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Sunday, December 14, 2008

Just Another Wall Street Firm Having A Bad Year

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After AIG and Citicorp and many other financial institutions having "bad years," here is one more... courtesy of Financial Times:

Investors around the world were rushing on Friday to assess potential losses from what could be Wall Street’s biggest fraud – a multi-billion-dollar scheme allegedly perpetrated by investment manager Bernard Madoff.

The case threatens to stoke fears among investors and encourage withdrawals from hedge funds struggling to raise cash to meet redemptions. At least one civil lawsuit had been filed on Friday on behalf of Madoff investors seeking to recover money.

“These people went to sleep Wednesday night thinking they had a comfortable retirement and now they are thrown into a spiral of horror,” said Stephen Weiss, a lawyer representing people who had invested a combined $1bn with Mr Madoff. “Some of these people don’t know how they are going to pay their mortgage.”

Mr Madoff, former chairman of the Nasdaq stock market, was released on a $10m bond on Thursday after prosecutors said he told senior employees, including his sons, that his operations were “all just one big lie” and “basically, a giant Ponzi scheme [similar to a pyramid scheme]”. Prosecutors said Mr Madoff put his losses at about $50bn but that estimate has not been independently confirmed.

Mr Madoff apparently came to grief over redemptions. He told a senior employee this month he was struggling to meet $7bn in redemption requests from clients, the criminal complaint said.

Mr Madoff’s investors ranged from his friends in New York financial and charitable circles to globally known fund managers. Funds that invested with Madoff – including Tremont, a US fund of hedge funds that had put more than $1bn in his hands – were particularly active in recent weeks in soliciting new money for his vehicles, say people who received the requests.

The biggest exposure appears to be Fairfield Greenwich, a US group with a $7.28bn fund managed by Madoff. Sterling Equities, flagship company of Fred Wilpon, owner of the New York Mets baseball team, was another investor.

In Europe, two funds from Pioneer Investments, an arm of Italy’s UniCredit, had “substantially all” their $835m of assets invested with Madoff. Other investors include Switzerland’s Union Bancaire Privée, London’s Man Group, Spanish bank Santander’s Optimal division and UK fund manager Nicola Horlick’s Bramdean Alternatives.

The Securities and Exchange Commission obtained an order to freeze assets of the firm. Experts questioned whether regulators could have acted earlier. “You have to wonder why the SEC did not know anything about this . . . if this has been going on for years,” said Bradley Simon, a former federal prosecutor.

Dan Horwitz, Mr Madoff’s lawyer, did not return calls for comment. He said on Thursday that Mr Madoff “is a long- standing leader in the financial services industry. We will fight to get through this unfortunate set of events”.
No conspiracy or fraud here, folks. Please move along. Just another long-standing leader in the financial services industry having a bad year. We need these wealth-creation leaders working along with our Federal officials preserving the arsenic of democracy.
Meanwhile, have we gotten the pillories ready for the automotive CEOs?
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There is always an easy solution to every human problem—neat, plausible, and wrong.
Henry Louis Mencken (1880–1956)
“The Divine Afflatus,” A Mencken Chrestomathy, chapter 25, p. 443 (1949)
... and one could add "not all human problems really are."
It was beautiful and simple, as truly great swindles are.
- O. Henry
... The Government is on course for an embarrassing showdown with the European Union, business groups and environmental charities after refusing to guarantee that billions of pounds of revenue it stands to earn from carbon-permit trading will be spent on combating climate change.
The Independent (UK)

Tracking Interest Rates

Tracking Interest Rates

FEDERAL RESERVE & HOUSING

SEARCH BLOG: FEDERAL RESERVE for full versions... or use the Blog Archive pulldown menu.

February 3, 2006 Go back to 1999-2000 and see what the Fed did. They are following the same pattern for 2005-06. If it ain't broke, the Fed will fix it... and good!
August 29, 2006 The Federal Reserve always acts on old information... and is the only cause of U.S. recessions.
December 5, 2006 Last spring I wrote about what I saw to be a sharp downturn in the economy in the "rustbelt" states, particularly Michigan.
March 28, 2007
The Federal Reserve sees no need to cut interest rates in the light of adverse recent economic data, Ben Bernanke said on Wednesday.
The Fed chairman said ”to date, the incoming data have supported the view that the current stance of policy is likely to foster sustainable economic growth and a gradual ebbing in core inflation”.

July 21, 2007 My guess is that if there is an interest rate change, a cut is more likely than an increase. The key variables to be watching at this point are real estate prices and the inventory of unsold homes.
August 11, 2007 I suspect that within 6 months the Federal Reserve will be forced to lower interest rates before housing becomes a black hole.
September 11, 2007 It only means that the overall process has flaws guaranteeing it will be slow in responding to changes in the economy... and tend to over-react as a result.
September 18, 2007 I think a 4% rate is really what is needed to turn the economy back on the right course. The rate may not get there, but more cuts will be needed with employment rates down and foreclosure rates up.
October 25, 2007 How long will it be before I will be able to write: "The Federal Reserve lowered its lending rate to 4% in response to the collapse of the U.S. housing market and massive numbers of foreclosures that threaten the banking and mortgage sectors."
November 28, 2007 FED VICE CHAIRMAN DONALD KOHN
"Should the elevated turbulence persist, it would increase the possibility of further tightening in financial conditions for households and businesses," he said.

"Uncertainties about the economic outlook are unusually high right now," he said. "These uncertainties require flexible and pragmatic policymaking -- nimble is the adjective I used a few weeks ago."
http://www.reuters.com/

December 11, 2007 Somehow the Fed misses the obvious.
fed_rate_moves_425_small.gif
[Image from: CNNMoney.com]
December 13, 2007 [from The Christian Science Monitor]
"The odds of a recession are now above 50 percent," says Mark Zandi, chief economist at Moody's Economy.com. "We are right on the edge of a recession in part because of the Fed's reluctance to reduce interest rates more aggressively." [see my comments of September 11]
January 7, 2008 The real problem now is that consumers can't rescue the economy and manufacturing, which is already weakening, will continue to weaken. We've gutted the forces that could avoid a downturn. The question is not whether there will be a recession, but can it be dampened sufficiently so that it is very short.
January 11, 2008 This is death by a thousand cuts.
January 13, 2008 [N.Y. Times]
“The question is not whether we will have a recession, but how deep and prolonged it will be,” said David Rosenberg, the chief North American economist at Merrill Lynch. “Even if the Fed’s moves are going to work, it will not show up until the later part of 2008 or 2009.”
January 17, 2008 A few days ago, Anna Schwartz, nonagenarian economist, implicated the Federal Reserve as the cause of the present lending crisis [from the Telegraph - UK]:
The high priestess of US monetarism - a revered figure at the Fed - says the central bank is itself the chief cause of the credit bubble, and now seems stunned as the consequences of its own actions engulf the financial system. "The new group at the Fed is not equal to the problem that faces it," she says, daring to utter a thought that fellow critics mostly utter sotto voce.
January 22, 2008 The cut has become infected and a limb is in danger. Ben Bernanke is panicking and the Fed has its emergency triage team cutting rates... this time by 3/4%. ...

What should the Federal Reserve do now? Step back... and don't be so anxious to raise rates at the first sign of economic improvement.
Individuals and businesses need stability in their financial cost structures so that they can plan effectively and keep their ships afloat. Wildly fluctuating rates... regardless of what the absolute levels are... create problems. Either too much spending or too much fear. It's just not that difficult to comprehend. Why has it been so difficult for the Fed?

About Me

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Michigan, United States
Air Force (SAC) captain 1968-72. Retired after 35 years of business and logistical planning, including running a small business. Two sons with advanced degrees; one with a business and pre-law degree. Beautiful wife who has put up with me for 4 decades. Education: B.A. (Sociology major; minors in philosopy, English literature, and German) M.S. Operations Management (like a mixture of an MBA with logistical planning)