Previous Columns
9:00 AM EST, Wednesday, December 17, 2008: The Dow rose 4.2% yesterday because the Fed cut interest rates to effectively zero. The Fed did this because it believes the economy is in the toilet and needs the boost of "free money." Of course, the last time the Fed did this, it was trying to kick the economy out of Tech Wreck of 2002-2002. And it effectively created the housing boom and, now, the real estate bust.

God knows what comes next. What we do know -- or at least what I know -- is that the Government has become the primary force for which way the stockmarket now moves. This meddling by the Government is why it's impossible to figure this market. My recent short recommendations (like D.H. Horton, Best Buy and Google) are all up. My long recommendations (sadly, few and far between), like yesterday's DGP and earlier GLD are up. Overall, though, I suck. Fortunately, I'm mostly in cash.

The Federal Government has become such an overhang that I will admit to being totally baffled. December is typically a good month. And I suspect that hedge funds with money are buying for two reasons -- because they're afraid of missing the bottom (assuming that's what we hit recently) and because they want their funds to look a bit better at year end. We are getting close to the end of the year.

More Madoff lessons: A Madoff FRAUD victim told CNBC today that the major lesson she had learned was "Don't put all your eggs in one basket." I don't think that was the key one. My lessons:

1. Don't get suckered in by the alleged high returns and dump more money in. If anything, take money out. Don't put more money in. It destroys your allocation. Re-balance regularly.

2. More money to manage doesn't bring bigger results. In fact, it's much harder to make big returns with big money.

3. More money and more success bring more hubris. More hubris brings more invincibility. And more invincibility leads to mistakes, which leads to more gambles and ultimately to cheating. There's no evidence to suggest that Madoff didn't do OK at one point. Only when he got too big and things went against him did he resort to lying, cheating and stealing.

4. Be wary of people who give large amounts of money to charities. There's usually a reason beyond the inherent goodness of the charity or their heart. For people in finance, charity is a sales expense.

5. Due diligence makes sense. Asking some of the financial institutions who flunked Madoff would have been a major eye-opener. Societe-Generale kept its clients away from Madoff -- though it still lost billions with that rogue trader.

6. Don't trust fund of funds to make your investment decisions. That puts another layer of fees and incompetence between you and the manager.

7. There are actually very few good money managers. All go wrong eventually. The lady's point about all your eggs in one basket does make sense.

8. Back test the strategy. If he's playing commodities and says he's had a consistent 12% return for the past 10 years. Check out if this is plausible.

9. Don't trust the SEC, the state regulators or anyone else to protect you. NY AG Cuomo and his Mass equivalent Bill Galvin did wonders for holders of auction rate securities. But even that was after the fact, not while it was going on. Bloomberg's story this morning is an eye-opener:

Dec. 17 (Bloomberg) -- U.S. Securities and Exchange Commission Chairman Christopher Cox said the agency failed to act for almost a decade on “credible and specific allegations” of wrongdoing by Bernard Madoff, who authorities say bilked investors of as much as $50 billion.

Allegations dating back until at least 1999 “were repeatedly brought to the attention of SEC staff, but were never recommended to the commission for action,” Cox, 56, said in a statement yesterday. He announced an internal probe to review the “deeply troubling” revelations.

“He’s revolted by what he found out, but it’s also in his interest to be revolted,” said James Cox, a securities law professor at Duke University in Durham, North Carolina who isn’t related to the SEC chairman. “He’s taken a lot of heat over SEC enforcement.”

The SEC, already faulted in connection with the collapse of Bears Stearns Cos. and Lehman Brothers Holdings Inc., now faces criticism for failing to detect what Madoff termed “a giant Ponzi scheme.” Senate Banking Committee Chairman Christopher Dodd yesterday called on the agency to explain how the “massive fraud” went undetected. Madoff, 70, was arrested Dec. 11 after he allegedly told his sons that his eponymous firm, founded in 1960, was no more than “a giant Ponzi scheme,” the SEC said.

Instead of wielding subpoena power to obtain information, SEC staff “relied upon information voluntarily produced by Mr. Madoff and his firm,” Cox said. ...

The internal review will include “all staff contact and relationships with the Madoff family and firm,” he said, and mandate the recusal any SEC employee with more than an “insubstantial personal” contact with Madoff and his family.

Eric Swanson, a former assistant director of compliance and examinations at the SEC, is married to Madoff’s niece, Shana, who was a compliance lawyer at the Madoff firm. Swanson left the SEC in August 2006 and is now the general counsel of Bats Trading Inc., the third-largest U.S. equity exchange by trading volume.

In Fraud Case, Middlemen in Spotlight
By ERIC KONIGSBERG

As a go-between who shepherded clients and their money to Bernard L. Madoff, Walter M. Noel became so prosperous that he was only too happy to show off his good fortune to the world.

In 2002, Vanity Fair dispatched the photographer Bruce Weber to shoot a lavish spread of Mr. Noel’s wife and their five grown daughters at his home in Connecticut (“Golden in Greenwich,” read the headline). That was followed, in 2005, by a Town and Country story on the Noel family’s tropical retreat in Mustique.

These houses — joining Mr. Noel’s addresses in Palm Beach and Southampton and on Park Avenue — were visible evidence of his investment empire, the Fairfield Greenwich Group, which had $14.1 billion in February.

Mr. Noel’s firm, including four sons-in-law as partners, now has the distinction of being the biggest known loser in the Madoff scandal, to the tune of $7.5 billion.

For Fairfield Greenwich and a handful of other big feeder funds that were essentially pouring billions of dollars each into Bernard L. Madoff Investment Securities, a lucrative business evaporated last week when federal prosecutors said Mr. Madoff had been operating what may have been the biggest Ponzi scheme in history.

Mr. Madoff puts his own fraud at $50 billion and discussed details of it with federal prosecutors in New York on Tuesday, according to people briefed on the meeting.

The Fairfield Greenwich Group charged clients an annual fee of 1 percent of assets invested for providing access to exclusive hedge funds and performing due diligence on them, in addition to a fee of 20 percent on investment gains each year, according to people close to the fund’s operations. At that rate, an investment of $7 billion paid Mr. Noel’s company $70 million annually, and then $140 million more in a year in which Mr. Madoff reported a 10 percent gain (he steadily reported returns of 10 to 12 percent). ...

Mr. Noel’s largest fund, the $7.3 billion Fairfield Sentry fund, invested exclusively with Mr. Madoff. Mr. Noel has not disclosed how much of that was his own or belonged to family members and how much was his investors’. One of his daughters said, through a spokeswoman at Rubenstein Public Relations, that “a very substantial part of each family member’s personal assets was invested with Bernard Madoff alongside those of our investors.”

Fairfield Greenwich is based on East 52nd Street, though Mr. Noel worked frequently from Fairfield with his partners, Jeffrey Tucker, formerly of the Securities and Exchange Commission, and Andres Piedrahita. The 78-year-old Mr. Noel had a master’s degree in economics and a law degree — both from Harvard — and had worked for decades in banking before he founded Fairfield Greenwich, which established itself primarily as a marketing entity.

“As it grew beyond, you know, an informal, personal concern where Walter and a couple of people were investing money for his friends, they developed as a marketing force to put Madoff and investors together,” said George L. Ball, a former executive at E. F. Hutton and Prudential-Bache Securities who became friends with the Noels decades ago when both lived in Greenwich.

Mr. Noel met Mr. Madoff in the early 1980s and the businesses of both men grew symbiotically. Mr. Noel was as good a salesman as Mr. Madoff could have wished for. Mr. Noel is routinely described as affable, assured, graceful and nonaggressive. “He’s a terribly good person, almost in the sense of Jimmy Stewart in ‘It’s a Wonderful Life’ combined with an overtone of Gregory Peck in ‘To Kill a Mockingbird,’ ” Mr. Ball said.

Mr. Noel grew up in Nashville and met his future wife just after law school, when mutual friends set them up on a blind date.

They built a modestly prosperous life in Greenwich, and were perhaps best known among associates for their Christmas cards— “the people with five stunning girls,” in the words of a family friend.

“As we know, Walter’s success came after several thin years,” wrote John J. McCloy, a banker from Greenwich who described himself and his wife, Laura, as the Noels’ “best friends for more than 30 years,” in May in a letter recommending the Noels to membership in a private club.

In an interview, Mr. McCloy declined to name the club and said that he and his family had not invested with Mr. Madoff.

Mrs. McCloy went on to praise the Noels for their “personal charity.”

“Monica is a person, when friends have been down on their luck, who will quietly send a check in the mail, or airline tickets,” she said. ...

People in the industry continue to question Fairfield’s due diligence. Michael Markov, a hedge fund consultant, said that he was hired by a fund two years ago to look into Fairfield Sentry’s returns and found that it was “statistically impossible to replicate them,” he said.

Mr. Markov said that he found only one hedge fund whose returns correlated to Mr. Madoff’s. That was the Bayou fund, which was prosecuted by the government for fraud in 2006.

The Indian and the White Man
Chief, 'Two Eagles,' was asked by a white government official, 'You have observed the white man for 90 years. You've seen his wars and his technological advances. You've seen his progress, and the damage he's done.' The official continued, 'Considering all these events, in your opinion, where did the white man go wrong?

The Chief stared at the government official for over a minute and then calmly replied. 'When white man find land, Indians running it. No taxes, No debt, Plenty buffalo, plenty beaver, Clean Water; women did all the work, Medicine man free. Indian man spend all day hunting and fishing; all night having sex.'

The chief leaned back and smiled. 'Only white man dumb enough to think he can improve system like that."

This column is about my personal search for the perfect investment. I don't give investment advice. For that you have to be registered with regulatory authorities, which I am not. I am a reporter and an investor. I make my daily column -- Monday through Friday -- freely available for three reasons: Writing is good for sorting things out in my brain. Second, the column is research for a book I'm writing called "In Search of the Perfect Investment." Third, I encourage my readers to send me their ideas, concerns and experiences. That way we can all learn together. My email address is . You can't click on my email address. You have to re-type it . This protects me from software scanning the Internet for email addresses to spam. I have no role in choosing the Google ads on this site. Thus I cannot endorse, though some look interesting. If you click on a link, Google may send me money. Please note I'm not suggesting you do. That money, if there is any, may help pay Michael's business school tuition. Read more about Google AdSense, click here and here.