Thursday, January 1, 2009

Financial Clawback

I had never heard of this.* Apparently, bankruptcy law allows for investors who lose their money in a bankruptcy to go after other investors who sold their stakes in the bankrupt firm BEFORE it went belly up:
The Fort Worth plan and other Madoff investors who got out before the operation imploded may yet be snared by the bankruptcy proceedings. Under federal law, the trustee in the case can sue former investors to force them to return their profits and principal, a process known as a clawback.
I love the "theoretical justification:"
The legal theory is that investors who stick around to the bitter end shouldn't bear all the pain.
Perhaps this is just bad writing by a journalist who is in over his head. Or is just a lousy writer. In any event, this is an outrage. Just think of the incentives such a legal scheme produces, especially at at time like this. Don't invest your money, folks. Don't ever invest again. The financial world is so friggin' complicated, not even the SEC, your regulatory protector, could tell that a guy like Madoff was fleecing America blind. You have no hope of figuring it out on your own. Bury your money in the backyard, or just spend it all now so at least you'll get to enjoy it before it is stolen from you. And if you decide to get out, too bad. It won't matter. You'll still have your money taken. Just stay away. Avoid financial markets like the plague that they are. You'll get fleeced no matter what. If you think you've invested badly, for heaven's sake, don't get out. Don't take you money out of the hands of the irresponsible jerks. If you do, you'll just lose it all down the road, paying for all the other folks who invested poorly and stuck with the guy. If you give your money to a con-man, best just to let it ride. Let him keep it until the entire operation reaches critical mass and the entire world is in meltdown. That way, it won't just be one firm going down like the Titanic. It'll take the whole civilized world with it. That's the ticket. That's the ticket to prosperity. This is just as stupid as banning short selling. This is a way to ensure that any crisis reaches elephantine proportions before something is done to pull the rug out from under it and straighten things out. It is to place absolute faith in a bureaucracy which has proven itself utterly incompetent. It will eventually result in also entrusting it with absolute power. Any civilization that embraces this kind of governing philosophy deserves what it gets. *Once again, thanks to Gary North for an interesting and informative link.

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