Matthew Rafat

Madoff's Investors Don't Deserve Compensation or Sympathy

In case anyone is interested, I've written a follow-up to this article that explains the SIPC in more detail:

willworkforjustice.blo...

Madoff's Investors Don't Deserve Compensation or Sympathy

User 349707: if you're going to make wild accusations, stop hiding--print your full name like I do when I write something here. Also, try to provide some evidence or statements that support your statements. You haven't done so--and you won't be able to.

Madoff's Investors Don't Deserve Compensation or Sympathy

From Reuters: news.yahoo.com/s/nm/20...

"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."

Here are some quick responses to the comments above:

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 do public service. 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 JP 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.

Madoff's Investors Don't Deserve Compensation or Sympathy

EJL: I don't mind Madoff investors getting SIPC funds--the SIPC is funded by member broker-dealers, not taxpayers. Above all, the special tax breaks bother me, as well as the speed by which Congress changed tax laws to benefit Madoff's investors.

I am also bothered that our government is spending so much time prosecuting Madoff when more urgent matters exist, especially ones that affect all taxpayers. When was the last time you saw the government move so quickly on issues that primarily impact middle-class and poor Americans?

Madoff's Investors Don't Deserve Compensation or Sympathy

martyg: When people talk about widowers and senior citizens, I always think, "Where were the kids?" I help my parents manage their investments. Also, my mom usually sets aside her junk mail and financial offers, including credit card solicitations, for my review. Madoff may have unwittingly taught us another lesson--children and parents should work together to evaluate appropriate investments. In a world of sophisticated scam artists, it no longer makes sense for parents to shield their financial information from their children, who oftentimes have no idea what to expect until after their parents die. Perhaps post-Madoff, families will be more open about their finances and more willing to let grown children see their investments. In most cases, another set of eyes can't hurt.

Don't Be Scammed by Madoff Investor Sob Stories

SPK, you make some very good points. My article was primarily against the idea of bailing out Madoff investors using taxpayer funds. Sympathy is one thing--taking taxpayer funds is another.

Don't Be Scammed by Madoff Investor Sob Stories

To "Phil the Victim": I did _not_ favor the corporate or auto bailouts; however, I recognize that the auto bailout helped thousands of Americans who suffered because their unions and irresponsible boards made poor decisions. That's the difference between Madoff investors and the auto workers and lower level banker employees: one group (Madoff investors) could have diversified or chosen to do better diligence before investing, while the other group (lower level corporate and auto employees) had little power or say in any substantive decisions.

With power comes responsibility. You had the power not to invest in a certain fund or investment. Instead, you apparently delegated power to a mutual fund manager, who failed to do due diligence and invested with Madoff. You admit this when you wrote, "We were in a general partnership, [and] none [of us knew] how our money was invested."

The general taxpayer had no involvement in your decision to invest with your mutual fund or other investment vehicle, which then apparently chose to over-invest with Madoff. Given the lack of general taxpayer involvement or culpability, it is difficult to see any rational reason taxpayers should bail you out. The appropriate recourse is with your mutual fund manager, Madoff, or insurance (SIPC), not with the general taxpayer.

You mention you have lost your life savings and are in your 70's. Medicaid, Medicare, and Social Security income will prevent you from being impoverished. Thus, the general taxpayer is already assisting you and protecting you from dire poverty. You appear to want the general taxpayer to provide you with more of their money because you failed to diversify your investments. To paraphrase Barry Goldwater, a government that is big enough to help you avoid all your mistakes is also big enough to tell you exactly how to live your life.

You appear willing to hold other Americans and the general taxpayer responsible because you and your mutual fund manager/trustee made a mistake. Your mistake should not hurt responsible Americans, the overwhelming majority of whom diversified their investments, still lost thousands of dollars, and won't get a bailout.

Don't Be Scammed by Madoff Investor Sob Stories

Tesa, you said, "You seem to believe that 10%-15% return should have flagged a ponzi scheme." You are correct that a 10-15% return doesn't reveal a Ponzi scheme; however, a consistent 15% return over 25+ years, _without any losses_, is impossible without some illegal advantage, like inside information.

Madoff's investors could _not_ have reasonably believed that they were receiving 10 to 15% every year without some insider information. Madoff's position as a Nasdaq chairman probably convinced investors they had access to something no one else did. See link below for more:

finance.yahoo.com/tech...

At the end of the day, Madoff's investors should have diversified or at least attempted to do more due diligence. Their failure to follow the well-known and cardinal rules of investing--diversify and buy only what you understand--is the sine qua non of their current situation.

Most important, most of Madoff's investors were _not_ unsophisticated investors--most were educated, English-speaking, and affluent. This is why Madoff slept soundly at night--in his mind, even if someone invested a million dollars with him, most had plenty of money left over. He may have even believed himself to be a modern-day Robin Hood--stealing from the rich to give to the poor and the charities.

At the end of the day, the blame belongs on Madoff and the fiduciaries of charities and other entities who failed to diversify donors' money. Rather than excuse negligence, Madoff's investors should serve as an example to those who fail to diversify or who do not question impossible returns. Bailing them out would result in the following:

1. It would tell the world America will print money and devalue the dollar when its citizens--especially the rich and well-connected--make avoidable mistakes. If the Japanese, Chinese, Swiss, and British begin to question the U.S. dollar's integrity, it will be the beginning of the end for our entire country. We have major deficits and are currently dependent on foreign investors to finance our expenditures. When we have a surplus, we can afford to be generous. Right now, we can afford to be sympathetic only with our hearts, not with our wallets.

2. It would weaken faith in our country's sense of fairness. Anytime a government gives money away arbitrarily, others not part of the largess rightly cry foul. What about all the other victims of investment fraud, like the Baptist Foundation of Arizona or Sunrise Equities Inc.? What about the mortgage brokers who ripped off ordinary Americans by submitting mortgage applications with false income information? (And where's the perp walk for those people?)

To those of you who say I have no sense of compassion or morality, let me say this: if anyone ought to receive taxpayer money, it should be the families of Americans who were slain in Iraq. They are also victims of government inaction and negligence and have lost more than just money. The list of more deserving victims is endless, but if we go down that path, we will transform America into a land of sympathy-seekers, not strength. For a country that has been the symbol of hope for so many people worldwide, such an image shift is unacceptable.

Although I opposed the auto and bank bailouts, they will help hundreds of thousands of ordinary Americans who had little power to avoid their current situation. Auto workers themselves did not cause their current financial mess--the banks, their unions and the Big Three did. In contrast, Madoff's investors failed to do due diligence, failed to diversify, and/or must have believed Madoff had inside information. As a result, they do not have clean hands.

Any regulation that occurs should require nonprofits and other charities to fully disclose to the public (preferably on a website) not just basic P&L statements or budgets, but where they are holding their donations, and what specific investments they have bought. As long as taxpayer money is not involved, some good may come of this yet.

Don't Be Scammed by Madoff Investor Sob Stories

I suppose I need to clarify this earlier comment: "In any case, once Madoff's investors--most of whom are wealthy--record a loss for tax purposes, all taxpayers will suffer."

If Madoff's investors had diversified or at least done adequate due diligence, most would have paid taxes on their capital gains at some point. As it stands, with around 50 billion dollars of wealth evaporating, the average citizen/taxpayer has lost a major source of tax revenue, because no gains actually occurred, so no taxes will be paid.

The evaporation of so much wealth also caused harm because of the lost opportunity cost. Wealth invested in non-IPO stocks is taken out of the economy. For example, when I choose to invest long-term in Coca-Cola stock, I reduce my disposable income. Assuming I would have spent the money I invested, everyone from local retailers--which might have increased hiring to handle higher demand--to local government--which won't get any sales taxes--loses. The tax code recognizes that, and requires a tax to be paid when an investor recognizes a gain. Here, we have around 50 billion dollars that will never provide tax revenue. In short, Madoff's wealthy investors not only punished themselves by their inadequate due diligence, but local governments, schools, universities, fire departments, and police departments. Most people understand that taxpayers pay for all the aforementioned services, and voters are loathe to lay off teachers and police officers; thus, at some point, taxes will be raised, or the dollar devalued. Assuming neither higher taxes nor a devalued dollar is desirable, Madoff's investors have harmed all American taxpayers.

Don't Be Scammed by Madoff Investor Sob Stories

RealityCheck19:

1. You said, "[W]here do you get the idea that any of the investors are looking for a bailout. This is nothing more than your own guessing." Actually, Madoff's investors have already asked for a taxpayer bailout:

"[S]ome government aid is a very logical request," said Robert Schachter, [who] is representing several Madoff victims. "If we're bailing out Wall Street and the auto industry, maybe these individuals should be bailed out too."

sg.news.yahoo.com/ap/2...

2. You said, "Madoff was not a hedge fund." Main Street could not invest with Madoff--they had to go through a hedge fund, or, in some cases, through personal connections with wealthy investors.

3. You said, "[M]any people continued to reinvest their gains and therfore [sic] lost ALL of their investment." You admit these investors failed to diversify; therefore, they violated the #1 rule of investing.

4. The problem is that the SIPC does not have enough money to cover all the Madoff claims. As a result, if you favor full reimbursement, the money must come from taxpayers. It is possible--though not likely--that private brokerage insurance may have the money to reimburse all of Madoff's investors. In any case, once Madoff's investors--most of whom are wealthy--record a loss for tax purposes, all taxpayers will suffer.

Don't Be Scammed by Madoff Investor Sob Stories

I've read all of your comments with the hopes that our outrage will prevent another ill-advised bailout. Carnegie Mellon economist Allan Meltzer once said, "Capitalism without failure is like religion without sin." In other words, capitalism doesn't work unless we allow losers. Having losers creates two positive outcomes: one, it shows others what doesn't work (in this case, not diversifying or not doing due diligence when investing); and two, it creates shame--a powerful motivator--by warning others that bad actions lead to real consequences.

A Madoff bailout would be particularly harmful to capitalism as a whole, because it would pervert it into a tool for the rich and well-connected.
I called the WSJ article propaganda because it focused not on the investors who made substantial returns over the 25+ years of investing with Madoff, but on charities and the elderly. Thus, it was deliberately designed to pull on our heart-strings for a class of people who are generally well-off.

The real victims are non-Madoff investors who will suffer diminished returns from their mutual funds. Their mutual funds hold companies like UBS and other entities that invested with Madoff. No one will be bailing out these Main Street investors, but they are the real victims. Yet, all the attention is being given to Madoff's investors, who are a highly exclusive group of hedge fund investors and investors who failed to diversify their investments.

In the end, a bailout is wrong because it would cause the transfer of wealth from people America should support rather than penalize. Basically, rather than reward people for making wise decisions or providing utility to others, a Madoff bailout ensures that Main Street will continue to suffer for bad decisions made by the rich and investors who failed to diversify.

If we wish to serve as a non-exploitative economic model for the rest of the world, we must allow some failure. We must not allow well-connected investors to make bad decisions and then escape the consequences because of their friends in Congress, on Wall Street, and in the Dow, Jones & Company publishing firm.

More important, if we want the U.S. dollar to continue being the world's reserve currency, then we must ensure the rich as well as the poor suffer the slings and arrows of bad decisions. The alternative is printing more money, which will lead to inflation, and reduced stature.