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The article doesn’t mention a really important dynamic here — a LOT of the madoff IOUs were purchased by hedge funds for pennies on the dollar, from Madoff inve

The article doesn’t mention a really important dynamic here — a LOT of the madoff IOUs were purchased by hedge funds for pennies on the dollar, from Madoff investors who needed liquidity for e.g. retirement and couldn’t wait decades to get their money back. Dunno if there still is, but there was an active and liquid market for Madoff receipts for a while. A fund could tell an individual who was wiped out by Madoff “we’ll pay you $0.20 on the dollar for your claim against Madoff”, and then collect the $0.80+ that’s been recovered over the past 10 years. I don’t have an estimate of what % of the recovered dollars are going to the original investors...but it’s not 100%. A lot of the claims have been traded.

bertil 8y ago
This article then makes those trades more valuable, which gives an incentive to pursue fraud. It’s an interesting effect against the legal strategy to wear down claimants.
IfOnlyYouKnew 8y ago
That's sort-of how it's supposed to work? The price at the time was the market-determined value considering the uncertainty of recovery. As you mention, there were multiple hedge funds, so they would have been competing to buy up these coupons, making me suspect the price at the time reflected the best knowledge of the fund's situation and the law available at the time. It sure seems unjust post-hoc. But I can't really think of any improvements. The rate of recovery is somewhat extraordinary, as demonstrated by the appearance of it in the press. And it would not have happened without giving organisations with deep pockets the incentives to try to effect it.
- numlocked 8y ago
  Yeah, I sort of agree. But two things: 1. The article shares a bunch of anecdotes about individual investors receiving their money back, which is surely true, but not necessarily representative of what’s happening overall. 2. Unfortunately it probably wasn’t priced strictly by “odds of recovery” (and also I suspect there was information asymmetry there) but also based on liquidity needs. Large institutions can wait for cash. Retail investors can’t necessarily. Yes, yes time value of money blah blah. Still seems asymmetric.
  - blr246 8y ago
    This "asymmetry" is one of the reasons why having capital makes you powerful, and living paycheck-to-paycheck (maximum need for liquidity) makes you powerless.
    - fierro 8y ago
      More capital allows you to balance risk better (in this case, buying a bunch of IOUs, vs an individual holding one)
- forapurpose 8y ago
  It's supposed to work that way for oil futures, but I'm not sure 'justice futures' are a good thing. People have a right to be made whole; their need, and the justice system's unreliability and delay in delivering it, shouldn't be exploited by people with deeper pockets, IMHO; not everything should be priced on the market. It could become (or be) another way the poor or non-wealthy are excluded from justice and are practically denied their rights.
ballenf 8y ago
A similar issue I have is with the clawbacks themselves. Should the people who didn't have suspicions and/or didn't act on them have the same outcome as those who got out early? Doesn't this perversely incentivize leaving money in questionable investments? Or at least reduce the incentive to do one's own due diligence? The more people who pull their money, the faster a pyramid scheme collapses. So even a marginal change in the number of withdrawals can make or break such a scheme.
- markbnj 8y ago
  As far as I can tell the clawbacks are of profits taken, not principle. Since the profits were fictitious they represent money stolen from downstream victims of the scam. It doesn't really matter that Madoff stole it and then handed it to someone else: it's still stolen money.
- TuringNYC 8y ago
  >> Doesn't this perversely incentivize leaving money in questionable investments? If anything, it seems to incentivize spending money quickly, because only those with something left were in a position to have it clawed back. It isnt clear from the article, but i dont think claw-backs forced people without anything left to say, take out a loan to pay back what was spent.
m3kw9 8y ago
“we’ll pay you $0.20 on the dollar for your claim against Madoff” That’s a reasonable trade given you invest it.

bertil 8y ago

This article then makes those trades more valuable, which gives an incentive to pursue fraud. It’s an interesting effect against the legal strategy to wear down claimants.

IfOnlyYouKnew 8y ago

That's sort-of how it's supposed to work? The price at the time was the market-determined value considering the uncertainty of recovery. As you mention, there were multiple hedge funds, so they would have been competing to buy up these coupons, making me suspect the price at the time reflected the best knowledge of the fund's situation and the law available at the time. It sure seems unjust post-hoc. But I can't really think of any improvements. The rate of recovery is somewhat extraordinary, as demonstrated by the appearance of it in the press. And it would not have happened without giving organisations with deep pockets the incentives to try to effect it.

numlocked 8y ago
Yeah, I sort of agree. But two things: 1. The article shares a bunch of anecdotes about individual investors receiving their money back, which is surely true, but not necessarily representative of what’s happening overall. 2. Unfortunately it probably wasn’t priced strictly by “odds of recovery” (and also I suspect there was information asymmetry there) but also based on liquidity needs. Large institutions can wait for cash. Retail investors can’t necessarily. Yes, yes time value of money blah blah. Still seems asymmetric.
- blr246 8y ago
  This "asymmetry" is one of the reasons why having capital makes you powerful, and living paycheck-to-paycheck (maximum need for liquidity) makes you powerless.
  - fierro 8y ago
    More capital allows you to balance risk better (in this case, buying a bunch of IOUs, vs an individual holding one)
forapurpose 8y ago
It's supposed to work that way for oil futures, but I'm not sure 'justice futures' are a good thing. People have a right to be made whole; their need, and the justice system's unreliability and delay in delivering it, shouldn't be exploited by people with deeper pockets, IMHO; not everything should be priced on the market. It could become (or be) another way the poor or non-wealthy are excluded from justice and are practically denied their rights.

ballenf 8y ago

A similar issue I have is with the clawbacks themselves. Should the people who didn't have suspicions and/or didn't act on them have the same outcome as those who got out early? Doesn't this perversely incentivize leaving money in questionable investments? Or at least reduce the incentive to do one's own due diligence? The more people who pull their money, the faster a pyramid scheme collapses. So even a marginal change in the number of withdrawals can make or break such a scheme.

markbnj 8y ago
As far as I can tell the clawbacks are of profits taken, not principle. Since the profits were fictitious they represent money stolen from downstream victims of the scam. It doesn't really matter that Madoff stole it and then handed it to someone else: it's still stolen money.
TuringNYC 8y ago
>> Doesn't this perversely incentivize leaving money in questionable investments? If anything, it seems to incentivize spending money quickly, because only those with something left were in a position to have it clawed back. It isnt clear from the article, but i dont think claw-backs forced people without anything left to say, take out a loan to pay back what was spent.

m3kw9 8y ago

“we’ll pay you $0.20 on the dollar for your claim against Madoff” That’s a reasonable trade given you invest it.