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Yahoo headlines today have the lede.

A former British soldier killed himself after losing his life savings in an alleged $50 billion fraud run by Wall Street financier Bernard Madoff, the dead man's son said.

As the Cream sang back in the '60s, "If you lose all your money, pray God don't lose your mind."

I know I will receive some bad vibes about the following diary, as many people are living paycheck to paycheck, have a minimal or negative net worth. But, there is a punchline to all this.

This man, according to the article, was no mega-millionaire. He had about $2m in investments with European hedge funds that had, in turn, invested all their money with Madoff. I suppose it was the lure of easy money for the funds - i.e. they could collect investment money and not waste their time and money investigating and diversifying their positions.

About 18 months ago, I had about $1m in my brokerage account. How did I do it? The same way the vast majority of Americans who have achieved a million $ net worth have. I maxed out my 401K for 20 years, had a strong income, bought a house that was 1.5X my annual salary, spent an hour a day (at least) for a few years learning about the markets, was frugal, drove a minivan, took cheap vacations.

Of course, like virtually all the investors in my position, I had a vast drop in my net worth, but due to my total cynicism about the reality of the markets, I moved into cash, bonds and gold early in the crash. So I have not been hit as hard as people with all their money sunk into big cap funds. Now the fear is that our banks or brokerages will fail, wiping out a lifetime of work. Or that our money will be inflated away due to the vast debt of our country. So now, rather than investing, I am forced to diversify my cash by financial institutions. In addition, I have taken to increasing my spending in some areas, for example, doing very expensive foundation work on my house, in case we see really accelerated inflation, and my money evaporates. I am also investigating starting some small side businesses, of which I will need to start 4 to find the right one, meaning 12 hour work days to get it all rolling.

Maybe I am stupid, life is short, and I'm no spring chicken, but being raised by parents who were grew up in a crushingly poor environment during the Great Depression, I just can't handle having the wolves at the door. So I can understand this man's suicide, and it drives me forward into constant achieving. I am motivated by fear. I went from semi-retired a year ago, figuring I could hunker down and make it the rest of my life, to working as hard as when I was a young man.

But here's the irony. If Madoff ran his fund selling swaps and naked puts on phony assets, he would still be a "Master of the Universe." His losses would be "tragic," but understandable (how could he have known running a kiting racket would end in bankruptcy)? He could have gotten TARP money, and Congress would have debated the danger of potential "brain drain" if his salary was limited to 1/2 million bucks. But instead, he was too lazy or arrogant or smart to bother running anything but an out-and-out fraud, rather than the big public corporations, which only ran out-and-out frauds.
But now, his investors are killing themselves, rather than the folks who owned Citi or are vested in pension funds, who are only slowly bleeding to death.
BTW, I AM NOT A REPUBLICAN, I am a proud LIBERAL.

I have added a poll, I have seen similar, but I will throw it in for my own edification.

Good luck to you all.

Originally posted to shmuelman on Sat Feb 14, 2009 at 10:37 AM PST.

Poll

What is your economic fear level?

19%31 votes
41%65 votes
10%16 votes
27%43 votes
1%3 votes

| 158 votes | Vote | Results

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Comment Preferences

    •  Where do you think Madoff's $ went? (1+ / 0-)
      Recommended by:
      Catte Nappe

      Bernie certainly did not spend all his time running "an out-and-out fraud."  He certainly did buy swaps, lots of them, as head of the after-hours electronic trading floor he and his sons, and dozens of employees, operated.

      I can not understand why otherwise sophisticated people swallow the meme that he just burned through $50 billion in cash when he burned his customers.

      No, there are two interesting back-stories here.  The first, below, is the insider-trading scam everyone thought he was running.  The second, which nobody seems to have run down, is where the hell did he actually send all the client money he diverted?

      As for all this about Madoff as crook coming as a shock, read this from 2001 that alludes to the penetration of Wall Street by the Russian-Israeli Mob: http://www.nakedshorts.typepad.com/...

      Even then, there was widespread skepticism about the extraordinarily consistent returns Madoff Investments and Fairfield Securities were paying out to hedge fund clients.  Collars are nice, but nobody's performed nearly as well.    http://www.nakedshorts.typepad.com/...  

      Anyway, check this out by John Carney: http://www.businessinsider.com/...

      Tags: Bernie Madoff

      Lots of Bernie Madoff's investors, including institutional investors and banks, thought Madoff Securities was running a scam--they just didn't realize he was scamming them.

      The scam everyone thought he was running was basically having his hedge fund operation front-run the trades from his electronic market making operation. As the saying goes, you can't cheat an honest man...but cheating those who are dishonest is all too easy.

      The Financial Times today describes how one Swiss bank thought Madoff had an "edge" because of his market making business:

      A Swiss bank that helped channel funds to Bernard Madoff says the New York money manager had a "perceived edge" in the financial markets because he handled so many trades through his broker-dealer arm.

      Union Bancaire Privée, which advised 11 hedge funds that placed money with Mr Madoff, included the characterisation in a letter that it sent to clients on December 17 to explain why it felt comfortable with Mr Madoff.

      Mr Madoff’s clients believed that he employed a "split-strike options strategy" that would make money in both up and down markets through trades in stocks and options.

      "We were assured that he had some visibility as to the momentum of the markets...due to his significant volume size as a broker/dealer," the UBP letter said.

      "The perceived edge was Madoff’s ability to gather and process market-order flow information and use this information to time the implementation of the split-strike options strategy."

      See Also: I Knew Bernie Madoff Was Cheating...That's Why I Invested With Him

  •  This could all be avoided (2+ / 0-)
    Recommended by:
    shmuelman, ShempLugosi

    if people were not so materialistic and lived within their means.  

    Materialism and greed suck.

  •  Ut oh. (0+ / 0-)

    you have a million dollars. You're about to get pilloried here for being a rich scumbag. Good luck, man.

    •  No longer a millionaire (13+ / 0-)

      I could be wiped out by cancer, or an injury to my uninsured children. That's why I am a liberal. What do we really need in life? For me, clean running water, indoor plumbing, central heating, 24 X 7 power (all infrastructure), good education, healthcare, and freedom to express ourselves and justice and liberty for all.

      •  You need wholesome food, too. (3+ / 0-)
        Recommended by:
        theran, exmearden, chrome327

        We spent our savings paying off the debt on our farm, buying a wood cook stove, a second chainsaw, hand water pump, extra tools, seeds, dome lids, fertilizer, solar battery charger.......

        Now is definitely the time to spend on necessities while they're still available. I'm expecting sparse pickings in the retail outlets by summer.

        •  I'm not a survivalist (3+ / 0-)
          Recommended by:
          Halcyon, mkor7, chrome327

          but I agree that we will start seeing items disappearing from the shelves. I questioned a buddy of mine about why we are seeing price increases during such a tremendous recession / depression / monetary collapse.I have a snack brokerage, and I am having to do a price increase on all my chips today, even though wheat commodity is less than 50% of where it was a year ago. He said, I think wisely, that some companies will rather go out business than cut their prices.
          I agree, I think that there will be a change in the whole supermarket with 10,000 items model. I think many items will go away for a while.

          •  Saw this linked at Automatic Earth yesterday, (1+ / 0-)
            Recommended by:
            chrome327

            fro WSJ: US Consumers Cut Food Spending Sharply
            The article includes a chart of food spending since the late 1940's. Scary abrupt reduction recently. I think the spike in 1966 may have followed the NE blackout that fall, replacing the rotted food.

            We're not 'survivalists', most of whom are military/gun nuts who expect to shoot their hungry neighbors. We already grow most of our food, and figure we may as well take expand on that, and do whatever we can to reduce our dependence on the retail chain. We already heat with wood, so the stove is just common sense. A solar oven is a no-brainer too.

          •  Boutique grocery stores will become the new model (0+ / 0-)

            Look at going back to people that specialize, meat, bread, etc.  I predict those mini malls will start to look like the European small storefronts.  Small shops each with a specialty.  Big stores will become dinosaurs.

  •  I don't question your liberal values. (4+ / 0-)
    Recommended by:
    theran, golconda2, mkor7, chrome327

    Your liberalism most likely is rooted in social values.  And your fiscal values reflect classic liberalism.  

    Personally, I believe the distribution of resources in capitalist society is fundamentally flawed.  I believe in equality of social condition.  

  •  Investment strategy (8+ / 0-)

    Congratulations on your strategy. Some of us do have a million, either because we've saved and invested methodically (and are of a certain age), or because of inheritance, or whatever. I agree with your decision to invest some money in improving your home as a hedge against future inflation. We're doing the same, and employing the contractor with the highest environmental and workplace standards.  Investing in family, health, community are good ideas, too. We need to collectively redefine the words "investment" and "success." Then we'll have a better world, and fewer suicides.

  •  I Don't Have a Million Bucks (10+ / 0-)

    But over the last few years, I saved and saved, learned to cook at home, figured out how to economize things and ... yes ... moved my net worth out of stocks into more "conservative" investments.

    So, even though I recently lost my job, I am okay.  (For a while.)

    The thing is ...

    It doesn't really matter how much you have, at some point, because you can't take yourself off the grid completely.  There is no security wall high enough that you can build around yourself and your assets to protect yourself from those who have much less than you do.  And you have to share air, water, food, energy and infrastructure with the common man.

    I think that our elites have convinced themselves that they can remain billionaires at the same time that they drive the population at large into a state of deprivation.

    This will not happen.

    The "haves" cannot separate their fate from the "have-nots."

    I'm glad that you have a buffer, though, that is big enough to see you through the hard times going forward -- and thank you for increasing some of your spending to spread that cash around (especially where it gets spent locally).

    You can call me "Lord Bink Forester de Rothschild."

    by bink on Sat Feb 14, 2009 at 11:01:13 AM PST

    •  That was the point of the Bush years... (7+ / 0-)

      I think you captured the thinking of the Dick Cheney's of the world. Odious and evil, they built a police state with unlimited surveillance and a vast network of prisons (thanks to Bill Clinton too) and sold it as a national security issue. They threw torture and removal of habeus corpus too, just to add to the fear levels. Hope people wake up (they have to an extent) and make a serious demands to "legalize freedom" and affirm the constitution.

  •  How long will it take (3+ / 0-)
    Recommended by:
    PsychoSavannah, golconda2, chrome327

    for Madoff to be put in jail?

    Here in America, our destiny is not written for us - it's written by us. Barack Obama 9/28/08

    by quadmom on Sat Feb 14, 2009 at 11:01:22 AM PST

    •  Mark My Words... (9+ / 0-)

      Madoff will not see a single day in prison. He'll take the Ken Lay way out, whether that way is a natural death, suicide, or (if the far out folks are to be believed) a one-way trip to scenic Dubai, but he won't get justice...

      "Do not call up any that you cannot put down." H.P. Lovecraft, "The Case of Charles Dexter Ward"

      by golconda2 on Sat Feb 14, 2009 at 11:11:39 AM PST

      [ Parent ]

      •  I am mixed, but I lean in your direction (4+ / 0-)

        BTW google "dubai collapse" for a country in nuclear meltdown.

        •  Those stories (1+ / 0-)
          Recommended by:
          PsychoSavannah

          of thousands of cars gathering sand at the airport as expats flee are a little jarring.  But Dubai had no economy that wasn't based on leveraged RE and oil speculation.

          "Dream for just a second and then do it!" -- Kolmogorov

          by theran on Sat Feb 14, 2009 at 11:22:11 AM PST

          [ Parent ]

          •  Interesting word games (1+ / 0-)
            Recommended by:
            chrome327

            Thankfully, Dubai's police chief, Dhahi Khalfan Tamim, has dispelled the rumour, which was recirculated by The Times of London.

            "Be assured that if we had at least 50 or 25 or 15 cars abandoned at the airport, I would have told you about it," Dhahi reasoned in a hastily convened news conference last week.

            According to a Gulf News report - which seemed to double as a Dubai police news release - Dhahi said only 11 cars had been abandoned at the airport since January 1 last year. "False statements on the market collapsing, as stated in the article, are nothing but incorrect rumours," he said.

            The sickening rumours were first reported in an interview last month between the Abu Dhabi newspaper The National and Colonel Saif Muhair Al Mazrouei, deputy director of the Dubai police traffic department.

            He said the number of cars abandoned by owners escaping loan repayments in Dubai had increased 123 per cent, to 3241, last year.

            http://business.smh.com.au/...

            Did the original source say they were abandoned at the airport? No. He just said abandoned. Could have been in a hotel garage, in the former owners driveway, at their former place of work, etc.

            •  Yeah, yeah (1+ / 0-)
              Recommended by:
              chrome327

              It depends who you ask:

              Officials put the number of vehicles at 11. "No one believes that. There are 11 cars abandoned just on my street," said Anne, 26, a fashion editor from London. "Over the past two months I've been getting an email a day from people trying to sell their stuff. 'New Jaguar – need to sell before the end of the week'."

              I saw another story that said Dubai's population is down 5% in the past few months.  Sure, the other emirates will bail it out, but Dubai seems to have exploded, and to believe otherwise is like believing subprime was contained in 2007.

              "Dream for just a second and then do it!" -- Kolmogorov

              by theran on Sat Feb 14, 2009 at 03:39:25 PM PST

              [ Parent ]

    •  He's unlikely to do serious time (6+ / 0-)

      The thing he did, which is securities fraud, isn't even that high up on the list of crimes.  Have a lot of pot would probably be considered a lot worse.

      "Dream for just a second and then do it!" -- Kolmogorov

      by theran on Sat Feb 14, 2009 at 11:23:50 AM PST

      [ Parent ]

  •  This is a very good diary (5+ / 0-)

    The end, in particular, is very apt.

    If I write huge amounts of credit protection against money I don't have, and my counterparties believe me enough to let me mark these as valuable assets, maybe I'm not a complete Bernie, but I am some fraction of Bernie.  And the people who are using my worthless paper to make their risky paper 100% "safe" are some fraction Bernie too.

    That's one of the really troubling things about the bailout.  The capitalist solution would be that everybody loses all their money, but apparently only a literal pyramid scheme can't be bailed out...

    "Dream for just a second and then do it!" -- Kolmogorov

    by theran on Sat Feb 14, 2009 at 11:20:13 AM PST

  •  Apropos of this (4+ / 0-)

    There are probably more mini-Bernies out there.  Allen Stanford's name has been tossed around the financial blogs for a few weeks, and is finally hitting the MSM.  (He has a "bank" in Antigua that pays 7% on CDs and does not make any loans.)

    "Dream for just a second and then do it!" -- Kolmogorov

    by theran on Sat Feb 14, 2009 at 11:27:39 AM PST

  •  Tipped and rec'd (5+ / 0-)

    Your strategy for surviving the financial crisis has a name. It's called "living within your means." At some point society shifted from rewarding frugality to rewarding extravagance, but now it's time to shift back. Thanks for sharing a realistic picture of what that looks like.

    There will be time, there will be time.

    by Greek Goddess on Sat Feb 14, 2009 at 11:31:45 AM PST

  •  Can't vote in the poll. (3+ / 0-)
    Recommended by:
    shmuelman, mkor7, chrome327

    I've always been broke AND I'm terrified!  I don't need much to be happy but food is getting to be a luxury.  THAT is scary....

    -7.62, -7.28 "We told the truth. We obeyed the law. We kept the peace." - Walter Mondale

    by luckylizard on Sat Feb 14, 2009 at 12:59:32 PM PST

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