It's not Madoff, it's Worse

No doubt the public, encouraged by a righteous media, will demand more regulation to prevent frauds like Madoff from recurring. In response their auditing and enforcement staffs will probably double once again as they did in the last eight years.

It is far from certain that they would uncover the next broker-dealer committing large-scale fraud such as Madoff, but it is a certainty they will track down more technical violations from the sea of documentation required of the industry.

One has to wonder, in the eight examinations the SEC performed over 16 years at Madoff, might it have caught him if it had demanded to see fewer pieces of paper produced by those in on the fraud that were expertly crafted to throw off the agency, and instead had its staffers cross–check just a handful with counterparties?

According to a few SEC auditors interviewed off the record by the author, the firm’s counterfeit DTC trade confirms were so good they were “better than originals.” Wouldn’t following through with the DTC or Madoff’s trading partners, justified by the implausibility of Madoff’s business model, have revealed as the trustee suggested in February 2009 that no trades had ever occurred?

Might a tightly focused operation with fewer, more effective, and fraud-focused investigators and less paperwork be more productive and in alignment with what investors seek?

How much does the public rely upon the security blanket of knowing the SEC and FINRA are present at the investment advisors and broker-dealers it chooses to trust? If “Member–FINRA, SIPC” had not been emblazoned next to the firm logo, or if Madoff himself had not been chairman of the NASDAQ stock market, might more potential clients have scratched before they sniffed?

A town that has 100 traffic cops and no murder detectives probably won’t find any dead bodies, but its police force will be very busy and profitable.


Bill Baker,
for The Daily Reckoning

[Editor’s note: This passage is reprinted from William W. Baker’s book, Endless Money: The Moral Hazards of Socialism, with the permission of John Wiley & Sons, Inc (©2010). You can get your own copy here.]