Comment by hga | Hacker News Reader

Comment by hga | Hacker News Reader

Parent Full thread

I wasn't aware there were many "mini-Madoffs"; I heard about one or two, maybe three. Could you point us at a source to back that assertion up?

(One should also be cognizant of Buffet's "when the tide runs out, you see who's been swimming naked". While I don't think he meant it in this way, "genius is a rising market" and when the market goes down a lot of scams are driven out into the open because they can no longer keep their game afloat.)

In general, great efforts have been made to paint hedge-funds as eeeeevil, but with little to no evidence that I'm aware of (note Madoff was't running one ... in fact, didn't he make a big deal about his very low management fees?).

And I don't see how this is related:

The ostensible purpose of this legislation is to decrease systemic risk.

Preventing smaller investors from making necessarily small investments in whatever by definition isn't going to have much effect. The issues are big numbers, not small ones. And how does the 120 day delay fit into this???

Devolving the regulation of these investments to the states might in theory help, not that the SEC is a whole lot more useful than a potted plant (cd Madoff).

Regulating VCs as hedge-funds makes no sense whatsoever (that's not a point you're making, but I can't help but wonder if they're related).

> I wasn't aware there were many "mini-Madoffs"; I heard about one or two, maybe three. Could you point us at a source to back that assertion up?

Off the top of my head: Wextrust. http://www.nytimes.com/2008/08/12/business/12wextrust.html

I actually did some contract work for them in 2007, shortly before they were busted. I was never paid beyond my retainer. I found out why it was so hard to collect when the story broke in Crains Chicago. Normally I'd fight to get paid but they're now in receivership and I don't feel like taking scraps from charities and individuals who were wronged for so much more than I was.

edit: I understand that's just an anecdote, not real data. Basically media coverage is rare if the scheme is less than $200 million. There are some larger ones that never get attention because very wealthy people get taken and don't want to be made fools of for investing into these companies. I've got friends who work in the real estate business who've told me about several in the Chicago area that have been taken down or are under investigation. It was shockingly widespread, and I'd estimate there's easily thousands active worldwide.

Here's an incomplete list of ones that made the press in 2009: http://madofffraud.boomja.com/Ponzi-Schemes-Reported-in-2009...

Thing is, < 200 million US$ frauds aren't systemic risks. Yeah, we need to police them, but they don't threaten the system. Madoff's only did because he was such a "pillar of the community" (of Wall Street).

Sam Israel - pretended to jump off a bridge Markus Shrenker - pretended he'd crashed his airplane Marc Dreier Allen Stanford Arthur Nadel Nicholas Cosmo Joseph Forte

I could probably dredge up a few more -- it seemed like there was one every two weeks from July 2008 - Feb 2009, so these are just the few who were based in the US and who have Wikipedia articles.

While the financial reform is mainly being marketed as a fix for systemic risk, there's also a fairly strong contingent of people who want it to address various consumer protection issues such as predatory lending, failure to disclose fess, etc.(Mike Konczal has been following this carefully at http://rortybomb.wordpress.com/ ). While this effort is stalling, some of their suggestions will still probably make it into the bill. Basically, the politicians want to be in a place where they can say that only "the very rich" are in danger of getting ripped off by hedge fund scams.

The challenge here is that all issuance of securities is lumped into the same category of speculative investment by regulators. This might actually be a good time to try to break off a special category for investing in startups that is separate from the normal "accredited investor" requirements, perhaps by capping the amount anyone can buy as a percent of income(10%?) or assets(5%?). Since the main argument for these things is that each individual investment is too risky on its own, adding this sort of requirement for mandatory diversification might be good enough to get a regulatory carve-out for startups.

Please note that I personally oppose nearly all restrictions of these sorts -- I'm just trying to present the arguments of the regulators and to advance some plausible things to lobby for. It's worth keeping in the back of your head that if publicly-traded common stock was invented today as a novel financial instrument, it would be judged by regulators to have such an idiosyncratic cash flow profile that only financial institutions would be allowed to invest in it.

Reply on news.ycombinator.com