Wednesday, December 17, 2008

Problems at Madoff Obvious?

Another interesting side story to the Madoff Madness - putting aside the reports to the SEC, it appears that other investment experts realized that something was wrong, and refused to put their client's money with Madoff.

I spoke to a very successful hedge fund manager last week, who told me that he was asked to look into Madoff as a potential investment for a client of a client. He said after a review of the information he was provided, he told the client's client that he would not make the investment, because the returns were too great, and too consistent over an extended period of time. In his words, it was unbelievable, and impossible. And this from an investment manager who has been very profitable, for over a decade.

As press reports come out, there are more and more stories like this Other investment professionals, looking at Madoff statements, or returns, or whatever they reviewed, came away with the view that it was impossible, and something was wrong. The WSJ has a detailed analysis of one customer's account statements for an account that was being managed by Madoff and his "black box." With some digging, they learned that it was impossible for Madoff to do what he did in that account with 17 billion dollars - there simply was not enough options and securities in existence to invest that sum of money in that manner.

Today we learn that Societe General considering placing funds with Madoff, in 2003. The International Herald Tribune is reporting that after conducting due diligence on Madoff's investments,

Madoff's numbers simply did not add up. Société Générale immediately put Bernard L. Madoff Investment Securities on its internal blacklist, forbidding its investment bank from doing business with him, and also strongly discouraging wealthy clients at its private bank from his investments.

The red flags at Madoff's firm were so obvious, said one banker with direct knowledge of the case, that
Société Générale "didn't hesitate. It was very strange.

According to the article, the due diligence team was told that the strategy consisted of balancing holdings in large S&P funds with puts and calls, producing low volatility and minimized risk. However, according to the article, and other reports, when the due diligence team tried to backtest the strategy, they could not match the results
that Madoff was claiming.

Unfortunately, the bank kept its findings to itself, and it had no obligation to tell anyone else as far as I can tell. But the story is important, because this is a major bank who has blacklisted the firm 5 years ago.

Is this a case of perfect hindsight? If not, how was Madoff able to fool so many other advisers?
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