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Mum and dad investors cop economic tough love

By Catherina Toh - posted Tuesday, 4 August 2009

In Australia we can't lay claim to a financial scam the size of Bernie Madoff's ponzi scheme in the United States. But we have had our fair share of financial disasters that have affected thousands of mum and dad investors. Westpoint, Opes Prime and Storm Financial have ruined many people.

The Australian media has been flooded by stories of individual investors adversely affected. Some have lost their homes. Many must rely on the aged pension rather than the comfortable retirement they had planned. Some retirees have been forced to return to work.

Most of the media coverage has skirted around the fact that the Storm Financial investors were expecting to increase their wealth exponentially by investing with money they didn't have and couldn't afford. There seems to have been almost a sense of entitlement to amass wealth out of proportion to one's financial standing. This is echoed in the corrupt activities of former Queensland minister, Gordon Nuttall.


Following this materialistic version of the “fair go” spirit we have reacted to this devastation as we do to other disasters. We demand that the government bail out the hapless investors and look to regulators and financial institutions for compensation.

In the Storm Financial case we expect that investors, many owing more than what their share portfolios are worth, will be compensated by the financial institutions that provided the mortgages and margin loans.

In the United States it is different. There, investors have been hit, not just by Bernie Madoff, but also by a string of other collapses. Although in the Madoff case many investors were extremely wealthy, many were also mum and dad investors. Many have seen their life savings and retirement funds disappear. As in Australia, homes have been lost and retirees wrenched out of retirement.

But even though the SEC (The Securities and Exchange Commission) was clearly inactive and had failed to act on complaints it received for years about the Madoff operation, there isn't a loud chorus calling for government bailouts.

In some cases, the investors have access to the Securities Investor Protection Corporation, a compensation scheme for investors caught up in brokerage firm failures. But the anger and sense of betrayal rightly felt by investors has been directed against Mr Maddoff himself, his wife and family and, more recently, against his trustee in bankruptcy.

Judging by the stories in the media, people in the United States expect personal responsibility for investment decisions. They express guilt, anger, disbelief and heartbreak but rarely claim that investors didn't know what they were doing or that the government should have somehow prevented them from entering into their contracts.


In this free market world, your investment decisions are your own. An investment ethos of tough love balks at taxpayer subsidies for anyone foolish or unlucky enough to make the wrong investment decision.

The response even to the large scale predatory lending practices that led to the sub-prime mortgage crisis and the GFC was unsympathetic. If you bought a house with money you didn't have and couldn't afford, of course you were going to lose it. Those who did are seen to have gambled on the property market and lost. That the odds were stacked against them from the start was not reason enough for the government to make good that loss.

In Australia we prefer to see people as victims. We do not expect they will exercise even basic common sense when they enter into financial transactions. A fair go means you must have a safety net when increasing your wealth. Our calls for government bailouts and compensation cement our perception of mum and dad investors as financially illiterate children. The parent government is required to rescue people and to clean up the mess.

We won't be able to stop financial collapses from occurring and dragging mum and dad investors down with them. But we can reduce their likelihood by improving the financial literacy of investors and by making it clear that there is no safety net. A bit of tough love, after the style of the United States, might be the answer.

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First published in on August 03, 2009.

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About the Author

Catherina Toh is a lawyer specialising in legal and regulatory compliance for the financial services industry. She is based in Melbourne.

Creative Commons LicenseThis work is licensed under a Creative Commons License.

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