Madoff Scandal: Where Was the SEC?

Regular readers know that we are generally more sympathetic to government actors than the investment punditry. We think this stems from more direct experience with those in government and our disciplined effort to look at a problem from all perspectives.

Despite this perspective, there is one institution that gets a consistently low grade: The SEC. A few days ago we suggested that investors monitor potential changes at the SEC. We continue to believe that this would be important to the long-term health of the market. If the new leadership were to suspend mark-to-market accounting rules pending clarification, it could even have a short-term effect.

Likely Changes at the SEC

Here is what we wrote yesterday on RealMoney:

The Madoff scandal is yet another black mark for the SEC and Chairman Christopher Cox. In past comments I have noted that his official term of office extends until June of 2010, although Obama could appoint a new chairperson. In fact, several top SEC staff members announced their resignations right after the election. Cox himself has indicated plans to step down at the end of the Bush term, although he is willing to serve longer until a replacement is found. Gary Gensler (Treasury and Goldman Sachs (GS)) is the transition official in charge of the search. Some think that he might also be a candidate. Others mentioned include former SEC Commisioner Roel Campos, also on the transition team. Some speculate that Robert Pozen (former Fidelity vice-chair and now Chairman of MFS Investment Management) is a leading candidate.

The issues facing the SEC are deeper than just the personnel. There will be some effort at comprehensive reorganization to get rid of the gaps among the SEC, the Fed and the CFTC.

Charlie Gasparino just reported that the SEC is saying that they get many tips like the one received on Madoff. One of the critcisms of Cox is that he did not go after the budget authority needed to fulfill the enforcement responsibility.

Conclusion

This upcoming change is a market positive that is not yet on most radar screens. A good dissertation topic for someone in political science and public policy would be the study of Presidential transitions and why timing created over 200 years ago no longer works.

We give President Bush high marks for his attempts at handling the crisis and turning over the reins. Despite the "country first" attitude, the delay in implementing new programs is contributing to the economic distress.

Comments

[Mr Ed:]

Mr Cox is not qualified for the SEC position. He has cost our country Billions of dollars-Up tick rule,naked shorts,mark to market accounting,
no regulatory over sight to name a few failures. His lack of leadership has left the investment public on there own. This man need to resign ASAP!
How, ever he is so out of touch that he has no idea of what damage he has done. So FIRE HIM!!!

2008 Dec 13 04:56 PM

[Ames Tiedeman:]

Forget Hedge Funds. Do not send any of them your money. Stick with well grounded Mutual Funds like Fidelity or 20th Century or others. Back to basics. Do not be a fool and send your millions to a one man shop. Go with firms like Fidelity who cannot steal your money!!!! The track records of the many mutual fund companies are better than that of Hedge Funds anyway. Hell, buy your kids Coca Cola, JNJ, PG, and take the stock certificates and put them in your safe deposit box if you want. Do not mess around with these Hedge Funds and 1 man shops on the street! And stop following all the advise of the ETF crowd. If you have $10 million put 500k in 20 well run, good old fashioned mutual funds! Then enjoy life and look at your returns in 10 or 20 years...

2008 Dec 13 05:41 PM

[bosun.j:]

Oh freakin' please! You extremist-capitalists only cry for daddy (SEC in this instance) when somebody gets the best of you and your rich butt buddies! Otherwise you shrilly demand a "truly free market". Man up!

2008 Dec 13 05:44 PM

[Jimmy Lathrop:]

Forget about the SEC. Just beef up the DOJ.

2008 Dec 13 07:34 PM

[bosun.j:]

@Jimmy Lathrop:

The DOJ? Oh, you're anticipating an uptick in your white collar crime practice! Well, good luck counselor! Everyone needs an advocate. Even the freaks on Wall Street!


On Dec 13 07:34 PM Jimmy Lathrop wrote:

> Forget about the SEC. Just beef up the DOJ.

2008 Dec 13 07:44 PM

[dondon:]

Madoff's ponzi is no different than the government sponsored ponzi called Social Security.

2008 Dec 13 10:03 PM

[nova:]

Mr Cox, as the SEC Chairman, has done exactly the job he was hired for.

Well, the New York state governor is a blind person. It is perfectly convenient for so many...

As for Obama, he has no clue of what is going on. This is why he hired the entire former Clinton administrations.

The problem that arsonists (from both Clinton and Bush administrations and their masters from the Wall-Street) started a terrible fire and greatly miscalculated the consequences.

2008 Dec 13 11:36 PM

[Steven Hansen:]

i see nothing wrong with hedge funds. if you want to take the risk on an unregulated investment for high returns, that is your right. if you want a regulated investment, you have other choices.

2008 Dec 14 12:09 AM

[maelstrom:]

And Barney Frank ? he has no bame in the banking crisis ?

2008 Dec 14 12:22 AM

[abeoman:]

Change is welcoming, but certainly the lighthouse shift manager (Cox) sends out signals or prepares for the onslaughts of danger in a storm. A storm was brewing over a 24 months ago and the lighthouse turned off the lights!

The biggest addition to the SEC was the PCAOB with the assitance of Sarbanes Oxley, but futile in power or enforcement. The structures and business processes of the markets have not been fundamentally challenged.

Where is the legislation to address the immense powers of the Depository Trust Company (formed by the largest brokerage firms, with Goldman Sachs, Merril Lych, Lehman, Citi, Mellon BNY......) and the structures which create the opportunity for Maddoff type crimes?

SEC needs an overhaul and the business process needs to be challenged. If Mr. Cox or any of the new leadership has the guts and political will to tackle this gorilla head on, then we can talk about change and true transparency. When Enron and Worldcom were the points of disgust prompting Sarbanes Oxley and the PCAOB, we created a band aid, surrounded by the hoopla and media onslaught chastising accounting firms for extending into business consulting other than true accounting and auditing.

That created a vacuum of threats to go unnoticed and the FED and SEC even encouraged lax controls for hedge funds. The irony was that more capital was being driven as a resource to hedge fund type funds to circumvent stricter Sarbanes disclosures. If Madoff's Ponzi scheme was the TItanic, then the iceberg is out there, but we need effective legislation to turn the light on!



On Dec 13 03:00 PM TomArmistead wrote:

> Cox performed his duties as expected by those who appointed him -
> he did nothing, gracefully and conscientiously - set up commitees,
> got input, made proposals, and ignored the the greed and corruption
> running rampant on Wall Street.
>
> In his defence, the CDS operators got an exemption from regulation
> long before he took office - during the Clinton adminisration. <br/>
>
> Change will be welcome.
>

2008 Dec 14 04:06 AM

[J.Z.:]

If the guy had put on a ski mask and held up a 7-11 for a malt liquor and maybe $40 and change he would do at least 10 years. But no, he wears a tie and steals for an obsecene amount so he won't do time. He will write a book about it. He will do the talk show circuit and before you know it some political hack will not only get him a pardon but put him up for the Presidential medal of freedom award.
The moral of the story is.. if you do a small crime you wil be punished. Do a big crime and there is only reward. Such a country!

2008 Dec 14 05:20 AM

[john s. gordon:]

as mark twain said,

if a man steals a loaf of bread he goes to jail.

if a man steals a railroad, he goes to congress.
> jack

2008 Dec 14 09:05 AM

[WMBANZAI7:]

MADOFF THE WALL STREET FAKIR
(Rudolph the Red Nosed Reindeer)
WilliamBanzai7

You know Vesco and Boesky, and Keating and Milken,
Leeson and Mozer, and Ponzi and Wiggen,
But do you recall, the most famous securities fraudster of all?

Madoff the WALL STREET FAKIR
Had a GIANT PONZI SCHEME,
And if you ever saw it,
You could say it was Wall Street's own worst dream.

All of the other Wall Street fraudsters
Used to laugh and call him names;
They never believed poor Madoff
Made a legitimate Alpha trade,

Then one shady Wall Street trading eve,
Madoff spilt his own beans to the SEC
"Madoff oh your scheme's so bright,
Won't you go to jail tonight?"

Then how the Wall Street fraudsters loved him
As they shouted out with glee,
"Madoff the WALL STREET FAKIR,
You’ll go down in securities fraud infamy."

Q: Whats the difference between Bernie Madoff and the CEO of a bulge bracket Wall Street investment bank?

A: Madoff is not asking for a bailout.

2008 Dec 14 10:38 AM

[carey_jim:]

I've always thought the American obsession with socialism and the hunting for communist witches under every bed (which has been going on since before World War I) is a screen from behind which the American huckster and financial Wizard of Oz, hides.

Not that socialism would be any better, of course. I also believe that if socialism ever comes to America, these same people will be the commissars.

"The never ending battle for truth, justice, and the American way"

Where is Superman, now that we really need him?

2008 Dec 14 12:09 PM

[gatekeeper:]

There are talking heads on CNBC professing they knew something was fishy with Madoff's operation for a long time and even had backed away from investing, despite high returns. So we doubt Madoff is an isolated case. Perhaps someone could organize a list of other questionable Wall Street operators so they can have an opportunity to expound on (brag about) their M.O.s or, alternatively, be exposed as frauds. Ahhh, the light of day.

2008 Dec 14 12:10 PM

[oldman:]

the real criminal is the lack of regulation.

2008 Dec 14 05:31 PM

[kurt walter:]

So called "sophisticated" investors wrote their investment checks to Madoff's company, not a 3rd party custodian that is the only way you should invest money. No wonder Madoff was able to do his scam. You don't make your checks out to your broker. Moral of the story: just because you have lots of money doesn't mean you are smart.

2008 Dec 14 06:25 PM

[ngwun:]

"Not that socialism would be any better, of course. I also believe that if socialism ever comes to America, these same people will be the commissars."

Deja vous?

2008 Dec 14 07:03 PM

[Ames Tiedeman:]

The audit firm, the accounting firm, the folks at the SEC, should all be jailed..

2008 Dec 15 05:27 PM

[roger maxims:]

With due respect, Madoff ended up like this because the markets failed him. If you ask doctom stock traders in 1999 or real estate stock traders in 2006, 10% guaranteed return in a bull market is next to nothing.

Not only Ponzi schemes, but NYSE also falls apart when everyone wants their money out. Particularly borrowed, leveraged money as such.

2008 Dec 18 12:26 AM