Reactions to My Madoff Rant: No Apologies

From Reuters:

Walker-Lightfoot, a lawyer in the SEC's Office of Compliance Inspections and Examinations, sent emails to a supervisor saying information provided by Madoff during her review didn't add up and suggesting a set of questions to ask his firm, the report said. One of Walker-Lightfoot's supervisors on the case was Eric Swanson...Swanson later married Madoff's niece.

My earlier article on Madoff's investors generated numerous comments on Seeking Alpha's website. Here are some quick responses to the comments:

1. Someone wrote, "If you were one of those who lost a lifetime's savings, your article would have a slightly different sentiment." Perhaps you are right; however, I diversify my investments and I buy investments available to the public. I do not and cannot invest in hedge funds or other non-transparent "clubs."

2. Two people have criticized my grammar and spelling--please point out specific mistakes. One person wrote that "investors like you and I could not get Madoff" should have been written as "investors like you and me..." I disagree, but I will check my Strunk and White manual later.

3. An anonymous person implied that I would feel differently had Madoff's investors been of a different religion, more specifically Islam. That's the kind of irrelevant, divergent thinking that Madoff's investors want to avoid if they want any chance of sympathy. People are upset because of perfectly rational factors:

a) Madoff's investors should have diversified their investments;

b) Madoff's investors are receiving special treatment from the government in the form of special tax breaks (paid for by general taxpayers) and more-than-usual government resources;

c) Madoff's investors are seeking to portray themselves as poor widows when most of them are probably still more affluent than 95% of Americans (take a look at Madoff's client list, and you'll see many trusts, private banks, foundations, corporations, and LLCs);

d) most Madoff investors would not have invested heavily with Madoff unless they believed he had an unfair edge or special connections unavailable to the public investor;

e) Madoff's investors believed Madoff was using investment strategies unavailable to the general public (they were right--it just wasn't the strategy they expected).

People are also upset because they see a fundamental shift in values. In the old days, the rich believed they had a duty to the public. They recognized that capitalism necessarily results in winners and losers, and the government could not solve the problems of vast inequality and disparate opportunities by itself. Look at Theodore Roosevelt, John D. Rockefeller, Jr., and John Pierpont Morgan. It's hard to remember now that J.P. Morgan bailed out the federal government, but it really did happen.

I'm not saying all rich persons have lost their moral compasses. Eli Broad, Warren Buffett, Ted Turner, and Bill and Melinda Gates are doing wonderful things, but most of us work hard every single day and will probably never be worth millions of dollars, or even one million dollars.

Most of Madoff's investors got to the financial promised land and squandered their chance at permanent retirement. They did so voluntarily--no one forced them to violate basic investing rules and to invest heavily with Madoff. Thus, it is hard to stomach the general media's sympathetic coverage of Madoff's investors when so many Americans are homeless, out of work, and live paycheck to paycheck.

[The original post is here.]

Comments

[semperpax:]

"Like you and me" is correct. Use the objective case after the preposition. (Most people today don't know what a preposition is, much less what case its object takes.)

Jul 02 03:57 PM

[User 439971:]

"b) Madoff's investors are receiving special treatment from the government in the form of special tax breaks (paid for by general taxpayers) and more-than-usual government resources;"

Taxpayers aren't financing this so-called "special" tax treatment. The IRS is simply returning money it received from fake income over the years. The IRS was by far the biggest beneficiary of the Madoff fraud. It raked in billions of tax dollars on income that didn't exist. If something gets screwed up in your tax filing, you amend your return to get it fixed. That's what's happening here.

"c) Madoff's investors are seeking to portray themselves as poor widows when most of them are probably still more affluent than 95% of Americans (take a look at Madoff's client list, and you'll see many trusts, private banks, foundations, corporations, and LLCs);"

This makes absolutely no sense. Based on your ridiculous logic, you'd have these trusts, private banks, foundations and corporations going to the media and complaining about being poor widows. You haven't seen that because it hasn't happened. No, what you have is poor widows talking about how they became poor widows.

Read the transcript of the victim testimony at the sentencing. Maybe you'll get a glimpse of some real victims:

www.usdoj.gov/usao/nys...

Your other complaints are valid. Pointless, but valid. The investors that are entitled to SIPC claims should get those claims. Those who filed tax returns on income that never existed should get those taxes refunded. None of this is taxpayer-funded. SIPC is funded by securities industry dues, and the IRS will simply pay back money it shouldn't have gotten in the first place. It's pretty simple, really.

Jul 02 06:14 PM

[Matthew Rafat:]

User 439971 writes, "The IRS was by far the biggest beneficiary of the Madoff fraud." First, you are ignoring the tens of millions of dollars spent in law enforcement time and resources solely to benefit several thousand Madoff investors. We, the taxpayers, pay for the DOJ, SEC, and other government watchdogs. When they use our money to focus on matters that primarily benefit an educated, affluent group, people ought to be upset.

Second, you are wrong in saying that Madoff's investors will only get back what they paid to the IRS. After the CPAs and tax lawyers are done, many Madoff investors will get credits for much more than they actually paid. These changes will result in taxpayer-funded windfalls for early Madoff investors. For example, let's say you invested $5,000 with Madoff in 1975. Over time, your investment becomes $50,000. The problem is, most Madoff investors will submit claims for the full 50K, even though their original investment was only 5K.

Also, you misinterpreted my article and somehow conflated widows with banks. I talked about "the general media's sympathetic coverage of Madoff's investors." In my previous article, I linked to a WSJ article that focused on a small, select group of investors who were not representative of a typical Madoff investor. If you review the actual list of investors--or, as the WSJ calls it, "Madoff's *Victim* List," the typical Madoff investor was not a poor widow.

Bottom line: Madoff's investors didn't invest in a fund directly available to the public, like a Vanguard or T. Rowe fund. It isn't a crisis of confidence or a public interest issue when fund managers, trusts, corporations, private banks, and rich people go "off-the-grid" to find a sure thing. Investors may choose to go "off-the-grid" if they want; however, if their exotic investment fails, why should taxpayers' money and resources be involved?

Jul 02 07:03 PM

[Ilanbigfoot:]

Great article. Now let's get back to those unemployment numbers...

Jul 02 07:13 PM

[reveigel@ms...:]

What is interesting is the difference between Madoff and the government. Madoff did apparently run a small Ponzi scheme, got caught and receives 150 years in prison. The government runs the largest Ponzi scheme ever, 'social security' and is praised for it. Madoff affected relatively few but the government affects almost everyone. Madoff could not bankrupt the nation. The government program could. We do live in a great country. Politicians are the cream of the crop. And they try to 'con' us taxpayers and voters daily and we love it?

Jul 02 08:11 PM

[Nathaniel C:]

Your quite right about how the rich used to care about serving the public interest. I remember reading about JP Morgan in 1907 when he personally stopped a banking panic out of civic duty. He could have sat back and watched all of his rivals collapse. Instead he used his power and respect to organize a private bailout for the troubled banks. But he only helped banks that were facing a liquidity problem not irresponsible banks that deserved to fail. No Federal Reserve money printing or taxpayer bailout required. How about that!

The legendary trader Jesse Livermore was asked by Morgan to stop shorting stocks because it could lead to a general market crash and negatively impact the economy. Out of patriotic duty, Livermore covered all of his short positions (at a large gain) and bought as much stock as he could. The market and general economy quickly rebounded.

Jul 02 10:43 PM

[persephone1:]

Madoff investors thought they were diversified. The difference between Lehman and Madoff was that only one was a fraud. Lehman, for its clients, invested in a diversified portfolio; Madoff was supposed to be invested in Fortune 100.

How many investors truly understand the complex nature of all their investments with various funds/companies? Not many, I presume. That's why people hire financial experts.

They did not think the Madoff returns were so out of line. Many other funds generated far better returns. Yes, not as consistently, but those who invested did so because it was touted as a conservative fund.

Madoff was not some pipsqueak; he wasn't a fly-by-night operation. SEC investigated several times...you know the facts. Many of these investors were normal people, whose parents and grandparents had invested with Madoff for decades (not getting suspiciously high returns). Get over it—your predisposition to believe the worst is showing.

Jul 02 11:47 PM

[fortune8:]

Great article!

Engage not irrationally into profitable attractions, because jumping too quickly into temptation may well blind wisdom.

Jul 03 09:24 AM

[Gregman2:]

Yes, the SEC failed. Wronged investors will get loss carry forward tax refunds. Yes, SIPC will pay claims. So...let's move on.

Jul 03 12:24 PM

[Matthew Rafat:]

Gregman2, how much do you know about the SIPC? Turns out that the taxpayer is on the hook when funds are inadequate to cover claims:

willworkforjustice.blo...

Jul 03 01:42 PM

[TinyTim:]

"d) most Madoff investors would not have invested heavily with Madoff unless they believed he had an unfair edge or special connections unavailable to the public investor;
e) Madoff's investors believed Madoff was using investment strategies unavailable to the general public (they were right--it just wasn't the strategy they expected)."

"Unfair edge, connections & unavailable strategies."
So Madoff was a genius at playing to greed and dubious motivations.
It's all part of the sting.
A fool and his money are soon parted.
I've been ripped off a few times myself in investments, but didn't expect deferential treatment.

Jul 03 02:46 PM