UPDATE: The full list is here -> Madoff Trustee’s List of the Firm’s Customers.
I am deeply concerned that taxpayer monies may be used to reimburse Bernie’s rich investors more than the usual $500,000 SIPC coverage. Taxpayers are already paying Bernie’s investors half a million dollars each. I fear that Congress will increase the cap of SIPC insurance, purportedly as a populist move (I can already hear the words, “For our protection”)–and then make the increased limits retroactive. If that happens, taxpayers will be on the hook for even more money, all to be paid to sophisticated, rich investors.
Plenty of logic within, so read the whole thing. Unfortunately, the setup started almost immediately, meaning some of this bailout may be a foregone conclusion.
UPDATE: The SIPC will probably use the ‘bank exec precedent‘.
The WSJ brings us this 10-point checklist that every
gullible investor due diligence team should perform before investing in a fund:
1. Does the fund have an independent agency verifying the performance of their portfolios, and are they well known?
2. Are other service providers to the funds independent of the firm?
3. Is the firm a registered investment adviser, and has it undergone a regulatory audit?
4. Is there adequate separation between those running the money and the fund’s overall management?
5. Can you provide me with independent references for the manager and key people at the firm?
6. Have investors got access to management and timely updates on funds?
7. Are you blinded by the reputation of a manager or following the herd after hearing about a “superstar” manager?
8. Does it look too good to be true?
9. Have you learned lessons from former blow ups?
10. Has the fund ever been in a legal dispute with any investors past or present?
According to the prevailing wisdom, #7 and #8 seem to be the points this fairly comprehensive list of investors in the Madoff fund(s) should have paid particular attention to.
As investigators figure out how the money disappeared, the ramifications for investors are large. If the money were stolen from a brokerage, as much as $500,000 per client should be covered by the Securities Investor Protection Corp., a nonprofit funded by the securities industry. However, SIPC doesn’t cover investment losses, and many of Bernard L. Madoff Investment Securities LLC’s clients had millions of dollars invested with the firm, far above the SIPC limit.
“The concepts blur in a Ponzi scheme where one person’s principal is another person’s profits,” said Jay Gould, a former SEC investment-management attorney who now runs the hedge-fund practice at Pillsbury Winthrop Shaw and Pittman LLP in San Francisco. “It’s the receiver’s job to go back and collect as many assets as possible, from whatever sources, including investors who withdrew assets from the scheme — whether those assets were characterized as principal or profit.”
In other words, those that withdrew early (and the concept of ‘early’ might go back a very long way in this case) may wind up writing checks. That could be more painful than simply losing money you haven’t spent yet.
Henry Blodget has a who’s who client list posted here. The comments there are worthy, particular those suggesting TARP money will save the day.
UPDATE: Calls for restitution. Yes, those comments were prescient.
UPDATE 2: Here we go – blaming the SEC. Meanwhile, it seems while Madoff was a relative unknown, every financial reporter on the face of the earth now has an ‘elderly neighbor’ who invested, and a ‘source’ who knew things were fishy.
UPDATE 3: And the SIPC is stepping in.
I was pinged about this last night, and twice this morning. The generally consensus seems to be that a $50 billion loss “seems impossible” for a lesser known investment advisor that reported $17 billion of assets under management on their latest Form ADV. The bottom line is there is going to be a lot of speculation, and none of it can be quashed from looking at the complaint. There are, however, some other points worth considering…
If you consider the possibility of many Madoff entities, a long list of otherwise trusting customers, and multiple layers of leverage, estimated losses might not be what will be procured from a single investment advisor, but rather what MIGHT evolve after all the holes in all the balance sheets are uncovered.
It wasn’t long ago that analysts galore were estimating the total losses from the mortgage meltdown in the $300 to $500 billion range. That number quickly jumped to $700 billion, and then to $1.2 to $1.5 trillion. Mortgage problems have since infected every facet of the credit markets, and number crunchers have already put the liquid price tag at $7.5 trillion (and still growing).
How ‘impossible’ might the Madoff scenario seem six months from now?