Latest Madoff Victim: You

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There’s not much hope for people who lost their shirts on the Madoff scam. But you’ll be happy to hear that some of them will recoup losses courtesy of your tax dollars.

I’d heard recently that among its other choice decisions, AIG (now a ward of the federal government) had managed to offer insurance for some of Benard Madoff’s fraudulent investments. The dollar amounts aren’t that high. So far AIG has received 85 claims for Madoff losses. And the individual policies only cover up to $100,000, though I’m told the policies were sometimes layered together in ways that could make the effective insurance limits much higher. What’s more, a private insurance company can insure anything they want, be as stupid as they want to be.

But the fact that some of your tax dollars are going to go to people who lost money to Madoff does get us back to the premise of the government’s take over of AIG, and to be specific, the highly questionable premise that AIG isn’t simply bankrupt.

Remember, the idea of taking over AIG was that it had so much systemic exposure through the world of finance (through CDOs, credit default swaps, etc.) that letting it go under would just be too damaging to the macro-economy. In principle, that makes sense to me. But presumably there’s no systemic damage involved in not paying out these Madoff claims. A lot of the hundred-fifty-plus billion dollars of US government money has simply been passed through to other banks like Goldman Sachs, Merrill Lynch, UBS, Deutsche Bank, etc.

As Carlos Mendez told the Wall Street Journal recently, “It’s like a home run for some of the banks. They bought insurance from a company that ran into trouble and still managed to get all, or most, of their money back.”

Will Goldman fail without the few more billion the government gave the bank through AIG? I doubt it. Will the taxpayer be made whole for covering the losses Goldman incurred by dealing with AIG? Of course not.

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