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Will Wall Street Banks be Compelled to Compensate Madoff Investors?

Posted by Larry Doyle on December 15, 2009 11:46 AM |

Will Congress hit the 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.


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 later today, 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

  • Scott Stapf

    Get your facts straight: SIPC is not the FDIC. It does not provide “insurance,” as you state incorrectly a number of times.

    • Larry Doyle

      Thanks, Scoop!

      An entity that charges annual premiums, even if only $150, to develop a reserve fund for the purpose of covering losses . . . well, in laymen’s terms that is known as “insurance.” Perhaps you are confused, depending on what the definition of “is” is.

      My recommendation is that you type the word “SIPC” in the search window here at Sense on Cents so that you can become more educated about SIPC and then, in turn, educate us. It may very well be that the first story you come across is my piece which was posted 12 minutes before your comment, in which I quote from the SIPC website:

      It is important to recognize that SIPC does not work the same way as the Federal Deposit Insurance Corporation in terms of blanket protection of losses.

      In addition, chew on this from SIPC’s Mission Statement:

      When a brokerage firm is closed due to bankruptcy or other financial difficulties and customer assets are missing, SIPC steps in as quickly as possible and, within certain limits, works to return customers’ cash, stock and other securities. Without SIPC, investors at financially troubled brokerage firms might lose their securities or money forever or wait for years while their assets are tied up in court.

      Happy navigating. Visit and comment often.

  • Randy Bowman

    Call it what you will, Scott.. and just to be accurate, the FDIC has nothing whatsoever to do with the Madoff scandal.

    The only party that provides protection for losses to investors in situations like this is the SIPC and even though they don’t provide total blanket protection in such cases, their product was designed to operate like insurance, neverthless.

    I think Mr. Doyle’s references are just fine and if what the SIPC is offering does not act like insurance and thus does not compensate investors as it was designed then it should either be shut down or else replaced with something that actually works.

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