This economic crisis is souring like milk. Auto deadlines, Barney and the bailouts, CDOs and other toxic assets. There are problems everywhere.
For years I have explored the uncertainty of wealth, both as a financial adviser and as the author of Top Producer, a novel set on Wall Street. Right now, there's one question troubling me. It keeps surfacing in every corner of this crisis. It won't go away, even as cavalries from every branch of the government charge to our rescue. I keep wondering the same thing.
When is my money really my money?
It's not clear. Let's start with Bernie Madoff. Assume a New York investor pulled capital from Madoff's fund sometime during the last six years. The courts can claim the redemption was preferential, unfairly benefiting some to the detriment of others. They can call for the money's return. Such requests are known as "clawbacks."
There's legal precedent on this issue. The Bayou Hedge Fund Group, for example, first hinted at the current spate of Ponzi schemes. Back in 2005, the Commodities Futures Trading Commission alleged fraud and misappropriation by Bayou's principals. The bankruptcy judge later ruled that profits, and even seed capital in some circumstances, were subject to return.
Return where? Clawback Capital LLC?
In Bayou, Madoff, and other Ponzi schemes, the courts decide who gets what. Judges consider the expenses incurred while unraveling the scams. They review the different percentage ownerships among shareholders. And as reasonably as possible, they distribute recovered money to the victims. It's usually cents on the dollar.
The premise here is fairness. Why should new investors -- duped by Ponzi schemes -- bear all the pain? Their fresh funds enabled other investors -- duped by Ponzi schemes -- to exit with both profits and seed capital. It's like playing hot potato with real money.
Enter clawbacks. Through the years, courts wrestled with solutions. They created arbitrary periods, six years in New York, which govern Ponzi schemes and enable the courts to clawback funds.
The same concept applies to non-fraudulent bankruptcies. The courts can reclaim money, for example, repaid by a person or entity that later declares bankruptcy. Subject to timing, the transfer may be considered preferential. And that's not fair. Were you thinking, Clawbacks aren't my problem? Don't bet on it.
What about that loan to your brother-in-law?
Clawbacks may be the only fair way to clean up the muck left by Bernie, Bayou, and other Ponzi schemes like Stanford. Don't forget the non-fraudulent bankruptcies. But clawbacks don't sound fair to people, who redeemed their investments to pay bills or reduce debt.
"Let's get this straight, your honor. I used that money to pay tuition. And now you want it back?"
There are few winners in bankruptcies. And there are no winners in financial scams. With the possible exception of family members who own million-dollar estates protected by Florida's homestead laws. But that's a different issue. The problem is that my lead question keeps surfacing in other corners of the crisis.
When is my money really my money?
Consider AIG. Their executives, the ones refusing to return bonuses, may face a 90 percent tax. No doubt, they're asking the same question in some form or another. Unfortunately, the debate, like the underlying assets, has turned...well...toxic.
To begin, let's review the ill will. We see "acrimoney" everywhere in this crisis, all the sniping and backbiting and scrounging around for cash. The unhappy union between Merrill Lynch and Bank of America comes to mind. The rancor over pork in the proposed budget is white hot. But let's stick to AIG. The bailout funded bonuses. The bonuses annoyed Brooklynites. The Brooklynites traveled to the headquarters of AIG Financial Products in busses. The busses continued the tour, visiting the homes of executives boiling mad over personal vilification from bonuses.
Everybody's angry. It makes me crazy that my tax money rewarded individuals who gave birth to the toxic assets that messed with our lives. Were those AIG bonuses really contractual?
The excuse, "legal commitments," smells. Through the years, I worked for big investment houses and finance boutiques. These companies always retained "out clauses." There were always plausible rationales, legal positions that lawyers could snarl over and defend to the death that empowered companies to commandeer their cash.
Contractual? I don't buy it.
That said, I believe the proposed 90 percent tax on AIG bonuses sets dangerous precedent. It's retroactive. The government is trying to change the past. It's not legislating for future socioeconomic issues. Maybe that's why this legislation is losing steam.
Like it or not, the boom and bust of economic cycles are here to stay. I wonder whether there will be another event, which so enrages the public that the government rules retroactively. The 90 percent debate smacks of mob rule.
When is my money really my money?
Hear me out on the issue of anger and mob justice. We're all hurting from the economic downturn. There's plenty of retroactive legislation that would make us feel better. Let's tax legislators at the 90 percent rate. They approved the funding tied to AIG's bonus fiasco.
Don't even need the bus tour of congressional homes.
While we're at it, let's tax a few select bureaucrats from the SEC. They were asleep at the switch back in May of 2000, when Harry Markopolis first alerted the SEC to Madoff's hijinks. The AIG bonuses totaled about $165 million. Madoff's Ponzi scheme totaled $65 billion, when I checked last. The math makes it clear which gaff cost more.
Whatever happened to stocks -- the kind used by Pilgrims?
Assume, for the moment, the SEC listened to Markopolis and shut down Madoff in 2000. No one would have invested for the last eight or nine years. The six-year clawback would not apply to New Yorkers duped by Bernie as long ago as 2002. That's if the government did its job.
Where's the justice?
Our money is at risk. Not just from the bear markets and the volatility of securities. Laws contribute to our uncertainty. We've known some of the rules for years. The courts have carefully vetted clawbacks through decades, even centuries, of litigation. The concept of preferential transfers goes way back.
Now, the economic crisis is more severe than anything we've seen since the 70s. We learn about bad behavior and poor decisions every day. The government, in response, is exploring powers that violate a cardinal rule of fairness. They're grappling with punishment for past actions, not future behavior.
Uh-oh.
It feels like a whole new game: hide-and-seek in a really bad neighborhood. We wonder when changes will affect us personally. So many of us have worked hard. We've played by the rules and managed our debt load. Sound decisions didn't stop the recession from finding us, though, and assailing our wealth. The message, the question we each face, is clear.
When is my money really my money?
Here's the bad news. No single solution keeps your money safe and allows it to compound happily over time. And forget about hiding your money. Somebody will find it eventually. Even Swiss banks, long the guardians of secrecy, are cooperating with foreign governments. On March 13 of this year, Switzerland bowed to international pressure and agreed to relax some of its banking secrecy. Otherwise, the country risked joining a blacklist of uncooperative tax havens.
Here's the good news. Incremental solutions, the nuts and bolts of everyday financial planning, help. Diversify your investments. Tweak your estate plans by funding trusts or opening accounts for family members. The more accounts you have -- different names and different entities -- the harder it is to reach all your assets. Keep watching. I will.
We never know when acrimoney will visit us personally.