Sincerely yours,
Lawrence R. Velvel
Dean, MassachusettsSchool of Law
Having set forth the letter about the bond proposal, let me now turn to the question of financing the proposal.
One of the last legislative assistants I spoke to asked me a question that nobody else had. She asked how the bonds would be financed, how they would be paid for. This, she said, would be a very important consideration. I replied that I had always assumed they would simply be issued by the government (just as it issues savings bonds, Treasury bills, etc.), but would give consideration to the question of how to finance them. After some consideration, it seems to me that they could be financed by a technique similar or identical to the way in which SIPC itself is financed -- by the brokerage industry -- or to a way in which people are speaking of financing healthcare -- by a tax on companies issuing the gilt-edged plans costing $25,000 or more per year.
The government could require that, let us say, $100 billion in 20-year, two percent bonds must be bought by the industry whose philosophy, practices and greed gave rise to the general economic meltdown and to the culture which let Madoff get away with fraud for 20 to 45 years, which is receiving hundreds of billions or trillions in bailout monies (which it often is not lending though lending was a major goal in giving the industry trillions in bailout monies) and which is again making money hand over fist and will be giving out huge pay packages. The government would thus require the investment banking/banking/brokerage industry ("ib/b//b industry") -- the once three separate groups that Sandy Weill and friends (including Alan Greenspan, Robert Rubin and Lawrence Summers) thought it would be great to and did combine or allow to combine, thereby bringing disaster to ordinary people -- to buy the $100 billion or so in bonds at two percent interest, with the principal payable in twenty years. The government would then invest the 100 billion dollars and earn interest on it at the best rate it can get.
Then the government would issue, to Madoff victims, bonds with a face value of $65 billion, at seven percent interest payable annually and tax free, with the 65 billion dollars in principal being payable to the victims after ten years.
The 100 billion dollars the government receives by selling bonds to the culprit ib/b/b industry would be used to pay victims the seven percent they are to receive annually for ten years, and then to pay them the $65 billion principal of their bonds. $100 billion plus the annual earnings on the $100 billion would, I suspect, suffice to pay the victims seven percent per year (which is $4.55 billion a year or just over $45.5 billion in ten years, plus pay 2 percent interest payable to the investment bankers each year, or another $2 billion per year for a total of $6.55 billion per year ($2 billion plus $4.5 billion equals $6.5 billion), or a total of $65.5 billion over ten years. This would leave, at the end of ten years of interest payments, $34.5 billion of the original amount obtained from the ib/b/b industry, plus the amount of interest earned over the ten years on the money obtained from the ib/b/b industry. This overall total, as indicated, would, I suspect, be enough to pay the Madoff victims the $65 billion in principal owed to them after ten years.
After paying the Madoff victims the principal owed to them after ten years, the government would then continue paying the members of the ib/b/b industry two percent a year for another ten years and, at the end of that ten years, would pay them the $100 billion principal on the bonds they hold.
I do not know the extent to which amounts left in government coffers from the initial $100 billion sale of bonds to the ib/b/b industry, plus interest earned on that money, would cover the interest paid to the ib/b/b industry from years 11-20 and the repayment of principal to the ib/b/b industry after year 20. All of this is a matter for mathematicians and financial experts, who would use such financial tools as discount rates, etc. to decide how much in bonds should be sold to the ib/b/b industry if we want the initial sale to the industry, plus earnings, to cover repayment to the industry after 20 years. (A lesser amount than otherwise could be sold to the industry if we don't care about that.) All that I am trying to do here is to set forth a basic idea: that the guilty industry should be required to buy an amount of low interest rate bonds sufficient to provide the money to pay Madoff victims seven percent a year for ten years, and to pay $65 million in principal to victims after ten years, and that the principal of the bonds held by the guilty ib/b/b industry should be paid after 20 years.
I conclude with a brief discussion of an all-important ingredient in obtaining enactment of a bond proposal (or any proposal relating to Madoff victims): lobbying. Without a major lobbying effort, there will be no enactment of a bond proposal (or, in all probability, of the Ackerman or Meeks proposals or of a proposal to increase the amount paid by SIPC to reflect inflationary changes since 1978). Lobbying is the way Congress works; for practical purposes, lobbying and huge expenditures on lobbyists -- plus gigantic campaign contributions -- is the way Washington as a whole works. I strongly recommend that any political tyro interested in the possibility of obtaining enactment of anything in regard to Madoff read Robert Kaiser's recent book called So Damn Much Money in order to learn how the lobbying game works, including obtaining the support of key Congressional players and their staffs, persuading one or more of the legislators to be the point person for the effort, contacting many or most of the rest of the members of Congress and their staffs, providing Congress and its staff with memos of the reasons in favor of a bill and of the answers to criticisms, providing them with a draft of a bill, drafts of floor speeches about a bill and drafts of committee reports on it, and continuously keeping in close touch with Congressmen and Congresswomen. (I interviewed Kaiser, for several years the Managing Editor of the Washington Post, about his book for the better part of two hours for a television program I regularly do on books. Watching a DVD of the program (DVDs will be available to others in a few weeks) would give you much information more quickly than reading the entire book, but I nevertheless strongly recommend reading the entire book if you are a political novice who wants to get a fix on what would be involved in a lobbying campaign regarding Madoff. I know people don't like to read books, but . . . . . . . . . .)
There are only two ways that a significant lobbying campaign in favor of the bond proposal can be mounted. One way, the standard one, is to enlist the services of a professional lobbyist, often, even usually, a Washington lobbying group or a Washington law firm that lobbies (or perhaps a lobbyist located elsewhere with extensive experience in and contacts required for lobbying in Washington). I have been part of a small group of people who pursued this earlier this year. The problem is that the lobbyists want, in the words of Kaiser's title, so damn much money. The price ran between one and two million dollars. People who have been wiped out by Madoff do not have that kind of money.
There are, of course, some persons who were and still are so rich that, despite huge losses to Madoff's Ponzi scheme, the one to two million dollars needed for a massive lobbying campaign by professional lobbyists on behalf of the bond proposal would be pocket change to them. None of these people have yet stepped forward publicly, in connection with lobbying, in regard to any aspect of Madoff (though I believe some of them have done some things behind the scenes). Whether they would be willing to step forward to fund a lobbying effort on behalf of the bond proposal remains to be seen. In absolute terms they would benefit monetarily more than anybody else from the success of the bond proposal, since it would restore scores or even hundreds of millions of dollars to each of them in return for what is to them pocket change.
There are some who think that the reason such very wealthy people have not stepped forward in the past is that so far there has been little focus on obtaining restitutionary legislation, as opposed to focus on lawsuits, SIPC, etc., and that the relevant wealthy persons may step forward in future if and when the focus changes to obtaining legislation. But, as said, this remains to be seen.
Another way to finance a lobbying campaign is for lobbyists to work on a contingency fee basis. My clear recollection is that there is no federal law against this (although some states, like New York, have such a law governing their own citizens). Given that scores of billions of dollars are involved -- $65 billion on the November 30th statements, $100 billion or so in a bond sale to the culpable ib/b/b/ industry - - even a contingency fee that is miniscule in percentage terms would be a gigantic absolute sum. (One-tenth of one percent of $65 billion dollars is $65 million, which would be a gigantic contingency fee in absolute terms. One percent of $100 billion would be an even more gigantic contingency fee of $100 million.)
Payment of the fee could be assured in either of two ways. One would be to have an earmark for the fee in the bond proposal legislation itself. The other would be as follows: It is probable that the legislation should contain provisions setting up a very small temporary organization -- of not more than four or five people or perhaps fewer even than that -- to calculate the amount of bonds to be received by each victim and to insure that all goes as it should. Not all the victims would get the amount shown on their November 30th statements (even when they are completely innocent victims rather than participants in Madoff's fraud), because some will already have had part of their losses covered by SIPC or tax refunds. The job of the small group would be somewhat analogous to the job of Kenneth Feinberg and his people in regard to payments to the families of victims of 9/11 (though the small group's job would be infinitely simpler than Feinberg's was). With regard to assuring payment of a contingency fee, the small organization of five or fewer persons could be given the duty of determining and arranging for payment, from the bonds bought by the culprit ib/b/b industry, or from general federal coffers if bonds are not sold to the industry, of a contingency fee that can be no greater than some small percentage established in the legislation (analogously to limits on payments to trustees established in the Bankruptcy Code).
