Business Update with Mark Lacter

Should Ponzi victims get bailed out?

Well, let's be clear about this: Should the investors who lost billions of dollars by placing their money with Bernie Madoff and Allen Stanford be bailed out? Some of those folks have been pushing senators to add $4-billion to the financial regulatory bill as compensation for their losses. Thing is, no other Ponzi victims would be eligible for the pot, and that, of course, is absurd. Just because their scams got more notoriety doesn't mean they should get more money.

Still, it raises an interesting question: Should the government somehow get involved in compensating the victims of fraud? And how would it be done? Currently, there are a couple of entities designed to help investors, such as the Securities Investor Protection Corporation, but many of the Madoff victims - and none of the Stanford victims – are eligible. The cold, harsh truth is that a lot of those people will never see their money again. Yet Peter Henning, a former SEC lawyer and federal prosecutor, doesn't see how a bailout plan could work. From DealBook:

"While an insurance fund sounds like a nice idea in theory, there are a number of problems with creating such a program. First and foremost, who will pay the premiums for the insurance fund? Various financial firms like banks, brokerage firms and investment funds could be tapped for the money, but as in any such program, law-abiding organizations would be forced to pay the price for the miscreants. Moreover, these firms will pass any insurance cost along to their customers in the form of higher fees, so the public ultimately will carry the burden.

Identifying who would be eligible to make a claim on the fund would also be complicated. Many of the Ponzi schemes uncovered since Mr. Madoff turned himself in did not involve conventional investments in stocks or bonds but instead more exotic investments. There is no accepted definition of a Ponzi scheme because frauds come in many different stripes. Specifying which ones the insurance program would cover and which it would not would most likely involve arbitrary decisions and leave out potentially worthy claimants. The broader the scope of coverage, the greater the costs for financing the insurance."

Absent any kind of insurance program, should Ponzi victims be given special consideration when they lose money? Should they be accorded different status than the folks who happen to pick the wrong blue-chip stock at the wrong time?

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