Thursday, December 10, 2009

None too excessive protection

The Times yesterday ran a story about Madoff victims seeking compensation for their losses from the SIPC (Securities Investors Protection Corporation), a government-chartered non-profit that offers limited account protection to brokerage customers against default by participating brokerages. The agency has $1.2 billion in reserves now, with a lifeline of $1 billion from Congress. Madoff claims at present exceed $20 billion. If you want to understand the intricacies of this specific dispute, read the article. SIPC’s position is undoubtedly correct.

The article brings to mind, however, the outstanding issue of CAPCO Insurance, nestled up in the verdant hills of Vermont. Astute readers will recall the July story in the Times about CAPCO, a captive insurer owned by nine large broker-dealers, including Lehman Brothers, Goldman Sachs, Fidelity, Edward Jones, get whole list) to provide excess protection for brokerage accounts, including those at Lehman, where claims may run to $11 billion dollars. CAPCO was stripped of its ratings in February and is no longer writing coverage.
With bonus season upon us and broker-dealers having enjoyed much better 2009s than 2008s, one would think it would be a fine time for participating firms to recapitalize CAPCO, or at least to earmark reserves for that purpose in anticipation of Lehman-related claims. It would be nice to hear commentary on this issue from David Viniar and his counterparts.

Another delicacy in the SIPC article in the Times came from the mouth of former SEC Commissioner Harvey Pitt, who argues that the SIPC “is missing an opportunity to stand up by those who have been defrauded by a master swindler.” My gentle reader may recall that the SEC under Pitt was utterly deaf to repeated and well-documented entreaties by whistle-blower Harry Markopolis to shut Madoff’s master-swindler ass down. She may also recall that, in the Spring of 2007, after the initial statute mandating hedge fund registration with the SEC had been beaten in court and after well-publicized but now laughably puny scandals at hedge funds Amaranth and Bayou, Pitt – already at the helm of his own hedge fund -- vigorously opposed further efforts to bring hedge funds into the SEC umbrella or to raise the asset and income thresholds for investments in hedge funds. Our hirsute erstwhile “regulator” argued at the time that middle-class investors should not be denied the opportunities to enrich themselves in alternative investment vehicles just like their richer counterparts. Hedge funds in aggregate did not do their jobs well during the credit crunch and considerably aggravated market volatility as a whole. Bu it is good to know that Harvey is ever and always on the side of the common man.


Anonymous said...

How ironic, Madoff stole more wealth from his fellow Jews than Hitler and all his Nazi thugs combined! I seriously doubt the law or any political placations will cause the SIPC to do more than their average job, you cannot make a silk purse out of a sow's ear.

Anonymous said...

You cannot make enhancement cream out of thin air either, but it doesn't hurt to try!