/em><\/div>\n<\/ul>\n<div align=\"justify\"><img loading=\"lazy\" decoding=\"async\" hspace=\"4\" height=\"97\" width=\"146\" border=\"1\" align=\"right\" src=\"http:\/\/images.nymag.com\/daily\/intel\/20081212_bernard_146x97.jpg\" \/>So much for <strong>Bernard Madoff<\/strong>. Nothing complicated here &#8211; he&#8217;s been a crook for a very long time. The question is how did he get away with it for such a long time?&nbsp;<font color=\"#500050\"><strong>eriposte<\/strong><\/font> mentions two articles about how it could&#8217;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] &#8211; <font color=\"#200020\"><strong>if it&#8217;s too good to be true, it probably isnt!<\/strong><\/font> In fact, that&#8217;s a good way to say what this and every other stock market crash or scam is about, so I&#8217;ll say it again: <font color=\"#200020\"><strong>if it&#8217;s too good to be true, it probably isnt!<\/strong><\/font><\/div>\n<p>      <\/p>\n<div align=\"justify\"><font color=\"#200020\"><strong>Madoff&#8217;s consistency seemed impossible because it was [impossible].<\/strong><\/font> I want to add something to <font color=\"#500050\"><strong>eriposte<\/strong><\/font>&#8216;s discussion of this absurd saga. <strong>Bernard Madoff<\/strong> was <strong>Chairman of the NASDQ Exchange<\/strong> in the 1990&#8217;s. Remember <strong>Wendy Gramm<\/strong>? She is the former <strong>Chairman of the Commodity Futures Trading Commission<\/strong> and wife of former Senator <strong>Phil Gramm<\/strong> who was Mr. Deregulation and created the OTC unregulated Derivatives Market. She left the <strong>CFTC<\/strong> to go on <strong>Enron&#8217;s Board<\/strong>. It looks like some people &quot;in the know&quot; take what they &quot;know&quot; with them when they leave and put it to shaky use. The SEC would be well advised to look into the doings of former Exchange and Government Financial Gurus in their future regulation activities when looking for fraud. And, by the way, <font color=\"#200020\"><strong>if it&#8217;s too good to be true, it probably isnt!<\/strong><\/font><\/div>\n","protected":false},"excerpt":{"rendered":"<p>Recently, I was talking about the future of the blogs, and mentioning emptywheel&#8216;s facility at document analysis. In the course of that discussion, I also mentioned eriposte: The master is eriposte, but his offerings are rare and almost too dense to follow without another translation or two. I said that because of his series on [&hellip;]<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_bbp_topic_count":0,"_bbp_reply_count":0,"_bbp_total_topic_count":0,"_bbp_total_reply_count":0,"_bbp_voice_count":0,"_bbp_anonymous_reply_count":0,"_bbp_forum_subforum_count":0,"footnotes":""},"categories":[2],"tags":[],"class_list":["post-2703","post","type-post","status-publish","format-standard","hentry","category-politics"],"_links":{"self":[{"href":"https:\/\/1boringoldman.com\/index.php\/wp-json\/wp\/v2\/posts\/2703","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/1boringoldman.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/1boringoldman.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/1boringoldman.com\/index.php\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/1boringoldman.com\/index.php\/wp-json\/wp\/v2\/comments?post=2703"}],"version-history":[{"count":0,"href":"https:\/\/1boringoldman.com\/index.php\/wp-json\/wp\/v2\/posts\/2703\/revisions"}],"wp:attachment":[{"href":"https:\/\/1boringoldman.com\/index.php\/wp-json\/wp\/v2\/media?parent=2703"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/1boringoldman.com\/index.php\/wp-json\/wp\/v2\/categories?post=2703"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/1boringoldman.com\/index.php\/wp-json\/wp\/v2\/tags?post=2703"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}