Tuesday, September 8, 2009

SEC Failures Highlighted in 477 Page Madoff Report

I have yet to peruse the 477-page report released by the SEC's internal watchdog that described in painful detail what a bunch of bumbling idiots work at the SEC. But the FT has a nice summary of how, after being tipped off on numerous occasions over the course of nearly 20 years, the SEC failed to uncover the giant Madoff Ponzi scheme. I'm not talking about one or two emails from respected investors and analysts that said "hey, you guys should give Bernie Madoff a call, something's not quite right over there." The SEC received numerous tips from many folks that said outright "I think it's a ponzi scheme." Or "Their options trades might not exist." No less than the esteemed Renaissance Technologies became uncomfortable with Madoff in 2003 and withdrew money from the funds when it couldn't understand or replicate Madoff's strategy. The firm suspected something was amiss and wanted to get out before Eliot Spitzer got wind of it. According to the report, on numerous occasions, SEC officials thought it was sufficient to call Mr. Madoff, ask him questions, and then take his word as evidence without asking for any supporting documents. Can we forget Harry Markopolis's pleas for a thorough investigation of Bernie Madoff that were repeatedly ignored despite the painstakingly detailed information he provided to investigators?

Interesting then that the new budget calls for an increase in funding for the SEC by more than 13% from its 2008 budget of $906 million. 2008 was sort of a banner year for the SEC wouldn't you say? It would've been a fantastic opportunity for the SEC to do something productive with its nearly $1 billion budget. Although the SEC was directly responsible for regulating the broker dealer community, it failed to police them during the market run up and sat idly by while the entire sector melted down last year. The SEC neglected to uncover loads of fraud and/or ponzi schemes until they unraveled by themselves due to investors calls for redemptions. Furthermore, the SEC's single action during the entire crisis during 2008 was to blame short sellers for the failure of financial firms and then institute a short sale ban that merely exacerbated the volatility in the markets. It didn't stop the insolvent firms from going bust. That's what $1 billion of our money bought. So I say cut the SEC's budget instead of raising it. To zero. What is the point of having an organization that shuffles papers and provides the illusion that someone is actually policing the market when they aren't? Anyone who can point to anything useful that the organization did in the past few years to protect investors is welcome to share their opposing views.

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