Now it seems that lots of people didn’t actually lose the money they put into the Madoff scheme at all! (I predicted that would be the case on this blog).

But that’s not going to stop them from filing for the return of their (paper) principle…..nor is it going to stop people who actually lost their investment from going after some of the winners for a chunk of real profit, claiming it was only virtual.

I know your head is spinning. But that’s the latest news:

“No one knows yet how many people will emerge as net winners in the scandal, but the numbers appear to be substantial. Many of Madoff’s long-term investors have, over time, cashed out millions of dollars of their supposed profits, which routinely amounted to 11 percent to 15 percent per year.

Jonathan Levitt, a New Jersey attorney who represents several former Madoff clients, said more than half of the victims who called his office looking for help have turned out to be people whose long-term profits exceeded their principal investment.

“There are a lot of net winners,” he said.

Asked for an example, Levitt said one caller, whom he declined to name, invested $1.8 million with Madoff more than a decade ago, then cashed out nearly $3 million worth of “profits” as the years went by.

On paper, he still had $4 million invested with Madoff when the scheme collapsed, but it now looks as if that figure was almost entirely comprised of fictitious profits on investments that were never actually made, leaving his claim to be owed anything unclear.

Other attorneys report getting similar calls.

Under federal law, the court-appointed trustee trying to unravel Madoff’s business can demand that people who profited from the scheme return some or all of the money.”

More  at AP.

LONDON (AP) — Britain’s Serious Fraud Office opened an investigation into the British business operations of Bernard Madoff on Thursday, raising the prospect that the alleged Wall Street fraudster could face criminal charges here.

The fraud office, which is cooperating with its U.S. counterparts, said its investigation would focus on British victims and “any criminal offenses that might have been committed in the U.K.”

Responding to criticisms that it has moved too slowly in the past against illegal activity in London’s huge financial sector, the agency said the inquiry showed its “new, faster approach to tackling fraud.”

From AP.

“Unlike Alan Greenspan, who didn’t believe it was his job to even point out bubbles, much less try to deflate them, Mr. Reddy saw his job as making sure Indian banks did not get too caught up in the bubble mentality. About two years ago, he started sensing that real estate, in particular, had entered bubble territory. One of the first moves he made was to ban the use of bank loans for the purchase of raw land, which was skyrocketing. Only when the developer was about to commence building could the bank get involved — and then only to make construction loans. (Guess who wound up financing the land purchases? United States private equity and hedge funds, of course!)

Then, as securitizations and derivatives gained increasing prominence in the world’s financial system, the Reserve Bank of India sharply curtailed their use in the country. When Mr. Reddy saw American banks setting up off-balance-sheet vehicles to hide debt, he essentially banned them in India. As a result, banks in India wound up holding onto the loans they made to customers. On the one hand, this meant they made fewer loans than their American counterparts because they couldn’t sell off the loans to Wall Street in securitizations. On the other hand, it meant they still had the incentive — as American banks did not — to see those loans paid back.

Seeing inflation on the horizon, Mr. Reddy pushed interest rates up to more than 20 percent, which of course dampened the housing frenzy. He increased risk weightings on commercial buildings and shopping mall construction, doubling the amount of capital banks were required to hold in reserve in case things went awry. He made banks put aside extra capital for every loan they made. In effect, Mr. Reddy was creating liquidity even before there was a global liquidity crisis….”

More at the New York Times on how India avoided a crisis.

Comment:

This is a very interesting piece, as much for what it says, as for what it doesn’t say.

Look at the first paragraph:

“What has taken a number of us by surprise is the lack of adequate supervision and regulation,” Rana Kapoor was saying the other day. “This was despite the fact that Enron had happened and you passed Sarbanes-Oxley.”

Nowhere does the writer, Joe Nocera, or his editor, qualify this quote. The reader would be left with the idea that there are no regulations in the US banking system. He would think it was all the fault of one man, Alan Greenspan, the chairman of the Federal Reserve Bank, who didn’t do what he should have.

Well, Greenspan didn’t. But there were regulations on the books alright. The problem is not lack of regulation, it’s the existence of a banking cartel and a its PR wing in the financial press.

  What’s more, the Fed is NOT a central bank in the same way as the Indian bank. The Fed system is a private-public system.

What’s the overall effect of the piece? To leave people with the impression that all that’s needed is to replace our financial czar and expand his role.  All we need to do is put in an anti-Greenspan, who can jack up interest rates to 20%. That’s Paul Volcker, on Obama’s team. I am all for interest rates at 20% and a tougher application of the laws. 

But as long as the people who monitor the laws are drawn from the same industry, don’t call it a free market.

At least, the Times admitted that none of this means that the Indian economy isn’t taking a hit. Of course, it is…..