WHEN bankruptcy trustees were appointed over a hectic weekend late in 2008, there seemed no end to the losses caused by the collapse of Bernie Madoff’s Ponzi scheme. Cash in the bank was no more than $150m. But the losses have been less, and the assets available for compensation greater, than had been feared.
On February 22nd Irving Picard, the bankruptcy trustee overseeing the liquidation of Mr Madoff’s firm, announced that a fund set up to reimburse customers would make its ninth distribution, of $621m, bringing the total handed out so far to $11.4bn. Another $1.8bn is held in reserve for contested claims. This is on top of a separate distribution of $723m last November from a separate fund run by the Department of Justice. Another $3bn remains to be distributed in that fund and the bankruptcy trustees hold out hope that substantially more will be recovered and returned.
Mr Madoff, who will turn 80 in April, is serving a 150-year sentence in a North Carolina prison. At his trial former Madoff employees said they had created fake trades as early as the 1970s. The fraud was able to continue for so long because Mr Madoff had a remarkable ability to attract money and deflect regulators. It helped that some of his customers were non-profit organisations, which typically withdraw just a small share of their money each year. When the edifice collapsed clients lost homes and retirement savings. Some charities had to close their doors; others, though they survived, were thrown into convulsions. One of Mr Madoff’s sons later committed suicide, as did a son of David Friehling, his accountant. Mr Friehling had entrusted Mr Madoff with his savings and pleaded guilty to rubber-stamping the Madoff fund’s accounts.
Even working out the number of people who suffered losses has been tricky. The bankruptcy trustee received 17,000 claims, which were winnowed down to 2,300. The Justice Department received 66,000, reduced to 39,000. The difference is one of definitions—the bankruptcy trustee looks at direct account-holders, which may encompass many investors, whereas the Justice Department looks at individuals who lost money, even if they invested indirectly through a fund.
Each of the account-holders in the bankruptcy action have received at least $1.4m and in total, 64% of claims have been covered. Full satisfaction would require $4bn-5bn more, plus the money held in reserve. The Justice Department sent cheques to 25,000 in an initial distribution and will send more money to more people soon. But a full reimbursement would require perhaps another $10bn.
At times, the two funds have shared in settlements, including early in their work, with billions of dollars received from J.P. Morgan, where Mr Madoff had accounts, from the widow of one of his close associates and more recently from the estates of his two sons. But they have also drawn money from different sources. The proceeds of selling Mr Madoff’s home and art collection, for example, went to the Justice Department under the rules of forfeiture.
The bankruptcy trustees have operated by suing entities that may not have done anything illegal but whom they regard as having received inappropriate payouts—notably money that purported to be investment returns but was, under the Ponzi scheme, in reality simply another client’s money. This has been a vast operation, occupying up to 300 lawyers at one point, and now perhaps 100. The past year has been particularly successful, with $1.1bn recovered from three investment funds.
Efforts are under way to recover up to $5bn from overseas funds in several countries, including several offshore tax havens but also Britain, Ireland, Israel, Switzerland and Luxembourg. An appeal due to be heard later this year in the second circuit federal court in New York raises profound questions about the reach of American law into other countries and whether the trustees have the power to require money to be returned. More than 30 major law firms are involved in the case.
The total amount involved in the Madoff affair is now thought to be in the range of $25-30bn, not including lost returns which, given compounding, would more than double that amount. Someone familiar with the fund run on behalf of the Justice Department predicts that the distribution will be completed by the end of 2019. The bankruptcy trustee is working to an entirely different time-frame, with the current litigation possibly dragging on for another several years. The scam ran for decades. It is perhaps not surprising that it will take additional decades to bring this sorry tale to a close.
Japan still has great influence on global financial markets
IT IS the summer of 1979 and Harry “Rabbit” Angstrom, the everyman-hero of John Updike’s series of novels, is running a car showroom in Brewer, Pennsylvania. There is a pervasive mood of decline. Local textile mills have closed. Gas prices are soaring. No one wants the traded-in, Detroit-made cars clogging the lot. Yet Rabbit is serene. His is a Toyota franchise. So his cars have the best mileage and lowest servicing costs. When you buy one, he tells his customers, you are turning your dollars into yen.
“Rabbit is Rich” evokes the time when America was first unnerved by the rise of a rival economic power. Japan had taken leadership from America in a succession of industries, including textiles, consumer electronics and steel. It was threatening to topple the car industry, too. Today Japan’s economic position is much reduced. It has lost its place as the world’s second-largest economy (and primary target of American trade hawks) to China. Yet in one regard, its sway still holds.
This week the board of the Bank of Japan (BoJ) voted to leave its monetary policy broadly unchanged. But leading up to its policy meeting, rumours that it might make a substantial change caused a few jitters in global bond markets. The anxiety was justified. A sudden change of tack by the BoJ would be felt far beyond Japan’s shores.
One reason is that Japan’s influence on global asset markets has kept growing as decades of the country’s surplus savings have piled up. Japan’s net foreign assets—what its residents own abroad minus what they owe to foreigners—have risen to around $3trn, or 60% of the country’s annual GDP (see top chart).
But it is also a consequence of very loose monetary policy. The BoJ has deployed an arsenal of special measures to battle Japan’s persistently low inflation. Its benchmark interest rate is negative (-0.1%). It is committed to purchasing ¥80trn ($715bn) of government bonds each year with the aim of keeping Japan’s ten-year bond yield around zero. And it is buying baskets of Japan’s leading stocks to the tune of ¥6trn a year.
Tokyo storm warning
These measures, once unorthodox but now familiar, have pushed Japan’s banks, insurance firms and ordinary savers into buying foreign stocks and bonds that offer better returns than they can get at home. Indeed, Japanese investors have loaded up on short-term foreign debt to enable them to buy even more. Holdings of foreign assets in Japan rose from 111% of GDP in 2010 to 185% in 2017 (see bottom chart). The impact of capital outflows is evident in currency markets. The yen is cheap. On The Economist’s Big Mac index, a gauge based on burger prices, it is the most undervalued of any major currency.
Investors from Japan have also kept a lid on bond yields in the rich world. They own almost a tenth of the sovereign bonds issued by France, for instance, and more than 15% of those issued by Australia and Sweden, according to analysts at J.P. Morgan. Japanese insurance companies own lots of corporate bonds in America, although this year the rising cost of hedging dollars has caused a switch into European corporate bonds. The value of Japan’s holdings of foreign equities has tripled since 2012. They now make up almost a fifth of its overseas assets.
What happens in Japan thus matters a great deal to an array of global asset prices. A meaningful shift in monetary policy would probably have a dramatic effect. It is not natural for Japan to be the cheapest place to buy a Big Mac, a latté or an iPad, says Kit Juckes of Société Générale. The yen would surge. A retreat from special measures by the BoJ would be a signal that the era of quantitative easing was truly ending. Broader market turbulence would be likely. Yet a corollary is that as long as the BoJ maintains its current policies—and it seems minded to do so for a while—it will continue to be a prop to global asset prices.
Rabbit’s sales patter seemed to have a similar foundation. Anyone sceptical of his mileage figures would be referred to the April issue of Consumer Reports. Yet one part of his spiel proved suspect. The dollar, which he thought was decaying in 1979, was actually about to revive. This recovery owed a lot to a big increase in interest rates by the Federal Reserve. It was also, in part, made in Japan. In 1980 Japan liberalised its capital account. Its investors began selling yen to buy dollars. The shopping spree for foreign assets that started then has yet to cease.
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