Meanwhile, a federal judge on Monday threw a lifesaver to investors who may have been duped, saying they need the protection of a special government reserve fund set up to help investors at failed brokerage firms.
U.S. District Judge Louis L. Stanton ordered that clients of Madoff’s private investment business seek relief under a federal statute created to rescue cheated investors. Stanton also ordered that business be liquidated under the jurisdiction of a bankruptcy court and named attorney Irvin H. Picard as trustee to oversee that process.
Stanton signed the order after the Securities Investor Protection Corporation asked that steps be taken to protect investors in the scheme, which has ensnared several major banks and prominent figures as victims and could result in as much as $50 billion in losses.
Congress created the SIPC in 1970 to protect investors when a brokerage firm fails and cash and securities are missing from accounts. Funds can be used to satisfy the remaining claims of each customer up to a maximum of $500,000. The figure includes a maximum of up to $100,000 on claims for cash.
Not sure how I feel about this, especially considering this nugget from Atrios last week:
“I am shocked, as I know you are, by this fraud,” Merkin wrote. “As one of the largest investors in our fund, I have also suffered major losses from this catastrophe.” Analyst Henry Blodget wrote on his blog Friday that some savvy investors figured Madoff was up to something because his returns were so high. “Many Wall Streeters suspected the wrong rigged game, though: they thought it was insider trading, not a Ponzi scheme,” Blodget wrote. “And here’s the best part: That’s why they invested with him.”
The entire scam is having serious repercussions:
Around the country, the nonprofit community is reeling from the Madoff scandal. At least two other foundations have been forced to close their doors, having lost virtually all their assets to what authorities describe as a Ponzi scheme that depended on new investment money to pay off on earlier investments.
Charities that depended on those foundations for financing, like the Innocence Project and the UJA Federation, and wealthy donors like Norman Braman, Mort Zuckerman and J. Ezra Merkin have now added the Madoff scandal to the list of reasons that fund-raising has been crimped this fall. In some cases, the foundations had placed their money with Mr. Madoff directly; others had invested with funds that turned assets over to him. And some nonprofits relied on a steady stream of money from donors, like Ms. Levy-Church, with now vanishing fortunes.
Have there been any changes to any regulations, any changes to the way business is conducted since this slow-motion catastrophe started a few months ago? For this outsider, it really looks like the entire system is corrupted, there are no checks and balances, and the market is really looking like a government guaranteed casino. People invest their money in wild schemes, profit for a while, and then when it goes under, they get their money back from the taxpayer.
Correct me if my impression is wrong, but the entire system makes Enron look like a solid business model right now.
Phoenix Woman
That’s pretty much it. Phil Gramm (with help from Robert Rubin, who now rues what he did) gutted the safeguards that kept the oncological species of free-traders from going hog wild, and this was the inevitable result.
sparky
Yup. Unless you are underwater on your mortgage or your health care bills or your education loans. Then you are too small to rescue. Think of it as a safety net that only holds up the really big fish while the small ones fall to the ground and expire.
Comrade Stuck
Bush’s first SEC pick Harvey Pitt said it best, that we could look forward to a "Kinder an Gentler SEC"/ (or , get out of their way, THEY have money to steal)
It seems like these days, it’s only poor peoples money that is safe.
MattF
This ‘bailout’ is peanuts compared to the losses. Henry Blodget is following this stuff pretty closely– Blodget’s list of ‘known’ losses is up to around $30 billion.
TCG
When Tom Daschle accused the Bush Administration of trying to Enron-ize the economy in 2001 or 2002, I thought he was engaging in a clever hyperbole.
With the passage of time, Daschle’s hyperbole looks now like a solid prediction.
Napoleon
They were talking about this on the BBC overnight playing on my local NPR station this morning and the guy they were interviewing was talking about one of the investors who was a retiree who was so impressed with the returns his retirement was getting from this guy that he went and got a home equity loan and took all his equity out of his house and invested it with this guy. Now he has no retirement fund and his only other substantial asset is fully leveraged.
One thing I have a hard time believing is that he did this all on his own. It was just way too big of a fraud not to have accomplices.
The Other Steve
About 25 years ago, my grandparents lost about $250,000 in one of these types of scams. I can’t recall exactly which one, I seem to recall it being an insurance annuity or something though.
This was a man who came of age in the depression and never trusted banks. The reason he’d invested the money was because my uncle had talked him into it. After that failure, he pulled all of his money out of banks. He invested everything he had buying property. He said buying land was the only safe investment in this god damned world. Not houses, but land. Just plain flat land. farm land, ranch land, you name it.
I am increasingly coming to the same opinion.
Bob In Pacifica
Send that man an envelope.
bootlegger
Enron is the prototype of the modern business model.
But the problem is too much regulation you see. If we had simply gone into hear-no-evil, see-no-evil, speak-no-evil mode then none of these problems would have come to light and we’d all be blissfully ignorant while we wondered why our bellies rumbled from hunger and our children shivered in the cold. Because this was Life Under Capitalism before we insisted that our government do something to regulate the Free Marketeers.
Now here we are again, having to explain yet one more time why we can’t simply let the Greedheads run wild. Tim F. was correct on the other thread, business is about greed, period, and we shouldn’t forget that or try to change it. But we should damned sure regulate it and keep it under control. Greed won’t go away with more control and business will continue, it just won’t hurt so many people in the process.
The Other Steve
He had people working for him, and it’s hard to believe they weren’t aware. Someone had to be handling the accounting and sending out statements.
Napoleon
@MattF:
Blodget has an interesting article in the current Atlantic. He has a perspective that only someone who has been around for a while on the inside could have.
AhabTRuler, V
@The Other Steve: At this point I would invest in precious metals, preserved foodstuffs, and ammunition.
Napoleon
@The Other Steve:
Right now would be a really bad time to buy real estate.
Incertus
@Phoenix Woman: Not to nitpick, but I haven’t seen much of an indication that Rubin rues anything other than it not working out the way he’d hoped. He hasn’t exactly backed off his policy positions.
As to the post, I remember hearing, growing up, a couple of maxims over and over. You can’t cheat an honest person, and if a deal seems too good to be true, it probably is. Seems to me that both apply in this case.
The Other Steve
BUY MORE AMMOES!
AND GUNS! LOTS AND LOTS OF GUNS! AND AMMOES!
The Other Steve
Possibly, although the values are dropping. I was thinking about maybe buying 40 acres out in Colorado. Start planning now for retirement.
Napoleon
@Incertus:
I don’t think that is accurate. I think he now acknowledges that the government needs to actively address the income inbalance that has widened since the early 1970’s, whereas when he was in the Clinton admin he thought if you paid attention to good budgeting the rest would automatically take care of itself (and the person inside the admin who had a position like the one he has today would be Robert Reich). So basically Rubin has all but acknowleged that Reich was right.
dr. bloor
I don’t have a problem with this as long as lazy-assed hedge funds who threw money at him are treated as a single entity (rather than a situation where each of their investors are treated as individuals with rights to claim). This will give those few little old ladies a bit of a safety net, but won’t do the greedheads much good.
The Other Steve
Norm Coleman is lawyering up in Minnesota.
Apparently he was taking home improvement advice from Senator Ted Stevens.
Napoleon
@The Other Steve:
If I had a lot of money I could sit on for a long time I think I would wait another 6 months or so and then start bottom feeding in the market. One thing though I think when the markets eventually pick up again the days of suburban sprawl are gone and the action will be in fill in the cities and inter-ring suburbs. The thing is though, I think you are going to have to be prepared to sit on the property for a while.
J.
Here’s my suggest: Forget regulations. They don’t work. I say tar and feather this guy, publicly, on primetime, and let him hang out in a stockade for a few hours, with extended coverage on C-SPAN.
The only way "we" are going to change the system/lessen corruption is making an example out of these guys by publicly embarrassing/humiliating them.
While not technically murder, Madoff has done harm to more people than any domestic terrorist or murderer has. While many of those people should have known better, there are plenty (like the state workers in Fairfield, CT) who had no clue.
This whole thing DISGUSTS me.
AhabTRuler, V
@Napoleon: Well, at least I don’t have to listen to moron assholes talking about flipping properties anymore.
In the DC-Metro area real estate is beginning to take on fire sale proportions, but the bubble was extra-stoopid here.
Pat Cleary
Regarding Madoff and the SPIC. I believe that the coverage is only offered to securities that are regulated by the SEC. I thought Madoff was involved in derivatives swaps and the other arcane stuff. Is there really coverage or is this an attempt to protect the banks and the rich investors?
AhabTRuler, V
Your not wrong. I fondly remember the collapse of Enron. Good times. Ah, to be there again.
bago
If you chose to put people behind bars one year for every million they lost… this guy would be looking at 50k years behind bars.
Montysano (All Hail Marx & Lennon)
@The Other Steve:
I was going to disagree, until you said "Not houses, but land." For me and mine, we’re thinking 10-20 acres down in the Black Belt region, plenty enough to grow stuff and raise a few animals. Get a job teaching school.
So far, J. H. Kunstler has been very correct. If he continues to be correct, I want to be far away from the doomed suburban areas.
Svensker
Aw, the poor widdle rich people lost their moneys? Cuz they beweaved the nice man wif the 12% return? Awwwwww.
Fuck them very much. They can keep their damn mitts off my tax dollars.
AhabTRuler, V
Yay! It’s the Morgenthau plan for America! We’re all subsistence farmers now!
Chinn Romney
You’re probably thinking about Prudential Securities/New Era. That one nailed alot of retirees.
p.a.
Relax. I’m sure our 401’s and pensions (remember them?) are next in line for a big wet greenback kiss.. Right, Washington? Hello? helllloooooo…
The fact(oid?) I’ve seen: the last 30 yrs. is the first time in US economic history (good records being from say late 1800’s on) that wages have not increased in concert with productivity. If that $$$ didn’t go towards wages, it went…?
Church Lady
While a steady 10% return on an investment, year in and year out, irregardless of overall market conditions, might seem to good to be true, I can see how individual investors could be taken in. A lot of these people had been investing with this man for over thirty years and increased their investments with him over time as their trust in him grew, some reaching the point that they had their entire life savings invested with him. Many were probably not the most market savvy investors and probably looked at that steady 10% return the same way one would look at the annual return on a bond. With the way the Dow doubled in a period of seven or so years, 10% annually doesn’t seem like an unreasonable expectation for a small individual investor to have. My retired parents have annuties that guarantee a 7% return. Of course, that return is determined on the value of the underlying investment, so their 7% return right now is based on a lot less money than they initially invested. Ouch.
On the other hand, large institutional investors like banks and hedge funds are different. These investors are supposed to be the most savvy and technically knowledgeable and are the ones that drive the markets. That steady 10% return, irregardless of market conditions, should have thrown up red flags all over the place. For some, it did.
The available protections should be there for the individual investors that were rooked. For the institutional investors that should have known better, I’m not so sure.
Montysano (All Hail Marx & Lennon)
@AhabTRuler, V:
Ahab, I really hope Kunstler is wrong, but I fear he’s not.
We’re all Tom Joad now.
iowa housewife
Now maybe it is time to stop blaming low income homeowners for the collapse of our economy.
AhabTRuler, V
That’s terrible. I mean, I can’t stand Steinbeck.
Andrew J. Lazarus
This was an under-enforcement issue. The auditors are in on the scheme (probably not on purpose, they just took Madoff’s word). The failure of the government to spot-check the audit? Well, even under WJC, and much more so under W, businessmen are gods. Scrupulously honest. Police are for Negro crackheads.
Brick Oven Bill
The lure of glittering prizes and endless compromises seems to be widespread in certain areas of Palm Beach and New York. Taxpayers have no responsibility to help these millionaires, who probably knew better.
Judge Stanton is wrong, granting him the benefit of the doubt.
p.a.
Actually, it was the model It was just a little ahead of its time. If they had waited a while, or been less greedy right from the start, they would be here to join the feeding frenzy. How they would have morphed into a financial, or just plain blackmailed the gvt. with threats of power system collapse, I don’t know. Maybe both.
Xenos
You have it a bit backward. Madoff was his own back office, and for the most part hedge funds put investor money in his vehicle, and the hedge funds then took 20% of the client "profits". Sure, a few people must have helped him do this, but his main co-conspirators are the hedgies (fiduciaries!!) who know his super-secret proprietary scheme must be bogus but who made a living providing him with $$ and blocking the transparent view that their investors should have had into their own investments.
It was all pretty brilliant. You can’t invest unless you have the kind of money to go into a hedge fund, and since it is a hedge fund, you give up the right to see what exactly is going on. There were some long-term investors who invested directly with Madoff, but what kept the scam going and growing was the flight of capital to unregulated hedge funds over the last 10 years.
Since the hedging strategies did not work so well once there were a couple hundred funds trying to game the same system, they needed some sort of reliable route to a guaranteed return that justified their fees, and left enough profit for it to be worth the trouble for the investors. The hedge funds became less and less hedging vehicles and more and more connections for insider-based schemes.
I fear that there are a few more Madoffs out there.
bootlegger
Before Y2K a bunch of good-for-nothing grad school layabouts were doing our drunkin’ theory thing when the topic of "what will be most valuable after the crash" came up. Of course you’d need guns ‘n ammo, canned or dehydrated food, and access to heating fuel (wood). But if you really wanted to be wealthy after the crash, the most valuable commodity would be booze. Stock up on all the cheap liquor you can find in 1.75 liter plastic bottles and laissez les bon temps roulez!
liberal
@The Other Steve:
Of course land is the best investment in the world, as Henry George understood. (In the long run only, of course.)
But the best land to invest in is land that has a good chance of being upzoned for more profitable development, whether or not it has a house on it.
liberal
@p.a.:
There’s only two other things it could go to: profit (capital) and rent (land).
Mrs. Peel
Agreed. Also, people should realize that they don’t need more credit they need more INCOME and that only comes from good paying jobs. To mask the biggest transfer of wealth in American history the Republicans pushed easy credit and asset speculation as a replacement for income growth.
Matt
SIPC is basically the broker/dealer version of FDIC insurance – it provides for a minimum level of recovery for anyone who has an account at a failed stock broker. The limits – $500,000 per investor, with a cap of $100,000 for cash – are nothing compared to the millions of dollars most investors lost. As a result, only small-time investors, like retirees and widows, will be fully insured under this program.
Zifnab
Yes, in theory we just storm the Bastille and the aristocrats learn their lesson. In practice, you still need to assemble your army of pitch fork wielding peasants if you don’t want to rely on the existing bought-and-paid-for legal system.
But regulations only work when the majority of people abide by them. When you build a system in which everyone who works within the system prospers, you have a regulatory scheme that people will adhere to. If you build a system in which lawful individuals suffer while lawbreakers prosper, people have no incentive to play by the rules. If you don’t enforce regulations – which almost by definition handicap the individual for the betterment of the collective – no one has any incentive to play by the rules. And a "kinder, gentler SEC" makes regulations toothless and forgettable.
Still, you can’t "forget regulations" because they’re you’re just left with witch hunts against the evil voodoo that caused the latest crash. You need to build a regulatory system that works and you need to compel people to obey it. But after that, people should see the system works and WANT to obey it. People should be filing their SEC reports as clearly and transparently as possible because it increases their investor confidence and inflates their stock values. Companies with strong records of integrity should receive priority during government bailouts.
Take a look at the FDIC – a classic example of the benefit of intelligent regulations. Banks flourish despite heavy burdens of transparency, investors are numerous and incredibly confident, and the government rarely has to jump in and save anybody.
ninerdave
@iowa housewife:
But if you can’t blame low income people, who’s left to blame? I mean surely Wall Street has absolutely no responsibility here!
Few quick comments:
Any semi-educated investor knows that 12% return for that long is bullshit.
The SIPC is for brokers, not for hedge funds and is NOT meant to cover losses when you
got scammedmade a bad investment.Merkin, what an unfortunate last name. A Merkin is a pubic wig
Punchy
At this point there’s no incentive to pay your mortgage. Gubbment gunna bail you out. No incentive to not run up CCs. CC bank might not exist in 6 months; also, gubbment likely to bail out CC debtors. No incentive to buy GM or Chrysler (sp?), no incentive to make those car payments if you do.
Gunna be fun as shit to live in an accountability-free society, at least at first.
Punchy
I believe that comes with a mule, if I’m not mistaken.
bootlegger
BTW: how is John Deere doing?
Jeff
While I understand losing some assets, any foundation that has to close it’s doors because of this was mismanaged. Where was their diversification? If they put all, let alone a higher percentage then they could afford to lose, in these "investments" then their money managers should never be hired again.
bago
@liberal: Don’t forget, in high inequity situations there is another resource that people hoard. It’s downright biblical. Bitches. (I apologize in advance for the sexism of this comment.)
Uhm, weird tag parsing going on. Imagine I linked this.
http://www.youtube.com/watch?v=xIRPcICB-iY
Seriously. Your preview is going through some funk.
bootlegger
@Jeff: No doubt. "Diversify" is the only investment strategy that seems commonly agreed upon. Except for that stupid commercial: "put all your eggs in one basket, and watch that basket." Now that I think about it, maybe they were setting us up.
scarshapedstar
And through all of this, the wingnuts beat us over the head with the fact that "more Americans own stock than ever!"
TheAssInTheHatOnMyCat(Formerly Comrade Tax Analyst)
Could have been the Lincoln S & L fiasco (remember Charles Keating? John McCain probably should). I believe that was an annuity scam.
Reverend Dennis
The judge’s decision in this case is another example of the notion that rich people deserve to be rich. They should not be heavily taxed nor should they even have to pay inheritance taxes. If they lose money because of their greed or stupidity then it’s our duty to make them whole again. If you’re a CEO who mismanages your company while being paid several hundred times what your lowest-paid employee is making the worst you can expect is a multi-million dollar severance package. If you’re a Wall Street type who paid himself millions while torching the economy you get to keep the money you made and take ours to make your company sound again. OTOH, if you’re a UAW auto worker or someone who gets bankrupted by a catastrophic illness the full majesty of the government will make sure that you get fucked and stay fucked.
TheAssInTheHatOnMyCat(Formerly Comrade Tax Analyst)
Don’t look now, Bill, but your anti-Semitism is showing again.
I’d bet my hooked nose on it.
TheHatOnMyCat
Why all the hate on Madoff?
His scheme could have been the basis for the "Social Security Reforms" that GOP was trying to peddle a few years ago. If you thought that Trust Fund Lockbox was hokie, just imagine what a privatized retirement scheme using Madoff’s model might have looked like.
Genius! Madoff could have been Social Security Commissioner.
Doh!
Dreggas
Bottom line, this is what the "free market" of investing looks like. Granted we’re supposed to have some "rules of the road" but for the past 8 years the proverbial Highway Patrol has been asleep in the cruiser at the side of the road after going into sugar shock from a steady diet of donuts.
Reverend Dennis
"There ain’t no such thing as a free lunch" used to be conventional wisdom. We have arrived at the happy state where there is such a thing as a free lunch but it’s only for those who have never gone hungry.
srv
In Tim’s world, regulators will always keep up with Gordon Gekkos. I call it the Tom Clancy Theory of Government. The good guys will always save us.
In the real world, not so much.
passerby
@Mrs. Peel:
Thanks, Mrs. Peel, for that viewpoint. It’s seems subtle, and I say subtle because I’ve never heard it brought forth in any discussion, but, I think you’ve presented the core of the doctrine of modern finance.
Shorter doctrine: Live beyond your means, it’s the American way.
Calouste
I’m leaning more and more to the conclusion that the only way for the US to prevent this kind of thing in the short term is to go China-style, put a number of the bastards up against the wall and send the bill for the bullets to their family.
Maybe in a few decades when there is a perception amongst the upper classes that the law indeed applies to them as well, we can go back to more humane penalties, but until then the gains of fraud are too big for them to be offset by the relatively small risk of a few years in prison.
Shygetz
If you want to rail about the futility of regulators ever keeping up with crooks, maybe you shouldn’t cite a movie where the crook gets caught by regulators.
Just a thought.
r€nato
hmm, I would not say that.
I think it was just the canary in the coal mine.
r€nato
so long as Americans keep voting for Republicans who promise to
deregulateallow the crooks to run wild, no the good guys will not be able to save us.Americans are learning once again why all those troublesome bureaucrats and regulations were put in place all those years ago by those horrible Democrats.
r€nato
I find your ideas intriguing and I would like to subscribe…
r€nato
look, I am not without compassion for those swindled by Madoff, even the rich fat-cat Republicans.
(maybe this will teach them to have some compassion for others’ misfortunes, since apparently the only way fat-cat Republicans can learn it is to suffer themselves)
but, jesus… how many times do people have to be told "diversify, diversify, diversify"???
When you arrive at a certain age, you should be primarily in bonds, not putting everything you’ve got PLUS borrowed money into hedge funds!!!
r€nato
NO WAY!
There’s *got* to be a way we can blame this on Barney Fag, Chris Dodd, Clinton and the ni&&ers!
Brachiator
Yes, your impression is somewhat wrong. Whenever returns look unnaturally high, investors should look to an audit. If the audit is incomplete, or not from an independent auditor, you gotta suspect fraud.
One of the things that some investors admit here is that even though they thought the returns were unusual, they assumed that it was because of "insider trading." In other words, they assumed that the fund was breaking the rules, rules that everyone knows about, but they didn’t care.
Regulations don’t matter when greed takes over. This is not a fault of free markets, but of human nature.
Rick Chalek
While you’re investigating just what an animal this guy has been, don’t forget to look at Uday and Qusay (Mark and Andrew, his sons) and especially Josh Stampfli, his wunderkind market maker. There’s far more guilt to go around than just big, bad Bernie. I don’t want him to be lonely as he rots in hell. The least they can do is allow him to spend eternity in prison with his lying family and senior employees who HAD TO KNOW VERY WELL WHAT WAS GOING ON. Anyone who actually believes that Madoff locked himself in a room and secretly perpetuated this scheme is out of his mind. The man would have had no time for anything else in his life, and god knows he spent enough time schmoozing potential investors on the country club turf in West Palm Beach and the concrete canyons of Manhattan, as well as the celebrity studded beaches of Montauk. Shame on the SEC for being asleep at the wheel. This was no overnight operation…my family was invested with this bastard for the better part of 40 years.
Bill Arnold
If you chose to put people behind bars one year for every million they lost… this guy would be looking at 50k years behind bars.
Even with a log scale, say 4 years for every zero, he’d still get significant time, e.g. 45 years or so.
Nancy Irving
It’s a truism that one way to a successful con is to make the mark think HE is the one doing the conning.
If what Blodgett says is true, some of the "victims" here are anything but innocent, and I sure hope they don’t profit under the law mentioned in the linked piece.
On the other hand, that he also took the charitable organizations is a tragedy and an outrage. Above and beyond the practical effects, he has stolen Mr. Levy’s legacy as a philanthropist, and that of others.
And there is sure to be involvement by institutional investors–pension funds etc. Sad.
AJEA
Let me get this straight: the Madoff investors are going to get bailed out and the rest of the country not? The Big 3 not? When its taxpayers that are paying these amounts? Is it because the Madoff investors are Jewish?
David
Wake up everyone, the scam is happening right now. Madoff lost a lot money during the market meltdown, in order to recover his friend’s money, he claims he did a one person ponzi scheme, the friends then file lawsuits and get bailed out for losses they took from the market. This is how it will play out out, Cox is the fail guy, Madoff won’t go to jail, friends get bailed out, and we are left holding the tab. Wake up.
Scott
I feel bad for those who have lost money in the scam. However, they asked for this.
So called sophisticated investors know that you cannot trust someone to do something if there are no rules and no ways to force transparency.
Deregulation is a farce and everyone knows this, including Greenspan. You would not drive on a road with out signage and rules!
The last thing this country should do is reward people who too excessive risk. We don’t hand gamblers their money back when they leave a casino.
Wayne
TOO Bad for you if you lost in this scam. People lose everyday..BOO HOO