Monday, August 10, 2009

Excess SIPC - six years ago and a missed Red Flag for Madoff victims

Today is August 10 , 2009 - six years ago yesterday, the NY Times reported "A long, free ride was ending". After 30 years of never having paid out on a claim some of the country's largest insurers including AIG announced their exit from underwriting EXCESS SIPC insurance for many Wall St securities brokerage firms. A quote from the AIG spokesman went like this - "Why is AIG exiting? It's too much exposure"....really I'm not making this up.

An excerpt..."But no other part of the surety bond business has been affected as extremely as coverage for the brokerage houses. The insurers have not trimmed coverage or raised prices; they have simply gotten out. ''It's too much exposure,'' said Joe Norton, a spokesman for the American International Group." The link to the NY Times full story

Huh? Too much exposure to what? Recently, FINRA, the former NASD has been running radio ads announcing, in so many words how they help protect investors accounts. To which one might ask when a group (AIG, Travelers, Radian), not just one insurer, ends insurance coverage whose sole purpose is to protect customers' accounts over and above the SIPC limits should the primary regulator inquire as to what prompted the withdrawal and what is the NEW cause for concern inside broker dealers that's "too much exposure?"...perhaps the NASD was on vacation that day...after all the story ran on August 9, 2003, a drizzly, overcast Saturday in the Business section, buried on page 5 at the bottom. When it was more relaxing to enjoy that warm cup of coffee then skip to the Weekend section. Maybe it was me or maybe I was lucky that my breakfast order was taking a little longer to arrive...I may have never flipped to page 5.

Why EXCESS SIPC matters to the Madoff victims.
Lack of it was one of a number of RED FLAGS.

Affluent investors, not just those of Mr Madoff who knowingly or unknowingly became "customers", would be concerned and generally aware of this type of insurance coverage, let alone professional, intermediary advisers including accountants, CPA's, lawyers, business managers and consultants. The lack of it, considering the sums many customers entrusted and turned over and the prominence of some customers, is one thing...astonishing. See the link to fiduciary liability exposure at

A FiduciaryALERT™ was posted in 2004 urging caution and review with hedge funds citing among other items, the above Excess SIPC insurance coverage cancellation.

Another facet of this story seems to have been unreported when it comes to AIG's FPG underwriting derivatives credit default swaps of many of the same brokerage houses proprietary (not customers) trading positions; perhaps, subject to proof, the very exposures AIG's Mr Norton, said were "too much". Yes too much for the regulated AIG insurance operation, but seemingly appetizing for the UNregulated AIG FPG.

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