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Tags: Madoff | SEC | bailout

Madoff Case Spurs Quest to Define Legal vs. Looting

Arnaud de Borchgrave By Tuesday, 27 January 2009 11:11 AM Current | Bio | Archive

In 2000, Harry Markopoulos, a leading expert on derivatives, wrote to the Securities and Exchange Commission's Boston office to inform the federal watchdog of markets that Bernard Madoff was running "the world's largest hedge fund fraud."

Markopoulous stipulated that his name “not be released to anyone other than the branch chief and team leader in the New York region, without my express permission."

The Greek-American was worried about his safety and that of his family. He clearly was afraid of assassination.

He said his report was written solely for the SEC's internal use. But his red flag was only one of 28 such warnings to the SEC in the first eight years of the 21st century.

A Greek-American friend of Markopoulos, now in Switzerland, wrote in his blog, "He nailed Madoff, listing the back-door marketing and financing schemes as if he were an insider. But the SEC did not respond. Powerful political voices ordered the SEC not to proceed. I am not naming names because libel laws favor mostly the criminal in Europe, and their names will never get past libel lawyers. The largest investors were not Jewish charities as was reported by New York newspapers, but French, Spanish and Swiss private banks."

Markopoulos predicted the implosion of all the main funds, which he named, that dealt with Madoff four years before they imploded. That nobody listened or did anything about it is an even bigger scandal.

A total mental meltdown of 3,000 SEC bureaucrats, each presumably endowed with average mental faculties, and a headquarters festooned with red flags, taxes credulity.

Cognoscentis laugh at the idea that Madoff, still under house arrest secured by $10 million bond, was a lone-wolf operator. That his brother, two sons, nephew and niece, and his wife, Ruth, did not know stretches credulity. Madoff himself knew the jig was up almost 18 months before the end. As Taki Theodoracopoulos, a friend of Markopoulos, says in his blog from Gstaad, Switzerland, "The great con artist had more than a year to prepare how to con the government about who was in on the con. The so-called 'feeder funds' now claim they knew nothing and are themselves victims. But they should have known. Whatever happened to due diligence?"

Madoff continued his fraudulent operations with impunity until five months ago, when he was accused in the $50 billion Ponzi scheme, a tad larger than Charles Ponzi's original scam that bilked investors out of a mere $15 million in 1920, equal to about $150 million today. Who was Markopoulos afraid of? That's the mystery that remains to be elucidated.

Another is the interesting relationship between Madoff's niece, Shana, a rules-compliance officer at her uncle's business, and her now husband, Eric Swanson, an attorney and former SEC compliance officer. Swanson also was tasked with reviewing Madoff's business in 1999 and again in 2004. He married Shana in 2006. Madoff, a co-founder and former head of the Nasdaq stock exchange, was widely regarded as beyond reproach, and he bragged about his ties to the SEC.

The Madoff affair is not unconnected to the global scandal of toxic mortgage assets, a criminal enterprise of subprime mortgages that slowly engulfed the world in 2006 and 2007 and felled financial houses on both sides of the Atlantic, triggering humongous bailouts at the expense of the taxpayer.

Also not unconnected was Jerome Kerviel, the 32-year-old French junior trader who rocked the financial world a year ago with what then was the biggest trading loss in history: $6.3 billion at the Societe Generale. The bank spent three days unwinding $65 billion of bets Kerviel had made on its derivatives desk. Both Madoff and Kerviel demonstrated in their own way the advantage of cyber heists over bank robberies with a gun and a note at a teller's window.

Following the end of the Cold War, democratic capitalism gradually morphed into crony and then casino capitalism shielded by obscurantist derivatives and hedge funds and outlandish executive compensation packages before sinking into bandit capitalism.

Today, even some conservatives fear that institutions too big to fail may have to be nationalized. Already a ward of the federal government, Freddie Mac, after drawing $14 billion in taxpayer cash, was back at the federal window to ask for an additional $35 billion.

When the Treasury seized both Freddie Mac and Fannie Mae, it pledged $100 billion to each, chiefly to restore the confidence of investors who had fled in droves. The government, on behalf of the taxpayer, is charging 10 percent interest.

President Obama's unhappy lot is to repair deep fissures in the capitalist system while avoiding both the slough of market socialism and the gangrene of state corporate capitalism when government also takes over failing giants. Four months ago, the Bank of America, the country's largest bank, now armed with a $45 billion government bailout, bought foundering brokerage Merrill Lynch for $50 billion in stock. Today, the two companies combined are worth $40 billion.

In the narrow window after the sale of Merrill was agreed to but days before the deal was closed, John Tain, formerly of Goldman Sachs, brought forward about $4 billion in discretionary bonuses. "This wheeze went down," reported the Financial Times, "just as Merrill headed into a record $21.5 billion operating losses in the fourth quarter and BofA started seeking additional taxpayers' funds from the troubled asset relief program to digest its acquisition."

Bonuses based on 20 percent of the losses were legal to insiders; looting to incredulous outsiders.

With California issuing IOUs instead of state pension checks and other states accumulating countless billions in unfunded pension liabilities, the danger is clear and present. A sample of 109 state pension funds lost close to $900 billion in a year through December 2008. The American crisis, fueled by a criminal enterprise of massive predatory lending for subprime mortgages, is ricocheting around the world.

Goldman Sachs projects that U.S. banks will lose an additional $1.1 trillion before the economy recovers. New York University's Nouriel Roubini, who holds an impressive degree of accuracy in his forecasts, sees this number ballooning to $3.6 trillion. Insatiable, voracious greed still appeared to rule the Wall Street roost.

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In 2000, Harry Markopoulos, a leading expert on derivatives, wrote to the Securities and Exchange Commission's Boston office to inform the federal watchdog of markets that Bernard Madoff was running "the world's largest hedge fund fraud." Markopoulous stipulated that his...
Tuesday, 27 January 2009 11:11 AM
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