Crunk Times, My friend.....Crunk Times

[Flipx99 5,000+ posts]

Here's how an originally honest guy can get caught up.

1. I run a small fund...maybe $60MM in investments.

2. Because it's small, I can be nimble and make good investments

3. Morningstar, Yahoo!, or some other magazine says "Flip's Fund" beat the average by 100 bp (1%)

4. Now, people pour $$$$$$ into my fund and now it's a $1B fund.

5. It's hard to turn a giant boat, thus I cannot generate the returns I once could because the fund is now so big. Furthermore, these new investors want sayso into my investment philiosophy and demand similar returns as prior investors.

6. I get pressured from my bosses to perform with lucrative incentives.

7. I turn crooked

---

If people would research the strat...why that strat suceeded, etc. then they would realize that strat may not be best...most people hop from fund manager to fund manager, catching the bottom side of a hot hand. Hell, I bet if you bought all the companies that started with the letter "r" in the month of May, eventually, that strat would generate higher than avg returns, but it is NOT sustainable. No strat is, nor will it ever be. Why? Because people are stupid.

 

[JimJ 5,000+ posts]

I hope Rick Warren gets booed.

 

[IamDeMan 5,000+ posts]

Well, it's like this.
1. I establish a reputation for doing well in the market on my own.

2. Other people want to give me money for me to generate high returns for them.

3. My strat is risky and doesn't always work.*

4. I can promise high returns as long as new money flows in

5. I use WSW's $$ to pay returns for Iam's initial Investment

6. I use dB's $$ to pay WSW's investment

7. It works until there are no more suckers.

Couple more things to consider

1) This is how most defined benefit pension plans work.

2) Excellent returns on the market can make it not a Ponzi scheme...meaning if the strat works, Madoff isn't reliant on the next guys money. Because it works sometimes, he doesn't always need a new sucker

3) Madoff created false scarcity...meaning he only allowed certain people/orgs to invest with him. This increased demand as now people wanted to invest in Madoff because it made them cool.

That makes perfect sense, but raises another question. Why is this basic formula ok for some types, but in this case it is not "acceptable". Maybe I am misunderstanding but there seems to be a thin line of being ethically acceptable then. I guess for Pension plans there is the acceptable assumption that a new set of investors will always be coming in to pay the old for the most part? Or is it the fact of the way he portrayed it, and pensions are pretty much well defined on how they work?

Like most times, greed > due dilligence.
If you research bubbles, this has been going on since the 1500s with the South Sea Company, and there there was this deal on Tulips from Holland...but I forget when that was. Either way, it all works the same.

Noreply here, just making notes.

 

[IamDeMan 5,000+ posts]

I just put the two and two together that db is denver broncos

Not to rub it in, but he has mentioned this more than once in CT.

Here's how an originally honest guy can get caught up.
1. I run a small fund...maybe $60MM in investments.

2. Because it's small, I can be nimble and make good investments

3. Morningstar, Yahoo!, or some other magazine says "Flip's Fund" beat the average by 100 bp (1%)

4. Now, people pour $$$$$$ into my fund and now it's a $1B fund.

5. It's hard to turn a giant boat, thus I cannot generate the returns I once could because the fund is now so big. Furthermore, these new investors want sayso into my investment philiosophy and demand similar returns as prior investors.

6. I get pressured from my bosses to perform with lucrative incentives.

7. I turn crooked

---

If people would research the strat...why that strat suceeded, etc. then they would realize that strat may not be best...most people hop from fund manager to fund manager, catching the bottom side of a hot hand. Hell, I bet if you bought all the companies that started with the letter "r" in the month of May, eventually, that strat would generate higher than avg returns, but it is NOT sustainable. No strat is, nor will it ever be. Why? Because people are stupid.

It is amazing how many times this answer fits.

 

[IamDeMan 5,000+ posts]

Also, my feeling is that while greed is ultimately the answer to the why it happens. it isn't just the greed of the one(or entity) in control of it, but also the greed from everyone involved as well that perpetuates the cycle.

 

[Flipx99 5,000+ posts]

That makes perfect sense, but raises another question. Why is this basic formula ok for some types, but in this case it is not "acceptable". Maybe I am misunderstanding but there seems to be a thin line of being ethically acceptable then. I guess for Pension plans there is the acceptable assumption that a new set of investors will always be coming in to pay the old for the most part? Or is it the fact of the way he portrayed it, and pensions are pretty much well defined on how they work?

Noreply here, just making notes.

I am uncertain as well. But I feel this is going to be a HUGE problem some day.

Companies, not just automakers, with defined benefit plans must make yearly contributions to the pension fund. In a market such as this the company must make a bigger contribution than normal to make sure there is enough money to payoff the retirees. This causes a clash of strats....do you encourgage the pension fund to take high risks....or do you pay out of pocket? You have these people known as actuaries that measure how many dollars you need based on estimates of when people retire.

Madoff cooked the books. I am uncertain what would be the outcome if he said outright, I am using Peter's money to pay Paul.

 

[DBfan187 5,000+ posts]

Not to rub it in, but he has mentioned this more than once in CT.

Which brings us back to the 'moron' part. //content.invisioncic.com/y282845/emoticons/cool.gif.3bcaf8f141236c00f8044d07150e34f7.gif

 

[Flipx99 5,000+ posts]

Also, my feeling is that while greed is ultimately the answer to the why it happens. it isn't just the greed of the one(or entity) in control of it, but also the greed from everyone involved as well that perpetuates the cycle.

It requires greed on all accounts. You could be a theif fund manager, but if the investors weren't greedy, you wouldn't make a nickel.

 

[Flipx99 5,000+ posts]

Not to rub it in, but he has mentioned this more than once in CT.

I can't believe I didn't notice....I have done the dB thing many times...hell, it isn't even dB in his username...

It is amazing how many times this answer fits.

Indeed. However, if I could estimate something as simple as under what conditions people will refinance their homes, the amount of money to be made is near infinite. For instance, if I could produce a working model today, I'd be worth ~$5B tomorrow. It's not people's stupidity that bothers me, it's the fact I (nor most real economists) can accurately predict what people will do under what conditions.

 

[DBfan187 5,000+ posts]

Kirk Wright scammed lots of former Broncos players. http://www.bizjournals.com/atlanta/stories/2008/05/19/daily54.html

 

[IamDeMan 5,000+ posts]

I am uncertain as well. But I feel this is going to be a HUGE problem some day.
Companies, not just automakers, with defined benefit plans must make yearly contributions to the pension fund. In a market such as this the company must make a bigger contribution than normal to make sure there is enough money to payoff the retirees. This causes a clash of strats....do you encourgage the pension fund to take high risks....or do you pay out of pocket? You have these people known as actuaries that measure how many dollars you need based on estimates of when people retire.

Madoff cooked the books. I am uncertain what would be the outcome if he said outright, I am using Peter's money to pay Paul.

So my questioning legitimacy of this formula for one situation and not others, isn't out of sorts?

The biggest ethical difference seems to be the reporting basically. Him cooking his own information/data is the real issue here.

I understand what actuarial do to an extent. But since a lot of their suggestions are based on models and not absolutes, one could consider that to be "cooking", no?

Of course when you talk about madoff cooking, I assume you mean he literally pulled it out of his ***. No modeling or real data of any kind was used?

 

[IamDeMan 5,000+ posts]

It requires greed on all accounts. You could be a theif fund manager, but if the investors weren't greedy, you wouldn't make a nickel.

Yes this is what I was getting at. You validating that thought for me is huge. Helps me with how I will present my discussion on it.

Obviously in the end when that much money is involved, everyone is going to look to hang an individual with all the blame. In reality though they could all benefit from looking in the mirror a little closer.

 

[IamDeMan 5,000+ posts]

Kirk Wright scammed lots of former Broncos players. http://www.bizjournals.com/atlanta/stories/2008/05/19/daily54.html

Thanks for that link. That's good stuff too.

 

[Flipx99 5,000+ posts]

So my questioning legitimacy of this formula for one situation and not others, isn't out of sorts?
The biggest ethical difference seems to be the reporting basically. Him cooking his own information/data is the real issue here.

I understand what actuarial do to an extent. But since a lot of their suggestions are based on models and not absolutes, one could consider that to be "cooking", no?

Of course when you talk about madoff cooking, I assume you mean he literally pulled it out of his ***. No modeling or real data of any kind was used?

Not really, no. If I knew how to make a dollar betting on the collapse of pension funds, I'd put a couple grand there. Defined benefit pension funds, imo, is not a sustainable model. Think about it, when the company is doing worse and scratching up dimes it has to pay the most to the retirees.

The models the actuaries use are/should be transparent. While they still may be worthless, they are transparent by both the union (or other employee rep) side and the management side. I doubt you or I could see the models that define the companies contribution to defined benefit programs, however.

I haven't heard/read much about precisely how Madoff fixed the books. He had a model, which he disclosed and followed. This is how people started figuring it out. He told investors what he was doing...the returns where the issue. This is the biggest difference between finance and accounting. Accounting is past, finance is future. You don't model accounting, as it has already happened.

 

[Flipx99 5,000+ posts]

Yes this is what I was getting at. You validating that thought for me is huge. Helps me with how I will present my discussion on it.
Obviously in the end when that much money is involved, everyone is going to look to hang an individual with all the blame. In reality though they could all benefit from looking in the mirror a little closer.

The parallels between this and the subprime fiasco are worth noting. However, no one wants to blame themselves because they believe they are entitled to a house, 2 cars and a dog. Just as some investors believe they are entitled to 20% annual returns.