Madoff 150-year sentence underscores global crisis toll

Posted at 06/30/2009 1:11 AM

BASEL/NEW YORK- In a grim reminder of the toll the financial crisis has taken on investors, disgraced financier Bernard Madoff was sentenced to 150 years for defrauding investors in a $65 billion investment fraud.

Madoff, 71, is accused of masterminding Wall Street's biggest Ponzi scheme.

Meanwhile, the world's central bankers meeting in Switzerland said on Monday that to prevent another global credit crisis, financial products should be sold to consumers only when certified as safe.

Yet oil and U.S. stocks rose as markets continue to bet that the worst of the most brutal economic downturn in decades is past and that an anemic recovery is around the corner.

A rise in Japanese industrial output and a pick-up in euro zone economic confidence showed unprecedented government spending to ease the crisis is having an effect.

However, policymakers said it was too early to conclude a recovery was taking root, and officials in the United States, Europe and China said the need for further stimulus measures should not be ruled out.

As traders waited for major U.S. manufacturing and employment data later in the week, a report on Monday from the Federal Reserve Bank of Chicago said economic activity remained extremely weak in May, at levels consistent with a persistent severe recession. [ID:nNYS005181]

"I think that we are not out of the woods yet," said Guillermo Ortiz, Mexico's central bank governor and the BIS board chairman, on the last scheduled day of the group's meeting in Basel, Switzerland on Monday. "One important question is whether these green shoots actually take root."

What is final Madoff toll?

Madoff confessed to running a Ponzi scheme in which investors were paid phantom returns from money paid by later investors.

Investigators do not know how much was stolen, according to court papers. Prosecutors say $170 billion flowed through the principal Madoff account over decades, and that weeks before the financier's December arrest the firm's statements showed a total of $65 billion in accounts.

The trustee winding down the Madoff firm has so far collected $1.2 billion to return to investors.

The Bank for International Settlements (BIS), which acts as a forum for central banks, said government efforts to revive the global economy might have only a temporary impact because banks are not being pushed hard enough to fix their underlying problems.

Banks' lending and other practices, including the approval of risky mortgages in the United States, led the global economy into the worst recession in decades. Governments have poured trillions of dollars into rescuing the financial system and reversing the tide of millions of lost jobs.

Global recovery hopes have pushed world stocks more than 20 percent higher in the second quarter. But markets have moved sideways the last two weeks on worries that a rally off the March lows may have been too aggressive in their bets on the strength and timing of the nascent upturn.

U.S. blue chips were up about 85 points, or a bit more than one percent, to 8525 in midday trading.

The BIS was alarmed by how a collapse in the value of opaque and complex securitised products propelled the world's financial system into crisis. It said in its annual report all financial products should be registered like medicines.

The safest instruments would be available to everyone, a second tier only to people with authorization, treated like prescription drugs, and a third tier to a limited number of pre-screened individuals and institutions, like experimental drugs are.

A final tier would be securities deemed illegal.

"Such a registration and certification system creates transparency and enhances safety ... This will mean that issuers bear increased responsibility for the risk assessment of their products," the BIS said.

The BIS also said that while governments have moved quickly to support their economies, they have not done enough to remove problem assets from banks' balance sheets.

"A significant risk is therefore that the current stimulus will lead only to a temporary pickup in growth, followed by protracted stagnation," it said.

Recovery signs

Japanese industrial output rose 5.9 percent in May and manufacturers see further, albeit smaller, increases in the next two months. That improvement is set to be reflected in the Bank of Japan's quarterly tankan survey on Wednesday.

The euro zone's economic sentiment index rose for the third month in a row to 73.3 in June, a European Commission survey showed, topping a Reuters poll forecast of 70.8.

But the signs of recovery are fragile and not conclusive.

Japanese industrial output is still nearly a third below year-ago levels while euro zone economic confidence is below the lows of the last big recession in the early 1990s.

Policymakers are concerned the nascent revival could fizzle out and said they stand ready to take more action if needed.

"Right now we believe what we have done is adequate to the task. If more is needed, we'll have that discussion," top White House adviser David Axelrod said on Sunday.

European Union economic chief Joaquin Almunia said Europe faced quarters of negative growth and further stimulus measures should not be ruled out, while a senior Chinese government economic said the country had scope to increase spending if needed.

The International Energy Agency struck a cautious tone on the prospects for recovery, sharply cutting its medium-term forecast for oil demand.

Some economists say more spending will damage already fragile government finances and could stoke inflation.