The recently discovered financial frauds carried out by Stanford and Madoff are the tip of the iceberg. With over 10,000 hedge funds in the US alone and many more in Europe and in the offshore tax havens there will be many more conmen uncovered in the months and years ahead.

The hedge funds are an unregulated industry which “manages” several trillion dollars worldwide. These types of frauds have been allowed to go undetected because of the complete lack of hedge fund regulation and to a lesser extent the financial naivety of the investors in such schemes. These investors are largely very rich individuals who have benefited from the massive redistribution of wealth that has gone on over the last 25 years from the workers and poor of the world to a new breed of super rich individuals.

The con has been easy to run in rising financial markets with money flowing into these schemes at a faster rate than it flowed out. Madoff had never ever made a financial transaction in over 13 years and Stanford had issued false investment certificates and put investors’ money in property and private equity schemes instead of as he claimed in financial markets.

But once markets began to fall and investors made withdrawals the cons were eventually exposed. This is not just bad news for the hedge fund industry but investment firms and capitalism as a whole. Clients of hedge funds have stepped up their withdrawals from these funds and a large part of the meltdown in markets this week was down to hedge fund withdrawals. But investors and individuals are loosing their trust in all investment management schemes. This will put additional downward pressure on the financial markets. It also means in the long term capitalism will find it yet more difficult to raise money to bail it’s self out using financial markets. It will have to increasingly turn to governments, that is ordinary people to fund its bail outs and investment projects.

We may laugh at the madness of investment capitalism and the naivety of its rich investors but it is the workers and poor of the world which will eventually have to pay for these crooks scams.