Madoff, the Failure of the SEC and Rescuing the Rich

Monday, January 05, 2009
Harry Markopolos

Although Bernard Madoff has become the poster child of the collapse, the Securities and Exchange Commission (SEC) carries a heavy share in the responsibility for ignoring Madoff’s impossibly consistent returns; they even ignored years of warnings from Harry Markopolos, a former asset manager who finally wrote a 19-page letter to the SEC in 2005 proving that Madoff had to be scamming his investors. In a New York Times Op-Ed, Michael Lewis and David Einhorn explain how the S.E.C.’s mission got turned upside-down: “Created to protect investors from financial predators, the commission has somehow evolved into a mechanism for protecting financial predators with political clout from investors. (The task it has performed most diligently during this crisis has been to question, intimidate and impose rules on short-sellers—the only market players who have a financial incentive to expose fraud and abuse.)…It’s not hard to see why the S.E.C. behaves as it does. If you work for the enforcement division of the S.E.C. you probably know in the back of your mind, and in the front too, that if you maintain good relations with Wall Street you might soon be paid huge sums of money to be employed by it.” 

Other financial institutions suffer from similarly skewed incentives; credit rating agencies like Moody’s or Standard and Poor are paid by the very same firms that they rate. On top of all the intentional obfuscation coming from regulatory agencies, the Treasury demanded an exorbitant sum to save Wall Street from itself: “In the middle of all this, Treasury Secretary Henry M. Paulson Jr. persuaded Congress that he needed $700 billion to buy distressed assets from banks—telling the senators and representatives that if they didn’t give him the money the stock market would collapse. Once handed the money, he abandoned his promised strategy, and instead of buying assets at market prices, began to overpay for preferred stocks in the banks themselves. Which is to say that he essentially began giving away billions of dollars to Citigroup, Morgan Stanley, Goldman Sachs and a few others unnaturally selected for survival. The stock market fell anyway.”
The End of the Financial World as we Know it (by Michael Lewis and David Einhorn, New York Times)
Madoff Had Early Skeptic in Boston Gumshoe (by Craig M. Douglas, Boston Business Journal)
The World’s Largest Hedge Fund is a Fraud (by Harry Markopolos, November 7, 2005 submission to the SEC) (PDF)


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