Secondary market datapoints of the day

December 14, 2010
Peter Lattman and Diana Henriques for answering my question from last week.

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Many thanks to Peter Lattman and Diana Henriques for answering my question from last week. Yes, as I suspected, there is a secondary market in Madoff claims — although from the tone of the article it seems more like a primary market, where hedge funds compete with each other to buy claims from people who have been defrauded, rather than a well-functioning secondary market where those funds actually trade the claims between each other. The going rate seems to be about 30 cents on the dollar, with an expected payout, somewhere down the line, of roughly double that amount.

For the Madoff victims who can afford to sit tight for the time being, then, the eventual losses are likely to prove manageable: the pretty healthy final recovery comes on top of the massive tax refund they got immediately after the fraud was uncovered, returning to them the taxes they paid on all that fictional investment income.

The NYT report comes from Dealbook, the bloggy arm of the business section, so maybe if I ask a question they’ll answer it. The story says that in October, “claims were trading at about 25 cents on the dollar” — does that mean that victims were willing to sell for 25 cents, or does it mean that there was an actual brokered market and that hedge funds or other non-victim investors were selling at that level? If so, that’s a very interesting datapoint, since it implies that the sellers either managed to buy their claims at a very deep discount indeed, or else got quite demoralized, for some reason, about the prospects for recovery.

Incidentally, while I’m on the subject of opaque secondary markets, Kerry Dolan is reporting that Facebook shares are now being valued at $23 each. That’s $115 on a pre-split basis, which works out at a valuation of over $50 billion — roughly the same as General Motors, somewhere between Morgan Stanley and Boeing. Wow.

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