Real Options -The Madoff Affair - Essay Example

The Madoff affair Question Discuss the two most important facts that you learned about the Bernie Madoff Affair. Bernard Madoff is popularly known for his investment firm which turned out to be one of the longest, widest and deep cutting Ponzi scheme in the financial history. This investment firm was no ordinary firm but rather a multi-billion hedge fund. The first important fact to note is that Madoff knew how to market his firm to the right kind of people in the society. He was a good financial marketer/manager.

This is because he frequently rubbed shoulders with the rich people in Wall Street and its immediate environs. It is believed that the Ponzi scheme did not begin in the 90’s as Madoff confessed rather much earlier in the 80’s (Manzakee). Despite that Madoff had no record of bribery with the authority; his case shows that the financial security top officials were failing in their jobHow the fraudster managed to pull through during the financial hard times remains a question worth noting. Additionally, most financial managers today, are still perplexed as to how Madoff managed to trick the Securities and Exchange Commission (SEC).

The Ponzi scheme raised suspicion a number of times. However, when SEC investigated the firm’s financial records and activities Madoff’s pyramid scheme was undetected. The second important aspect worth noting is that Madoff kept his business low profile and this is why it took long before the scheme was uncovered. This was through secrecy and hiring family members as his top officials in the firm. This was until December, 2008 when Madoff admitted that the firm was “one big lie”. He specifically confessed this to his son who was a top official in the same firm.

The confession came just when the economy was in its worst and banks that had loaned some of the investors’ money counted billion in losses. Madoff firm was stated as a Ponzi scheme which was pyramidal in nature because the past investments returns from earlier investors came from the latest investor’s deposits. Therefore, the returns were not true product of the investments. The firm was stripped naked and the true business conduct was revealed when some of the investors withdrew their funds from the firm.

Madoff had funds to pay the investors their interest money and this led to his arrest for crimes of fraud, false financial statements and money laundering among others. The crimes made the perpetrator convicted the maximum of 150 years (Manzakee).Question 2: What did you learn about finance and hedge fund management from this video?The Ponzi scheme not only shocked the financial advisors, SEC but also president Barack Obama. In an interview after Madoff’s conviction, President Obama exclaimed that “we feel asleep on the wheel”.

What he meant was that the financial managers and securities failed greatly in letting a single individual influence a huge number of investors with as pyramid scheme. Needless to say, Financial and hedge fund management is an issue that should be addressed keenly and monitored from time to time. Madoff case has shown how easy it is to fool a good number of investors into a pyramid scheme without their knowledge. For this reason, SEC ought to sensitize the public on the difference between a hedge fund and a pyramid scheme.

SEC should also investigate investment companies’ financial record. Investigations should advance in getting to know how such a company makes interest for its investors(Clauss, Roncalli and Weisang 1).Question 3: Do you believe that Bernie Madoffs approach to managing hedge funds is an isolated incident or indicative of a more systemic problem on the nature of investments today? Why do you believe this?Madoff’s case is not the only pyramid scheme that has threatened investment today. It is not easy to distinguish as pyramid scheme from a genuine investment company.

This is because the schemes hide their real image by claiming to operate as direct-selling firms.Other pyramid schemes pretend to be multi-level marketing companies promising to make better return within no time. Nevertheless, it is traditionally know that profit comes from selling products and services to consumers but schemes do not perform any sales to gain their profit. Recently, Federal trade commission revised their consumer protection in relation to multi-level marketing. It stated that if he profit gained in multi-level marketing is from direct sales to consumers than it is legitimate.

However, recruiting investors is who sales are made than that is a pyramid scheme those affectsmany participants from losing their money. In most countries, pyramid schemes are illegal and America serves as an example through the conviction of Bernard Madoff (Greenberg, Frayter 7-9).Works citedClauss P., Roncalli T., Weisang G.Risk Management. Lessons from Madoff Fraud.. Waltham:Ervy University &Bentley University. 2009. PrintGreenberg H., Frayter K.Why Spotting a Pyramid Scheme Isnt So Easy. 2009. Web.

3 July 2014Manzakee S. The Madoff Affair. 2008. Web.3 July 2014