“All the rational people”

That “all the rational people” supported President-elect Barack Obama in the 2008 election was one of Jack Beatty’s main points at the post-election forum I attended last month. The specific people he was referring to were hedge fund managers, that is, people like Bernard Madoff and his customers.

[Saturday morning update:Today's Boston Globe has an article on the financial devastation caused by Madoff in the Boston area. Among the those who have lost money are the Massachusetts state pension ($12 million), the Robert I. Lappin Charitable Foundation ($8 million), the Shapiro family ("about $145 million"). The article mentions something that WRKO talk-radio host Howie Carr pointed out during yesterday's show, namely that Madoff won a lot of clients at an exclusive country club in Palm Beach. In fact, Carr said that one of the draws of the club was that if you became a member you could get Madoff to manage your investments (Carr has a condo down there and while a pauper by some standards he's not exactly middle class).

Robert Trigaux has a round-up post on Madoff's Florida connection that leads to a post on the country club connection.

Here's an interesting paragraph from an article in today's New York Times on the losses sustained in the New York area:

Mr. Merkin, a prominent philanthropist and the founder of several hedge funds, including one called Ascot Partners, jolted his clients on Thursday with a letter announcing that “substantially all” of that fund’s $1.8 billion in assets were invested with Mr. Madoff.

Why, exactly, do you have clients if all you do is put their money in a single fund that isn't your own? What value do you add? Seems very strange to me.

Sunday-morning update, December 14: So, that Lappin Foundation, what exactly was it up to? Here's how the Boston Globe described it yesterday:

In Salem, the Robert I. Lappin Charitable Foundation, a private family organization that financed trips for Jewish youth to Israel, said it was forced to shut down and lay off seven employees yesterday after losing all of its estimated $8 million to Madoff. The foundation also supports Jewish educational and cultural services on the North Shore.

Here's how the foundation describes parts of its mission on its website:

Supporting interfaith families in raising children exclusively within the Jewish faith by facilitating conversion to Judaism for those seeking to do so, as well as by providing educational programs about Judaism

In other words, the organization's mission was to rob children of interfaith couples of the their gentile heritage. How cute.

I recommend Seth Gitell's entry on the Madoff-scandal. The best bits are in second half of it so be sure to read the whole thing.

Sunday afternoon update: Henry Blodget has perhaps the most incendiary piece so far on the Madoff mess. Last Friday he wrote on his blog on AlleyInsider:

[W]e’re hearing that the smart money KNEW Bernie had to be cheating, because the returns he was generating were impossibly good. Many Wall Streeters suspected the wrong rigged game, though: They thought it was insider trading, not a Ponzi scheme. And here’s the best part: That’s why they invested with him.

It’s hard to feel sorry for investors who thought they were cheating the non-cheating investors.

Monday updates, December 15: The number one rule in investing is to diversify one’s investments to reduce risk. That’s solid advice but it seems to me that in the case of Madoff, you could have invested in five different funds only to find out that everyone one of them had invested all their money in Madoff’s fund(s).

Swedish bank Nordea Bank AB was taken in by Madoff: Forbes and other sources report that Swedish bank Nordea may have lost $65 million of its clients’ money through a pension fund called Fairfield Sentry (as in the Fairfield Greenwich Group that reportedly has lost $7.5 billion in the Madoff mess).

Fairfield Sentry’s strategy? “Primarily split-strike conversion:”

Fairfield Sentry Ltd. invests in shares of the S&P100 Index which are hedged by put options. Additionally, the Investment Manager sells call options on the relevant index.

“Split-strike conversion” is not for dumb hicks, it’s for all the rational people!

“Fairfield Sentry Ltd. has a low volatility of 2.58%”

It may have been a little bit higher over the last few days.

I can’t imagine that none of my 401(k) funds have money tied to Madoff’s mess. Of course one of my funds is such a woeful performer one probably couldn’t tell the difference.

Bloomberg has a list of people and organizations who have lost money on Madoff.

Here’s a piece on Fox Business News (but really from Dow Jones-owned MarketWatch) by a man whose wife worked at the Lappin Foundation.

December 16: The Boston Globe reports that Rye Investment Management has lost “has lost all of its clients’ money.” The group, owned by Massachusetts Mutual Life Insurance Co. through Tremont Group Holdings Inc, “had retained Madoff as the sole manager of its funds, which reported assets of $3.5 billion in April.” Again, what value do you bring to your investors if you do nothing but put all your money in the hands of some other guy? And why do you insist on having the word “Management” in your name when you evidently manage jack? And check this out, from a :

At the same time, Robert Schulman, Tremont’s long-time Chief Executive Officer, will be stepping aside as CEO of Tremont Group Holdings, Inc. to become President of the organization’s single manager division, Rye Investment Management. Schulman, 61, will remain as Chairman of Tremont Group Holdings, Inc. and continue to serve on the Tremont Capital Management Investment Advisory Board.

The Rye Investment Management platform accounts for US$3.5 billion in assets. “The growing size and complexity of our single manager business requires dedicated leadership,” said Schulman.

“Our goal,” added Allan, “is to significantly increase within the next two years the size of Tremont’s current fund of hedge fund assets under management.

Rye Investment made up about half of Tremont Group’s assets, so I guess the expansion plans may have to be scaled back a little.

But, alas, Rye Investment Management did bring value: It was a “feeder fund.” The Globe article again:

One Rye Investment client described the firm as a back door into Madoff’s firm, which had built up a mystique by making it difficult to get in. The minimum investment to get into the Rye Select Broad Market Fund, for example, was $500,000, less than the $1 million minimum Madoff required of direct investors.

Maybe Rye Investment Management more appropriately should have been called Rye Investment Hangaround and sporting the tagline “We Know This One Guy.” Schulman retired in June this year, perhaps exhausted from all the complex managing.

Apparently I’m not alone in finding it a bit odd that so many investment raked in management fees when they in fact didn’t do much in way of managing. Write Rachel Beck and Joe Bel Bruno for Business Week:

The sprawling fraud allegedly carried out by the once famed investor Madoff has raised serious questions about the role of hedge funds in the scam since fund managers handed over billions of dollars to Madoff, apparently without giving him much scrutiny.

That undermines hedge funds’ promises of expertise and trust, and the result could mean a bloodbath in the industry if investors win big in court or bail out on hedge funds entirely, experts said.

Investors in Minnesota are among those who lost a bundle to Madoff. At least $300 million, according to one estimate.

December 17: The SEC has announced an investigation into why the agency “failed to act on warnings about the activities of Bernard Madoff stretching back nearly a decade” according to MarketWatch. It is also “expected” to investigate “the relationship between Madoff’s niece Shana Madoff and Eric Swanson, a former SEC official who spent 10 years at the regulator before leaving in 2006.” The two married in 2007. Bear in mind that Madoff is a former head of Nasdaq which in my opinion makes the relationship rather questionable regardless of Madoff’s investment activities, but I’m probably a bit of an extremist in that regard.

Bloomberg reports on how the Madoff mess continues to affect not only Jewish but also other non-profit organizations:

Jews in the U.S. give more than $5 billion to Jewish causes. Although they comprise just 2 percent of the population, Jews contribute 25 percent of the largest gifts to higher education, according to a recent study cited by Gary Tobin, president of the San Francisco-based Institute for Jewish and Community Research.

Tobin is also quoted in Washington Post:

“The world of Jewish giving is relatively small, and Madoff was one of the biggest players in that world”

However, “[t]he alleged Ponzi scheme’s effects on Washington’s Jewish community appear to be smaller than those in New York, Boston and Los Angeles” according to the Post.

The Wall Street Journal has an article on Fairfield’s role in the Madoff mess. Here’s a key sentence:

In 2007, Fairfield Greenwich reported $250 million in revenue, $160 million of which came from the relationship with Mr. Madoff.

It’s funny, by the way, how this hyper-modern The World Is Flat globalization looks a lot like 15th Century palace intrigues:

[Fairfield's owner] Walter Noel built the perfect global marketing machine for Bernard Madoff: Four sons-in-law with connections among the wealthy in Rio de Janeiro, Madrid, Milan, London and Geneva, who brought socialite flair and few demanding questions for Mr. Madoff.