Thoughts, from Victor Niederhoffer

December 14, 2008 |

Many elements of the fraud charges against M would seem to have applicability to markets. The macher thing, where he was seen as a "macher," a big-hearted big shot. His denying to some people the favor of taking their funds. His friend the tall partner who would mention at clubs that "Bernie earned me 12% this year and he's not open to the public but I can probably get you in." Cialdini apparently calls this a triple threat fraud where someone else mentions how great M is, and then you don't investigate because it would be an affront to the accomplice (who you don't know is getting a fee), and you use all your energy to see if you can get in rather than to investigate the performance. Amazing is that we've all been subject to reports of returns in the security field that seem way out of line with those actually achieved.

Sam Marx comments:

In addition, because M owned and ran a large brokerage firm, the "mark" would feel that his investment was getting some illegal inside advantage that resulted in high returns, such as front running. Most, if not all, confidence games rely on the greed of the mark. You never hear about successful Ponzi Schemes that have been successfully unwound.

James Sogi writes:

That's a good point. Its the reverse of the survivor bias. Let's call it the loser syndrome, where the losses are hidden, as the successful con, the mark doesn't know he's been taken. Further if he does, he doesn't want to blow the whistle because of either romance, his own complicity or blameworthiness. On a more common scale, the denial syndrome often glosses over and forgets failures, losses, defects, losing trades, that extra drink

James Goldcamp writes:

The surprising part of this to me is much less the regulatory overnight or lack thereof, but the third party fiduciary roles. Where was the administrator and the auditors of the funds? How could this have happened? Will it turn out that he invented counterfeit bank and Prime Broker statements and if so did he personally have the technical means to do so? (Unless he was his own PB, but it's hard to believe any reasonably sophisticated investor like Tre~0nt would buy into such a set-up). I have to ask, how did the trial balance, balance?

Victor Niederhoffer requests:

Let us never forget the human tragedies here. I cry when I read the letters of people who had their life savings or wealth or retirement or plans ruined by this. My goodness, what a terrible crime and way to live one's life.

Ronald Weber writes:

Tragic indeed, but I can’t help to quote the good old Livermore, almost one century ago, on the average investor:

“He wants to get something for nothing. He does not wish to work. He doesn’t even wish to have to think.”

“There is profit in studying the human factors-the ease with which human beings beleive what it pleases them to believe; and how they allow themselves-indeed, urge themselves- to be influenced by their cupidity or by the dollar-cost of the average man’s carelessness. Fear and hope remain the same.”

“Investments were not wanted. The demand was for easy money; for the sure gambling profit.”

Comments

6 Comments so far

michael webster on December 14, 2008 3:53 pm
The classic confidence trick is to rely upon the something for nothing gambit.

Greed is neither necessary nor sufficient.

What is necessary is that the mark never thinks: "what is in it for the other guy?".

If BM was touting an 10-12% return with no volatility, he didn't need private money. BM could have established a new savings and loan system: lend at 2% and earn 10-12%, borrowing from public banks and "earning" from his "trades".

A private lender to BM made no sense, if the private lender thought "what it is in it for BM?". The only sensible conclusion was that there was something screwy with the economics of the deal.

Kid Yellow used to say that he was happy to take money from marks that thought they had tumbled to a fixed race: the mark was happy to think he was screwing the horse operators, public, and track. The Kid was happy to offer the other side of that bet.
George Parkanyi on December 14, 2008 4:01 pm
None of this is new, and is why we all manage risk through diversification, trade size, allocation and so on. It’s part of the game - always has been.

The recent resilience of equities in the face of all the doom-and-gloom, and this type of surprise blow-up news, is actually quite interesting. In an environment some large markets are plagued by poor liquidity (read credit and real-estate), where else can you put your money, especially if you want to stay nimble? US Treasuries obviously is one based on the current bloat you see there, but what about stocks that are currently trading with yields like bonds? Not bad. You still have to make judgements about the quality of the security, but at least you can get in and out easily.

Commodities and currencies are liquid markets as well, but that’s not where the bulk of long-term investment money is generally deployed. Mostly its in credit, then equities, and since the former is in the penalty box at the moment, some of the money that would normally go there is likely being re-deployed into equities - bad news or not, buying the dips.

Most money managers are not paid to sit on cash, or in T-bills. Anyone can do that. So if they are going to deploy, the question to ask is - where, and why?
Jim Davis on December 15, 2008 12:37 am
It’s not really fair to say that victims might have thought they had an illegal inside edge.

They could just have easily have thought that it HAD to be legitimate for the very reason that M was so intertwined with the ’system’ for so long. How could there be fraud with EVERYONE (ie regulators) looking?

I’m afraid that the only reliable defense in a case like this is a universal distrust for EVERY entity. This is not news, but here we have yet another example of feet of clay.

Should be a disclosure on EVERY brokerage and bank statement: Please Remember to Diversify — This Institution May Be A Fraud. (we may yet get to that stage)

Quite a bombardment lately of these, the Auction Rate Preferred scandal, AIG incompetents, it goes on ad nauseum.
jamshed nazar on December 15, 2008 9:46 am
I just find it plain funny…

would someone comment on this, it is fair enough that the trader / manager does not disclose his strategy in play during the quarter or the year, but would he get by with providing no information on what he did last year? no paper trail?

understood that he was handling private investments, but at least the people who were invested with this guy, did they not know what was held by their funds last year or earlier?

market is too big and too private for regulators to do much about it. the regulators just like to investigate a few high profilers few times a year, parade them on the media and that's pretty much it.

Its definitely up to the clients to "know where your money is / has been" as Maria would say on CNBC.
douglas roberts dimick on December 16, 2008 4:52 am
Perhaps most insightful is that from an outsider…

http://scienceblogs.com/cortex/2008/12/hedge_fund_fraud.php

And I quote: “The market, after all, is a classic example of a “random walk,” since the past movement of any particular stock cannot be used to predict its future movement. This inherent randomness was first proposed by the economist Eugene Fama, in the early 1960’s.”

The oversight here of Lehrer may be his generic usage of “market” for his “pattern” applications to characterize the “random” nature of markets as well as world itself. He is making the same fundamental error as those who batch stocks.

What of the relativity of such quantified correlations?

V, you on the waiting list?

http://www.amazon.com/How-We-Decide-Jonah-Lehrer/dp/0618620117/ref=pd_bbs_sr_1?ie=UTF8&s=books&qid=1227632740&sr=8-1

dr
Adam Nelson on December 16, 2008 11:41 am
I find it interesting that there is a high correlation between large investors in the ponzi scheme and big supporters of anti-free market politics. I wonder if their investment (that returned a high rate of return for a very long time without any volatility) might be a factor in their political support. If changes in the law haven’t impacted returns on one’s “market based” investments, it’s logical to presume that those investors would take far more concern with a proposed law’s social benefits rather than it’s large market costs.

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