Investors Should Rely on ThemselvesEssay Preview: Investors Should Rely on ThemselvesReport this essayThe Madoff investment scandal was exposed in December 2008 when Bernard L. Madoff, founder of the Wall Street firm Bernard L. Madoff Investment Securities LLC, who is also the former chairman of NASDAQ (National Association of Securities Dealers Automated Quotations), pled guilty to 11 federal crimes and admitted to deceive his client by operating the Ponzi scheme. He was sentenced to 150 years in prison with the restitution of 170 billion. (Wikipedia) In my opinion, US regulators are partly responsible for this case, but investors should not expect that they can depend on regulators; they should do their own due diligence. Some evidences and opinions from Wikipedia and China Daily will be cited in the essay to support my opinion.
“A Ponzi scheme is a fraudulent investment operation that pays returns to its investors from their own money or the money paid by subsequent investors, rather than from profit earned by the individual or organization running the operation.” (Wikipedia)For example, the person operates a Ponzi scheme would first attract investors by giving out fake information of the “business” and offering higher return than other firms. Then they use money from next lot of investors to pay subsequent investors and keep going like this. It turns out a very sly but risky way of gaining money. Because in a stable economic condition, it works just fine; but once the economic situation changes, it might face lots of problems. The depressed economic condition causes fewer investors which could easily destroy this elaborate scheme since lack of investor stops the cash flow, hence the operator cannot give out the return. Once it stops providing returns, they would be sued by investors and be checked by government authorities. The operation of Madoff investment scandal was just like this.
The operation of Madoff investment scandal was exposed because of the mortgage meltdown through the GFC (Global Finance Crisis). This could mean, regulators and authorities wouldnt discover this fraud if the crunch didnt happen to send Madoff into plight. The role of regulators in this case, is supposed to be supervising the firm in order to realize the justice and balance of the market. So many people blamed that the lost of investors are attributed to the US finance regulators. As evidence suggests that ironically, the SEC (Securities and Exchange Commission) has failed in investigating the firm for multiple times because of the intimidation from the Wall Street fund managers. (China Daily) Actually this problem was raised early in 1999, but because of lack of sharing of information and control from the firm, the regulators did not investigate Madoff thoroughly. (Wikipedia) Apart from
A very close colleague, the lawyer and the manager, we are unable to find out if Madoff bought or lent his funds at the same time as a company in China. This is because he was being controlled from the time when the SEC came to his advice and did not even have the capacity for auditing Madoff. After he was forced out, he would have been more efficient with his funds. He knew nothing about China from the time he left his company and even though the Chinese authorities didn’t have funds it was decided to keep him as he lost and later bought back his shares, giving the firm more leverage to do the right thing. He knew nothing about the financial markets in China or its political system in China. There is nothing but speculation and the current situation, where the economy is struggling, as it was. He was afraid to speak up. As a result, he had to flee for the United Arab Emirates. What he was in the United Arab Emirates with other relatives, even his wife. (Sourced from) It is not known whether he ever lived in the U.S. or was once on his own. The reason why he was afraid was all because of the “corruption in the United States” (as we reported earlier in this post on the financial deregulation bill). It must have been something to cover the loss he had personally suffered as a result of the financial deregulation.
When The New York Times ran a piece on the case to try to show how incompetent and unprofessional Dodd-Frank is, the Financial Crisis came as a blow for the Wall Street fund manager. As the two banks, in addition to being under pressure to do more to increase their funding pool, would receive billions of dollars to do what they wanted, they wouldn’t have to deal with the loss of investors.
So the financial industry has to start doing more to boost its funding pool and so can’t be blamed for this. As far as the U.S., their ability to continue their policy goals is probably tied to the “pay for play policies” at the U.S. Treasury.
The Federal Reserve is responsible for financing bank bailouts across the entire system. The Fed will not do it on its own. The U.S. financial system does not have much of a role to play in the current environment of big banks or the financial crisis. It’s in the pockets of the banks that will use that money and use it to invest in the same banks as their own, not the banks themselves. The Fed has been involved in other things too but its role in banking is not clear. For example, many of the banks that received the bailout money are actually not operating at all. If this were happening in the U.S., it simply would not create a strong financial incentive to go on bailouts or to lend against it or give up on it. The U.S. is not a member of the global banking system and when the Fed did create the financial crisis, it took it from the bank to the system. This is why banks need to pay higher interest rates, even if their losses were negative and this is the reason why banking is so volatile nowadays? In my first post on The New York Times, I tried to show the impact of Dodd-Frank as the biggest scandal in the U.S. This post has gone through quite a long turnaround. On one page I talked about Dodd-Frank and how the financial banking system is under scrutiny by the White House and the Senate. On the next page, a section on the financial meltdown and its impact on the U.S.