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Will Wall Street Banks be Compelled to Compensate Madoff Investors?

By Larry Doyle on December 16, 2009 at 9:30 AM in Banks, Bernie Madoff, Economy, Sense on Cents (Larry Doyle blog)

Will Congress hit Wall Street banks with a one-time assessment in order to compensate Madoff investors? Why might that happen? Very simply because SIPC (Securities Investor Protection Corporation) was woefully underfunded given the fact that SIPC member-firms, including all the large Wall Street banks, paid a token $150 (yes, that is not a misprint, a token $150) annual premium from 1996 until April 2009 for SIPC coverage.

Each and every investor in America should be livid at the insurance scam perpetrated by SIPC and its member firms, but especially by the largest firms taking the greatest risks! I will address this insurance scam in a post later today, but for now I want to highlight an engagement between Rep. Paul Kanjorski (D-PA) and Stephen Harbeck, the head of SIPC that occurred last week during a hearing on securities investor protection reform.

This interaction should have received massive coverage by the mainstream media. Regrettably, but not surprisingly, it did not. Why? If it received the appropriate coverage, it would shine a laser beam on the incestuous nature of the relationship between Wall Street firms and its regulators (SEC and FINRA) and insurer (SIPC).

From the transcript of the hearing last week:

KANJORSKI: And just a couple of questions. I think you’re absolutely correct, Ms. Speier. And we’re going to work toward that end, I hope, as a committee.

But I — I notice you’re talking about increasing the premiums in the future. Why haven’t you thought about making a back assessment? You’re — you’re really punishing the people that are going to come into the business or may not even have been in the business when Madoff was around.

Why shouldn’t we put the assessment on the people that were in the business when it happened, and with the law professor, Coffee, indicating that would put an incentive on the dealers to be working more in conjunction with the SEC and with your organization to see that this doesn’t happen, because there would be a payment that they would have to make.

(CROSSTALK)

KANJORSKI: Why — why — in order to accomplish an assessment instead of a future increase in premiums, would you need legislation to do that?

HARBECK: Yes, we would, Mr. Chairman.

KANJORSKI: Well, will you prepare that request so you get it to the committee and we can look at it.

Will Wall Street firms be hit with this ex-post facto one-time assessment to address the gross failures of the regulators at the SEC and FINRA, along with the SIPC business model, in truly protecting Madoff investors?

The Madoff scam, the financial regulatory failures, and the SIPC insurance scam are all part and parcel of the Wall Street racket. It is high time the racket gets hit with the bill!

Stay tuned for Part II of this piece, where I will provide riveting video clips from last week’s Congressional hearing. In the meantime, for those who would like to read the entire transcript from the hearing, please click on the image to open a pdf document. It is well worth the read.

LD

  • creeper

    Some thoughts after reading the transcript:

    Yes, the investors were lied to if they were led to believe their Madoff money was insured.
    Yes, SiPC and SEC dropped the ball.
    No, it is not all the fault of the Republicans.
    Yes, a $150 premium for $500,000 worth of insurance is ludicrous.
    Yes, people lost fortunes to Madoff.

    No, I don’t feel sorry for them.

    Warning: heretical content follows.

    This business of government insuring every d@mn thing we do is leading to a nation of people who refuse to take responsibility for themselves. Far from accepting the idea that we should be insuring investors like Madoff’s, I’m beginning to question the logic of FDIC and FSLIC. If the government insures every dime people deposit in any so-called “financial institution”, where is the incentive for officers of those institutions to work hard or even be honest? It is precisely that invulnerability to loss that leads to the sort of shennigans we’re seeing all over the financial industry.

  • mountainaires

    Promote those who let it happen, and rush in to save the victims so we don’t notice that Mary Shapiro is running SEC? Why are Americans so fucking gullible? This is political theatre, not good governance. I am sick of this administration and this congress; they are idiots. Kanjorski may have good “intentions,” but it’s really alarming to see the general trends in this country, starting with bailing out the politicians, Fed, and banksters who have committed FAR MORE EGREGIOUS sins than Bernie Madoff—all of whose victims took a risk because they were willing to gamble for big returns on their investments. Citi gets a TAX BREAK for their bad behavior because it will look good for Obama? This is simply UNCONSCIONABLE.

    The Health Care “Reform” Bill is the most despicable act of treachery on the American people and now we’re expected to see this as RELEVANT? Well, I really don’t care about Madoff’s victims. They gambled; they lost. Period.

    No truer heretical words were ever spoken, Creeper. Thank you for leading us off on the right sentiment!

    This business of government insuring every d@mn thing we do is leading to a nation of people who refuse to take responsibility for themselves. Far from accepting the idea that we should be insuring investors like Madoff’s, I’m beginning to question the logic of FDIC and FSLIC. If the government insures every dime people deposit in any so-called “financial institution”, where is the incentive for officers of those institutions to work hard or even be honest? It is precisely that invulnerability to loss that leads to the sort of shennigans we’re seeing all over the financial industry.

    • http://www.sonicninjakitty.wordpress.com Sonic Ninja Kitty

      I agree with you both. There are many balls the SEC has dropped over the years where investors lost big because of faulty information. They cannot selectively choose to recompense only certain people.

      And this:

      …but it’s really alarming to see the general trends in this country, starting with bailing out the politicians, Fed, and banksters who have committed FAR MORE EGREGIOUS sins than Bernie Madoff

      Oh, so true, so true! It is sickening what is happening.

      PS–Thank you for this post, Larry.

      PPS–The MSM is dead. Worse than useless.

  • Ellen D

    I believe that every country needs a well-functioning banking system. If Americans cannot depend on American banks that are sensibly regulated and insured, money will move to foreign banks that are. This is now a Global Economy. It isn’t the 1930′s.

    • mountainaires

      Recent article I read said that about 17% of the population don’t even have bank accounts. The economy isn’t as “global” as we think, I guess.

      • Docelder

        If you ever have to go to the bank on a Friday afternoon… trust me, don’t have to do it… it is full of illegals “cashing” payroll checks… and having their thumb prints taken in doing so, I might add. These people for one don’t have or probably don’t want bank accounts.

  • NomNomNom

    http://news.yahoo.com/s/ap/20091216/ap_on_bi_ge/us_time_person_of_year
    Considering that Time just named Bernanke Person of the Year, I’d guess…no. But we probably will.

    • creeper

      Only slightly OT…

      We are also living in a world in which the AP names Tiger Woods “Athlete of the Year”.

      One has to wonder if that is for his golfing skills…

      We now return you to your regular discussion.

  • Peggy Sue

    I don’t know, Larry. When we’re living in a world where Time Magazine feels compelled to name Ben Bernake “Person of the Year,” all bets are off that sanity will rule, anywhere.

    But I appreciate the transcript link. I’ll put it in my “to read” stack.

    • creeper

      Nuts. My comment above was supposed to be in reply to this from Peggy Sue.

      More coffee!

  • jwrjr

    I am not sure that the big banks can be legally required to compensate the investors. To be sure, SIPC should have charged much more for the premiums. But SIPC said “150 dollars”, and the banks paid it. Legally speaking, what did the banks do that was wrong?

  • Patience

    While I can understand why some of Madoff’s victims felt safe investing with a former head of the NYSE (con is short for confidence after all), I’m sorry to say that when I saw how unprofessional the statements issued to his investors looked like, coupled with the fact that they enjoyed unreasonable returns on their investments, I lost sympathy for them. It reminds me somewhat of the ’80s Keating scandal in that the more I learned the more I realized there was greed all around. Caveat emptor.

    That said, our so-called watchdogs failed. I wonder if any got a big fat juicy piece of meat to distract them while the crime was being committed?