Fraud and Bailouts

First, bailout news. GM is shutting down half the company for at least the month of Janruary. This is extremely deflationary. How many car parts won't be ordered from China? How much steel and copper and aluminum won't be needed? Look out below!

And next, fraud. Bernard Madoff supposedly lost billions for investors in a giant Ponzi scheme. The warning signs were everywhere. First of all, the returns worked like clockwork, which means they were too good to be true. Second, Madoff also owned a market-making firm, or brokerage. Here's how he described it, according to the Wall Street Journal:

On Friday, Maxam Capital Management LLC reported a combined loss of $280 million on funds they had invested with Mr. Madoff.

"I'm wiped out," said Sandra Manzke, Maxam's founder and chairman. The Darien, Conn., fund of hedge funds will have to close as a result of the losses, she said.

"He was a low-key guy," Ms. Manzke of says. "He would say, 'Look, I'm a market-maker, and I don't want anyone to know I'm running money.'
It was always for select people. He was always closed, he wasn't taking new
money."

"I'm a market-maker and I don't want anyone to know I'm running money." Translation: "I'm making you money by taking advantage of the conflict of interest inherent in trading for investors and being a market-maker. I'm using inside information from my market-making firm to make money for you on the side." In plain English: "I'm cheating my market-maker clients for your benefit, so don't tell anyone."

That's the sleaziest sales pitch I've ever heard in my life. Anyone with half a brain could read between the lines.

Lesson: Never trust someone who says he will cheat others to make you money.

Now, I don't think many of the wealthy individual investors got that sales pitch. However, this can't be good for re-establishing trust in the financial system. And considering the level of sophistication of the con scheme, I think this one, as big as it sounds at $50 billion, will probably be even bigger. Hedge fund selling, here it comes!