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December 19, 2008

More on Madoff: The Financial Perspective
by Reggie Middleton

Ponzi scheme operated by Bernard Madoff, a former chairman of the NASDAQ, with allegedly $50 bn of assets is by far one of the largest scam in history of financial markets. To put it in perspective, it literally dwarfs that of Enron and Worldcom/MCI in the corporate arena. With investors already battling massive losses on their investment portfolio, a scam of this magnitude could further dampen their confidence. As most of the exposure for leading banks and financial institutions towards Madoff's investment was indirect exposure in the form of clients' assets with minimal direct exposure, the potential capital loss / write-downs in the financial statements could be limited for these financial institutions. However there could be significant indirect impact in terms of future inflows and/or redemptions for their asset management and private banking division.

• The main impact from a systemic point of view is that it undermines the levels of confidence which is already being plagued by economic slowdown and financial woes. This cannot be understated. Take a look at the comparison of some of the biggest, most renowned Wall Street banks' performance as compared to the performance of the research model of this blog, my proprietary performance, and that of the broad and global equity markets. I didn't make this stuff up. The marketing machine of the street will take many years to repair the damage that fraud, combined with relative underperformance has wrought on their business.
• Since most of the money belonged to institutional investors, international and high net worth clients of private-banking business, the potential losses will probably affect one of the profitable segments for banks - Private and Wealth management business. This is a segment that was aggressively pursued by many medium and large financial institutions, along with the prime brokerage business, whose near to medium term growth prospects have been significantly overestimated. Expect a significant drag on these business segments that have seen a significant ramp up in resources, and significant opportunities to small and nimble entrepreneurial operations such as this hybrid new media/investment/ financial analysis publication from which you are currently reading. There will be an enormous impact for the hedge fund industry in form of higher redemption pressure. Already Hedge fund performance has been dismal due to slumping market situation See "In the Great Global Macro Experiment, the next bubble to burst is.." for more on this topic. In September 2008 alone Hedge Funds faced redemptions of $43 bn. This scam could further aggravate the redemption pressure for hedge funds which could in turn lead to massive global de-leveraging. With increased redemption and de-deleveraging the stock prices could witness further downside.
• Also the scam could enforce tighter regulation for the hedge fund industry. The financing requirements for hedge funds could get adversely impacted as they would be required to post more collateral with financial institutions that could limit their leverage.

In the table below we have highlighted some of the entities with largest exposure in Madoff investments (both direct and indirect).

Reggie Middleton
Reggie Middleton, LLC
Perpetual Interests, LLCTM
http://boombustblog.com/

Who am I?

Well, I fancy myself the personification of the free thinking maverick, the ultimate non-conformist as it applies to investment and analysis. I am definitively outside the box - not your typical or stereotypical Wall Street investor. I work out of my home, not a Manhattan office. I build my own technology and perform my own research - in lieu of buying it or following the crowd. I create and follow my own macro strategies and am by definition, a contrarian to the nth degree.

Since I use my research as a tool for my own investing to actually put food on my table, I can stand behind it as doing what it is supposed too - educate, illustrate and elucidate. I do not sell advice, I am not a reporter hence do not sell stories, and I do not sell research. I am an entrepreneur who exists just outside of mainstream corporate America and Wall Street. This allows me freedom to do things that many can not. For instance, I pride myself on developing some of the highest quality research available, regardless of price. No conflicts of interest, no corporate politics, no special favors. Just the hard truth as I have found it - and believe me, my team and I do find it! I welcome any and all to peruse my blog, use my custom hacked collaborative social tools, read the articles, download the files, and make a critical comparison of the opinion referencing the situation at hand and the time stamp on the blog post to the reality both at the time of the post and the present. Hopefully, you will be as impressed with the Boom Bust as I am and our constituency.

I pay for significant information and data, and am well aware of the value of quality research. I find most currently available research lacking, in both quality and quantity. The reason why I had to create my own research staff was due to my dissatisfaction with what was currently available - to both individuals and institutions.

So here I am, creating my own research for my own investment activity. What really sets my actions apart is that I offer much of what I produce to the public without charge - free to distribute and redistribute, as long as it is left unaltered and full attribution is given to the author and owner. Why would I do such a thing when others easily charge 5 and 6 digits annually for what some may consider a lesser product? It is akin to open source analysis! My ideas and implementations are actually improved and fine tuned when bounced off of the collective intellect of the many, in lieu of that of the few - no matter how smart those few may believe themselves to be.

Very recently, I have started charging for the forensics portion of my work, which has freed up the resources to develop the site to deliver even more research for free, particularly on the global macro and opinion front. This move has allowed me to serve an more diverse constituency, which now includes the institutional consumer (ie., investment turned consumer banks, hedge funds, pensions, etc,) as well as the newbie individual investor who is just getting started - basically the two polar opposites of the investing spectrum. I am proud to announce major banks as paying clients, and brand new investors who take my book recommendations and opinions on true wealth and success to heart.

So, this is how I use my background and knowledge in new media, distributed computing, risk management, insurance, financial engineering, real estate, corporate valuation and financial analysis to pursue, analyze and capitalize on global macroeconomic opportunities. I have included a more in depth bio at the bottom of the page for those who really, really need to know more about me.

Visit his blog Boom Bust Blog.

Copyright © 2007-2010 Reggie Middleton

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