Monday, December 15, 2008

Seriously…Madoff Investors Want A Bailout?

Bailout seems to be the word in 2008: Everyone is getting one, or is giving their case for why they need one. In the latest bailout request, the Alternative Investment Management Association (AIMA) is asking for aid for the investors burned in the $50 Madoff investment scam according to Reuters. On the news we have heard heartfelt stories of retirees who lost everything, but then again these were supposed to be sophisticated investors. What should we do?

For those who are unfamiliar with the Madoff investment scandal, Madoff Securities is a hedge fund which set up a big ponzi scheme and scammed investors out of approximately $50 billion. To invest in hedge funds, investors are required to be accredited, which means they have at least a net worth of $1 million or make at least $200,000 a year ($300,000 if married). These types of investments require accreditation because they are considered riskier and more complicated and they are not bound by the same SEC regulations as common investments are.

The fact that these accredited investors would even ask to be bailed out by American taxpayers is preposterous. Considering that millions of people are out of work and millions of retirees already have nothing to live on aside from their social security checks, how can these wealthy people possibly want hardworking Americans to cover their losses? The government didn’t bailout investors in traditional stocks that went bankrupt. They didn’t bailout the workers in Enron who had their entire retirement account invested in Enron stock and lost everything. Sure, it sucks that these people were scammed, but it is hard to feel sorry for them when they have a lot to begin with and they knew that their investment was inherently risky.

Compounding that, I was blown away to learn that some of these people invested every penny of their wealth in these funds. If someone has $2 million and plans to retire on that money, how can one possibly think that it is okay to invest it all in the same fund? That is just ridiculous. I wouldn’t even invest all my money in U.S. treasuries, let alone some hedge fund. This should be especially true for people nearing retirement: The closer you get to retirement, the less risk you should be taking with your money. This means that diversification is absolutely vital, and very, very little of your portfolio should be invested in things like hedge funds. I do feel for these scammed investors, but, firstly, they should have known better, and secondly, they are now in a situation similar to that of millions of other retirees, except that these investors probably have other assets of value and are still better off than most.

If we aren’t willing to spend $15 Billion to bailout the auto industry, then we can’t spend billions to bailout wealthy hedge fund investors who got burned. The AIMA had to know that there was no way they would get it. This action will only cause a PR problem for hedge funds and might lead to increased regulation in the industry. This is could be a good thing or a bad thing depending on your perspective, but it is safe to say that most hedge funds would rather not deal with more regulation or scrutiny. At the end of the day, though, if so-called “sophisticated investors” are making stupid mistakes like this, then I would have to question the criteria being used.


Anonymous said...

Wrong! Most all of the investors opened segregated brokerage firm accounts with no required pre-conditions, SEC regulated, no different than your online E-Trade account, wherein here trading power of attorney to effect trades only [not withdraw monies] was given to Bernard L. Madoff. Daily P&S statements were mailed, along with monthly statements with all trades & open positions wherein the securities open in each account were and still are the property of the investor, not of a fund, ltd. partnership, or investment company.

SIPC is on the hook here for $500k per account, but being that this is such a low amount by statute, the gov't should up it to at least $2 million per account, as they upped the FDIC.

Furthermore, for international geopolitical reasons, and the reputable regard and functioning of our financial markets as a place to do business, a TOTAL bailout is a warranted & prudent endeavor, lest Wall Street will be regarded as the Wild West Calcuta of Finance, to be avoided at all costs. The USA cannot afford to lose its place as the leader of the financial world, and the Madoff Affair is surely the straw that broke the camel's back.

This was fraud, not regulated by an SEC guilty of mis and nonfeasence, not unprofitable trading.

Anonymous said...

Took Less then 16 business hours from the time he's arrested for Feds to step in and Cover losses of the Rich who invested with him. They used a Obscure Old Law , so again Public Money for The Rich , but NOT A DIME for the Working Man . I.E GM
workers. Im a Capatalist but this is ridiculous protection for the RICH but NOTHING for the working people at GM

When the Investors were making 20% a year interest they where Happy , they didnt ask any questions , now that they got burned , there crying !!

Anonymous said...

This bailout if it happens is another outrageous theft of taxpayer money. It means some are too rich to fail and another example of privatizing gains and socializing the losses. The supposed charities are not broad based, like United Way. They are ethnic and Israeli based. Madoff probably already shipped billions to Israel for safekeeping as they have no extradition agreement with the USA.

These people all believed Madoff had (illegal) inside knowledge and that's how he supposedly made his consistent double digit returns. Madoff was a money manager who coincidentally had broker dealer license. I'm not convinced SIPC is on the hook for anything. SIPC is funded by the brokers not the taxpayer and is clearly stated on their website. There are many cases of such money manager fraud investigated and the government never makes the investors whole. The entire Madoff scheme was fictitious as well as the stated ROI.

BTW did the government make the Enron, Worldcomm or MCI investors whole? As one who lost money in Enron, it didn't happen.

J said...

A bailout would set a terrible precedent.

Investors need to do their due diligence when they invest.

The taxpayers/gov't does not reap the benefits when investors win. Hence, the taxpayers should not reimburse/bailout investors when things go sour.

So please, any talk of such a bailout is simply ridiculous.

Anonymous said...

I want MY IRA BAILED OUT!!!!! I KNEW this whole Madoff thing REEKED. This is one giant SCAM. That $50 BILLION is tucked away in Israel, and now all Madoff's HAND SELECTED Jewish "investors" will be repaid by the American GENTILES.