The IRS Role in the Madoff Ponzi

Since his arrest on December 11, 2008, we’ve been treated to a daily diet of “Bernard Madoff”. Congress is asking the SEC what happened. The SEC is asking itself the same question. Attorneys and forensic accountants for the victims are smelling blood in the water (lots of fee money) and the CPA auditor for Mr. Madoff’s companies is keeping his head down. This is nothing new. All ponzi schemes collapse when the supply of new victims dries up. And, in this case, the supply of new victims is a casualty of the collapse of the U. S. housing market and the use of real estate as ATM machines.

What has not been discussed is the role of the IRS in Mr. Madoff’s scheme. What am I talking about here? I am talking about the IRS computer program that matches items (like interest income, dividends and capital gains transactions) on tax returns filed by U.S. taxpayers with information forms (1099’s & K-1’s) that companies are required file with the IRS. If a taxpayer in Mr. Madoff’s pyramid reported a significant amount of dividend income received from Mr. Madoff, the IRS should have had an electronic record of it to compare with. Fifty billion dollars of investment paying 10% per year is $5 billion. Did the IRS ever ask anybody reporting Madoff scheme income about the source of the income? Had it done so, the scheme might have been uncovered years ago.

It's About Time!

http://www.mortgagefraudblog.com/index.php/weblog/permalink/us_attorney_launches_mortgage_fraud_task_force/


It’s about time! it seems as if the Department of Justice is taking its time. Perhaps a Certified Forensic Financial expert would be helpful in sorting this out and not wasting taxpayer money prosecuting people under a theory of “knew or should have known” that is not supported by the totality of documents and actual direct in person conversations as evidence. Prosecuting the real fraudsters this way instead of using hearsay and circumstantial evidence is a more direct way to conviction and restitution for victims.

It Is About Time

http://www.reuters.com/article/governmentFilingsNews/idUSN0747780820081108

It finally seems as if one of the big four public account ing firms, Deloitte & Touche LLP, is seriously enforcing the Sarbanes Oxley and AICPA rules prohibiting conflicts of interest by its partners and professional staff. Deloitte's decision to sue its former vice chairman for trading in securities of the firm's audit clients is a breath of fresh air in what otherwise has seemed to be a stagnating ethical environment. I applaud my professional colleagues for their action.

Possibility of Hyperinflation

Now that Congress passed, and the president signed, the financial industry bailout bill, don’t breathe a big sigh of relief just yet.

This bill allows the treasury to buy a lot of things, including a stake in major banks when it purchases stock in those companies. But the government won’t be buying into the root of the problem by purchasing land or housing.

The bailout bill plan, with all its pork barrel “sweeteners,” making it a $1 trillion venture, is allowing the treasury to purchase a lot of bad debt. That’s like plugging just one or two holes in a leaky dike.

What many national debt experts are not talking about is the growing debt that is due because of the slight of hand with Social Security funds – the borrowing from the fund, with interest, to boost general funds. Factor the Social Security problem into the national debt and the $10 trillion in current debt may not look so bad.

With total U.S. consumer debt, including credit-card debt and non-credit-card debt (but not including mortgage debt), $2.55 trillion at the end of 2007, up from $2.42 trillion at the end of 2006 (Source: The Nilson Report), the middle class is teetering on financial disaster. Where will the Federal government get the $700 billion to bail out the money lending industry? Where will the government get the trillions to prop up Social Security, Medicaid and Medicare?

One frightening possibility is if the U.S. Department of the Treasury decides to print its way out of the financial services industry and national debt mess that would open the door to inflation and hyperinflation.

In the world of hyperinflation Mr. & Mrs. Main Street could end up paying hundreds of dollars for a loaf of bread. In a worst case hyperinflation scenario, like in 1923 Germany, people could end up burning one hundred bills for heat because it would be more efficient that the small amount of fuel the bills could purchase.

World history has shown that when a government tries to print its way out of economic problems it ends up in economic disaster.

Keep The Fox Out Of The Henhouse

On September 20, 2008, the text of the “Draft Proposal for Bailout Plan” was released. Divided into twelve sections, it is the latest in a series of Bush Administration actions, which if passed in its proposed form, would further weaken our constitutional protections. Every section, beginning with Section 2, transfers virtual economic dictatorial authority into the executive branch of government in the person of the Treasury Secretary of the United States.

Section 2 gives the Secretary virtually unlimited authority to use $700 billion of taxpayer money for the purchase of mortgage-related assets.

Section 3 directs the Secretary to exercise his authority while taking into consideration prevention of the disruption and stability of financial markets and the banking system and the protection of the taxpayers. This Section provides no details of how this Bailout intends to implement these most important taxpayer protections. But rather, it leaves the methods to the discretion of the Secretary.

Section 4 requires congressional reporting while Section 8 makes any decisions taken by the Secretary under the authority granted by him by this Act not subject to review by our courts or any other administrative agency. In other words, any meaningful oversight or reduction in the authority granted to the Secretary under this Act requires a further Act of Congress.

Nowhere in this proposed Act is a prediction or other estimation of its ultimate beneficial effect. It is a $700 billion reward for bad behavior in an election year. By raising the statutory limit on the public debt, to $11.3 trillion, it puts the country on a faster track to financial insolvency. The same government that did the credit industry a favor by passing the Bankruptcy Act amendment that took effect on October 1, 2005, further encumbering and hurting our taxpayers, wants to apply a less rigorous standard to corporate bad behavior and burden the taxpayers with the bill.

I am against this Bailout. This Draft Proposal for Bailout is flawed by the cynicism and expediency with which it was drafted. It once again puts the fox into the henhouse. Those who advocated for a completely free financial market should pay a free financial market price for their advocacy. The taxpayers should not suffer the consequences.

Link to 9/20/08 Text of Draft Proposal for Bailout Plan:

http://www.nytimes.com/2008/09/21/business/21draftcnd.html?scp=12&sq=Paulson&st=cse

Recession? Don't be surprised!

In this article –

http://www.cnn.com/2008/US/01/22/Dobbs.January23/index.html -

Lou Dobbs writes that a recession is on its way. According to Dobbs, what’s debatable is exactly how bad the recession will be.

What a surprise! (Sarcasm)

For the past twenty-plus years the "leadership" of the U.S. has squandered more than 100 percent of the dividend that we had from our victory of WW II. The American savings rate is negative for the first time since 1929. What is worse, the effect of organized religion on our educational system has become so pernicious that it realistically threatens our economic and security futures of our nation.

How can Americans make informed economic and educational decisions in an atmosphere where critical thinking skills are not taught, in depth liberal arts subjects are not studied and physical education that affects our concentration is eliminated from primary and secondary education curricula in favor of teaching for exams that "grade" schools?

It seems to me that we would all be better served by leaders who truly had the best interests of this country at heart instead of the leaders who are venal, greedy and caught up in narrow tribal thinking. I strongly suggest eliminating the balkanization of our educational system that is bringing this country into a moribund economic condition and set national best practices standards for everything being taught in a manner that avoids the coddling of special interest groups through financial corruption methods.

I strongly suggest removing the influence of all organized religion from our public educational system so critical thinking and in depth liberal arts education can be encouraged at every point in the educational process. Finally, reinstituting the military draft; raising a five million person Army, Navy, etc., would go a long way toward employing millions of Americans in decent paying middle class income work by supplying the military from U.S. industries while inculcating an otherwise unobtainable work ethic discipline.

Don't Worry About Foreign Investment

This Associated Press story may give the impression that foreign investment companies are taking over the United States:

http://biz.yahoo.com/ap/071219/morgan_stanley_investment.html?.v=2

For those of you concerned about the infusion of foreign capital into the U.S. banking system and securities firms, don't be very concerned. The countries making the investments are merely returning some of the dollar capital that they've accumulated in their foreign reserve funds to its source.

In other words, it's a way of reducing the effect of our foreign trade deficit. Besides, what are these countries going to do? Allowing the largest banks and investment banking houses in the world to come crashing down, which would further erode the value of the U.S. dollar, would be disastrous for those countries so heavily invested in U.S. dollars as their main reserve currency.

I say, let them invest. They can't take the banks and securities firms with them when they leave and it only binds them more tightly to the U.S.

The danger that I see is the indirect influence that their investments would allow them to exert through these otherwise power house firms. Their influence would be more easily disguised by being used through U.S. citizens working in these institutions.

Perhaps our congress could look into amending the laws governing the activities of foreign agents and lobbyists to include this scenario?