Freud, the Consumer Finance Protection Agency and Madoff
The Obama Administration has just submitted to Congress a 150-page proposal for the establishment of a Consumer Finance Protection Agency. As expected, banks and financial companies of all types are in strong opposition.
The intent of this agency is to centralize the oversight and regulation of financial products offered to consumers - mortgages and credit cards being the big two. As one who has studied both of these products for many years, I should have a strong feeling about whether increased government regulation is necessary yet somehow I'm just not sure.
As Freud has said, "the mind is an arena for the struggle of antagonistic impulses" and so a la Freud, here are my competing thoughts:
FOR a Consumer Finance Protection Agency:
1. In the last ten years, banks and financial services companies, pushing for increased profits, completely lost sight of treating people fairly. Mortgage and credit card documentation is difficult to understand - deliberately so.
2. Humans are human. If you give us too much rope, we will in fact hang ourselves.
3. If you've ever run anything, you know that whenever there are too many people (government agencies) responsible for the same objective, no one gets it done. In the company I run whenever I want to know why Bill didn't get something done, he suggests it was Mary's job who thought it was Jane's job and so on. Just substitute different government agencies for Bill, Mary and Jane.
AGAINST a Consumer Finance Protection Agency:
1. Whenever there is government regulation, the fear of enforcement keeps innovation in check. Today, in hindsight, everyone hates the mortgage products that were created earlier this decade allowing people to buy housing with low down payments. However, had housing prices continued to increase, people would be lauding these creative products for opening the housing market to lots of low-income and first-time buyers.
2. The government does not simplify - it complicates (witness the 150 pages of authorizing legislation). A confused mind (consumer) is a close cousin to an uninformed mind. Who here understands the Internal Revenue Code?
3. People need to take responsibility for their own actions. Although the banks and finance companies should have done a better job making documentation and business practices more consumer-friendly, the truth is that as to mortgages and credit cards, there are only a half dozen or so basic points consumers need to understand. This stuff is not rocket science. There is a side of me that would much rather see our country put increased resources and energy behind financial education (especially for young adults) rather than more regulation.
MADOFF: How does all this tie in with Madoff? Here, too, I disclose the competing thoughts in my mind when I hear the stories of people who lost their life savings investing with him. On the one hand my heart is broken for these people. On the other hand when I hear calls for the government (translation: you and me) to cover their losses, I wonder whether these people should be made whole in light of the fact that they violated every basic rule of investing: a) diversify, b) only invest in what you understand, c) when the reward is out of line with competing products, there must be risk, and d) the stock market can never produce constant, predictable returns.
What are my conclusions? Not sure ... just using this post to disclose "antagonistic impulses."
Jim Randel is the founder of The Skinny On book series. His first book, The Skinny on the Housing Crisis, was just awarded the Gold Medal in the Robert Bruss Book Competition - sponsored by NAREE - an association of 650 journalists and professionals
Follow Jim Randel on Twitter: www.twitter.com/jimrandel
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Relative to your comments about blaming the victim for accepting what you perceive as above market returns without due diligence I have a few comments.
For those of you who advance the argument of the "greedy investors" and the unreasonableness of a 9-11% return - I submit to you that the Fidelity Magellan fund returned 16.42% over the lifetime of the fund and is up over 15% so far this year. In the 20 years I invested with Madoff Investment securities I NEVER got a return in that range. There are some who did get exceptional returns. Mr. Picower for instance got a 950% return in 1999 and is now being sued by the trustee in charge of liquidating Madoff's assets. Most investors are like me - and like you - who found a good money manager and stayed with them for a long time. Of course he was not a money manager - he was a thief.
It is critial that my fellow Americans understand that what happened to me and the tens of thousands of other investors duped by Madoff and the SEC can happen to any other investor in our markets. Suppose for instance, that Madoff Investment securities was renamed Merrill Lynch. The protection of your assets would be the same.
I want you to recognize that I am not asking for the return of the money I invested with Madoff Investment Securities, nor do I expect to ever see any of the gains I supposedly earned on those many 1099’s over 20 years. I ask only that the taxes paid by a crime victim be returned. The government is not an innocent bystander. It was because of the clean bill of health given by the SEC that I invested in Madoff Securites. Prior to the SEC investigation in 1992, I had never heard of the name MADOFF.
I had faith in the government institutions that were tasked with investigating agencies like Madoff to ensure that it was real. The SEC repeatedly stated that there was no evidence of fraud. With great power comes great responsibility - I believed them, and I will pay for that for the rest of my life.
It is WRONG for any government to keep these taxes. Madoff was a thief. I would like to believe that the government is not following in his footsteps.
Like far too many Americans you have mis-stated the objectives of Madoff victims. Unlike companies like AIG, GM and others who have taken taxpayer money, Madoff victims do not expect to ever receive any of our original investment, nor any of our supposed/phantom gains.
Madoff was an equal opportunity thief. He stole from the rich, the poor and everyone in between. Groups including charities, pension plans, unions, mutual funds and IRAs were targeted. It is beyond belief that he acted alone and I feel that he had partners in this crime. It is very sad that one of his partners was the SEC. I look forward to the SEC report that should be available in August detailing the failures of the SEC investigations of this beast. Madoff looks like us, talks like us and walks like us. But no one who destroyed the financial lives of so many with so little conscience can be human; so he must be a beast.
Madoff was given a 150 year prison term. I and the other investors got a life sentence. The only financial winners are the Federal and State departments of revenue. The taxes I paid over 20 years were paid on phantom income. This money never existed. The government has a moral obligation to return those taxes. A government that was created of the people, for the people and by the people cannot keep tax money that was obtained as a result of a criminal activity.
Dear Mr.Randel,
Thank you for your sympathetic comment re Madoff victims(your heart breaks).
However you are mistaken when you state that the government
The SIPC by law covers investors' losses up to $500,000.T
Also,I must respectfully disagree with your statement re Madoff investors violation of the 4 basic rules on investing.
Generally speaking your article would be more effective without any mention of Madoff.
With a ponzi scheme A DAY being discovered in California alone, you might change your mind about investor protection if the thief comes knocking on your door. We all think it can't happen to us - but trust me Mr. Randel, even Eliot Spitzer the king of crime discovery was caught in this one...I hope you might re-think your views and do some digging and discover just how easy it is...which is why protection for this miserable kind of damaging experience was created for consumer protection back in 1970. Now, if SIPC had run their agency correctly, increased refund fees set in 1978 to a believable level (is anyone there still earning 1978 dollars?) none of this would be the devastating issue it has become and the details of your post would be where they should be - in the column of irrelevance.
Mr. Randel seems to be forgetting the simple fact that had the SEC done its job there would be no Madoff ponzi scheme of this proportion, Had the IRS done it's job they would never have posted Madoff Securities as a non bank custodian on their website beginning in 2004. It all represents a whole lot of irresponsiblity and lack of due diligence that has served to crucify tens of thousands of investors - most not eligible for SIPC refunds as feeder fund investors. Based on these shortcomings - a road map ignored repeatedly beginning in 2000 by Harry Markopolos, failed SIPC policies, failed SEC enforcement - I would say there is some complicity and responsibility here. We can specifically address SIPC which collects its fees from the broker dealer industry so is totally outside of government - except of course for the 7 years it opted not to collect those fees beginning in 2001. Of course, $150 fee per broker dealer - yes, ALL of Goldman Sachs or any investment firm is only charged $150 per year - and they all got a vacation during those boom years from the onerous charge of...$150/
Jim, You say, "my heart is broken for these people" in referring to the Madoff Victims. Now let me point out what the above poster has stated:
"Nobody is asking the government to cover our (Madoff) losses. The Securities Investor Protection Corp (SIPC) is not a governmental agency."
The money that the Victims are entitled to is not government money, but money that has been set aside for just this kind of catastrophe by Wall Street Brokerages. Perhaps you did not know this because if not, what you are then saying is that you believe that this money should remain in the pockets of Wall Street brokerages who have been running rampant while the victims whose worlds they've destroyed should get nothing.
The damage inaccurate reporting like this does to innocent people cannot be measured. Think about your claim of how your "heart breaks for these people." If you really mean that, then I'd like to see a retraction, and a reassessment of your position.
Mr. Randel, thank you for the information about Madoff and your investment advice. Please consider the following information though in response to other comments you made that are factually incorrect.
Nobody is asking the government to cover our (Madoff) losses. The Securities Investor Protection Corp (SIPC) is not a governmental agency, rather it is an agency created by an act of Congress (SIPA of 1970) to protect investors should a brokerage company go bankrupt or in the event of theft, to give Americans confidence in investing and it is completely funded by the securities industry. Not one cent of taxpayer money. It acts much like the FDIC. Neither organization "judges" whether it was a smart move to put one's money into a bank or securities company. That is not the point of it. The point of both acts was to help both the securities and banking industry by conveying to Americans that they could feel safe investing that subject to the maximum amount allowed, a person would recover the amount of their last statement . That's the law. But, SIPC is not following its own statutes which created it. Imagine if the FDIC did not pay its customers what they thought they had, up to the maximum. There would be a run on banks that would force a "bank holiday." All investors must be extremely cautious. Another investment suggestions: Investors get their stock certificates in their own name, not the street name, to have possession of what they own.
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