Madoff scam filled with lessons
Madoff scam filled with lessons
Cliff Pletschet, financial columnist
Posted: 02/19/2009 03:10:39 PM PST
Updated: 02/20/2009 06:43:46 PM PST
One of the more disturbing epics to evolve from the current financial crisis — and I'm not talking about a collapse, takeover or bailout — constitutes the prime example of failed government regulation and oversight.
I'm referring to the alleged rip-off of $50 billion from investors by financier Bernard L. Madoff. But I'm not about to dwell so much on the purported crime itself but rather on the failure of the Securities and Exchange Commission to step in and stem it. Instead, the SEC sat on its hands for nine long years while the Madoff case ballooned out of control.
In 2000, Boston-based Rampart Investment Management obtained market documents covering Madoff's little known hedge fund, ones that showed unusually consistent returns. Harry Markopolos, a Rampart portfolio manager, discovered that, regardless of market conditions, Madoff's numbers moved straight up at an angle of 45 degrees.
Findings
After a four-hour study of figures, Markopolos concluded that the numbers were bogus and that the company was a fraud, reports USA Today in Feb. 13 story.
At that point, Markopolos, 52, led a one-man, nine-year crusade to topple Madoff, now accused of structuring the largest Ponzi scheme in history. A Ponzi can maintain its appearance of success by paying off old investors with money taken in by new ones.
I think the fact that Madoff was former chairman of the
Nasdaq Stock Exchange and thus well-respected in the investment world, probably made the SEC skeptical when Markopolos took his figures to the commission. But wasn't there anyone as smart as Markopolos at the SEC? When Markopolos first went to the SEC, Madoff's fund was valued at "only" $3 billion.
Only the Great Recession brought Madoff down when in December his victimized clients, including celebrities, charities, banks, other hedge funds and everyday investors felt the pinch of the recession and started to demand their money back from Madoff. The clients were turned away. Madoff was virtually broke.
Finally, Markopolos got his day before Congress, testifying out of a 375-page report he put together to cover his futile nine-year effort to get the SEC to act. He said at times he was afraid he might be murdered.
Finally, Christopher Cox, head of the SEC was out the door, not only because of his blindness to repeated allegations in the Madoff case, but because of lax enforcement over-all that many believe contributed to the Great Recession. Cox lamely contended that his agency lacked authority to limit the massive leveraging that led to the financial collapse.
Lax enforcement
In truth, the SEC had plenty of power to rein in risky behavior by investment bankers and others, but chose not to, according to an article in Time magazine. Cox claimed that a dwindling staff hampered enforcement. Now Linda Thompson, head of the SEC's enforcement division, is stepping down amid widespread accusations that her office overlooked Madoff's misdeeds after years of warnings. Too little, too late.
The wheels of justice turn slowly, but no doubt Madoff will eventually pay for his crimes. I'm less concerned with financial losses by celebrities, banks, charities and other hedge funds, but how does his conviction help those people who lost their life savings in the alleged scam?
Published reports tell of retirees who lost all of their savings to Madoff and were forced to seek work. Twenty-year-olds are finding it hard enough to find jobs. For 60-year-olds the task is impossible.
It's easy to say that everyday investors should have smelled a rat early in the game. But who taught them the elements of the risk-reward ratio? They didn't learn it from their parents, from schools or even from life's adventures.
They relied too heavily on public protection by government regulation and oversight. But who oversees the overseers, and who regulates the regulators? Apparently, no one. If anything good comes out of the Great Recession if might be a stronger guardianship of the financial world by regulators. Our citizens are supposed to be protected by the government from all enemies, foreign and domestic, but these troubled times, the worst since the Great Depression, are showing that's not the case at all.
In addition to poor government regulation and oversight, we have been treated to inferior business leadership.
Corporate chief executive officers, obsessed with their own personal wealth, comfort and importance, have measured their significance in terms of millions of dollars in pay, perks and bonuses, totally blind to the performance of the stocks and bonds held by everyday investors.
That's pure greed, and, no matter, The Wall Street Journal runs a long article headed in big type by "Greed Is Good." The point of the article is that if executives are not well-paid, the companies will be afflicted by "brain drain." I say, let the draining begin.
There, I've got some things off my mind today
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