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Thursday, December 18, 2008

The Crash of '08 Roundup — December 18, 2008

Items of Interest:

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The Bernie Madoff Ponzi

Bernie Madoff runs into media scrum as he returns to his NY City apartment from courtMadoff, who is free on bail(?), runs into media scrum at his apartment

Bloomberg:
Madoff’s Wife Said to Be Investigated Over Ponzi Scheme Records -- Ruth Madoff, the 67-year-old wife of alleged fraud mastermind Bernard Madoff, is being investigated by U.S. regulators over whether she helped maintain secret records used in a $50 billion Ponzi scheme, a person familiar with the matter said.

The Securities and Exchange Commission, combing through files at her husband’s New York firm, found evidence she may have helped track payments, the person said, declining to be identified because the inquiry isn’t public. Two people with knowledge of the probe said on Dec. 14 that the agency is also examining why her name appears on related transactions...
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NY Times:
Madoff Scandal Shaking Real Estate Industry --Almost no segment of New York City’s real estate industry was spared in the Madoff scandal, which may be history’s largest Ponzi scheme: commercial brokers large and small, little-known developers and prominent families like the Wilpons and Rechlers all lost money to Bernard L. Madoff, industry executives say.

The outsize impact on the industry may have resulted largely because Mr. Madoff (pronounced MAY-doff) managed his funds much the way that real estate leaders have operated successfully for decades: He provided little information and demanded a lot of trust...
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Bespoke:
If You Ever See a Chart Like This, Run Away Fast -- We've all heard how Bernie Madoff's returns sounded too smooth and consistent to be true. In picture form, however, the returns are even more eyebrow raising. The chart below shows the cumulative returns of $1 invested in the hedge fund Fairfield Sentry Limited, which was a fund run by Fairfield Greenwich Group that essentially directed all of its assets to the stewardship of Bernie Madoff...

Chart of Bernie Madoff's performance 1990-2008
The Nasdaq bubble of 2000-2002 didn't even dent Madoff's performance.
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Banks will need another $250 Billion

Alan Greenspan / Economist:
Banks Need a Bigger & Better Capital Cushion -- In a guest article, Alan Greenspan says banks will need much thicker capital cushions than they had before the bust.

GLOBAL financial intermediation is broken. That intricate and interdependent system directing the world’s saving into productive capital investment was severely weakened in August 2007. The disclosure that highly leveraged financial institutions were holding toxic securitised American subprime mortgages shocked market participants. For a year, banks struggled to respond to investor demands for larger capital cushions. But the effort fell short and in the wake of the Lehman Brothers default on September 15th 2008, the system cracked. Banks, fearful of their own solvency, all but stopped lending. Issuance of corporate bonds, commercial paper and a wide variety of other financial products largely ceased. Credit-financed economic activity was brought to a virtual standstill. The world faced a major financial crisis...

... another $250 billion would bring the [LIBOR] spread back to near its pre-crisis norm. This arithmetic would imply that investors now require 14% capital rather than the 10% of mid-2006. Such linear calculations, of course, can only be very rough approximations. But recent data do suggest that, while helpful, the Treasury’s $250 billion goes only partway towards the levels required to support renewed lending...
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Jordy Yager / The Hill:
With economy in shambles, Congress gets a raise -- A crumbling economy, more than 2 million constituents who have lost their jobs this year, and congressional demands of CEOs to work for free did not convince lawmakers to freeze their own pay.

Instead, they will get a $4,700 pay increase, amounting to an additional $2.5 million that taxpayers will spend on congressional salaries, and watchdog groups are not happy about it...
Discussion:
Allahpundit / Hot Air: Palin: No pay raise for me, thanks
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NY Times:
States’ Funds for Jobless Are Drying Up -- With unemployment claims reaching their highest levels in decades, states are running out of money to pay benefits, and some are turning to the federal government for loans or increasing taxes on businesses to make the payments.

Thirty states are at risk of having the funds that pay out unemployment benefits become insolvent over the next few months, according to the National Association of State Workforce Agencies...
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Kevin Depew / Minyanville:
Point of Recognition Still Ahead of Us -- Deere Apparently Not Caught in Headlights After All

The unorthodox tools, the weirdness, they know no bounds. Yesterday the Federal Deposit Insurance Corp. - yes, the agency created by Congress to insure deposits and supervise financial institutions - said it would guarantee $2 billion of debt issued by farm-equipment maker John Deere (DE).

The FDIC's Temporary Liquidity Guarantee Program has been used mostly by large banks like Goldman Sachs (GS), Morgan Stanley (MS) and Citigroup (C), though according to the Wall Street Journal both General Electric Capital (GE) and American Express (AXP) have used the program to access funds.

Nevertheless, Deere, which the Journal points out at least does maintain a few small industrial banks used to finance consumer purchases, marks a bizarre turn in the government's intervention in credit markets...
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zero hedge

Calculated Risk

Mish's Global Economic Trend Analysis

Paul Krugman - NY Times

The Big Picture - Barry Ritholtz

naked capitalism - Yves Smith

Pragmatic Capitalism

Washington's Blog

Safe Haven

Paper Economy

The Daily Reckoning - Australia