The next Madoff bombshell to drop

Discussion in 'Wall St. News' started by wilburbear, Dec 15, 2008.

  1. Madoff's stated strategy was split strike conversion. According to Madoff, this involved going long a basket of stocks against buying puts and shorting calls.

    These are very closely watched arbitrage relationships.

    For example, long SPY stocks, of course, tracks the SPY instrument. If it does not, virtually risk-free arbitrage quickly bangs it back into line by going long the individual stocks, and shorting the SPY instrument. And, long the SPY stocks has a similar, very tight relationship to the SPY options, because a basket of long SPY stocks, can be counterbalanced almost exactly through the creation of a short SPY position by going long SPY puts and shorting SPY calls.

    Even if a broadly-diversified, random basket of stocks is selected for this strategy, the returns should converge to the S&P 500 over time (think of how hard it is for the average fund manager to surpass the market averages over time - or even to significantly lag them on a risk-adjusted basis for a diversified basket of stocks over time).

    Long stocks, combined with long puts and short calls in a delta neutral ratio, (which is what Madoff was trying to simulate through the very consistent returns), will produce very stable returns. Just as it is unlikely to make much money with this strategy, it's also unlikely to lose much money with this strategy. A $50 billion loss is not within the realm of possibility.

    Consequently, Madoff was not pursuing his stated strategy. The strategy evolved into something else over time - possibly to catch up to past losses, or the money was stolen.

    Expect Madoff to admit he was not actually trading in the manner he described, or, more ominously, expect him to say he just "winged it" and no records were kept. The second option is an irresistible cover for theft, in the days before the fraud becomes known.
  2. What exactly is the bombshell here? You just repeated what has been written in dozens of articles.
  3. ipatent


    Or laundering money into foreign accounts the IRS can't trace.
  4. That was yesterday.

    Not only can they trace them, they are.
  5. ipatent


    Suppose he placed trades through somewhere like Dubai that is not as regulated as the US. One short, one long. Decide later which trade gets credited to Madoff and which to the Bahamian Corp. that has the Swiss bank account.

    Can they trace it?
  6. Mvic


    As I said when this story 1st broke, a $50B loss can act as the cover for a lot of bad stuff. If he was in cahoots with others and someone had to take the fall maybe he took on board a bunch of bad trades from others to make them whole, he was going down anyway, $15B or $50B from his point of view what is the difference. Infact this seems like basic type of fraud the mafia used to do, bunch of brokers/businessmen get together and eventually when enough money has been stashed one of the group takes the fall for everyone's losses.
  7. tradersboredom

    tradersboredom Guest

    this is basic fraud.

    transfer the money in, transfer the money out offshore.

    give out fake monthly statements to clients. and when want to cashout, shut down business.

    this isn't the first ponzi scheme.

    from experience, i've encountered many wall street fraudsters attempting to do this,.

  8. :D
  9. that's my vote