The Oedipal twist: Madoff's own sons, Andrew and Mark, turned Madoff in after he told them that the money-management arm of his firm, which ran hedge funds for wealthy investors, was "a giant Ponzi scheme." That term gets thrown around a lot, so we'll remind you of what it actually means: A scheme in which current investors are paid outsized returns not from investing profits but from money put in by new investors.

That is, according to an FBI agent's complaint, exactly what Madoff did:

deceived investors by operating a securities business in which he traded and lost investor money, and then paid certain investors purported returns on investment with the principal received from other, different investors, which resulted in losses of approximately billions of dollars.

All goes well in this kind of scheme until the money stops flowing in. Madoff told his sons that customers had sought to withdraw $7 billion, and he did not know if he could come up with the cash.

Madoff's lawyer, Dan Horwitz, touted his client's "unblemished record" to the Wall Street Journal. But rivals on Wall Street have questioned his curiously steady returns for years.

The complaints against Madoff are shocking. But mostly for the simplicity of the alleged swindle. A Ponzi scheme, in this day and age? It show the need for better hedge-fund regulation — boring! This was a rich-on-rich crime.

The case of Marc Dreier, a lawyer recently arrested on allegations of a $380 million hedge-fund fraud, is far more compelling, with faked-up websites and multiple cell phones. Prosecutors say he tried to sell fake debt instruments to a pension fund.

It all points to a much-needed sweep of the hedge-fund world. But neither Madoff nor Dreier seem to have played a significant role in the housing bubble that could end with 8 million homes in foreclosure. Yeah, the feds got their men. But we didn't get our scapegoats.

In a previous post I said I would shut-up... But I just can't help myself: Probably because I know more about financial implications than the average Silicon Valley individual:

@sample032: It is a well-known "fact" that all banks (including investment banks) fail on a Friday: Probably because everyone is out glow-stickin' it up or something during the weekend.

@deathbychichi: AIG wants government assistance because they don't want private companies to take-over aspects of their business and create spin-offs. Or it's like a methadone-addict asking for help as long as the help provides perpetual heroin. In other words: AIG insured junk-debt; and now they're looking for a cash-based way-out of their debt: Enter the Federal Reserve. Seeing that the Fed is willing to now buy stock as collateral from various companies, as well as sub-prime MBOs; I guess that... well, I really have know idea....

Things are fucked.

Anyway, for an investment for Monday, September 15, 2008:

If you (the active investor) think that financials will go down in price; then buy the ticker SKF: SKF is a double-inverse of the financial sector.

On the other hand, if you aren't totally sure about the Financial Sector losing value: Then for every one share of SKF that you buy purchase four-to-six shares of XLF; that should create a nice hedge.

Lastly, if you honestly think that the injection of liquidity from the Fed, plus the creation of a liquid-pool of capital from the major Wall Street players ($70 billion) will off-set any decline in prices of the Financial sector, then you would be best- off buying XLF out-right.

The disconnect has been long in the making. The economy is a constant topic of discussion in the Valley — but the question is always, "Why aren't we feeling it yet?"

That's because the bicoastal economy has split apart. After the '90s bubble burst, investment banks slashed their presence here, and have not returned in force. With no IPOs and few large acquisitions, Wall Street's investment banks have realized that the geeks are not going to make them rich. And the geeks have realized Wall Street will not make them rich, either. Small boutiques like GCA Savvian and Frank Quattrone's Qatalyst are taking whatever midmarket M&A action there is; Wall Street's local bankers have been reduced to shopping around private investment rounds in companies like AdBrite and Glam Media.

There's even talk of creating new markets for tech-startup securities which bypass the public ones. Sarbanes-Oxley regulations have made going public an even more tiresomely bureaucratic affair; meanwhile, employees at fast-growing companies like LinkedIn and Facebook are itching to realize some of their paper wealth.

The only potential buyers of those shares are "accredited investors," which the SEC defines as individuals with net worth of more than $1 million or steady income of more than $200,000. Netscape cofounder Marc Andreessen recently spoke of the unintended consequences of post-Enron regulations; instead of protecting the public investor, they have resulted in cutting him off from opportunity. The rich will get richer, while the average Joe will never get a chance to invest in the next Google. (Or, one should note, the next Pets.com.)

The Valley's entrepreneurs love to disparage Wall Street. Google's cofounders famously tweaked the bankers' noses by insisting on an egalitarian auction format for the company's IPO. Yet no one has invented a perfect algorithm for distributing the fruits of the Valley's innovation to the investing public. Wall Street's thundering herds of braying brokers, for all their flaws, managed to spread the wealth. The notion of the insular Valley doling out its profits to a crowd of privileged insiders surely appeals to those already inside the circle. But it should alarm everyone else.

Bad idea. Those people have no idea what they're talking about, according to Liz Ann Sonders, chief investment strategist at Charles Schwab:

When Wall Street's almost 1,800 equity analysts figured U.S. earnings growth for the third quarter of 2007, they were 8.2 percentage points too high. Forecasts for the fourth quarter were wrong, too, overestimating profits by 33.5 percentage points, the biggest miss ever.

• A Goldman Sach survey of CIOs found indications of "decelerating spending growth."
  
• ChangeWave Research said 24 percent of IT departments will increase their budgets in 2008 compared to the fourth quarter.
  
• Cisco CEO John Chambers said he expects 2008 to be "lumpy."
  
• The CTO of Sony Pictures says annual eight-figure capital expenditures in tech will remain flat.

(Photo by )

Here are the highlights, handily pared down from SeekingAlpha's voluminous list:

• JPMorgan: Raises estimates, juiced about surprising revenue and operating profits.
  
• UBS: Raises price target from $38 to $41, still has concerns about erosion in core listings growth.
  
• Merrill Lynch: Reiterates Neutral rating, still waiting to hear if other new investments will flop like Skype.
  
• Goldman Sachs: Raises price target from $43 per share to $51, likes stable growth.
  
• Deutsche Bank: Downgrades eBay from hold to sell, complains about 2 percent transaction volume growth (and potentially declining soon), user disengagement, higher ad costs, declining purchase frequency, rising seller costs and operating margin pressures.
  
• RBC: Raises price target from $40 to $44, but only because they're optimistic about the whole sector.
  
• American Tech: Raises price target from $45 to $47, approves decision to cut auction listing fees.

  (Photo by Ryan Fanshaw Photography)
  

Deutsche Bank analyst Jeetil Patel told clients, "One quarter does not make a trend." He's also disappointed Yahoo didn't adjust its expectations for the last few months of 2007, even after acquiring BlueLithium, an online-advertising startup, and Zimbra, a Web-based software company.

Rob Sanderson, an analyst with American Technology Research, said he's waiting for Yahoo to do more with the Right Media Exchange, as Yahoo president Sue Decker has been promising since Yahoo acquired the company in the spring.

Jordan Rohan, analyst with RBC Capital, was more optimistic. "We think the worst is behind Yahoo for now."

But remember, this is also the guy who valued me-too platform-maker MySpace at $15 billion late in 2006.

(Photo by r.s.m.b. Sees)

First, a caveat: Fortunes have been made and lost trying to suss out the psychology of the stock market, and if I truly understood it, I'd be working on Wall Street. But, like a psychic reading tea leaves, every so often, I might glimpse a pattern that fits the situation.

Apple shares have run past most analysts' targets and, some believe, past the economic realities of how Apple can perform. The rumors sweeping Wall Street of cutbacks in production of iPhones — from 9 million to 4.5 million — are just a sign that people are looking for a way out of their own overblown expectations. Apple has long said it expects to sell 10 million iPhones next year. Not this year.

What's ludicrous is that anyone believed that Apple, famous for its lean supply chain and careful inventory management, would have put in firm orders for 9 million iPhones in the first place. If there are any cutbacks being made, it's in Wall Street traders' lurid fantasies. And as they rein in their imaginations, they inevitably rein in Apple's high-flying stock.

(Chart by Yahoo Finance)