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A secondary market emerges from Madoff claims

Marketplace Staff Jun 17, 2011

A secondary market emerges from Madoff claims

Marketplace Staff Jun 17, 2011

Kai Ryssdal: This is a cold and heartless thing to say, but it’s true. There is almost nothing Wall Street can’t turn into a profit-making opportunity.

I’m talking specifically here about claims against Bernie Madoff. There’s a multi-billion-dollar market out there of investors buying up those claims from the victims of Madoff’s Ponzi scheme, all in the hopes of a payoff later.

Michael Rothfeld had the story in the Wall Street Journal today. Good to have you with us.

Michael Rothfeld: My pleasure.

Ryssdal: Tell me about these claims markets. How do they work?

Rothfeld: Typically in any kind of a bankruptcy, when there are people who are owed money, they are entitled to collect money that they lost. That can happen in a corporate bankruptcy, or in the case of Bernard Madoff’s Ponzi scheme, these are victims who invested with him and lost money. And basically, it could take years for any of that money to come back, and it’s fairly uncertain. So what happens is there are distressed debt experts — investors — who are offering them upfront cash payments, and they’re hoping that down the road, they’ll be able to collect more money. So the creditor gets some money upfront, and the investor is helping to make a profit.

Ryssdal: Yeah, you say some money upfront. So how much are these actual claim holders getting? Are they getting 30 cents on the dollar, 70 cents on the dollar?

Rothfeld: Right now they’re selling between 70 and 75 cents on the dollar, and when this first started around a year ago, they were getting 20, 25 cents on the dollar. And the price jumped up dramatically after, in December, there was a huge settlement for $7 billion by a former Madoff investor named Jeffry Picower. So that brought the pot of available money up, and it showed people that the recoveries were going to be significantly higher than they thought before.

Ryssdal: Yeah, that is to say the people who are buying these claims have a much better chance now of actually being in the money when the payments are made, right?

Rothfeld: That’s right. If you’re an investor, right now you know based on what’s already been recovered, you’re going to get at least 50 cents back on the dollar from your losses. So if somebody wants to buy your claim, you’re not going to sell it for less than 50 cents and you’re not going to sell it for 50 cents. You’re going to sell it for more. And the investors obviously are hoping that, eventually — and they have to have some reason for thinking this — that they’ll all maybe get 85 cents on the dollar so that they can make a nice profit.

Ryssdal: These claims markets — secondary markets, basically — have been around for a while. But it is just another example — and a very specific example with the Madoff case — of Wall Street being able to buy and sell pretty much anything, right?

Rothfeld: That’s right. And in the Lehman Brothers bankruptcy, which is going on also right now, this is a big thing that’s happening. And the same thing as in Madoff, where there’s people who are being sued or banks that are being sued to get money back into the bankruptcy, and at the same time on the back end, they’re also trying to profit off of this by trading in claims.

Ryssdal: Say that again: some of the banks who are being sued over the Madoff incident are trying to buy up some of these claims, right? So they’re working both ends against the middle?

Rothfeld: That’s right, at least a couple of the banks. And so what happened was, as Madoff was operating, there was a lot of banks that worked with investment funds, hedge funds, that fed money to Madoff. These were known as feeder funds. Now they’re being used by the trustee who’s trying to recover money that went out at Madoff, when these feeder funds withdrew money. And so they’re being sued on that end. And on the other hand, a couple of them — UBS and Royal Bank of Scotland are two of them — they are also trying to trade in these claims or have at least made some bids on some big Madoff claims.

Ryssdal: Completely legally, we should point out.

Rothfeld: There’s nothing illegal about it.

Ryssdal: Michael Rothfeld, writing in the Wall Street Journal today about the secondary market in claims against Bernie Madoff. Michael, thanks a lot.

Rothfeld: Thanks Kai.

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