Like what you've read?

On Line Opinion is the only Australian site where you get all sides of the story. We don't
charge, but we need your support. Here�s how you can help.

  • Advertise

    We have a monthly audience of 70,000 and advertising packages from $200 a month.

  • Volunteer

    We always need commissioning editors and sub-editors.

  • Contribute

    Got something to say? Submit an essay.

 The National Forum   Donate   Your Account   On Line Opinion   Forum   Blogs   Polling   About   
On Line Opinion logo ON LINE OPINION - Australia's e-journal of social and political debate


On Line Opinion is a not-for-profit publication and relies on the generosity of its sponsors, editors and contributors. If you would like to help, contact us.


RSS 2.0

Bernie comes out of the closet

By Cassandra does Tokyo - posted Monday, 12 January 2009

Not a year has gone by during the past 15 that I have not contemplated what Bernie Madoff did (or didn't do) to make his money. Seventy to one-hundred basis-points-a-month. Net. Net. Net. During tempests, earthquakes, panics and crashes - even during the closure of the exchange itself, Bernie apparently minted coin like few others. Even Renaissance and Shaw tripped occasionally. Not Bernie. Yet no one knew what he did. It was one of the best kept secrets in the world. Oh yeah, sure, split-strike conversions were the official line. But every sceptical arb trader knew this couldn't be true.

I also never came across an ex-Madoff trader the way one meets ex-Shaw, ex-Moore Cap, or ex-Citadel employees. Resumes are sent in reply to postings and guys have done the rounds, even if they weren't unhappy and making a moral statement. A spouse moves ... whatever. Surely there must be disgruntled Madoffians somehwere, right? Were they ummm underground? I mean, literally? My friends at a large investment banker (who were soliciting business from them years ago) who'd been to their offices said it looked like the bridge from the USS Enterprise (the Starship - The Next Generation version). Entry to the IM sub was strictly verboten. Uh huh. He said it was a paperless office. No paper trails. Hmm. Violators were fired. Weird. No one transgressed.

Whatever he did, he came a long way from arbing the odd-lots that were the reputed foundation of his activities. I knew his shop from London where he was one of the few to make markets in US stocks out of hours, and if my clients for whatever (mostly ill-advised) reason needed to trade instantly, Bernie would make a price. Not necessarily a good price, but a price. But one does so at their peril since the folk with material non-public information are more predisposed to want to trade outside hours, so the pick-off risk was huge. But he never complained.


Next thing I know, he's at the centre of electronic trading revolution - an electronic market-maker facilitator at the centre of trading universe. Yet even Timber Hill has bad hair days. Volkswagen ord-pref days. Not Bernie. Is he arbing the exchange fee structure? Is he algorithmically scalping cause he's seeing the order flow before it gets to the exchange? Maybe. Profitably? Who knows? But I didn't have a problem with an old Jewish guy making markets. This is what we DO. But there are these investment funds - Fairfield Sentry and Kingate, and these are the issue. They are Madoff-only feeders reputed to be $7 billion each. Are they funding his market-making? Why does he need so much capital? What the f*ck f*ck f*cking f*ck could he be doing in the equity markets with that much capital and still keep it a secret AND deliver returns?

They say they are doing these split strike conversions but I can't see how the numbers work. Nor can anyone else. The Wall Street Journal raises the red flags, in an article but it's dismissed as hyperbole disseminated by jealous competitors. But the nagging thing is: there are lots of smart guys out there. More than 60 of them near Stonybrook with Simons focused on cracking the nut faster, better quicker, and this activity and result, I can understand. But there is no sign of such exactitude or intellectual firepower at Madoff. Just 70 to 100 bps per month, secretiveness, and dissonance.

In 2000, I advised a family-office on their alternative investments, and constructed a portfolio on their behalf. I had free rein (thanks! anon). Included in their legacy portfolio was a sizable Madoff position. As a fiduciary - and a conservative one - coming on the heels of LTCM which also lacked transparency and which made it hard for me to raise capital - I dug, asked every well-connected equity-finance, prime-broker, electronic trader and HF allocator type I knew and it still didn't add up. The best and brightest still had no more insight than I, though the sceptical shared my suspicions. So, I strongly suggested they "dump it".

"One isn't being compensated sufficiently for not knowing, and something just isn't right here. Yeah maybe it’s OK, but I think it's not". But they liked "it" and they liked "him". "He's always paid", they said. "We've been with him a long time". Old school they were. Trusting. What the f*ck did I know anyway?

Well it seemed to me that the "split-strike conversions" were profit shifting bookkeeping tools. Money invested in the feeders did obtain split-strike conversion positions on their books that had an implied "yield" equal to their return but it seemed these were pre-arranged combinations that shifted return back to the investment vehicles and were "phantom" positions v Madoff securities. In the interim, Madoff presumably has use of the entire pool of capital, to do what he pleased, plus whatever that pool could command in terms of leverage from bank lines and financing sources. It could be in anything and everything.

He could be doing mutual fund timing, or mutual-fund market impact trades. Credit arbitrage. Funding coup d'etats in Africa, or buying GSCI commodity swaps. More plausibly, he could be doing option and index-option market impact trades since he was ostensibly at the centre of market flow, or he could be at the centre of a loan-sharking network across America earning 50 per cent per annum, and here he was passing a paltry 9 per cent back to investors. Either he was crooked beyond belief or he was an evil contrapreneurial genius. Who would have thought he was both?!


Some crimes are too perfect: some facades too well-painted to be original or convincing. A good hustler knows he must lose sometimes in order to win. THAT is the reflection of reality that makes it believable, and gives confidence to the punter who will shortly be taken out. THAT was what was wrong with Bernie Madoff's ponzi. The people who were taken - like the Family Office and many others investors who in time will go public on their fleecing - wanted badly to believe they were onto to something that was so good that they ignored the most obvious signs of bogusness. It just didn't make sense. It just didn't add up. Even Jim Simons earns it. There is no free lunch.

There is something fitting and just in the timing of this. It is emblematic of America since Reagan and the Great Leveraging. Something for nothing. Thank you Mr Laffer. But as a philosophy and modus operandi it is quite literally, bankrupt and without merit. And Laffer has since been proven to be full of shit. Now, Americans will have to confront this, the premise that greed is good and self-guiding and somehow omnisciently beneficial for it has had repercussions down to the core of our society and values. "Sorry everyone ... what you've been pursuing has all been a lie, a big ponzi, a rat-hole to nowhere ... ". Re-boot.

  1. Pages:
  2. Page 1
  3. All

First published in Cassandra does Tokyo on December 11, 2008. This article has been judged as one of the Best Blogs 2008 run in collaboration with Club Troppo. If you have a blog post you would like to nominate please send it to

Discuss in our Forums

See what other readers are saying about this article!

Click here to read & post comments.

1 post so far.

Share this:
reddit this reddit thisbookmark with Del.icio.usdigg thisseed newsvineSeed NewsvineStumbleUpon StumbleUponsubmit to propellerkwoff it

About the Author

Cassandra does Tokyo blogs at a site of the same name. "She/he" desires to remain anonymous and is an investment manager who, despite an enviable track record of investment success, desires to do something more meaningful than making money.

Creative Commons LicenseThis work is licensed under a Creative Commons License.

Article Tools
Comment 1 comment
Print Printable version
Subscribe Subscribe
Email Email a friend

About Us Search Discuss Feedback Legals Privacy