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Commentary: Madoff's Fraud Ushered in Changes to Secretive Hedge Funds

ABI Bankruptcy Brief
ABI Bankruptcy Brief
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December 13, 2018

ABI Bankruptcy Brief

Commentary: Madoff's Fraud Ushered in Changes to Secretive Hedge Funds

Bernard Madoff’s sordid legacy remains the stuff of headlines. But his fraudulent scheme altered — and transformed — the hedge fund industry, according to a Bloomberg News commentary. As fund lawyer Steven Nadel at Seward & Kissel LLP put it in a recent interview: “Madoff was a huge wake-up call for the entire asset-management industry.” Already bruised by losses in the wake of Lehman Brothers’ bankruptcy three months earlier, the middlemen who help pick and vet hedge funds for investors fell further out of favor. Many of these so-called funds of funds did business with the conman by steering clients to his firm. Leery of putting their money at risk, retirement plans, sovereign wealth funds and other investors began shunning these firms to invest in the hedge funds directly. The impact of that has been staggering: Investors have pulled their money from funds of funds for 10 straight years. The industry lost almost a fifth of the money it had pre-Madoff: Assets stand at $647 billion as of the third quarter, according to data compiled by Hedge Fund Research Inc. That caused many firms to merge or shrink their businesses.

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Senate Bill Would Prohibit Mailing Checks Worth Thousands of Dollars to Strangers

The practice of mass-mailing of “live” checks to consumers to bait them into taking high-interest consumer loans would be banned under a bipartisan bill introduced in the Senate this week, the Washington Post reported. More than a million such checks are issued each year, according to estimates, as lenders compete for customers. Once a consumer signs and deposits the money, he or she is obliged to repay it at interest rates that run as high as 36 percent or more. The bill’s backers faulted the lending industry for targeting the checks to people who may be too desperate — or unaware — to resist the mailed solicitations. “It is unconscionable that someone would take advantage of another person’s dire financial situation to make a quick buck for themselves," said Sen. Doug Jones (D-Ala.). Many people “don’t realize that these checks are actually high-interest loans until it’s too late,” said Sen. Tom Cotton (R-Ark.) "Congress should pass our bill now to stop this underhanded practice.”

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Insured Losses from November Wildfires Already at $9 Billion, with More Claims Expected

California Insurance Commissioner Dave Jones said yesterday that the insured losses from the conflagrations that consumed thousands of acres in California last month and killed more than 80 people already total $9 billion, the Los Angeles Times reported. The bulk of the insured losses — worth about $8.36 billion — are from 28,519 claims for damaged or destroyed residential personal property. There is an additional $571 million worth of claims for commercial property and $124 million for other assets, including automobile losses. “We know this number is going to climb,” Jones said of losses from the Camp, Woolsey and Hill fires, which damaged or destroyed nearly 20,000 homes. In Northern California, losses from the deadly Camp fire have totaled $7 billion, while those from the Woolsey and Hill fires in Los Angeles and Ventura counties are $2 billion.

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Subprime Personal Loans Predicted to Flourish in 2019

Financial forecasts for subprime debt predict growth in the personal loan space, thanks to financing provided by fintech startups as well as the Trump administration’s lighter regulatory touch on payday lending, reported. Subprime personal loan balances have been climbing since 2014 and are forecast to increase 20 percent next year, to a record $156.3 billion, according to credit-scoring firm TransUnion. The last three months of this year will be the biggest quarter ever for origination, accounting for some 5 million loans. “A lot of it is being driven by non-prime and subprime originations,” said Jason Laky, TransUnion’s consumer-lending business lead. Personal loans aren’t new, and neither are point-of-sale loans, another option that is becoming increasingly popular. San Francisco-based Affirm, founded by PayPal co-founder Max Levchin, is one of the leaders in point-of-sale loans and is available at more than 1,200 U.S. retailers. The company says its lending process allows it to approve far more applicants across the credit spectrum than traditional lenders. Levchin says the company’s loans are fairer and more transparent than other products, because there are no hidden fees and they have a set pay-off date.

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New on ABI’s Bankruptcy Blog Exchange: Newly Proposed Bankruptcy Legislation (Small Business Reorganization Act) Needs to Be Enacted ASAP

New bankruptcy legislation to help small businesses and entrepreneurs, titled the “Small Business Reorganization Act (SBRA),” is wending its way through the U.S. Senate, is long overdue and should be enacted with all due haste, according to a new blog post.

To read more on this blog and all others on the ABI Blog Exchange, please click here.

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