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Made off with $50bn

Robert Peston | 17:19 UK time, Friday, 12 December 2008

I am told that "Madoff" is pronounced "made off" - as in "he made off with the money".

That's the end of the jokes.

The supposed $50bn swindle by Bernard Madoff at his hedge-fund and securities trading business is serious stuff.

It's possible that Mr Madoff's $50bn estimate of how much he's evaporated is an overstatement. But there will be losses for investors in his funds, such as clients of Nicola Horlick's Bramdean.

Perhaps more troubling are the implications for the multi-trillion dollar hedge fund industry in general.

This industry is rapidly contracting, as the likes of Morgan Stanley and Goldman Sachs reduce the credit they provide to funds.

And the collapse of Madoff is likely to to accelerate the disappearance of funds - in that it may persuade many investors to demand their money back from even high qualiity funds and funds of funds.

Investors will note that regulators have taken long, hard looks at Madoff over many years, and failed to detect fraud.

Which will make investors fear - however irrationally - that no hedge fund can be deemed wholly safe.

If investors demand their money back, there would be wholesale dumping of assets by hedge funds.

And that would compound losses for them, as the price of assets would fall - and it would prompt demands by creditors for hedge funds to put up more collateral (margin calls), which would lead to further asset sales.

All of which would mean that the moment when share prices, property prices or any other asset prices find that elusive floor would be deferred yet again. Which matters to anyone saving for a pension and for banks' ability to turn on the credit tap again.

Which is why, as I said, it would be unwise to chuckle at Madoff's mad mess.


Page 1 of 3

  • Comment number 1.


    I have nothing new to say. And believe me I am not chuckling.

    Quote :I blame the media messengers who put these feet of clay statues up there and keep them there. Despite being supposedly intelligent people. The media plays along with a rather dangerous game - yet on other matters lie without hesitation and later apology.: Unquote

    You yourself report "Investors will note that regulators have taken long, hard looks at Madoff over many years, and failed to detect fraud"

    Said regulators blinded by the light of celebrity perhaps - allegedly?

  • Comment number 2.

    Hedge funds by their very nature cannot

    be SAFE.

    They are the BOOKMAKERS of the financial


    So whats the BIG SURPRISE?????????????

  • Comment number 3.

    Since Madoff has made off, shouldn't someone be pursuing him, freezing his assets and putting him in jail??

  • Comment number 4.

    I don't suppose he has lent it to Flash Gordon, as that would be £50bn less we have to pay back.

  • Comment number 5.

    If this is a pyramid scheme, then every one of his original investors was part of it. Their assets must be seized as the proceeds of crime and used to restore the funds.
    I was saying earlier on your colleague Nick Robinson's site that I was involved in sorting out a Balkan problem. In fact, I was financial controller of the force who sorted out Albania after they hit problems due to a pyramid scheme. The way we did that was to be merciless: anyone who was a deliberate part of the roots of the scheme got hauled in quick. We then spent years rebuilding the Treasury regulation which let them get away with it, the Police who took their cut, and the banks who were behind it.
    This is identical, and I strongly suggest the bankers resposible for this should be imprisoned in an Albanian prison. That should most certainly encourage good behaviour in the future.

  • Comment number 6.

    it was just management fees and commissions etc
    initial charges always have been an unknown variable amount

  • Comment number 7.

    On the 4th November I warned about hedging funds. Click on wakeupbritain to see previous blogs.

    Next prediction: physical gold promised will not be delivered, paper gold market collapses next!

  • Comment number 8.

    He is not the only one to be doingwell in this regard today. we have some of our own too

  • Comment number 9.

    One hardly knows what to say--stunned silence often follows when a massive tragedy is witnessed.

    Kipling has a few wise words, the conclusion of his poem 'God of the Copybook Headings':

    In the Carboniferous Epoch we were promised abundance for all,
    By robbing selected Peter to pay for collective Paul;
    But, though we had plenty of money, there was nothing our money could buy,
    And the Gods of the Copybook Headings said: "If you don't work you die."

    Then the Gods of the Market tumbled, and their smooth-tongued wizards withdrew
    And the hearts of the meanest were humbled and began to believe it was true
    That All is not Gold that Glitters, and Two and Two make Four
    And the Gods of the Copybook Headings limped up to explain it once more.

    As it will be in the future, it was at the birth of Man
    There are only four things certain since Social Progress began.
    That the Dog returns to his Vomit and the Sow returns to her Mire,
    And the burnt Fool's bandaged finger goes wabbling back to the Fire;

    And that after this is accomplished, and the brave new world begins
    When all men are paid for existing and no man must pay for his sins,
    As surely as Water will wet us, as surely as Fire will burn,
    The Gods of the Copybook Headings with terror and slaughter return.

  • Comment number 10.

    # 4
    Don't be daft.
    Either flash Gordon has already lent our money to him or AD will promise our money to protect the speculators

  • Comment number 11.

    Oh dear oh dear ... the rot surfaces at last!

    Fron reports looks like Madoff fessed up to his employees then the FBI paid a house call.

    Couldn't happen in the UK, looks like our plods at SOCA (Serious Organised Crime Amateurs) have been warned off the City.

    Politicians will say "Its against the National Interest you know" re Saudi arms "commissions".

    When will the UK's financial wizards be brought to book? Never is odds-on!

    Broken Britain.

  • Comment number 12.

    The whole financial industry is rotten to the core, thats the publics view.
    No matter how good our manufacturing, energy or service industries are, all is ruined by the reckless casino merchants in the City.

  • Comment number 13.

    "regulators have taken long, hard looks at Madoff over many years, and failed to detect fraud."

    I really hope somebody with more power then ordinary blogs readers here ask themselves how this was possible.

  • Comment number 14.

    regulators have taken long, hard looks at Madoff over many years, and failed to detect fraud.

    hedge funds are like weapons of mass destruction, just because you can not find evidence of fraud, that does not imply it does not exist

  • Comment number 15.


    Our entire banking system is a Ponzi scheme of epic proportions. It relies on a continual increase in loans taken out by government, businesses and individuals in order to function.

    It grows until it can grow no more, then there is a credit crunch.

  • Comment number 16.

    My Christmas wish, Robert.

    Will you please give me a nice white background (of the sort that you use when you descend and walk amongst us) for my contributions to your blog?

    It will make them look important and special.

  • Comment number 17.

    When Captain Bob went for his swim it was reckoned that the fall-out would be five times the sum that was first deemed to have been lost. I don't know if it was but that was small beer compared to this shambles.

    This does not look good at all.

    Time for the auditors to kick the door in and get to work.

    We need to nail all the crooks so that our children and grandchildren can know who destroyed the future.

  • Comment number 18.

    I have long thought that somewhere in this godalmighty mess there would be some criminal activity, either by an individual or by organised crime, the numbers were just too huge and had to tempt someone to have a go.

    I should like to make a small wager that before the end of this fiasco the sticky fingerprints of the Mafia or some other crime syndicate are found and I'll bet that it will not be just the profits that have been stolen but the principle sums that were fraudulently advanced in many cases. The criteria for lending were ridiculously loose and would have been just too mind blowingly attractive to ignore.

  • Comment number 19.

    Many ordinary people will be absolutely destitute in 12 months time.

    If the likes of Hornby, Mathewson, Goodwin, Crosby, Applegarth et al are not pursued for their assets, it will be a travesty. Limited liability must no longer be allowed for company directors who negligently lead steer their ships onto the rocks, dragging others in their wake.

    Not that I would approve, but the Chinese might well have shot them by now.

    Sir Tom McKillop apologised, but Goodwin couldn't muster a word. By the way, he is still chairman of the Prince's Trust. Wasn't their original motto "Helping young people help themselves" ? Glad they have a boss who has led by example.

  • Comment number 20.

    I don't think Madoff could have committed a $50 Billion Fraud without help and must have had partners involved.

  • Comment number 21.

    Surely hedge funds can be relatively safe if they actualy hedge and don't speculate.

    If I am long £100 in BP and short £100 in Shell (Hedging I believe) then how is this so risky?

    If I am just £100 million short then that is taking a punt - or a Madoff Hedge.

    So talk us through the role of the regulators and auditors in this sorry mess............

  • Comment number 22.

    Millions are not enough, I'm going to swindle in billions! One for the next Oxford thesaurus; Greed = Doing a Madoff.

  • Comment number 23.


    This will not be the only sham hedge fund. You only have to look at the growth in new hedge funds which have been efectively sold in the UK by IFAs over the last five years in pursuit of absolute returns. The barrier to entry is quite low. A class B listing on the Gurensey CISX will get you going, a modest amount of seed capital and you are away. Although unregulated funds cannot be marketed in the UK, they can certainly be sold to so called experienced investors.

    The funds have really no regulatory oversight and pricing can be very lax. Most have the ability to gate redemptions if there is a rush to get the money back.

    As I see it, there is still two large catastrophe risks out there - unwiding the CDS mess and continued buffeting from the Hedge Fund shocks. Let us hope this is not a harbinger of further financial doom.

  • Comment number 24.


    Bubbles burst. they always burst. Every single economic one has burst. They pop. they go bang. they explode.

    Hedge Funds, Financial Services in The UK, The UK Housing Market....

    Bubbles. Pop. Bang. Gone.

    Take a deep breath and try again.


  • Comment number 25.

    My father in law worked as a director in a FS firm years ago. He noted that the other directors just laughed when the FSA (or equivalent regulator at the time) came in.

    They just didn't understand the complexity and didn't challenge answers given to their questions. They just weren't clever enough.

    Then again it's not that clever for the mensa City boys to bring the world's economic system to its knees.

  • Comment number 26.


    So they produced the credit card. gave everyone the plastic and took the money.
    so when are all these bankers going to prison then?

  • Comment number 27.

    CRUMBS ??

    EVEN MORE FALSE GOLD!!!!!!!!!!!!!!!!!



    MILDLY GOBSmacked. . .

  • Comment number 28.

    When Chancellor Gordon gave the BofE independence to set interest rates he simultaneously took away their supervisory role by setting up the FSA.

    The FSA was populated by employees whom the other government departments did not want (allegedly) and who certainly had little to no knowledge or experience of the financial services industry.

    This gave Gordon the 'leverage' without which he seems to be unable to operate.

    The rest is history

    And soon to be ours!

  • Comment number 29.


    ANY body up for getting a FORD MUSTANG

    arranged to get one today FAB.

    So Obama save Ford cos i will need the

    spare parts.

    Im no Steve Mcqueen Though.

    The Wife is unamused WHOOPS.

  • Comment number 30.

    #17 and #21 #25
    Auditors? Regulators!!

    Who the Hell do you think approved all the reports and accounts?

    Get real.

    External auditors are a complete and utter waste of money.

    Regulators are even worse. They will accept any garbage and never follow up when given a direct push towards wrong doing.

    I was an internal auditor in financial services sacked for telling the truth.

  • Comment number 31.

    Reminds me a bit of what Gordon Brown did with the UK housing / debt bubble since 1997...

  • Comment number 32.

    Real hedge funds take bets against much larger client portfolios. That is where the name comes from. A wealthy investor might have less than 10% of his portfolio in a hedge fund to offset certain foreseeable risks associated with his main investments.

    Modern "fashionable" hedge funds are nothing of the sort, they are just mutual funds operating with insane leverage of a level normally only associated with British banks.

    In either case, Robert Peston's statement "Which will make investors fear - however irrationally - that no hedge fund can be deemed wholly safe" is bizarre in the extreme. Of course no hedge fund is wholly safe. No investment is wholly safe, ESPECIALLY with leverage! Every investor must by law be provided with a statement to such effect ("significant risk of loss", "past performance does not guarantee..." etc) in the prospectus.

    Besides, this scheme was not really a hedge fund. It sounds more like a pyramid scheme pretending to be a hedge fund. Whether that might trigger a crisis of confidence with effects at the next redemption window is unknown, but Peston explained it very poorly.

    As for regulation, I am satisfied that "regulation" and "hedge funds" did not appear in the same sentence in this article.

  • Comment number 33.


    You're talking about unallocated gold?

  • Comment number 34.

    just because some hedge funds are corrupt
    it does not mean all hedge funds are corrupt
    in other words
    some (but not all) hedge funds are corrupt

  • Comment number 35.

    Bernard Madoff is a .........

  • Comment number 36.

    Unpopular question. Just how much of the derivatives market is similarly compromised?

  • Comment number 37.

    Hi, Robert:
    It is sad that this gentleman is being accused of stealing this much money; and he will make a sweet-heart plea bargain to avoid spending most of his life in prison....

    I also, know, that he is been charged and not yet, been convicted of any criminal offence.

  • Comment number 38.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 39.

    This is just another story that will provide ammunition for all the anti-capitalist ,communist and anarchist nuts.Does anyone remember the Mayday riots that happened a few years ago in London.They tried storming the stock exchange,I always remember the one scene of a terrified couple trapped in their BMW as a gang started to smash their car up.I think its only a matter of time before these events happen again.When you hear stories about our so-called fair society with its free market capitalist economy and people are swindling billions,and bank bosses are being forced to resign with a multi-million £/$ payoff(often for being the architects of failure),is it any wonder people rebel.The question is,when does the revolution start?

  • Comment number 40.

    Yet another example of gullible investors being blinded by reputation and an emperors new clothes scam.

    I have said it before and I will say it again. If it looks too good to be true it probably is too good to be true!

    People cannot expect huge returns unless either

    a) the people behind it are genuises and don't make mistakes. We know that didn't work, remember all the nobel prize winners behind the failed hedge fund in the late 1990's or

    b) it is a con and someone will get ripped off.

    It appears our American friend is in the latter camp.

  • Comment number 41.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 42.

    The whole hedge fund industry is imploding. At the peak last year the industry had an estimated $2.5 trillion under management. probably about half that now and should bottom out less than $1 trillion.

    They say when the tide goes out you can see who was swimming naked.

  • Comment number 43.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 44.

    The trouble is Robert, that hedge funds take short as well as long positions. So the great unwinding of these positions will not exclusively make share, commodity or other asset prices go down. They may go up (like the situation with VW last month when headge funds were trying to unwind short positions). The net effect could, well, net itself off.

    Just like your scare mongering on the Lehman CDS auction, the fallout from a reduced hedge fund industry could turn out to be a damp squib.

  • Comment number 45.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 46.

    Well all I can say is that I'm very surprised.
    I mean, I'd always assumed, like everyone else, that snake oil salesmen could be trusted with billions and billions of other peoples money.

    But one thing this crisis is proving is that it is possible that the profession of snake oil salesman is not as reputable as once it was.

    Sad times indeed.

  • Comment number 47.

    Does this make him a hedge-hog?

  • Comment number 48.

    Sorry for being thick, but why does it delay the floor being found? Doesn't it just mean the floor may be lower than people thought, but we're still getting there?

  • Comment number 49.

    @9 OldSouth

    Thanks for the poem.

    The regulators and their long, hard look are a fat lot of use aren't they.

    We have got to wise up to the compulsive liars around us. If only we could spot them in the crowd. Wouldn't that be a useful new industry for this country - manufacturing a lie detector that worked! I'd bet my last dollar that the higher up you go in the wonderful scheme of things, the noisier the machine would get.

  • Comment number 50.

    Wealth is a conditional trust, not an absolute possession.

  • Comment number 51.


    Not a great surprise, really.

    And I wonder how many more hedge funds will soon be shown to have been operating a 'Ponzi' style business.

    All this serves to prove is that we need completely new rules for all businesses that deal with just that one special, strange, bizarre product - 'money', and that the traditional capitalist model for banks and other investment companies, which relies on 'trust' - the "don't ask us to give you any details but just take it from us that we are richer than you, we've got lots of money and we know it's safe, and what is more we're giving you much better than average returns" model - is completely bust.

    Robert, we need a new concept in banking and financial services based around "openness" i.e. increased transparency.

    Why this - well, more and more rules about what you can do here or do there is just going to get too complicated, so we should go back to the only principle that will work.

    Throughout the many decades of development of the western capitalist model the one element that, unrelentingly, has improved and increased the efficiency of, the system is.... greater transparency.

    We need "open banks", "open investment funds", "open hedge funds" and so on, meaning that company law should be amended (and maybe more relevantly the FSA's regulations obviously) such that if your company is a "money only" business (i.e. you deal in investments, insurance, monetary instruments of any sort) then you have to declare results at a much higher level of detail and transparency, and regularity - quarterly - than a business that deals in non-monetary products - widgets etc (as anyone who runs a normal limited company here has to do) i.e. OK, yes, remove individual's names, but tell us how many contracts you have, what value, what duration, what promises/guarantees were attached etc and that your business is liable for. And for those businesses that are really very very big, if you want to have the protection of the limited liability laws we all accept, then we need to have this information even more regularly - monthly in fact.

    Money is a special product, and any company that deals only in money needs to be subject to much greater levels of disclosure than the rest of us who run businesses designing, making, distributing and selling actual 'things'.

  • Comment number 52.

    Talking about Made Off, there may have been an equally scandalous con over a bank merger in this country, with the Government in on the proceedings. You are a fund with a large share holding in a profligate collapsing bank with mountains of toxic debt. You also own a large holding in another bank which has been prudent and has little exposure to that of its rival.

    You vote for both banks in the merger, thereby ensuring that it goes through. Hey presto - you have reduced your losses by sharing them with the good bank. All the little shareholders of the prudent bank are stuffed, and presumably can do nothing about it, even though the large shareholders have probably stitched them up.

    I have been investing since 1967, and if I ever see my money back from the prudent bank then I will never invest in shares again because I think it is all rigged.

  • Comment number 53.

    I have just finished watching Little Dorrit

    Merdle---Madoff 150 years and nothing changes.

  • Comment number 54.

    Any investment wholly leveraged by debt is at risk.

    Goodbye, and good riddance, Gordon.

    Don't come back.

  • Comment number 55.

    was it a quote honest mistake unquote

  • Comment number 56.

    Madoff should be Knighted ,we need people like him to get money from the sovereign wealth funds .

    At least he knew what he was doing unlike our clueless PM

    The primary purpose of finance is to separate fools from their money[and share it with the government ] ,so that they can realize that they are double taxed fools ,this realisation is of course much more dificult for "educated " types,and puts the limits of mass education in perspective

    In pollytricks and finance every waking moment is for peddling lies ,why is it so dificult for fools to understand that they are fools ?

    If Madoff was in Gordons shoes he would of course do likewise and carry on the scam to infinity and beyond .

    Surely St Madoff the patron saint of ponzi credit bubbles was only trying to save the world .

  • Comment number 57.

    I sneak on at the end so that the moderator is possibly the only person that will read my comments, mainly because I am not economist or a banker or know anything about the financial world.

    But what I do know is that we have seen the future and we cannot figure out a way to avoid it. It’s not that it’s that’s all bad; it’s that it’s going to be different, very different!

    So while we wait for that comet to impact and end the world as we have known it and in knowing there’s no way now to dodge it.

    How could we lessen the impact?

    So with hindsight what we should have done was to pay everybody’s outstanding credit cards bills, personal loans and mortgages.

    Don’t confuse morals with economics; I know we should not have borrowed so much, I know we should have saved more, but we didn’t and what would have been the point as the banks went bankrupt!

    It may be politically unacceptable (like nationalising the banks), but it could have just saved us from real hurt.

    O.K. if that’s hard to swallow; then at least guarantee the loans, yes, by Government. This would also include companies as well as Woolworths.

    Will that saves us? No, but it would lessen the impact.

    There’s no going back – there’s only the future and the future is going to be very different.

    Winging and whining savers!

    I didn’t hear a great deal of objections from savers, either corporate or individuals when the returns on their savings were really high due to the credit bubble – did you? It’s the other opposite side to the coin and the credit bubble, so when saver wring their hands together and moan about their returns I ask what did they do with their returns when they were earning on their investments?

    Cashed in their gains?

    Bought to rent?

    Bought foreign property?

    Spent it?

    Re-invested it?

    Thought that their investments would give them a life without money worries?

    If you’re earning 1, 2 or 3% above inflation you’re doing well! Interest is not paid on you putting money into a bank and ‘hey presto’ it earns money, it earns money when the bank loans to business and personal borrowers and to home buyers at a higher rate of interest and makes a return, some it skims off in profit and then returns interest in the form of a payment on the money you invest. I know that’s very basic, but in principle that’s what happens.

    It not without risk is it? We don’t expect all those businesses, personal borrowers and home owners to go bust!

    Ah! But if they did?

    It’s just a house of cards.

    So here it is! Austerity now or in two years, well I has no more that 15 years to live on average, so I say party now! As we will need at least 30 years to pay off what we have messed up for future generations on the economy, let alone global warming. Sorry for all those to follow, but hey you can blame it all on us!

  • Comment number 58.

    #19 - Sasha, absolutely on your wavelength, destitution is too good for these guys,

    Yours Aye,


  • Comment number 59.

    well, it was going to happen eventually-truth will out. Although what I saw on the news tonight seemed to suggest he declared his loss before he was found out.

    If that was the case, how can u trust his figures? I suspect it's more than stated!

    I thought hedge funds were right up there with short selling in terms of risky gambling with other people's money.

    Therefore, another rotten, greedy crook notes the dust!

    Notice how no one cries over him, nor is surprised?

    We know it's going on-when do the Fraud squad get to work here? Oh, I forgot-White collar crime is not high on the list of legal 'must do's'. And all the police's funds are still in Iceland aren't they?
    Gordy-watch out, watch out there's a thief about! When will you get caught too?

    And just what do you plan to do with the 20/20/20 money?

    Ps-anyone spot the US treasury overriding the senate over the car people?!

  • Comment number 60.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 61.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 62.

    If it look to be too good to be true it is! It always has been, and it always will be.

    In history there has never been much difference between financial service companies making huge 'profits' and card sharps. The do not actually 'make' anything they just move money about, generally with the help of inside knowledge. Similarly the miracle investment schemes run by cocaine gangs in South America are in fact money laundering schemes.

    Miracles happen in fairy stories, not real life. One man's financial profit is another's loss - this appears to have been the case with what appears to have been a gigantic pyramid scheme in this case.

    This window into the World of financial services really ought to be a warning to us, as usual too late, not to rely on financial services as an 'engine' of the economy.

    Is it being unfair to characterise the whole city of London as just the same activity? But that is how one feels again and again when the next miracle comes to light! They need to get back to the basics of handling the financial transaction of trade to regain respect. It is after all the City and Financial Services that have destroyed the British and the world economy by destroying liquidity. They cannot be bailed out by the poor and they must reform.

  • Comment number 63.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 64.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 65.

    The whole of the finance industry resembles a wild garden that hasn't been looked after for years.
    Wherever you look, whatever stone you lift up there are nasty, vile-looking things that come crawling out.
    We are only at the start of the great Global Unravelling.

  • Comment number 66.

    #19 It's been more that 35 years since I had to memorise Law cases for an exam but wasn't there something under case law whereby directors and officers of the company are "jointly and severally" liable for their actions to the full extent of the damage and are *NOT* covered by the limited liability of the company !!

    Since I haven't touched a law book in more than 20 years, perhaps someone could refresh my (failing) memory !! Sorry, but it's too full of routines to deal with bits and bytes right now !!

  • Comment number 67.

    #59 "Gordy-watch out, watch out there's a thief about!"

    Don't be silly !! He's too busy saving the world !! He's got no time for a petty thief or two !!

    And to think many questioned my sanity when I left a well paid job in the City to become a nerd !!

  • Comment number 68.

    My #63 referred to moderators? Why? It observes all your house rules. Come on.

  • Comment number 69.

    Having worked for 10 years in the Hedge fund and fund of funds (fof's) industry some further information should be added at this point.

    After the case of the Manhattan fund collapse in 1999 (another fraudulent fund manager) a number of the higher quality fof's (who existed then and were stung by Manhattan) added forensic accountants and private investigators to their payrolls. Due to this most of the better operators knew that Madoff was uninvestable proposition. Only Aksia have come forward so far higlighting their concerns from last year (see the Aksia Madoff news story on the web), more will follow.

    In my mind as with the post Manhattan era, the fof's with the strong operational due diligence teams will do well from this mess. They will say that “you really should use us as you can’t carry out the due diligence necessary”, that was the line post Manhattan. Some of the weaker and newer fof’s will fall by the wayside due to missing the patently obvious red flags.

    Fortunately for the UK this particular kind of fraudulent problem cannot happen here. This is due to the fact that to raise money in the UK you need an Administrator. An Administator is a 3rd party who calculates the funds Net Asset Value (NAV) based on the securities and cash held by the fund. Interestingly in the US this is not a prerequisite demanded by the SEC! They can make their own NAV up, they only need to bluff their way past the Auditors at year end (which is why Madoff used a rather off track auditor).

    With this in mind extra regulation of this industry is not essential for the hedge fund world (and the world) to move forward. Some basic 3rd party validation (an administrator) is needed in the US, stipulated by the SEC like the FSA requires in the UK. Having experienced an FSA audit I know for a fact that extra regulation enforced by more checks and enforcement will not really work, it will just change into a larger game of cat and mouse than it is now.

    Finally the hedge industry is contracting and will continue to contract, not due to the Madoff mess, an annual hedge fund collapse is built into the minds of investors already. It will contract due to the poor absolute performance of the funds. In the post dot com bubble years of 200-2003 they market was in free fall but the hedge funds on average (the HFR index is good proxy of this) made between 5%-10%. This performance drove the huge growth in the hedge fund market. This year the performance is different, the average fund will probably lose 16%, no absolute returns this year! Not to mention the really poor performance of the hedge fund titans, I won’t name them here. That alone will drive doubt into the minds of investors that hedge fund managers are masters of the universe.

  • Comment number 70.

    Well well well just another day in the crooked banking/finance sector. What a crook I hope he gets life for what he's done. On another issue Robert, how about doing something on the current Abbey bank scandal. This bank has decided to threaten it's customers with a macho letter about a very convenient clause in some of their customers contracts. Effectively threatening to pull-in their loans at some indistinct point in the future if certain conditions in the mortgage agreements aren't met. Well let's make sure the bank understands quite clear that if they try it we the taxpayer (the government) will refuse to provide any financial help to that bank and that we'll let them sink. How dare the senior management do this? It's about time we had a clear-out of these top managers and an investigation into their dealings over the last few years.

  • Comment number 71.


    Agree completely. To make bad worse, Hornby is being retained by Lloyds TSB after he resigns from HBOS, on "a consultancy basis". But don't worry: he's only getting £60,000 a month for it. Words fail - the effrontery is simply jaw-dropping.

    Some way needs to be found to take away the assets and wealth built up by these people as they impoverished millions and wrecked the economy

  • Comment number 72.

    Isnt it strange that we have the wealthiest financial people in history at the same time as the biggest "bust" in history.
    What a coincidence, eh?
    Of course no-one would say that under new-labour they have concentrated most of their time filling their own pockets with the publics money, instead of serving the public, and industry.

  • Comment number 73.

    When I learnt a little bit about hedge funds in my MBA, I always thought that schemes like these which involve selected clients and no regulation have potential to become pyramid scams. In my native India, shrewed scamsters with no formal education have managed to swindle gullible and uneducated small investors by get rich quick pyramid schemes, however this scandal proves that the situation is hardly different at the 'uppermost' end of the financial world. In addition to credit crunch, this scandal has further exposed hollowness of so called 'capitalist ethics'

  • Comment number 74.

    i notice that in all the current scams, crises, bankruptcies etc that nobody appears to blame accountants and auditors....yet every company be it Northern rock or bear stearns presumably had their account signed off as being a true and fair statement! time to bring them to account to explain their carelessnes.....

  • Comment number 75.

    is there any difference between the theft, incompetence, malfeasance, misfeasance etc when trading in mortgage backed securities, hedge funds, short selling etc. in the city, as the usual manipulation of our money by the powers that be.
    e.g. council charges, speeding fines, parking fines, court costs etc

  • Comment number 76.

    The scandals and the frauds of the age of unregulated capitalism are coming in thick and fast.

    This era deserves its own anthem.

    I am sure Robert Peston is preparing a BBC special, with the working title SCAM revealing the world of derivatives and hedge funds and how they destabilised the global economy.

    As a soundtrack to this programme and anthem to the folllies of this age I suggest
    the Bourne Identity theme, Extreme Ways by Moby.

  • Comment number 77.

    america started the corruption trend too

  • Comment number 78.

    Its all just gambling.

    The stock market is no longer a place to invest in companies with a view to sharing the profits.

    All other valuations are just gambling on a bubble (and as others have noted the Beeb is screening Little Dorrit with the same theme).

    Add to that the world economic driver known as the USA ('when the USA sneezes the world catches a cold') and its a dire situation all round.

    Just had another of those charming Cahoot (Abbey et al) emails saying that interest on savings is now 2.00% stretching to 3% if over GBP1M. At least they have dropped the line from the previous two emails which said that overdraft rates remain the same.

    Since Northern Rock are today advising 3.5% on Silver Saver accounts over GBP1 at least our National Bank is trying.

    So it sounds as if Santander really want to close Cahoot which is a pity as at one time they were a beacon for not only good saving rates but also an excellent example of how online banking should be done. It took the demise of the old Northern Rock to sort out their stupid website which was an example of how NOT to do it. I guess they found they needed to go outside the NE to get decent programmers ;-) Ducks for cover......

  • Comment number 79.

    It is surprising that someone like Nicola Horlicks should have fallen for this.

    A wise investor should assume that anything that gives an exceptionally good return is also exceptionally risky. After all, if this were not the case why does anyone invest in anything else.

    "If it looks to good to be true, it probably is to good to be true."

  • Comment number 80.

    The FSA's standard response to the suggestion that short selling should be banned was it improved liquidity - a rather meaningless response to me.

    Anybody worrried that a former chairman of the FSA became the chairman of a big hedge fund short seller in Northern Rock?

    Anybody worried about Rothschild "entertaining" OhLord mandy and Osbourne?

    Anybody mystified by the lack of regulation of hedge funds?

    An investigation by the media into political contributions by hedge fund managers and their employment of former senior politicians and civil servants is long overdue.

    Their current "easy touch" having destroyed confidence in UK equities, is sterling-an easy target given this incompetent government and BoE.

  • Comment number 81.

    I'm no economist, in fact I'm an unemployed pig-castrator.

    But surely it was only a matter of time before somebody noticed that we no longer make anything, no longer provide services, no longer grow much, nor do we actually seem to have any businesses left which aren't involved in the lending and borrowing of money?

    How can ALL these hedge funds promise ever-increasing returns, for doing apparently nothing, investing in companies founded on the investments of other hedge funds?

    A snake devouring itself, and it seems as though we we're down to the last bit of "neck".

  • Comment number 82.

    Quote from Bramdean's website

    'Robust and thorough due diligence is at the heart of our firm's investment process. Our detailed manager monitoring programme ensures that our clients' investments are subject to on-going and effective governance.'

    If the Madoff thing is a Ponzi as alleged and Bramdean didn't spot this then it doesn't say much for them or the rest of the investment "specialists"

    On the theme that comes up from time to time on this blog about 'wingeing savers' it would be interesting to hear what these bloggers view as a reasonable view on savings.

    Most of us know that there is no REAL return on bank savings taking inflation into account but equally many, like me, never trusted the flash insurance pension schemes but invested in stocks on a long view as well as keeping a bigger percentage in cash. So actually we have done quite well over the years taking the whole lot into account.
    I am NOT 'wingeing' about saving rates just voicing the disappointment I feel that prudent savers will be paying for this and the reckless let off scot free.

    This is the basis also of the German view of Brown. They will be picking up the tab for the rest of Europe who are taking the Canute approach. Oh and they have some real industry to back them up.

  • Comment number 83.

    well if you invested your money in the scheme, you must be stupid.

    the nigerian mentality is if someone is greedy enough to be enticed by the lure of easy wealth, they deserve to lose it.

  • Comment number 84.

    So the rats are starting to leave the ship! Good, let's hope that they take their fleas with them. We are already going to face the Black Death in the coming years that was caused by their greed and contagion.

    Robert asked what kind of system we were going to create when this is all over. Let me suggest a TRANSPARENT system. If it's too complicated that you need "experts" to even understand it then it's dodgy. Let's get back to basics and let openness and simplicity rule.

    The complicated mess that has been created produced paper wealth for some in the short term andpain for the majority in the longer term. Let's get back to a fair combination of wealth, demand and supply that is understandable by all.

  • Comment number 85.


    STUCK UP???

    Youve got to laugh.

    Sick to death of that dreadful woman.

  • Comment number 86.

    69. At 09:37am on 13 Dec 2008, BrokenCapital

    Excellent analysis. Totally agree about how this will actually be a help to the stronger HFoF players. I worked in the multi-manager/investment consulting business until recently, and they will be poking this story in front of every prospect. They'll then show how their HFoFs had no exposure to Madoff, showing off the dozens of people committed to Hedge Manager evaluation, highlighting how much more due diligence they do on these products etc etc. Clear message? "You don't have the resources to do this but we do, so out source management of your alternatives asset allocation to us".

    More or less agree about the risks in the UK (actually across the EU), though a HFoF could still invest in Madoff via a Modoff collective vehicle, in which case there's no real assets to custody here, just the Madoff Fund shares which, it appears, were underpinned with fresh air. However, you correctly point out some of the "red flags" to prevent buying this kind of stuff. In our business we regarded non-independent calculation of the NAV as an automatic veto. Use of "one-man-and-a-dog" audit firms for multi-billion dollar Funds also tended to attract a veto. And we tracked very closely those Funds that were very slow to calculate and release NAVs for their Funds.

    The notion that more regulation will make us all sleep easier at night is just nonsense. The FSA already has 8,000 pages of rules. I don't see a couple of thousand more making a big difference. We need better regulation, which probably means less not more. Every rule is a gaming opportunity to the financial industry.

    There's also too much emphasis on how much people get paid, and far too little on their personal risk. The reason why nobody in the industry is complaining is that they're far more worried about having higher potential liabilities put on them personally than having to earn less for a few years. That would have happened anyway after this year's losses. I'd much rather see a loss-clawback requirement in every registered individual's employment contract, so they become liable for losses like the ones we've seen this year. They'd never be able to pay them all, of course, but the risk of losing their entire personal asset base would make them focus more closely on risk to begin with, and be more conservative. It's ironic, but many Hedge Managers do this already, via large personal holdings in their own Funds. Those that do this tend to be a lot more conservative than the ones playing with other people's money only.

  • Comment number 87.

    POST 86

    CLAW BACK on earnings FANTASTIC idea.

    I would go for making them bankrupt every


  • Comment number 88.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 89.

    I am becoming extremely disturbed with the reporting methods of the BBC throughout this Credit Crunch. As someone from the construction and development industry I feel quite strongly that the BBC is praying on peoples fear of vulnerability.
    Any one who had a 125% mortgage deserves very little sympathy especially as they are a very low percentage of the mortgage market. Now we are told about the Abbey Clause. How many people does this affect? What percentage of the mortgage market? Oh no the BBC cannot report that it is a drop in the ocean. It is all bad news.
    When are the BBC move on and investigate the news properly. I believe BBC news is becoming a red top TV programme.
    Lets get some perspective out there.

  • Comment number 90.

    The BBC is just a black bleak reflective attitude on society brodcast over the waves.

    Why do you worry can always switch it off?

    Truth betold Radio 4 is an abys of dispare but some one some where tells them that their missery is worth listening to.

    I can honestly proclaim that listening to Radio 4 between 07 and 08 is absolute proof of the BBC's distance from the people and their ease with those who daily destroy this Country.

    We in the United Kingdom are a People

    yet all we hear are those who destroy us through ineptitude.

    Was not Journalism at sometime more to be about finding the truth rather than cuddling culpable?

  • Comment number 91.


    Alex, hedge-funds are the punters, not the bookies.

    There is only one failed bookie I've ever known of, he's now on Channel 4 Racing.

    I'm sure that not all hedge-funds are run by disreputable crooks.

    After all, not all estate agents are slimy and insincere...

    OK, well yeah, most hedge-funds probably are run by spivs, as a Scottish bloke who's been keeping a low profile recently said.

    Anyway, is the demise of Madoff's hedge-fund
    at all related to the recent announcement of job cuts at Conservative central office?

  • Comment number 92.

    Maybe the stock market in its current guise is just one big myth? I make a product and have shares. My output is stable and my order books remain full but one phone call from an uninformed city type and the price goes up or down and the company and its product hasn't changed one iota.

    I'm told to keep investing in my retirement fund as my money is buying more shares while the prices are low and when the market turns, I'll have much more. Is this another myth to keep us on board? What other choice do I have?

    Maybe someone should look into Berkshire Hathaway?

    The US never wanted big government to control the people - now they got what they wanted, an unregulated/uncontrolled market.

  • Comment number 93.

    Today's breaking story (having broken this one yesterday)
    Radio 4's report on Abbey National calling in mortgages in negative equity is being referred to the Treasury Select Committee.
    The bite-back for banks refusing to respect HMG starts here.

  • Comment number 94.

    Madder and madder.
    My contribution # 88 has also been referred to the moderator.
    Let's try to get what I had to say in a form that is gnomic.
    Madoff is out on bail.
    Should he decide to skip bail, guess where he would head for?

  • Comment number 95.

    Your message is schizophrenic: are you protesting or excusing our pessimism?
    The viewpoint here, taking the longer term, is that the Chancellor was given some space when this started, although we thought he was doing too little too late. Experience shows we were right, and yet he still wants space he's run out of to do too little too late. He's now in moral overdraft and we're worried he's bankrupted the country, given the hugely reduced value of the asset base.
    Some still have faith in the political system, and some think that;s gone by the board as well. It's becoming noticable that Crash is looking more and more like a cross between Cruella Darling Ville and Droopy Dawg as days go by, and is in a world of his own.

  • Comment number 96.



    Furthermore, CNBC reports the hedge fund due diligence firm Aksia found a 2005 letter to the SEC stating that Madoff was running a “ponzi scheme”.

  • Comment number 97.



    Furthermore, CNBC reports the hedge fund due diligence firm Aksia found a 2005 letter to the SEC stating that Madoff was running a “ponzi scheme”.

  • Comment number 98.

    Nos4 10,31, 54
    Do you agree with my friend that it would only take the lunatics a few hours, or less, to associate the British Prime Minister with Mr Madoff.

  • Comment number 99.

    A Ponzi scheme is a fraudulent investment operation that involves paying abnormally high returns ("profits") to investors out of the money paid in by subsequent investors, rather than from net revenues generated by any real business. It is named after Charles Ponzi.[1] A Ponzi scheme has similarities with a pyramid scheme though the two types of fraud are different.


  • Comment number 100.

    Madoff aopears to have got away with it for so long because he was a respected member of the financial establishment (NASDAQ) He also provided investors with reasonable, rather than excessive returns.However competitors had already muttered about the improbabililty of him achieving such constant returns year after year.Why, even after receiving the Ponzi letter the SEC failed to act, we can only guess. It might having something to do with 50 billion dollars.


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