Wednesday, March 18, 2009

Is It Like Evenly Matched Mad Dogs Tearing Themselves to Bits... Or Am I Being Unkind?

Bernie Madoff only allowed the rich and powerful to invest their money with him. In a Ponzi scheme, the people who get out early do very well - leaving the rest holding the bag. Some of the losers (about 13,000 people who have lost about $65B - or $5M each, on average) are now trying to get back, in court, the winnings of Madoff investors who cashed in before the crash. It's an interesting battle of Rich & Powerful v. Rich & Powerful. You'd think the losers didn't have a chance, but some of those losers have a lot of clout.

That the losers are powerful has been playing out in other ways. The losers have already got the IRS and congress to grant them extended tax breaks over and above the usual tax breaks for investments that lose money - even over and above the tax breaks normally given to victims of fraud. Your run of the mill citizen doesn't get that kind of response from government.

The Madoff losers are also being compensated by the Securities Investor Protection Corporation (SIPC), which will reimburse them up to $500K each. Little old SIPC only charges a $150/year flat fee to brokerage firms, so that's going to put it in a mess of debt. The outcome may be positive, though: SIPC may be raising their fees to as high as$100K per year. We need to get serious about collecting money in good times to finance bailouts and reimbursals in bad times - just as unemployment insurance has always been financed.

No doubt Losers v. Winners will play out in court for some time to come. According to New York bankruptcy law, the losers may be entitled to winnings up to six years in the past.


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