Chip Diller Speaks on the Bernie Madoff Affair ~ The Risk Averse Alert

Wednesday, December 24, 2008

Chip Diller Speaks on the Bernie Madoff Affair

There were no unexpected technical developments following today's abbreviated session. Some indicators more or less remain at critical inflection points (see yesterday's "How to Measure Blood in the Streets"). Still, short of anything unusual developing, all things taken together continue suggesting the market's anticipated surge higher could be imminent.

Vote this leading stock market expert at FeedTheBullIndeed, it's possible the market's sideways trade over the past month has reached its end. Of course, we will know soon enough.

Tonight, rather than beat back the bear with another deadly dose of technical analysis, let's instead talk Bernie Madoff.

You may be reading as I am about his undoing possibly leading to a terrible fallout. It's feared hedge fund redemptions might accelerate.

I came across the following short piece titled, "A Fitting End to a Lousy Year," written by Andrew Gordon at Investors Daily Edge yesterday:
A worsening economy has pushed the market down. A global recession has pushed it down further. Will the latest Wall Street scandal push it down more?

Some of the hundreds of losing hedge funds have written letters to investors saying that they won’t accept requests for redemptions until a later date. Most, however, have been forced into selling to meet an avalanche of redemption requests for January 1. This massive selling is another reason why the market fell so quickly.

Could we get a little rally after January 1?
Institutions will have to reinvest this money. Treasuries and money-market funds are returning next to nothing. The stock market could be the beneficiary by default.

But the Bernie Madoff ... $50-billion rip-off (Good news: he may have cheated investors out of as little as $30 billion!) may trigger a new rush by institutions to get their principal back. A lot of funds of funds had exposure to Madoff. That would mean more selling and could blunt a bear rally. Thanks a lot, Bernie.

Todd Harrison over at Minyanville in "Madoff Matters: Social Mood" writes:
The structural implications are massive. I speak with a lot of money managers and most of them have fielded additional redemption requests since the story broke. I'm not talking bottom of the barrel here either--folks who are up nicely on the year are still suffering as "fund of funds" sell their winners to finance the sinners.

Do you suppose "funds of funds" have "gates" allowing some legal means of stemming redemptions (much as hedge funds can)? This could buy time. But if not, then what?

I'm asking rhetorically. How does the fallout from Madoff's fraud rate against FNM, FRE, AIG, MER, LEH, BSC, C (have I forgotten any?), which in the annals of 2008 have amounted to much, much bigger, systemically-threatening swindles? Truth is there's really no comparison.

There is, however, commonality. Former U.S. government lawyer, Gary Aguirre, can tell you all about the cozy relationship Wall Street's elite has with its regulators.

You should have no doubt. The fix is in ... and the Tory Press, indeed, flaunts this fact. Just contrast live reports showing the U.S. Marshall standing outside Bernie Madoff's Manhattan apartment against the several interviews CNBC has given former AIG chairman, Hank Greenberg.

Mr. Greenberg says everything was fine China when he left the company a few years back. However, the public record tells a different story.

Obviously, that this guy gets airtime so history might be rewritten is a sure sign the fix is in.

So, zare vill be no chaos. At least not yet...

Fast Money
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