Crisis Diary as it unfolds ….

Madoff’s Ponzi Scheme

Bernie Madoff’s hedge fund blow-up was the stunning piece of news on wall-street last week. The Ponzi Scheme that his NASDAQ ex-chairman ran amounted to a fraud of the scale of $50B. The detailed news here.

The features of his Ponzi scheme that hardly invested anything in any market,

Pay steady 10% returns to old investors from the investments of new investors

Steady and modest returns which enable him to keep it afloat for years.

Don’t ask don’t tell policy about underlying investment strategy – as long as everybody was getting steady returns nobody complained

Accounting fraud to show fake trades and profits

Several charity organizations and banks like RBS and HSBC invested in his scheme without any due diligence.

Although this was a huge news and had a potential to hurt the market sentiments further, markets were quite nonchalant about the news, which is another sign of market bottom. Worst unemployment numbers with more than half a million going out of job in one month, market goes up. Investors set to lose $50B in a ponzi scheme, market reacts neutrally. Goldman Sachs reports negative revenue and record losses, Goldman Sachs shares go up. These are all the signs of fear being overdone.

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December 16, 2008 - Posted by | News | , ,

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