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Yet another huge banking fraud

Yes, you might have heard about it. Bernard Madoff, ex-CEO of NASDAQ, orchestrated a pyramidal scheme in order to get money out of the investors. By promissing them huge returns, Madoff managed to attract more than $50 billion. But the entire scheme was a fake…

Well, how was it possible to create such a Ponzi scheme in the heart of the American financial system? In fact, not so difficult. At least, if we judge after the quality of the attracted clients. Big losers include the Fairfield Greenwich group, who lost almost $7 billion in the scheme. The Fairfield Greenwich Group charged clients an annual fee of 1 percent of assets invested for providing access to exclusive hedge funds and performing due diligence on them, in addition to a fee of 20 percent on investment gains each year, according to people close to the fund’s operations. At that rate, an investment of $7 billion paid Mr. Noel’s company $70 million annually, and then $140 million more in a year in which Mr. Madoff reported a 10 percent gain (he steadily reported returns of 10 to 12 percent). So, as we at consider, it is shocking not only that Bernard L. Madoff Investment Securities was able to con so many people for so long, but also that so many middlemen got involved into the scheme.

Madoff operated what is called a Ponzi scheme (probably the biggest in the history). In this scheme, the yields for the investors placements are paid not our of real revenues from these investments, but from other investments. Obviously, the pyramid of the Ponzi scheme means that you have to continuously attract new investments – but that eventually the scheme crashes when you fail to do so. What is amazing for Bernard L. Madoff Investment Securities is how long it resisted – almost 15 years, with an 11%/year yields track of record.

What is interesting is how many big bank names have placed funds with Madoff. In the early 2003, Societe Generale sent out a team of experts to audit the fund for placing the money with it later. What they found was so strange, that Societe Generale bailed out of the deal immediately – and was even strongly advising its clients not to place money with this company. Societe Generale escaped therefore not only from loosing billions of dollars, but also from a big image blow, as other banks have suffered. Other famous institutions did not do the same due dilligence. As a result BNP Paribas, HSBS of Royal Bank of Scotland invested more than $1,5 billion to investment management firms, who in turn leveraged higher returns with Bernard L. Madoff Investment Securities. The irony is that in return for their placements these investment companies received collateral as assets in Bernard L. Madoff Investment Securities – today worthless, of course.

Amazingly enough, none of these big customers performed enough due dilligence to check this investment behemoth. And to make it more embarassing for an already torn down banking industry, even the Security Exchange Comission (SEC) failed to spot what was going on. A 5-year audit was postponed this year, thus leaving all covered and clean. In our opinion at, this is not only a huge failure of the regulatory bodies, but also a big question mark on how the investment banks were managed. Was it only greed that was driving them? Where is lost the other force that drives the City – fear?

Noone knows. But banks are falling like a deck of cards.

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