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Saturday, March 21, 2009

Madoff Victim Bailouts

I was watching the Communism Channel, and they had some interesting jokes about Congress and Bernard Madoff's victims.

Most of Bernard Madoff's clients reinvested their dividends in the fund. They paid income taxes on those phony profits. Congress passed a law, allowing Madoff's victims to recover taxes already paid on phony profits. Without that legal change, Madoff's victims would be required to claim a capital loss and deduct it from future taxes.

Some of Madoff's victims directly invested with Madoff. Since his fund was incorporated as a brokerage, his victims are entitled to SIPC insurance covering the first $500k of their losses. (The SIPC functions the same as the FDIC. A small tax is paid on all brokerage accounts, with the profits used to fund the SIPC.) Some of the victims were not invested directly with Madoff, but indirectly via "feeder funds" or a "hedge fund of hedge funds". (Such a fund makes no direct investments itself, but merely invests in other funds and charges a fee on top of the other funds' fees.) Those victims were not entitled to SIPC protection, because they were not directly invested with Madoff.

Congress is considering changing the law, retroactively, so that more of Madoff's victims qualify for SIPC insurance. Even if you invested with Madoff through a feeder fund, you will qualify for SIPC protection. They are also considering retroactively increasing the coverage total from $500k to $1M.

The comedians on the Communism channel were saying "Hooray for the State! They're reimbursing Madoff's victims for their loss!"

Let's look at this conversely. Effectively, Congress is saying "Higher taxes for everyone who didn't get ripped off by Bernard Madoff!" When you look at it that way, the victim bailout is obviously stupid.

If you invest all your money in one place, and it turns out to be a scam, then you *DESERVE* to lose all your savings! When the State bails out victims of fraud, the State encourages dishonest behavior!

If you had less than $500k invested directly with Madoff and qualified for SIPC protection, you outperformed anybody who invested in the stock market, who lost a huge chunk of their savings!

Whenever the State prints new money for bailouts, productive workers pay the cost as higher inflation. Whenever the State pays for a bailout, the net effect is higher taxes for any business that didn't need a bailout.

3 comments:

Richard said...

Where do I begin to comment on the trashing of Madoff victims? Should I first point out that contrary to what the author wrote, there was no Congressional change in the law. The only thing that happened was that the IRS published guidelines clarifying the existing law. Secondly, you imply that the amounts SIPC pays is a bailout. SIPC, similar to the FDIC, was formed to give the American investor confidence in the system that in the event a brokerage house goes out of business that they will be recompensed for a portion of the damages up to $500,000. This is not a bailout in any sense of the word, especially when compared to AIG or any of the banks. I strongly resent your illogical statement that people who invest all their money in a place that turns out to be a "scam" deserve to lose all their money. I suppose you'd agree that a little old lady who leaves her home everyday and walks across the street at the same place deserves to be mugged. The investor is not the criminal. There is no justification for what Madoff did. His supposed portfolio of stocks were diversified. Most U.S. investors use only one broker for investing. Madoff returns on investments trailed the market by large percentages for the entire decade of the 1990's. Why don't you express some of your indignation at the SEC, the great watchdog of the American people,formed to detect fraud, that could not find it if presented on a silver platter, and yet time after time proclaimed Madoff clean as a whistle! How dare Americans be so stupid as to depend upon this agency whose very mission was to discover fraud, and yet could not find the largest one in the history of the world. Rather than lace into the thousands of people who lost their life savings, their homes, the food on their table, try placing the blame where it should be placed. Let's not forget either about all the brokerage houses that were paying to SIPC a mere $150 per year, knew about the Madoff fraud, but remained silent. Now their premiums have skyrocketed and they have nobody to blame but themselves.

Anonymous said...

Cronyism. The Madoff victims can pull some strings... just like Goldman Sachs.

maemail said...

Richard - thank you for correcting many of the inacurracies in this article. Not only did the SEC wantonly ignore the repeated evidence supplied to them of the Madoff crime by Mr. Markopolos beginning in 1999, for nearly a decade, they also lured investors into the fraud with their public imprimatur by allowing the Wall St. Journal articles in December of 1992 to disclose that based on their investigations the Madoff firm was devoid of fraud. Thus, the SEC funeled hard earned investor money into another branch of government, the IRS, in the form of short term taxes on those 10% returns, reducing them to approximately 6-7% gains. Thus the IRS became the largest beneficiary of the Madoff crime and remains so today.

Making the investor the target for
our government's massive failures does not address the bigger issues that should be of concern to all Americans - the government has made tens of thousands of people penniless through their irresponsible and negligent actions - policemen, firefighter's, pensioners, people from all walks of life - decent hard working American citizens. This author's remedy is to further penalize the investor and give the government a pass. I still operate on the belief that the government is only allowed to collect taxes on earned income - not on money that apparently didn't exist - and is responsible through its agencies to ALL U.S. citizens.

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