According to published news sources, there are suggestions that those injured by the Madoff "Ponzi Scheme" scandal should receive government TARP (Troubled Assets Relief Program) funds.

This should be a non-starter. Every investor in Madoff's scheme was wealthy and had the resources to independently investigate Madoff's operations. They all allegedly signed "big boy" letters attesting that they were financially sophisticated and had sufficient capital to make such financial investments. The returns that were offered by Madoff were not made available to the individual citizen/investor and so no public money should be used to bail out people caught up in this growing financial scandal.

"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." <Source>

If these investors were covered under SIPC (Securities Investor Protection Corporation) by virtue of dealing with a bona fide brokerage company (and not a hedge fund or investment bank), I see no reason why their accounts should not be covered to the legal limit of $500,000 ($100,000 cash). But nothing more.  I do not see why SIPC protection should be extended to these people if they were not covered at the time they made their investments. In fact, to extend coverage to this group at the detriment of other insured parties may be illegal without an act of Congress. And then it would simply be immoral.

Today's news ...

Today’s news is filled with tales of political and corporate fraud, mismanagement, defalcation and malfeasance … and nobody seems to be especially responsible or culpable under the law.

Our legislators, the very finest that the special interest lobbyists and lawyers can purchase, have almost eliminated even the concept of penalizing inappropriate activities that do not involve clear-cut criminal activities such as robbing a bank using a gun or stealing a loaf of bread from the neighborhood market.

But what about those who rob banks with computers or use schemes to bilk money out of the public. In many cases, these people are politically connected and as the term goes, lawyered-up. In many cases, top executives are expected to simply step down from office – often with a multi-million dollar golden parachute – and thus allow the corporation to plead guilty to a technical violation and pay a “record fine”  to some agency without ever having admitted their guilt. Considering that the fine is actually paid by those who have been swindled out of their property, it only adds insult to injury when these settlements take place.

Only when the fraud is committed by a single person or a few people acting in concert do the authorities seem to seek jail time.

Trust: the basis of all banking …

Trust, the basis of all banking, seems to be rapidly eroding. As one who is somewhat involved in the financial industry as a systems designer and management consultant, I find that while the bankers are trying every which way to snag customers, they are overlooking the most critical factors involved in creating a trust relationship.

Most banks have no system for resolving the central issue of trust. On a one-to-one relationship with an organization, we find that the fiduciary responsibility to the client has been significantly eroded or totally erased from consideration.

In a fiduciary relationship, one party has the legal responsibility to represent the best interests of the counterparty in such a manner as to always act for the sole benefit of the represented party – especially over the self-interests of the counterparty.

In a nutshell, this is the basis of all financial transactions, a trust relationship between the customer who is placing their money with another person or institution with the expectation that it will be prudently managed and that an explicit or implicit fiduciary relationship has been established between the parties.

Introducing the weasel words …

Most financial institutions present potential customers with a unilateral account agreement on a “take it or leave it” basis. Within these agreements one can find that the explicit or implicit fiduciary responsibility has been waived by the customer in favor of a generalized acceptance that the financial insitutions will try their best to satisfy the customer’s expectations – without any really enforceable guarantees. Within these documents one can find their remedies against individual corporate officers and executives are limited and there may be “hold harmless” and “arbitration clauses” which prevents the customer from seeking damages on behalf of themselves and others similarly situated – the dreaded class action lawsuit.

What these unilateral agreements disguise in a plethora of words is that there is an inherent conflict of interest that may prevent the financial institution from acting as a fiduciary. That is, they have the conflicting duties to earn an acceptable rate of return on their shareholder’s investments and that this duty may conflict with any duty to an individual customer.

Now before bankers start screaming foul and claiming that I am misrepresenting the situation, consider for a moment the number of executives who have been caught making decisions or altering accounting rules in order to earn an outrageous bonus.

The executives at the nation’s largest mortgage operations, Fannie Mae and Freddie Mac, were accused of doing exactly that. Manipulating the numbers to earn outrageous bonuses. (Yes, they only got a slap on the wrist, the big penalty was paid by the shareholders, and nobody went to jail)

Also consider the number of organizations in which executives traded securities among themselves to boost commission income and/or simply manufactured products to sell to their own clients – while knowing that the full extent of the risk was being masked by institutional happy talk and pointing to the marble and bronze home office edifice that conveyed a sense of permanent solidness.

How can this happen?

Greed plays a big part. Trying to capture market share plays a big part. But, when all is said and done, one is confronted either with gross laziness and stupidity or an outright intent to defraud the customer – hoping of course that the problem can be resolved from future profits.

But when those profits do not materialize – it is tempting to pay off the early investors with the capital being received by the recent investors. Of course, all of the early – and probably influential – first investors will be touting the performance of your organization and pointing to the handsomeness of their returns. As long as you can keep the ball in the air and continue to attract new investors, everything appears to be in order. However, let one adverse action occur and the whole thing collapses as an unsustainable PONZI-style scheme.

Big names = laziness!

Many financial and corporate organizations lard their board of directors with prominent people or otherwise use prominent people to tout their wares. People who are compensated for their time and effort; if not with money and extra stock, then with special perks and privileges unavailable to the ordinary customer.   

People naturally assume that people of previous accomplishment, be they the President of a large corporation or a high-ranking political person, could not possibly be involved in a fraud. And so these people of accomplishment lead others to their financial demise.

The key factor being: people who have, for what ever reasons in the past, managed to achieve a notable position or accumulate a significant amount of money – are just a vain, stupid and lazy as those in the general population. Perhaps even more so as they may have developed a sense of “entitlement” after years of subordinate kowtowing and being surrounded by “yes” men.

Lead to slaughter like lambs …

Associating with so-called “people of quality” at events which reinforce the “specialness” of you and your potential relationship are often a significant “red flag” when it comes to financial firms. Imagine how privileged – and less likely to ask pesky questions – if you are a guest in one of those fancy, expensive skyboxes in a stadium named for the host organization. Think Enron Stadium.

It is no different for large organizations …

Put together a consortium of large, well-respected financial institutions and as the night follows the day, other financial institutions will follow along. It is the difficulty of getting that first, second and third financial institution that is the problem. After that, almost everybody, from top executives to the lower level employees believe that the first group of name banks has done their due diligence and everything was found to be proper, prudent and in order. The executives of lesser organizations wouldn’t dare to assume, let along accuse, the top people of the lead institutions of shirking their duties. Even when they may see these very same people on the golf course at four o’clock in the afternoon.

Which brings us to today’s outrageous story …

From AFP News …

“Top banks admit huge losses in Wall Street 'pyramid' fraud”

“Top world financial groups on Monday revealed massive potential losses from an alleged scam run by Wall Street trader Bernard Madoff, admitting they were fooled by a classic pyramid investment fraud.”

“British, French, Japanese and Spanish banks and funds said investments totaling billions of dollars (Euros) could be wiped off their balance sheets by a scandal that is set to affect some of the richest people in the world.”

Who were some of these banks?

According to published reports, some of the largest foreign banks may have exposures estimated at:

• Royal Bank of Scotland - $598 MILLION
• Santander (Spain) - $3 BILLION
• HSBC (Britain) $1.5 BILLION
• France's Natixis (France) - $606 MILLION
• BNP-Paribas (France) - $480 MILLION
• Nomura (Japan) - $303 MILLION
• BBVA (Spain) - $685 MILLION

Add to that some of the smartest and wealthiest people in the world and you have one major collective instance of stupidity.

“Madoff, a 70-year-old Wall Street veteran, was arrested last Thursday.”

The trigger event which caused the collapse of the Ponzi-like scheme …

“He is alleged by US prosecutors to have confessed to defrauding investors of 50 billion dollars in a long-running scam that collapsed after clients asked for their money back as a result of the global financial crisis.”

Where were the regulators?

Hedge funds, investment banks and other specialized financial entities function without any substantial regulation through the use of so-called “big boy” letters. In essence, the customer attests that they are financially sophisticated enough to weight the risks and rewards and that they have sufficient capital to make the transaction. No betting the farm for these people.

“British investment fund Bramdean Alternatives Limited, which said it had put about 31.2 million dollars in Madoff's company, said that the scandal raised ‘fundamental questions’ about the American financial regulatory system.”

" ‘It is astonishing that this apparent fraud seems to have been continuing for so long, possibly for decades, while investors have continued to invest more money into the Madoff funds in good faith,’ the firm said in a statement.”

The fact is that these firms trusted the other financial firms, never believing that they would serve as a “Judas goat” and lead them down the path to financial ruin.  In addition, they wanted desperately to believe that there was one individual and one firm smarter than all of the rest who seemed to be making extraordinary returns with minimal risks. Even though history has taught us that this is unlikely in a close-knit environment such as Wall Street.

What are they saying …

• insolvent for years
• losses up to $50 BILLION
• may be the largest fraud perpetrated by a single individual

(Courtesy of the Associated Press)

What can YOU do?

As per the old recommendation of the Better Business Bureau: Investigate before You Invest.

And as the old saying goes, “if it seems to good to be true… it is often a scam.”

My favorite, “If it’s so great, why would they want me to participate.”

Trust not banker nor politician – and especially a banker who has a politician on his board. Watch your wallet at all times.

-- steve

Quote of the day: “The very first law in advertising is to avoid the concrete promise and cultivate the delightfully vague.” - Bill Cosby

A reminder from OneCitizenSpeaking.com: a large improvement can result from a small change…

The object in life is not to be on the side of the majority, but to escape finding oneself in the ranks of the insane. -- Marcus Aurelius

Reference Links:

Top banks admit huge losses in Wall Street 'pyramid' fraud