Should fraud victims be made whole?

I read this morning from Bloomberg a report I find disturbing regarding a lobbying effort underway by Bernard Madoff and R. Allen Stanford fraud victims. It seems the victims have teamed up to request that Congress look into levying a tax on financial institutions in order to pay the victims back.

Talk about a bad precedent to set.

I don’t quite understand why these folks get a special hearing in the halls of Congress. We have laws on the books to deal with frauds like Madoff and Stanford, and much like FDIC, which protects bank depositors from losing everything, SIPC, or the Securities Investor Protection Corporation fund, is supposed to step in to protect investors from fraud, up to a $500,000 maximum per person. It’s a paltry amount when compared to the $65 billion that Madoff swindled from his clients, but that’s what the law states, and we should stick to it rather than retroactively applying a new standard.

It’s bad enough that the government’s inability to enforce its own laws led to this mess, but playing fast and loose with the law after the fact only compounds the problem. If we are going to levy a new tax on Wall Street to fund SIPC, the effort should be motivated by future funding considerations, not past frauds operating under past rules. And we certainly should not be playing around with the kinds of losses that SIPC will compensate. For instance, Bloomberg reports that the Madoff victims have already sued SIPC (and lost) in an attempt to compel the fund to base its payouts to victims on “fictional” statements issued by Madoff in his Ponzi scheme. And after all, why should SIPC pay investors phony profits?

If this is the direction we are going to go with SIPC, then we are creating large, unknowable exposure for the U.S. government in connection with securities fraud. Today’s fraud victims would have the banking industry pick up the tab, but as one professor noted in the Bloomberg story, this is just a back-door means of socializing the losses, because those bank taxes will get passed directly on to the consumer in the form of higher fees, and even then, it doesn’t help SIPC project future liabilities.

And just think, if the SEC had done its job, we wouldn’t be having this conversation. If anything, the revenues from any new bank tax should go to the SEC. It makes no sense to maintain a shitty securities law enforcement agency, yet lavishly fund the government “insurer” against fraud.