The US Securities & Exchange Commission, which regulates US-based financial institutions, has been blasted by a report for failing to act to stop the massive Ponzi scheme fraud of Bernard Madoff, who has been jailed after admitting his crimes. The SEC, like Britain’s own Financial Services Authority, has not exactly covered itself with glory during the financial crisis.
A point worth making – since I doubt it will occur to much of the MSM to make it – is that this episode will hardly deflect policymakers from the idea of loading even heavier regulations on financial services. Our own Financial Services Authority, in the form of its chairman, Lord Adair Turner, recently reminded people of how bureacratic mindsets work by calling for a tax on financial services which he says have become “too big”. Politicians and commentators routinely describe the crisis as somehow proving that “unregulated capitalism” has failed. And yet the SEC failure over Madoff proves a very different point: you can have all the regulations in the world, but if you don’t enforce them, and financial watchdogs are run by people lacking a bit of common sense, then the regulations will be useless.
As I keep reminding people, the credit crisis and the subsequent fallout occured, primarily, right under the noses of the world’s most powerful regulators and central banks, and not some obscure Caribbean tax haven or Alpine principality. And yet the impression given is that we have lived through a sort of re-run of a Wild West movie. The truth is very different.
“Financial watchdogs are run by people lacking a bit of common sense.”
Better to say that those people, or anyone else in their position, lack the right incentives.
“As I keep reminding people, the credit crisis and the subsequent fallout occured, primarily, right under the noses of the world’s most powerful regulators and central banks….”
Indeed, but I get the impression that you lean towards incompetence and ignorance as the causes of this crisis.
In deferrence to the undoubted superior intelligence, and professional experience of most of the main players; and numerous whistle blowers pronouncements and warnings from many commentators over the years, I’m forced to lean more towards other causative factors. Hidden political agendas, and outright corruption seem to me to offer a more plausible explanation.
I do of course exclude Gordon Brown from any charges of corruption. In his case, incompetence is more than adequate to explain his performance over the last decade.
The persistent delusion is that the West has a capitalist economy. It doesn’t. It has a rent-seeking economy, and the failures of government regulatory agencies are as likely to be a result of their delivering such rents as of their being ‘honestly’ incompetent.
History tells us that the sensibly cautious – not paranoid – way to look at government is with the presumption that it’s corrupt.
John East, I don’t entirely agree with your position – corruption and incompetence can and sadly do co-exist.
Also, one needs to look at the perverse institutional incentives that are created: bodies such as the FSA have a powerful vested interest not in preventing disasters, but in increasing their power, jobs and influence. In fact, they almost have a vested interest in allowing certain messes to happen so they can then demand even more powers, jobs, etc, to clean them up later.
Sex, money and power are interchangeable values.
Look into the SEC scandal; or, the many-too-many others;and, find all three. When the “insanity plea” became less easy, the “stupidity” and “incompetent”
pleas filled the gap. Madoff’s niece, yet.
Crime family values.
A resume should show that a job applicant is smart.
However, once employed, it is good to ‘play dumb’ now
and then, to remain employed.
What did we learn about the SEC after Enron and Worldcom? That it was useless as wet toilet paper and that itself was so poorly run that it couldn’t account for where all the heavy fines it imposed went – basically it was representative of the Federal Government as a whole – so badly formed and executed that no statement could be made about the propriety and due diligence of its affairs. Essentially it was nonsensically contrived and controlled. Anyone involved in it either had to be dim-witted or self serving and corrupt. No one would get involved in it otherwise (in a market quid pro quo sense – being productive and being compensated for it).
But that didn’t stop other interventions such as Sarbanes-Oxley and the takeover of the policing of the accounting profession. In turn, we are bound to get yet another dollop from the tureen of bureaucratic alphabet soup over Madoff. And the staffing will come not from white knights invigorated by trying to stop the defrauding of investors (a function supported by even libertarian/minarchic sorts) but from the careerist bureaucrats who see a good meal ticket when they see one. Nothing of any substance will be done but to create more red tape for those who already abide by the rules of mutual association and do nothing against the future Madoffs or Enrons or whatever.
Perhaps soon we will find that prevention is impossible when those who plan to do “evil” can’t be regulated and bureaucratized away. Sometimes you have to let evil doers do what they will and drop the hammer afterward – sort of “walking softly but carry a big stick”. But that would leave so many of the parasites within the Beltway without a job, and we can’t have that.
Well, the SEC Inspector General apparently places the blame on “an inexperienced staff and delays in examinations.” That’s probably true enough, as far as it goes, but I have a problem with this part:
Right, no interference there. These aren’t the droids you’re looking for.
That’s the problem with these “internal reviews”: you can never really have any confidence in the results, even if the reviewer has a fancy title like “Inspector General.”
Bernard Madoff fraud was blatent and on a vast scale – and it went on for decades, yet (yet again) the SEC proved to be useless.
Indeed worse than usless – for its existance gave false assurance to investors that they need not be careful, and doubt high returns that had no clear cause, because “the government was looking out for them” (a foolish position of Bill O’Reilly as much as the Democrats – governments can not “look out for” investors they must look out for themselves).
Indeed the government can no longer even tell the difference between fraud (as in Madoff) and such things as “insider dealing” (i.e. trading on information that is not generally known – which is what every serious investor tries to do) and even “anti trust” (which means anything the government says it does in a particular case – i.e. a totally ARBITRARY concept).
As government officials can not prosecute everyone guilty of such “crimes” as “insider dealing” or “anti trust” activity in violation of “competition policy” they get into the habit of only prosecuting people they dislike (for whatever reason) and not really looking into the affairs of people they do like – such as Bernard Madoff (with all his big contributions to leading Democrats over the years – the officials at the SEC love “progressive” businessmen).
Moral hazard in investing (the government will “look out for you” so you do not need to check anything yourself) and a government that has made normal business methods (such as “insider dealing” and “anti trust”) “crimes” – but picks which people it will prosecute (on the basis of whether the officials and politicians like them or not). And then spreads this attitude to real crimes – such as fraud.
This is not a good situation – indeed it is so ungood that investing in the American markets is insane.
The full extent of SEC bungling and incompetence is coming more clear with the release of the complete Inspector General’s report. (Note that the full report was released after 5 PM on Friday before a holiday weekend. Curious, no?)
Of course, anything Madoff did is dwarfed by perhaps the biggest Ponzi scheme of all, this being the UK state pension system.