Everybody remembers Bernie Madoff, who “managed” a hedge fund that turned out to be a $65 billion Ponzi scheme. He was finally arrested in 2008, but some had their suspicions about his business practices long before then. One of them was Erin Arvedlund, who 7 years earlier, wrote an article for Barron’s questioning Madoff’s legitimacy. She has since written two books, including one discussing Madoff titled “Too Good to Be True: The Rise and Fall of Bernie Madoff”. With a new mini-series about Madoff now on Netflix, she joined the ETF Think Tank to recount her experiences.
The timing is quite convenient because the series dropped right around the same time that FTX was collapsing. Arvedlund sees a lot of parallels between the two. In both cases, almost no one saw it coming. It appears as if Sam Bankman-Fried was just sloshing money around and moving it simply from one place to another, a practice that Madoff did as well. There were trades made, but no one really knows who the real owners of the accounts were. Madoff happened nearly 15 years ago, but many of the same things are happening today.
Part of the reason we’re seeing these occurrences happening now, such as FTX, could be a result of the pandemic. Sitting at home with stimulus cash in hand caused a brand-new crop of retail investors flooding into the market. You had too many millennials jumping into the process, trading on their phones and investing for the first time. There was also an influx of money that transitioned from sports betting to stock betting. It is likely a combination of a lack of knowledge and a lack of sufficient regulation.
There were early signs that Madoff’s business wasn’t legitimate. Arvedlund explains that in 1999, a financial analyst reviewed some of Madoff’s numbers and reached out to the SEC with the belief that it was mathematically impossible to generate the kinds of gains that Madoff was claiming. After the SEC failed to follow up, Arvedlund started doing her own investigating and found that several big financial firms, including Salomon Brothers, wanted nothing to do with him. Although some on Wall Street spoke highly of him, a lot of the big banks didn’t want to work with him believing that his numbers weren’t real.
Arvedlund’s article came out in 2001 questioning Madoff’s returns, but as previously noted, the SEC never came for him. The fact that Madoff claimed another big return, when the market cratered in October 2008, finally raised some red flags. He received billions in redemption requests with no possible way to meet those requests , effectively bringing him down, finally.
Arvedlund wondered if this may simply be a recurring cycle in the financial world. Every 10-15 years, there’s a recession and every 10-15 years, there’s a batch of new investors that take on too much risk, get in over their heads, and end up losing big. She notes that these new folks need to learn to treat it like investing and not gambling or a game.
Arvedlund says that the SEC has improved over time and has gotten pretty good. She says that Gary Gensler at the SEC recently had an open conference call to discuss unregulated shorting, which makes her think that they have a handle with what’s going on with FTX.
Other key takeaways:
- Why aren’t fiduciaries more accountable? Why aren’t some of them going to jail? Arvedlund isn’t sure. Sequoia gave FTX $200 million and had never even visited the office.
- How is it that many hedge funds seemed to be implementing naked short selling trading strategies on crypto on Exchanges? How exactly can that be allowed or monitored within the philosophy of decentralized markets?
- As a reporter, Arvedlund says she needs to be active on as many platforms as possible, including social media, because they’re trying to reach as many people as they can. She says Twitter doesn’t seem as open or as fun as it used to be.
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