Lipman: There's been some speculation that there was a don't-ask-don't-tell mentality among some of the more sophisticated investors. Do you buy that—that people thought perhaps he was front-running, perhaps he was doing something, but they didn't want to know about it?

Chanos: Well, you know, you hear these stories with the great benefit of horrible hindsight, and at least in the Madoff case there appears to be a paper trail of people who were concerned.... rightly concerned about this fellow's activities for a long time.

Wiesel: Listen, I don't understand that. What we haven't seen, first of all, the accountants—what about the accountants? I know our accountants from the foundation and so forth went through every month—

Chanos: Every great financial fraud has had audited statements. [Laughter]

Wiesel: Absolutely. But not only that, not only that but you say what [did they do] with the money? He told us what he did with the money. He bought a hundred shares of Coca-Cola but he sold 500 shares of Pfizer. It was all in the monthly, or weekly, report. Except, it was a lie!

Pitt: Well he wrote the monthly reports. His firm generated its own statements.

Lipman: Right, but is there a way to check that, Harvey? Can there be some guidelines put in place, some regulations put in place, so that there would be some sort of check on the kinds of statements that Professor Wiesel was getting?

Pitt: Well I think that's coming. I think we're clearly headed toward greater regulation, and I want to pick up from where Jim left off with respect to the secrecy aspect. The notion that you're putting your hard-earned money into something but you're not allowed to know what they're doing with your money really creates all of the difficulties, and it's part of a great con job, and whatever else you say about Madoff, he was a great con artist. But there has to be a way and it's fairly simple, to check on what the assets of the fund are. I mean, this is not rocket science, unfortunately. If it were, I would be happy to say that, but the question is if somebody says "I've got such and such and such assets," there's a very simple test—where are they, and how do we check to make sure they exist? This is, this is basic, fundamental accounting 101, and that's what's really required here, that was why, I said earlier in response to your question, why at least having an outside compliance audit every year, or every other year, would certainly reveal whether there were actual assets that were said. Here you have somebody who purported to be engaged in all sorts of trading, and the trades never occurred, I mean it was all fictitious.

Lipman: There's no way to electronically track that, that if you're putting 500 shares of Coca-Cola in a statement that it's somehow, that it needs to be reported and that it needs to all be correlated?

Pitt: There are several ways.... You shouldn't have, in my view, self-dealing. People who invest money should be required to deal through a non-affiliated entity so that there are actual checks; now that's not to say that the person who makes the trade can't be brought into the fraud, but I mean again, this is not very complex. You require the person to deal with outside, completely independent entities, you require actual statements, you require a monthly review and a certification of where the assets are; this can be done electronically, very simply and very easily. The fraud here was he claimed to have made investments and he made no investments.

Lipman: Are we going to have regulations coming down the line that will help us determine that?

Pitt: This is something that ultimately shouldn't even require regulation; this is fundamental to investing. You say you took my money and put it into something? Show me. Show me that you did it.

Lipman: So, Jim, to your point, you say, if you don't know what's going on, if they're not telling you how they're doing it, then you shouldn't be involved, but that's the whole basis of this black-box investing with a hedge fund—

Chanos: Well, let's go further, and maybe open this up, because that's still happening right now in our banking system.... And some might say the government complies. I mean, take a look at Lehman Brothers. Lehman Brothers, when it went under, had $150 billion of notes and bonds outstanding, of which people had written credit default protection on. And they had about $20 billion in equity the day they went under, on their balance sheet. The bonds currently trade at 10 cents on the dollar, and the CDS contracts, the credit default, were settled at 91 cents on the dollar, which means if you wrote protection, you had to pay out 91 cents. It equates roughly with the 10 cents that the bonds trade at now. That means that as of right now, and this happened in October, when the CDS auction occurred, that Lehman's debt [was] haircut by $135 billion. If we add the $20 billion of equity they had on their financial statements at the time, which was obviously worthless, that means that the hole in the Lehman Brothers balance sheet, when they went under, was roughly $150-plus billion. To give you an idea of the magnitude of $150 billion, the whole of Enron's balance sheet when the dust settled, all the claims were paid, frauds unwound, was about $60 [billion] or $70 billion. Lehman is twice Enron.... And we haven't even gotten to AIG yet, or some of the others. The level of accounting chicanery that is going on in these major institutions is stunning.