'Bernard L. Madoff Investment Securities LLC harks back to an earlier era in the financial world: The owner's name is on the door. Clients know that Bernard Madoff has a personal interest in maintaining the unblemished record of value, fair-dealing, and high ethical standards that has always been the firm's hallmark.'

It harks back to an earlier era all right, that of Charles Ponzi, famed fraudster in the 1920's; this looks like the world's biggest ever financial fraud (well, excluding the US housing market), with investor losses estimated from $17bn to $50bn. I always recall as a rookie buy side analyst meeting a fast-growing and highly rated equipment leasing company that was seeking secondary funding; the CEO, a charismatic self-made millionaire with a luxuriant moustache made an enthusiastic pitch. My boss didn't say much during the meeting other than repeatedly questioning how the cash-flow squared with the earnings statement but beckoned me to the window as they left and scrutinized the CEO's chauffeur driven limousine. 'I knew it. The guy's got a small rodent on his lip, his auditor operates out of a broom cupboard and to top it all he's got the personalized number plate of a classic egomaniac. It should spell FRAUD.' And indeed about a year later the company collapsed in an accounting scandal. Madoff (ex Chairman of NASDAQ no less) was another domineering CEO, used an obscure accounting firm, and had a slick line to sell suckers who believed consistent returns of 1 to 1.5% a month for over a decade passed the reality check. A split-strike conversion strategy using proprietary 'black box' quantitative techniques to minimise portfolio volatility? That's a fancy way of describing an option collar strategy, selling out of the money calls while buying out of the money puts on the same index, but still makes the returns suspiciously smooth. Statistically, markets just don't work like that; it was either fraud or large scale money laundering for Latin American narcotics entrepreneurs (and personally I can't understand how certain other 'black box' hedge funds otherwise generate their long-term returns using arcane and hyperactive trading strategies). The inevitable result of this is to create a new wave of hedge fund redemptions by paranoid investors (and you have to be seriously paranoid to accept negative yields on T-Bills), and blow an even bigger hole in Wall Street's credibility as anything more than a badly run casino. A key principle in investing is to be suspicious of gratuitous complexity; whether it's Enron or a hedge fund, if they can't coherently explain how they make their money in a couple of lines, avoid. 'Star' corporate or hedge fund managers should come with a health warning attached; as I explained many months ago in The Hedge Fund Hustle, many strategies employed recently to boost returns are borderline lunacy. The Madoff news, combined with the failure of Detroit's Congressional bailout, which would be devastating for auto residual values and hence bank loan portfolios (although I'd expect a Plan B solution to emerge, perhaps using TARP funds), has understandably spooked investors, but my recent positive near-term outlook on equity and energy markets stands.