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Issuing U.S. Government Bonds to Madoff Investors Deemed Least Expensive Approach
Tuesday, 07 April 2009 19:19
by Sherwood Ross

The best way to help investors victimized by Ponzi scheme fraudster Bernie Madoff at the least near term cost to the government is to issue them 10-year Treasury bonds with a seven percent tax free annual interest rate that they could live off of, writes a legal authority who also invested with Madoff
“Whether they were direct investors or investors through feeder funds, many of (the victims) who are now wiped out, were literally living off of their Madoff earnings, which they would take out every year for living expenses,” Lawrence Velvel, dean of the Massachusetts School of Law at Andover, observes.
Madoff investors were getting about an eight or nine percent return on their investments after taxes and, under the new bond plan, would “continue to get roughly similar amounts, probably a bit less actually,” Velvel writes. Pension funds and charities that invested with Madoff “will be able to continue to obtain money tax free, just as before,” Velvel points out.

And for investors that do not wish to hold their government bonds to term, there almost surely will develop a secondary market on which the bonds can be sold, depending on the situation, for their appropriately discounted value or their appropriately higher-than-face-value value, Velvel notes.

Under this bond approach, which did not originate with the author, the government would save billions of dollars up front. That’s because early estimates pegged the federal payout at $20 billion or more in tax refunds and Securities Investor Protection Corp.(SIPC) recovery.

“Under the bond proposal, at 7 percent tax free, the government over 10 years will pay out only $4.55 billion a year,” Velvel writes. “It will not pay out a total of the previously estimated $20 billion for over five years — not until the sixth year will the total reach $20 billion.” This compares with the ten trillion dollars in bailouts that the government will be paying up front — three trillion of which has already been paid — to the culprits who caused the financial crises.

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Moreover, at the end of 10 years, the government will pay the $65 billion it is estimated Madoff swindled from investors but the present value of that sum is only $33 billion and change at seven percent, the law school dean points out in an essay on his blog Velvel@VelvelOnNationalAffairs.com dated March 30, 2009.

“To me, the bond proposal…is by far the simplest, easiest, cleanest, quickest, most reasonable way of resolving the whole Madoff mess” and is applicable to lesser Ponzi schemes recently unearthed that “flourished because of governmental incompetence and irresponsibility.”

The bonds’ principal would be for the amount shown in an investor’s November 30th statement, minus amounts already obtained in tax refunds or from SIPC. “All litigation rights against the culpable will be transferred to the government, which is best situated to and can pursue them in court if it wishes and may be able to recover immense amounts by doing so,” Velvel writes. The victims will simply get bonds whose principal will come due in 10 years with interest payable annually until then.

Velvel is dean and cofounder of the Massachusetts School of Law at Andover, a law school purposefully dedicated to provide an affordable, quality legal education to students from minority, immigrant, and financially-challenged households. MSL has been praised by legal education authorities as a model for others and the dean has been honored for his contributions by The National Law Journal. Reach Sherwood Ross, media consultant to MSL, at sherwoodr1@yahoo.com)

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