The difference between Madoff and the Oregon PERS

Bernie Madoff differs from the managers of the Oregon Public Employees Retirement System investments in one crucial aspect. Madoff pretended to be doing something brilliant to produce steady gains when he was not. The PERS managers are doing it in full view of the public. Amazingly, nobody seems to care.

At the end of October, they were deeply in the hole for the year, but they still were able to brag about doing better than the market. This is straight horse pucky. They are doing better because, for a very large portion (perhaps 20%) of their investments, they know they have lost money but not how much. Their investments in real estate and "private equity" are so illiquid that they don't know what value to assign.

So they are continuing to assign the last value they could come up with. In reality, based on what others in the same asset class have done in the past year, they have likely lost 80% of their value.

There's no great secret to making extra money in an up market. You simply use leverage, borrow at fixed rates, invest at higher returns, and the difference accrues to the small equity base rather than being spread over the whole investment. But as Galbraith wrote in "The Great Crash of 1929," when the market goes down, people discover that the magic of leverage works in both directions. Thus the spectacular gains the PERS enjoyed for several years are quickly turning into massive losses.

The source of all this woe is that the Oregon legislature has declined to fix PERS. It has permitted the managers to make risky investments that, during the good years, went a long way towards backfilling the Unfunded Actuarial Liability (UAL). It was never a sound, long-term strategy and the consequences are coming back to haunt the state.

Wall Street may bring Peace to the Middle East

It may seem odd, but the Wall Street debacle of the past eighteen months may provide the impetus for peace in our time. I don't think this was intentional, although I'd be prepared to thank them if it turns out that this was planned and it proves successful.

The first stage was the destruction of demand for oil, which has brought the price of a barrel of crude down by $100. Without high priced petroleum, the leading sponsor of anti-American and anti-Israeli activities in the region, Iran, will not be in a position to do nearly as much. I rather doubt they will continue active pursuit of nuclear weapons. When you need all your money to buy rice, or whatever Iranians eat, you may have to give up on plutonium for a while. And Hezbollah may need to go on a financial diet as well.

On the flip side, the general decline of wealth and income among Wall Street types had affected their ability to fund Zionism with the same esprit, even before the events of the past week. To this, Bernie Madoff may have added the coup de grace. The $50 billion he seems to have stolen came disproportionately from Jews, and perhaps even more so from Jews with a special fondness for letting another Jew manage their money. Some of them were definitely among Israel's best friends.

Maybe it won't work out, but if it turned out that peace could come from the antagonists running out of the funds necessary to remain obstinate, it would be an elegant and symmetrical solution, as mathematicians would say.

Madoff -- Where was the New York State Society of CPAs?

The firm of Friehling & Horowitz, auditors of sorts for Bernard Madoff's financial empire, belonged to the New York State Society of CPAs. You can go to their Web site and search for Mr. Friehling yourself. He's right there, a member, apparently in good standing. More than in good standing. A July 15 newsletter from NYSSCPA shows board members of their various chapters. David G. Friehling is shown as a board member for the Rockland chapter. Earlier in the year, on April 15, he has an article in the newspaper of the NYSSCPA and is identified as the president of the Rockland chapter. The newspaper is, ironically, named The Trusted Professional.

CPAs perform three levels of services on annual statements. They render compilations, reviews, and audits. A single person would have trouble doing a compilation on financials as complex as Madoff's. A proper compilation would have been impossible without a team of CPAs, and Friehling is reported to have worked alone.

But an audit?! It can't have been a secret in Rockland, or at the HQ of NYSSPCA, that Friehling & Horowitz audited Madoff. Any sensible CPA must have realized that he could not either (a) conduct an audit that would meet AICPA standards or (b) remain independent when clearly, he can't have had any other clients. He has no Web page and he runs from essentially a storefront. No alarms bells anywhere?

The NYSSCPA has noticed the Madoff scandal and published an article on it. The article does not note, as other journalists have, the peculiarity of Madoff's outside auditor.