Reply #20: These were the so called "feeder funds" [View All]

[depakid]

Not sure how far the duty to perform due dilligence goes, but one would think that the investment managers would want to see what the "feeder funds" were invested in- and what potential exposure(s) they had. After all, we're talking about trust accounts that are required to be ivested with minimal risk to the underlying principle.

On the second point, David Sarasohn had a fine comment on that the other day:

What's revealed when the market recedes

...For decades, Madoff has run his own revered investment fund, producing regular returns and winning the trust -- and the money -- of large numbers of very wealthy families, philanthropic agencies and major financial institutions. He produced regular returns, and always had the money for anyone seeking a withdrawal. Wealthy figures begged their friends for introductions to Madoff, who served at one point as the head of the NASDAQ exchange.

Now it's all collapsed, and Madoff has admitted to his sons that he was running a massive Ponzi scheme, using new investors' money to pay off old investors, and now coming up as much as $50 billion short. His investors, many of them sophisticated individuals and institutions, are badly hurt and in some cases ruined.

That should be enough, or more than enough. But it may suggest something else.

Cons, after all, are easier to pull off when things are good, when there's plenty of money around -- including new money to pay off old investors -- and nobody's asking too many questions. The New York Times on Monday cited John Kenneth Galbraith's principle that when the financial waters recede, they reveal not only bad calculations and overextended positions, but actual embezzlements -- what he called the "bezzle." Madoff's is the first, but perhaps not the last.

Moreover, as Peter Hahn, a fellow in finance at London's Cass Business School, told Reuters, "A frothy market encourages slack oversight."

After all, who wants to ask questions when everyone's making money?

http://www.oregonlive.com/news/oregonian/david_sarasohn/index.ssf/2008/12/whats_revealed_when_the_market.html

Or, as the Grateful Dead put it "when life seems like easy street, there is danger at your door...."