In the end, Madoff’s scam was worth $50 billion on paper. Some of that was fake, and it’s estimated the actual assets invested are closer to $30-40 billion. That’s a lot of tacos.
It turns out the SEC investigated the guy on five separate occasions and missed revealing the fraud due to a combination of incompetence, deference, and just plain old-fashioned not caring. Madoff was, at one time, one of the most respected people on Wall Street, after all. Still, one would hope the SEC wouldn’t simply take him at his word.
But that’s exactly what happened. The recent SEC probe did not reveal any conflict of interest, but does reveal a shocking lack of investigatory will in the SEC. It’s not really a surprise, the SEC and Washington in general is heavily inter-connected with Wall Street. Individuals will start a career in finance, move to the government sector to build contacts, and then head back to Manhattan making a lot more money.
While it looks like the amount of out-right lying this causes is not alarmingly high, a government employee is much more likely to take what his former colleague (in the private or public sector) at face value. The government is supposed to regulate the market, but it’s all the same people working on both sides, with vested interests in not rocking the boat.
It’s not that the SEC doesn’t make investigations and levy fines. Mostly, however, they go after small-time problems, obvious con-men and manipulators. Ethical and legal problems with bigger firms may lead to a fine that sounds huge to the common man, but is little more than a littering fine to a firm pulling in tens of billions a year.
Even so, with the panic over, we may begin to see new regulatory efforts debated in government this week. The SEC and the CFTC are set to begin reviewing and arguing regulatory structure and efforts. The is far too little information to know how effective this regulation may be, but most agree something needs to be done to avoid the domino collapse of compounded risks we saw at the end of 2008 and the blatant shenanigans of people like Madoff.
It is certain the government needs to enforce a certain amount of transparency to avoid the events of last year. The market itself may have the best intentions but has demonstrated that, unregulated, it can easily build a house made of cards and exuberance. We all suffer when it falls.
links: Blistering report faults SEC for Madoff misses- – -The Real Regulatory Revolving Door- – -The Coming Fight On Financial Regulation
-Derek
So we could get rid of the SEC and we would have been better off here? I can agree with that.
Only in the same way I’d be better off fighting a fire if I got rid of my garden hose because it wasn’t doing a very good job, and then didn’t replace it with anything.
Why do we need a replacement? I’m assuming they have all the regulatory authority and regulation they needed to handle Bernie Madoff? I’m also assuming that the commission is better off having people experienced in business so they know the language and the tricks of the trade.
Without the SEC, individuals would step forward and investigate on their own. We have quite a bit of this happening already. However, without the SEC, people would have to investigate companies on their own rather than trusting the government to do it for them.
We don’t need to get rid of the SEC, that’s the point. As far as the market investigating itself, there have been many, many examples of markets, even commodity and finance markets that existed free from most of the regulation we have today. In every case, there was less oversight, less transparency, and more fraud. The market doesn’t regulate itself.
Why is Madoff in trouble? All he did was take people’s money and tell them he was investing it, all the while paying back funds from future investors as their return. He should have been appointed to head Social Security, not put in jail.
We don’t need to get rid of the SEC is the point of what? This comic? That would be really confusing.
This is the type of stuff I am talking about:
http://www.snitching.org/
http://www.theagitator.com/
http://brontecapital.blogspot.com/2009/05/paradigm-global-bidens-and-allegedly.html
The public gets the full details as the investigation goes on. They publish this for free. They do a better job than the SEC. They don’t have loopholes. They are decentralized.
When the government tries to get involved, it pushes these people out of the market.
The counter-example to your point is being discussed at this very moment. An independent investigator did not expose Madoff, but the SEC would have if it was functioning properly. That’s the thing, I’m criticizing the SEC but for -not doing it’s job- as opposed to criticizing it for existing.
Independent watchdogs are good and will always exist, I’m not sure why you think they won’t given that they always have and new ones form all the time. However, the big cases need access only the government has the right to. An independent can’t audit an office, demand copies of all paper work for a year, etc. The market can not regulate itself. That’s just a fact. It is a fact that has been demonstrated time and time again.
By having the SEC, we create a “fake” security. The government guarantees corporations and citizens invest in them, not based on their own analysis of the company’s honesty, but on the government’s.
Because of this “fake” security, there is less interest in independent investigation. Bloggers like the ones listed above would be more common because people would be more interested in the security of their investments. Currently, people are not scared that a particular company might be a bad investment, but they sure do cry fowl when it turns out to be true.
If, instead, the government stayed out of this, the companies would need real, independent accountability. They would open up their books to investment companies in order to get their recommendation. More open companies would open their books to everyone. Note that this would all be voluntary.
Of course, companies might still receive investment with no transparency. The people doing so would be taking that risk based on their belief in the integrity of the company’s owners. If the company plays them for fools, they might lose their money.
Other solutions might include more contractual limits on the investor’s liability, which would also require some transparency so that the investors can ensure that the contract is being followed.