Sunday, March 29, 2009

Why No Madoff Bailout?

Why No Madoff Bailout?

Bernard Madoff has pled guilty to running the largest fraud, a so-called Ponzi scheme, in U.S. history, having swindled some sixty-eight billion dollars from investors involved in his fraudulent scheme. Over the course of twenty years, Madoff managed to moved over 170 billion dollars through his fraudulent investment corporation, many of his investors being some of the wealthiest people on the planet.

Modoff’s scheme only came to light because of the worldwide financial crisis: “‘The fuel of a Ponzi [scheme] is cash infusion,’ says lawyer Michael Goldberg, Madoff’s undoing was the worldwide financial crisis, which prompted many investors to try to liquidate. He was unable to bring in the funds to meet the redemption requests, and his house of cards collapsed” (The Week, January 30, 2009, p. 11).

Madoff’s scheme resembled a successful investment firm, and was, in many ways, indistinguishable from other high rolling Wall Street investment firms: “Maddof ran his so-called hedge fund like and exclusive club…allegedly paying out some of the money as dividends to maintain the fiction, donating millions more to non-profits, and spending much of the rest on real estate, jewelry, and high living” (ibid.). For all practical purposes, Bernie Madoff was virtually doing business the same way that legitimate investment banks did: taking investors’ money, using the money to do business, and hoping that most of the investors will not demand their money back any time soon.

Madoff’s problem was unlike those of the large banks the federal government has bailed out, banks which, like Madoff, found themselves faced with having too many investors who wanted (or who may soon demand) their money back and not enough money on hand to pay them. But isn’t this very similar to what has happened with the recent financial collapse of companies like Bear Stearns, Citigroup, Bank of America, General Electric, and AIG? The recent federal bailout of so many failed corporations was necessary, so we are told, to insure the stability of our economy.

The recent outcry over bonuses given to (150 billion dollar bailout recipient) AIG executives only points up the fact that the federal government is heartily endorsing the corporate status quo and the taxpayers are bailing out those who live the high life. Unfortunately, our economy is far from stable; even with the recent 8.5 trillion dollar infusion of cash coming from federal taxpayers. Did I say cash infusion? Where have I heard that before? Oh yeah…it’s what Bernie Madoff’s sixty-eight billion dollar Ponzi scheme depended upon in order to remain solvent. It seems to me that perhaps the best thing to do, economically speaking, would be for the federal government to add Madoff’s fraudulent investment company, and its investors, to the growing list of taxpayer funded bailout recipients.
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