let us now contemplate bernard madoff's giant ponzi scheme.
but that's not quite as much fun as contemplating the sec's mea culpa issued over madoff's giant ponzi scheme....
Quote:
SEC under pressure over crisis detection
By Joanna Chung and Greg Farrell in New York
Published: December 17 2008 19:10 | Last updated: December 18 2008 02:07
In an extraordinary admission, the head of the Securities and Exchange Commission is blaming his own agency for missing numerous chances to detect what could be the world’s biggest fraud.
Discussing his decision to launch an internal investigation into how the SEC missed an alleged $50bn “Ponzi” scheme run by New York broker Bernard Madoff, Christopher Cox said on Wednesday that “over a period of several years, nearly a decade, credible information was on multiple occasions brought to the agency, and yet at no point taken to the next step.” He added: “We need an answer to these questions.”
But the failure to uncover Mr Madoff’s alleged scheme is only the latest in a string of setbacks for the regulator. The SEC and its chairman – expected to step down in January when the new administration takes office – have come under a storm of criticism for oversight failures amid the financial crisis, raising doubts about the future role and even the existence of the agency.
“The damage here could be irreparable,” said Jacob Frenkel, a former SEC attorney and assistant special prosecutor.
A senior Democratic Congressman, Paul Kanjorski, said on Wednesday that the Madoff scandal has raised “even more troubling questions about the effectiveness of our regulatory system.” A US House of Representatives panel is planning to conduct an inquiry into the failures of the SEC and other regulators in the matter before legislators start work next year in recrafting the regulation of financial services, he said.
The SEC has already stopped overseeing the big investment banks, after Bear Stearns and Lehman Brothers collapsed and the others converted to bank holding companies, supervised by other regulators.
A recent report by the SEC inspector-general said the agency failed to address “numerous, potential red flags” in regulating Bear Stearns.
Now, Mr Cox has ordered the inspector-general to conduct a full examination of the SEC’s past oversight of Mr Madoff and his firm that should include staff contact and relationships with the Madoff family. Mr Cox said the SEC staff failed to get subpoena power to obtain information, instead relying upon information voluntarily produced by Mr Madoff.
Mr Cox said the current investigation – which apparently came to light after Mr Madoff himself admitted to the fraud in court documents – has shown that Mr Madoff kept several sets of books and false documents, and provided false information involving his advisory activities.
The SEC chief did not elaborate on the “credible and specific allegations” that were previously brought to the SEC staff, and he emphasised on Wednesday that there was no evidence “at this point, that any personnel did anything wrong”.
However, the inquiry is likely to put growing pressure on two divisions of the SEC. The enforcement division is responsible for investigating and bringing legal action against potential wrongdoers. But the first line of defence within the agency for such action is the Office of Compliance Inspections and Examinations.
Former SEC chairman Arthur Levitt praised Mr Cox’s decision to launch an internal inquiry. But he lamented the fact that the SEC did not inspect Mr Madoff’s advisory business in 2006, the year in which it was first registered with the commission.
He noted that the unit is chronically understaffed. “They had 433 people in the office of compliance and examinations looking at 8,000 advisers two years ago,” Mr Levitt said. “Today they have 400 people looking at 11,000 advisers and thousands of mutual funds.”
Indeed, former SEC officials have repeatedly pointed to shortage of resources. But they also say that the enforcement division, in particular, has suffered under Mr Cox’s tenure, because of administrative hurdles that limited the staff from moving quickly and aggressively.
Charles Clark, a former SEC enforcement official who led the agency’s investigation into the collapse of Enron, and is now a partner at the law firm of Kirkland & Ellis LLP, said: “Everyone who is scrutinising this situation needs to be tempered in how quickly they make judgments about this matter, which everyone acknowledges is extremely complicated.” However, Ross Albert, a former SEC senior special counsel and assistant US attorney, said the SEC chairman was throwing the agency’s career enforcement staff “under the bus” to deflect blame for his own leadership failures. “The SEC certainly has the resources to handle sophisticated and complex investigations, but the political appointees ... set the SEC’s enforcement agenda.”
Copyright The Financial Times Limited 2008
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FT.com / In depth - SEC under pressure over crisis detection
in case you haven't been following this---and admittedly it's almost difficult to follow simply because it seems like madoff is to the financial meltdown what the flying shoe in iraq was to that debacle--the incident inside the incident that sums up much about the incident as a whole---and in a context where you find, even on the nitwit cable "news" shows talking heads who lean into the camera and say "deflation: it's a bad thing"----and so it seems like Everything is Sliding Toward the Crapper--now there's this. so the Everything that is Sliding Toward the Crapper is now taking the time to stage metaphors of itself on the way down.
last thing we want to see really is the baroque.*
apparently bernard madoff told his sons a couple weeks ago maybe, i like to think over thanksgiving dinner, that his investment firm was a giant lie, a ponzi scheme, kinda like the one that max bialstock runs in "the producers" but really fucking big.
the difference is that where max would literally and metaphorically screw old ladies, madoff did it to banks, charities, pension funds, and small investors.
having heard this confession, his sons decided to turn him in. (aside: after watching too much in the way of crappy reality shows, i am curious abotu the oedipal dimension of this action...but that's another matter, one for gossip girls like me.)
and a few days after news of this turn-in and subsequent arrest broke, the mea culpa comes from the sec.
now i find this to be amazing. and there are lots of questions that could be asked about all aspects of this---but at the outset, i'll pose only one and see if things develop.
in yesterday's ny times, thomas friedman, who i generally see as a bit of a putz, did an edito that linked the madoff ponzi scheme to the derivative market as a whole. the basic argument is that there's no particular difference between what madoff was doing and the bundling and selling of negative numbers as a variant of commodity future---at the level of what friedman seems to understand as the fradulent nature of the products themselves---at the level of the collusion between a form of gangster capitalism and the agencies which were supposed to be regulating it---at the level of outcomes. do you agree with this assessment?
in other words, do you see a repetition of the mortgage market implosion in the madoff scheme?
the correlate of this is that madoff's scam surfaces at a particularly bad moment and is functioning as a metaphor for american-style capitalism as a whole. friedman makes this argument by situating himself in hong kong, having a conversation with a banker whose basic claim is that this amounts to a destruction of the ideological construct of america as model which presides over contemporary forms of cowboy/gangster capitalism (take your pick---all that changes are the outfits)...and undermines the legitimacy of the united states as center of an overarching rationality which the us has not hesitated to impose on other countries---because apparently the united states has at the same time exempted itself entirely.
if this is a widely shared view--and looking around the international press yesterday, it is reasonable to see it as widely shared, it follows that the madoff scheme, coming out now, really does intensify the problems facingthe united states by extending what was arguably already a political crisis (following from the variety of actions undertaken by the bush administration in particular) into a political crisis that directly affects the international economic order---in other words, the political crisis is tracking from enabling condition to internal factor.
what do you make of this?
what should the united state do now?
* in the sense that the whole can be explored through the contemplation of details: the whole is the proliferation of details; there is no center except as implied by the proliferation of detail...