Bernard L. Madoff and his Ponzi scheme

Bernard Madoff market maker and hedge fund manager was charged with securities fraud last week taking investors for as much as 50 billion dollars according to reports.  Investors in his fund use to state they do not know how he does it but his fund consistently returned 9-10% a year.  We now know how he did it, with a giant ponzi scheme. 

Ponzi schemes work by creating the illusion of profits by taking the funds of new investors and putting them into the accounts of current investors. Eventually new money stops coming in and original investors start asking for their money back and the whole things collapses.  People will want to assign blame for this whole thing. Clearly Madoff himself is to blame. He has been around Wall Street for 50 years and with his connections and reputation he did not need to defraud investors to make a living.  He got greedy and I hope he spends the rest of his days on this planet in a jail cell. 

I do not think we should over look the investors in Madoff’s fund. His list of investors is a who’s who of the world's rich. These were not your average 401K type of investors.  They were people with millions and billions to invest and should have known better.    The fund seemed to defy logic and Madoff gave very little explanation of how he made his returns.  Investors also got greedy and took an attitude of as long as I keep making money whatever he is doing is ok with me.  Investors long for the ideology that a money manager can continue to make money in equities no matter what the market is doing.  The investors in Madoff’s fund broke a fundamental rule; if it sounds too good to be true it probably is. 

The regulators are to blame also, but remember hedge funds have fought regulation and won time and time again.  They have basically operated outside the regulator environment.  So I will not blame the regulator as much as those in congress who fought against the regulation of hedge funds. 

No matter who we blame it will not get back the 50 billion dollars of losses for investors.  I just hope some investors will learn from this. There are certain principals of investing that no fund manager can get around.  One of those principals is that there will be periods of loss and if your fund never losses money be suspicious and get your money out while you can. 

Mortgage Relief Programs

New data came out this week from the Office of the Comptroller of the Currency and the Office of Thrift Supervision showing that borrowers who have taken advantage of the mortgage relief programs are still defaulting by about half. It seems that many of the borrowers simple can not afford the new terms.

The question I have is; how far are we willing to go to keep individuals who made irresponsible decisions in their home? At what point are we simply giving them the home? Not questions I have an answer to.

I do believe we need relief for individual homeowners and not only big corporations to get the economy moving again. That does not mean all borrows should get relief. I like Sheila Bair’s plan. Her plan will lower the interest rate to3-4.5% and your loan payment will be no more than 38% of your income. Borrowers will have to pay interest on deferred principal. The part I do not like is if the borrow ultimately defaults the government (taxpayer, you and I) are on the hook for 50% of the losses. Although I do not like I think it needs to be there to get lenders moving on the plan.

The Bair plan has angered many individuals because it is not fair to those of us who took out responsible mortgages and have been making are payments. At some point we need to get past that and have a plan in place that will benefit everyone in the long run. Sometimes life just isn’t fair and this is certainly a prime example.

Have you been making your mortgage payments on time and do you agree with bailout of borrowers?

It's Officail

The National Bureau of Economic Research stated this week that the U.S. is officially in a recession. You can read the full report at http://wwwdev.nber.org/cycles/dec2008.html

The good news is that we have been in a recession since December of 2007; the bad news is this may be a very long and deep one. So what is an individual to do?

As much as the government would like consumers to spend money to help get us out of recession, it is the last thing you should be doing. This is the time to take at look at your over all finances to make sure you are able to weather the storm. If you do not have an emergency fund saved up start one right away. You can use a money market mutual fund, the ING saving account or a safe account at your local bank or credit union. Try to get the highest rate possible, but it is more about safety and availability (easy access) than anything else.

The job market is a tough one in most sectors and employers can afford to be choosey when hiring. Make sure your resume is up to date and think about projects and other things you may have done that will really set you apart. Join or update any networking sites you are a part of. If you do get laid off you want to hit the ground running.

Pay down debt. Paying a little more toward the credit card bill or auto loans goes a long way in the amount of interest you pay in the long run. With interest rates so low, if you already have an emergency fund established put any extra money into paying down existing debt.

Help out others. One report I heard stated food banks are seeing 40 new families a month. So if you can afford to buy some can goods, give to you local food bank.

What are you doing to get through the down turn in the economy? We would love to hear your ideas, so please post them. Thanks.