Inside Job

5. News of the massive fraud prompted an angry public to question why the nation’s “watchdog function” for the capital markets, particularly the independent audit function, had failed once again.

Bernard Lawrence “Bernie Madoff” is an American former stock broker, investment adviser, non-executive chairman of the NASDAQ stock market, and the admitted operator of what has been described as the largest Ponzi scheme in history. (Bernard Madoff, 2011) This paper discusses the massive Ponzi scheme that Mr. Madoff created and those that were affected by it.

The significant finding from this article is that the world of finance is a very strange world. This world can offer opportunities to many, and at the same time, it can prove to be a mess for the others. Many people are not corrupt in their person, but by being negligent or by being careless, they fail at doing their duty successfully at some points in time. However, what the article talks about is the complete picture. Steven A Cohen faced a problem. He got entangled in an enormous financial mess.

Derivative contracts were either negotiated with specific counterparties (over-the-counter) or were standardized contracts executed and traded on an exchange. Negotiated over-the-counter derivatives were comprised of forwards, swaps, and specialized options contracts. Over the counter derivatives can be tailored to meet the customers’ needs with respect to time and quantity and they are not traded in an organized exchange. On the other hand, standardized exchange-traded derivatives consisted of futures and options contracts. Even though over-the-counter derivatives were usually not traded like securities in an exchange, they might be terminated or assigned to an alternative counterparty. Standardized derivatives trade on an exchange and have time and quantity that are fixed.

On December 11, 2008, a Wall Street investor named Bernie Madoff was arrested for confessing to one of the biggest Ponzi schemes in history. Before that day, many people had never heard of Bernie Madoff or perhaps may not have even realized their life savings were invested through his firm. To the casual observer, the arrest was just another dirty banker being taken to court for his actions; but in reality, the arrest was devastating to financial institutions, government regulators, and the personal wealth of thousands of businesses, charities, and individuals. In all, Madoff defrauded investors of $20 billion. Having been a well respected leader and trusted advisor on Wall Street for years, friends, family, and customers never questioned his tactics even though the red flags had always been there. In the end, many people blamed the government for lack of regulation on Wall Street, but the truth is that everyone involved from the investment firms to the personal investors chose profit over due diligence.

That may seem like a big number, but the money has come from shareholders, not individual bankers. (Settlements were levied on corporations, not specific employees, and paid out as corporate expenses—in some cases, tax-deductible ones) (Cohan 1).” The fines that the banks were forced to pay did not affect or stop them from doing unsafe banking practices. Out of the many investors and banks that took part in these risky investments only one was punished and sent to jail as said by Cohan.”

Lewis focuses the book from the perspectives of leaders from three investment firms that saw the future of the financial market and its inevitable collapse in the early 2000’s. Though given the opportunity, these men were not heroes. Instead of spreading the news and rebelling against Wall Street for infecting the market, they were more interested in making a profit. Michael Burry was focused on his company Scion Capital and buying credit default swaps to make both him and his investors’ money. Charlie Ledley and Jamie Mai focused on betting against Wall Street and ultimately in the end made fortunes.

When the Madoff Victim Fund began accepting claims from these third-party investors in 2013, it was overwhelmed by how many it got - over 52,000 in total.” (36,000 Madoff Victims Have Not Received a Dime in Restitution; 1,129 Fully Reimbursed, 2014).”The only consistent message here is that the U.S. financial regulatory structure is just as bad at delivering fraud restitution as it is at detecting fraud. When the news of the Madoff fraud first gained media attention around the world in December of 2008, there was widespread criticism of the structural failure of the U.S. financial regulatory system, particularly the SEC – which had not only ignored detailed, written warnings from professionals like Harry Markopolos and others that Madoff was running a Ponzi scheme but the SEC had actually closed investigations into Madoff’s operations and then shredded the evidence it had collected. Why did it take over five years to learn that 36,000 Madoff claimants have not received a dime of restitution? Why was JPMorgan Chase, which was charged with two felonies for aiding and abetting the Madoff fraud, given a deferred prosecution

The definition of "derivatives" is also very wide, and includes options and warrants, whoever they are issued by, as well as rights and interests in respect of listed securities (or other derivatives).

For this assignment, use the Internet to research high-risk investment brokerage firms that have been indicted or convicted of ethical violations to provide insight and understanding of this market segment.

One must pretend to know the broad and yet differentiated world of banking and equity portfolios without bothering to actually learn about them. Use words such as ‘instability’, ‘hedging’, and ‘derivatives’ to inspire awe and trust among those who discuss these activities with you. Of utmost importance to Step Two, one must invest in only certain types of products to assure that one’s portfolio remains inflexible and susceptible to crashing.

Many are probably familiar with what has become one of America’s horror stories. It is a story about the American dream and promise gone amuck. The conclusion of the story is one that has shaped the way businesses operate ever since. The documentary Enron: The Smartest Guys in the Room (Gibney, 2005) examines the ethical blunders of the natural gas/energy company Enron. Alex Gibney (2005), director and producer for the documentary, focuses on the role of three men who were credited as being key players in the downfall of the company. The three men were Chief Executive Officer (CEO) Jeff Skilling, Founder and Chairman Ken Lay, and Chief Financial Officer (CFO) Andy Fastow. Gibney (2005) proceeds to outline the gradually rise of Enron, the

Most firms hedge at least some of their risks. Hedging can take two basic forms—namely, natural hedging and hedging by means of derivative instruments. The use of derivatives as hedges has expanded greatly in recent years.

Among the most fundamental risks, associated with exchange-traded derivatives, is variable degree of risk. According to Ernst, Koziol, & Schweizer (2011), the transactions in

Derivatives are the contracts whose value is derived from the value of some underlying assets such as equities, commodities or currencies. These contracts helps the investor to reduce the risk of wearing down of his investments. The application of derivatives can be observed as an opportunity to transfer the risk from the person who wish to ignore it, to the person who is ready to accept it i.e. risk management hedging through derivatives. In an environment, in which portfolio managers are pressured to beat the indices, need to protect the investment gains in their portfolios from financial risk. Different hedging strategies can be formulated to meet the particular hedging requirements. Various studies on the outcomes of future and option listing on the underlying asset (equity, commodity, currency market) have been done with a