Wednesday, December 17, 2008

Nobody Could Have Predicted

That a political ideology of markets-gone-amok combined with at most voluntary self-monitoring as the ideal way to manage the beast could result in this:

U.S. Securities and Exchange Commission Chairman Christopher Cox said the agency failed to act for almost a decade on "credible and specific allegations" of wrongdoing by Bernard Madoff, who authorities say bilked investors of as much as $50 billion.

Allegations dating back until at least 1999 "were repeatedly brought to the attention of SEC staff, but were never recommended to the commission for action," Cox, 56, said in a statement yesterday. He announced an internal probe to review the "deeply troubling" revelations.

"He's revolted by what he found out, but it's also in his interest to be revolted," said James Cox, a securities law professor at Duke University in Durham, North Carolina who isn't related to the SEC chairman. "He's taken a lot of heat over SEC enforcement."

The SEC, already faulted in connection with the collapse of Bears Stearns Cos. and Lehman Brothers Holdings Inc., now faces criticism for failing to detect what Madoff termed "a giant Ponzi scheme." Senate Banking Committee Chairman Christopher Dodd yesterday called on the agency to explain how the "massive fraud" went undetected. Madoff, 70, was arrested Dec. 11 after he allegedly told his sons that his eponymous firm, founded in 1960, was no more than "a giant Ponzi scheme," the SEC said.

Instead of wielding subpoena power to obtain information, SEC staff "relied upon information voluntarily produced by Mr. Madoff and his firm," Cox said.

Hmm. And now Madoff voluntarily tells us that his sons knew nothing about the scheme.

It's crucial not to separate every one of these cases or to look at them as some sort of bad apples in an otherwise most wonderful American apple pie. The incentives the government gave to the financial industry in the last twenty years were not that different from an invitation to a nonstop orgy with free booze. Nobody had to really read the small script at the bottom of the invitation which mentioned that of course people should drink responsibly and keep the noise levels down. And if you didn't drink responsibly? Nothing bad would happen to you.

Except the party is over now. It's the cold light of the morning-after and everyone fights over whose puke it is all over that white sofa. Guess who gets to pay the cleaning bills?