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Update on Credit Crisis: Daryl Montgomery January 8, 2009 Copyright 2009, All Rights Reserved The Biggest Ponzi Scheme in History • Bernie Madoff admits to $50 billion hedge fund fraud on December 11, 2008. • Firm claimed $700 million in capital (not there). • Authorities originally stated fraud began in 1995, now thought to be the 1970s. • People duped include top business and financial execs, European banks, Hollywood celebrities, and charities. • SEC officials investigated Madoff 8 times in 16 years. They found nothing wrong. Were they bribed? • Madoff’s firm is a market maker for 350 Nasdaq stocks. He is the former chairman of Nasdaq. Another Big Securities Fraud • Marc Drier, head of 250-member New York law firm arrested for investor fraud on Dec 8. • Accused of forgery, selling fake financial instruments, false financial statements. • Hedge funds bought the fake notes. • Drier’s legal associates have allegedly been involved in even bigger frauds. • Escrow funds controlled by Drier firm seem to have been lost in bad hedge fund investments. This Months Biggest Overseas Fraud • Satyam Computer, India’s 4th largest software company admits to major fraud. • It inflated cash balances by more than $1 billion (not even Enron managed to do this). • Company had been overstating profits for several years (used fake cash to hide this). • Stock lost 77% of its value on Jan 7th. • Fidelity was major stock holder. Last Month’s Bailouts • Auto makers bailed out in U.S. until spring; Auto sales year over year down 53% for Chrysler, Ford down 32%, GM down 31%. • GMAC (chairman was a Madoff investor) becomes bank, gets Federal money. • Jaguar (was owned by Ford) requests bail out in England. • Infineon spin-off bailed out in Germany. • Ireland bails out its major banks. The Latest Economic News • Retail Holiday Sales – worst in four decades. • Employment – 3 state’s claim systems collapse preventing claim filings (weekly reports number can’t be trusted). Jobless report will be bad. • PPI, CPI are approaching zero for 2008 because of falling oil; don’t believe news claiming deflation. • England lowers rates to 1.5% (lowest since 1694); Japan 0.10%, Fed institutes ZIPR (Zero interest rate policy, predicted at last meeting). • Watch for 4th Q 2008 GDP later this month. Adjusted Monetary Base (future inflation)Currency Plus Bank Reserves Total Reserves – Sum of Deposits that count for Reserve Requirements Borrowed Reserves – Historically, Lower Number Easier Credit Non-Borrowed Reserves – Total Reserves Minus Discount Window Borrowing