Charts in the Babson Style for 11 December

Former NASDAQ Chairman Charged in $50 Billion Ponzi Scheme

"Do you know where your money is?"


Bernard L Madoff Investment Securities is the 23rd largest market maker on the Nasdaq for hedge funds and banks handling about 50 million shares per day.

The firm specialized in handling orders from online brokers in some of the largest U.S. companies, including General Electric Co. and Citigroup Inc.

Their Financial Advisory Business is separate from their market-making business with approximately 20 customers.

The $50 billion in confessed total losses does not quite square up with $17 billion under management at the advisory firm, even in these heady days of leverage.

Where and when is the unidentified loss of $33 billion going to hit?

Naked shorts which cannot be covered? Levered positions that are now vaporized?

Who are the twenty or so customers of the Financial Advisory business?

Who was his auditor? Who in the NASD knew about this? Who was handling his back office work?

Is the ghost of Richard Whitney walking the floor of the Exchange tonight?

cf. Richard Whitney, President of the NYSE 1930-35

Richard Whitney Warning Against the Securities Act of 1934 - Video

Securities and Exchange Commission
SEC Charges Bernard L. Madoff for Multi-Billion Dollar Ponzi Scheme
FOR IMMEDIATE RELEASE
2008-293

Washington, D.C., Dec. 11, 2008 — The Securities and Exchange Commission today charged Bernard L. Madoff and his investment firm, Bernard L. Madoff Investment Securities LLC, with securities fraud for a multi-billion dollar Ponzi scheme that he perpetrated on advisory clients of his firm. The SEC is seeking emergency relief for investors, including an asset freeze and the appointment of a receiver for the firm.

The SEC's complaint, filed in federal court in Manhattan, alleges that Madoff yesterday informed two senior employees that his investment advisory business was a fraud. Madoff told these employees that he was "finished," that he had "absolutely nothing," that "it's all just one big lie," and that it was "basically, a giant Ponzi scheme." The senior employees understood him to be saying that he had for years been paying returns to certain investors out of the principal received from other, different investors. Madoff admitted in this conversation that the firm was insolvent and had been for years, and that he estimated the losses from this fraud were at least $50 billion. (From 17 billion under management? Offer him the position of Treasury Secretary. This guy is a financial genius! - Jesse)

"We are alleging a massive fraud — both in terms of scope and duration," said Linda Chatman Thomsen, Director of the SEC's Division of Enforcement. "We are moving quickly and decisively to stop the fraud and protect remaining assets for investors, and we are working closely with the criminal authorities to hold Mr. Madoff accountable."

Andrew M. Calamari, Associate Director of Enforcement in the SEC's New York Regional Office, added, "Our complaint alleges a stunning fraud that appears to be of epic proportions."

According to regulatory filings, the Madoff firm had more than $17 billion in assets under management as of the beginning of 2008. It appears that virtually all assets of the advisory business are missing.

Madoff founded the firm in 1960 and has been a prominent member of the securities industry throughout his career. Madoff served as vice chairman of the NASD, a member of its board of governors, and chairman of its New York region. He was also a member of NASDAQ Stock Market's board of governors and its executive committee and served as chairman of its trading committee.

The complaint charges the defendants with violations of the anti-fraud provisions of the Securities Act of 1933, the Securities Exchange Act of 1934 and the Investment Advisers Act of 1940. In addition to emergency and interim relief, the SEC seeks a final judgment permanently enjoining the defendants from future violations of the antifraud provisions of the federal securities laws and ordering them to pay financial penalties and disgorgement of ill-gotten gains with prejudgment interest.

The SEC's investigation is continuing.

The SEC acknowledges the assistance of the U.S. Attorney's Office for the Southern District of New York.

Moscow Memories of 1997

The last trip I had to Moscow was in the spring of 1997 as the ruble crisis was getting seriously underway towards the Russian debt default in August 1998.

US dollars were king, and you could buy almost anything except diamonds and gold with them as the public was beginning to panic out of the ruble and even basic commodities were in incredibly short supply. Our driver would take the windshield wipers off his car at night so that they would not be stolen.

The black market was alive and well. The city had the flavor of the Wild West as the Russkaya Mafiya was out in force in trademark long black woolen overcoats. A shipment of the coats had arrived the previous year at a local flea market and were impressively sinister, amenable to concealment, yet effective against the cold, thereby creating the signature gangsta look.

On that trip I had a driver/bodyguard, and an interpreter as I had no Russian, just a smattering of loosely related slavic languages from childhood. The Japanese immersion course just completed in Princeton for another long term project was not particularly useful. French was in slight demand, but it might have been more useful in Leningrad. I was able to read some instruction for a video camera that used SECAM, but that was about it.

The interpreter was a lady who mildly resembled Tatiana Romanova in From Russia with Love, but with the disposition of Odd Job. She was serious and highly professional, but did have a weakness for Dunhill cigarettes and the curious two tone bloody Mary's they serve there. Her boss was an Italian ex-pat who was a real character.

One should always treat the local associates well and with respect, because not only will they keep you out of trouble, but they will often slip you a bit of valuable information, even during an active translation. They take pride in their work, and are not servants. It is not only a matter of good manners but also good business sense. The way in which the average American businessman behaves is too often clumsily embarrassing, vacillating between boorish and aloof.

We switched hotels at the last minute as there was an unscheduled execution in the lobby of our intended lodgings the week before our arrival. The hotel we did have was nice, foreign owned out of Belgium as I recall, but the staff was a bit stiff if you know what I mean. It was more like a minimum security prison than a hotel. I'm sure our drivers and guards were getting kickbacks. Everyone was getting paid one way or the other.

That last trip was the culmination of a series of business trips in which we were opening up higher speed data and video communications to Moscow from the domestic US via reliable non-satellite connections. Keeping a lock on Sputnik from the US was a challenge given the inclination and its tendency to wobble somewhat erratically.

The 'last mile' in Moscow was a challenge given Moscow Telephone's tradition of non-attention to quality planning and somewhat eccentric layout of their central offices, as in the basement of an old house with a propensity for periodic flooding, generally during key events for ABC News or the State Department.

It may sound like a serious problem, but my team tended to take this sort of thing in stride, since it was a walk in the park, relatively speaking, compared to dropping satellite dishes into a simmering theater of war which we had often done before.

We teamed with another company named Sovintel instead, and chose to go with direct microwave shots from their tower to the multinational business and government locations who were the prime customers as they were the only ones who could still pay for premium services.

I liked Moscow and the people in particular. A walk in Red Square on a crisp night with falling snow, with St. Basil's ahead and GUM department store lit up on the left is very picturesqe. The Kremlin looks like the entrance to the kingdom of Mordor.

The Red Army guards were young and annoying, probably cranky because they were not getting paid. I remember walking through Lenin's tomb, which was utterly deserted, and being yelled at constantly to 'move along' by a young Russian soldier who looked like he had an urge to plant his jackboot on my face.

Ex-patriates in Moscow had an interesting time, living in $5000 per month apartments that were more indicative of their non-resident status than the amenities of their accommodations. We visited an apartment in one of the seven "Woolworth buildings" from the Stalin era that had a door which would have served for a very secure bank vault.

The ex-pats telex messages to us in the planning phase were concise: "Bring Western toilet paper." They tended to meet us every morning at the hotel, to take the toilet paper and soap out of our rooms and eat with us as our guests at the hotel breakfast buffet. It was a nice spread, and offered a more extensive fare than the grocery store we visited which offered only cabbages and big garishly orange boxes of Uncle Ben's rice.

We attended a performance at the Bolshoi Theater sponsored by some multinationals. Most notably, as a friend so slyly put it, the expats may be living poorly but it was nice to see them bring their attractive young daughters to the event. I don't think any of them were married, and we came away with the impression that people took assignments there to escape bad debts or bad marriages in the West.

There were a remarkable series of conversations with an interesting local acquaintances including one I called "Casper the Ghost," because of the promotional movie cap he always wore. From the way he spoke I became convinced that the primary occupation of those with savings was to convert it into hard currencies, gold and diamonds, and if possible get it out of the country.

Casper was busy amassing enough gold, while facilitating the efforts of others, in order to get out of Russia and move to the western US. He cynically wore the mafia signature black coat to scare off small time competition. "I go to same flea market and buy. Its no hard to do." He was a good source of information for a few drinks and the promise of a contact in Colorado. I think his real name was "Ben." That is how he answered the phone when I called him back from the States.

That, and multinationals with a local presence like McDonalds trying to figure out ways to work around currency controls or do something productive with their profits. I had the chance to visit the largest McDonald's in the world at that time, at the request again of the expats, and it was indeed impressive with 32 checkouts, but no customers.

They were desperate times, and you could see that there was a climactic crisis coming. It is easy to talk about this sort of thing, a thousand to one devaluation of your home currency, but harder to understand the impact. Imagine that you have $500,000 in savings for your retirement. Now imagine that within two years it is effectively reduced to $500 or less, and you will understand how disconcerting a currency crisis can be.

If you don't think a financial panic is possible here in the US, just take a look at the negative returns on short term T bills, and you will get a taste of the leading edge.

One of the best descriptions of the Weimar experience I have ever read was by Adam Fergusson titled "When Money Dies: The Nightmare of the Weimar Collapse." It is notoriously difficult to obtain, but it does the best job in describing how a currency collapse can come on like a lightning strike, although in retrospect everyone could have seen it coming. Denial is a strong narcotic. People believe in their institutions and ignore history until they are staring off the edge of the abyss.

But in Moscow as in everywhere life does go on. I left with pocketfuls of 1000 ruble notes which I *bought* along with the requisite matroyshka dolls and military medals, all for the kids to play with. Things became worse, much worse, and then eventually they became better.

I have often wondered if 'Casper' ever achieved his dream of taking his diamonds and gold and relocating to Colorado. I hope he did. If he is there, I wonder if he is thinking of moving again.

Bloomberg
Russians Buy Jewelry, Hoard Dollars as Ruble Plunges
By Emma O’Brien and William Mauldin

Dec. 11 (Bloomberg) -- ...Russians are shifting their cash into foreign currencies and buying things they don’t need as the economy stalls and the central bank weakens its defense of the ruble, signaling a larger devaluation may be on the way. The currency has fallen 16 percent against the dollar since August, when Russia’s invasion of neighboring Georgia helped spur investors to pull almost $200 billion out of the country, according to BNP Paribas SA.

The central bank today expanded the ruble’s trading band against a basket of dollars and euros, allowing it to drop 0.8 percent, said a spokesman who declined to be identified on bank policy.

With the specter of the 1998 debt default and devaluation in mind, Russians withdrew 355 billion rubles ($13 billion), or 6 percent of all savings, from their accounts in October, the most since the central bank started posting the data two years ago. Foreign-currency deposits rose 11 percent.

Oligarchs Pinched

Those withdrawals are increasing pressure for the ruble’s devaluation, according to Basil Issa, an emerging- markets analyst at BNP Paribas in London.

Property is now a protective investment, not just a status symbol, said Sergei Polonsky, founder of real estate developer Mirax Group, which is building Moscow’s tallest skyscraper.

“Lately our clients are mostly those who buy real estate not to live in but to secure their investments,” Polonsky said. “No one wants to be left with pieces of paper.”

The 25 wealthiest Russians on Forbes magazine’s list of billionaires, including Oleg Deripaska and Roman Abramovich, lost a combined $230 billion from May to October as asset values plummeted, according to Bloomberg calculations.

‘Feel Happy’

For the burgeoning middle class, investments of choice range from electronics to gold jewelry. Evroset, Russia’s largest mobile-phone chain, is telling people to buy anything they can.

“It’s better to feel happy that you own something than to fear losing the money you have earned,” Chairman Yevgeny Chichvarkin says in a letter posted at 5,200 Evroset stores. “If you need a car, buy a car! If you need an apartment, buy an apartment! If you need a fur coat, buy a fur coat!”

Sales at Technosila, the third-biggest consumer electronics chain, have doubled since September as customers rush to swap rubles for flat-screen TVs and laptops, spokeswoman Nadezhda Senyuk said by phone from Moscow, where the company is based.

Jewelry sales are also accelerating, particularly items made of gold and diamonds, said Vladimir Stankevich, advertising director at Adamas, Russia’s third-largest jewelry retailer.

“More cash appeared on the market and there’s an opinion among shoppers that gold is a good investment in times of crisis,” Stankevich said.

Natalya Kulikova has a different approach. The 31-year-old sales manager said she’s opened accounts in rubles, euros and dollars at three different banks -- one foreign and two domestic -- to guard her savings.

“My main goal is to save money,” she said.

Putin Pledge

Those who don’t want to spend are keeping more money at home or in safe-deposit boxes because the government guarantee on bank accounts is limited to 700,000 rubles, said Yulia Tsepliaeva, chief economist in Moscow at Merrill Lynch & Co.

Alfa Bank, Russia’s biggest non-state lender, said demand for boxes has increased about 40 percent since October, and there are few available.

“The Russian experience with saving is not that good and people prefer to consume and enjoy rather than save in pre-crisis situations,” Tsepliaeva said. “Buy cash dollars and put them in mattresses or safe deposit boxes but not in accounts because most crises are accompanied by banking crises.”

A decade ago, many lost their life savings after the ruble plunged 71 percent against the dollar. Those fears prompted Prime Minister Vladimir Putin to pledge not to allow “sharp jumps” in the exchange rate, during a call-in television show Dec. 4.

‘Ideal Time’

Troika Dialog, Russia’s oldest investment bank, is betting the central bank will allow a one-time devaluation of the ruble of about 20 percent in January, following New Year’s and Orthodox Christmas celebrations.

“With the holidays at the beginning of January, companies won’t be fully working and people will be spending more money,” said Evgeny Gavrilenkov, Troika’s chief economist and a former acting head of the government’s Bureau of Economic Analysis. “That means demand for rubles will increase and that means it’s an ideal time to allow a devaluation.”

Russia has drained almost a quarter of its foreign-currency reserves, the world’s third-largest, since August as it tries to slow the ruble’s decline. The central bank has widened the trading band five times in the past month, effectively reducing its defense of the currency amid plunging oil prices.

Devaluation Skeptic

Urals crude, Russia’s main export earner, has slumped 72 percent since reaching a record $142.94 a barrel July 4. It fell below $40 for the first time in three years last week, compared with the $70 needed to balance the country’s budget.

The government will avoid a large, one-step devaluation because it wants to prevent a run on the banks and lure back foreign investors, said Chris Weafer, chief strategist in Moscow at UralSib Financial Corp.

“I’m skeptical a 10 to 15 percent devaluation will provide a significant boost for the economy because the sector that it will most benefit, manufacturing, is just too small,” he said.

The ruble will probably be allowed to drop in small steps to as low as 33 per dollar by the middle of 2009, from about 28 now, Weafer estimates. It will end next year at 26.8 because of a recovery in oil prices and a weaker U.S. currency, he said.

Svetlana Guseva isn’t taking any chances.

The 32-year-old mother of two from the southern city of Sochi plans to take her 8-year-old daughter, Dasha, to Moscow for the New Year’s holiday, a trip that will cost twice her family’s monthly income of about 30,000 rubles.

“This way at least we’ll have some memories,” she said.

Are Markets Naturally Efficient? Are All People Naturally Rational and Good?

There is a ideology that would like to believe that all people are naturally good and rational, and that markets are therefore naturally efficient and free if just left alone to themselves and allowed to function without regulation or management.

This line of argument is often pursued by certain faux conservatives when arguing that the police should be dismissed and the locks removed from the doors, in advance of a period of sustained looting of the common folk by the wealthy elite.

One thing almost all idealists have in common is that their work exists largely on paper, and is rarely to be found in practical implementations over any sustained period.

That is why there are so few farmers and women in this camp of free market idealists because their daily struggle with disorder and decay teaches them that nothing goes the way of order and productive results without plenty of hard work, repeated effort and at least occasional observation.

It is the man in his easy chair reading his books that believes that the dishes clean themselves, the clothes are self-folding and storing, and the children organize their rooms and personal hygiene willingly without 'interference.'

This romantic belief in natural goodness is a great fallacy underlying the Greenspan-Reagan doctrine of trickle down easy money and the prima facie good of boundless deregulation.

It is similar to the belief in the natural goodness of all men and the self-ordering of large societies towards justice and equality without effort. It sounds nice, but in practice it is just ridiculous and almost utterly without support except in the minds of its philosophical adherents. No one who has ever driven in a major metropolitan area can possible believe it.

What people forget is that it takes rules and referees and a great deal of hard work and repeated efforts to create and maintain a fair game and a level playing field for the many who may wish to play.

So too with the notion of a natural tendency to free markets. Its just not true. Markets tend to gravitate to oligopoly, insider dealing, fraud and utter inefficiency. Free market capitalists quickly come to hate competition with their success, and are always seeking to avoid the zero profit outcome through unfair market advantages and the stifling of competition.

Markets can be over-regulated by central planners, and it is always the road to ruin. But they can also be under-regulated and allowed to degenerate into the same awful excesses that governments and peoples fall into at various times in their history, periods of seemingly collective madness, disregard for the individual, and the rise of the will to power.

Government is best that governs least indeed, but with the appropriate level of government to uphold the principles under which people come together to interact in a society and avoid despotism and anarchy. There is a range of good and evil in people, and they join in society for their mutual protection, and the accomplishment of efforts requiring a broad participation.

It is no accident that Jefferson was one of the framers of the Constitution, which although remarkable in its simplicity is ingeniously complex in its design, and fine balances of powers that endure with the commitment and sacrifice for the greater good of each succeeding generation.