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The SEC we deserve

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Tuesday, November 3, 2009

In his own telling, Bernard Madoff was a version of the serial killer who leaves notes saying, "Stop me before I kill again." In Madoff's case, he was waiting for the Securities and Exchange Commission to ask him how he took in billions of dollars, never invested any of it and was reporting steady investment earnings. The answer, it seems, is that he had accomplices -- the Keystone Kops of the SEC who were always letting Madoff down: "I wish they caught me six years ago, eight years ago." So do others.

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Madoff spoke those very words in June when he told H. David Kotz, the SEC's inspector general, how he managed to bilk some of American's savviest investors out of billions of dollars. Madoff's scheme was the essence of utter simplicity. He relied on both the kindness of strangers and the stupidity of investigators. It worked brilliantly.

Madoff himself said he was dismayed by his good fortune. In documents recently released, he recounted six times the SEC came to him and asked, more or less, "Bernie, how do you do it?" He gave some complicated answers, dropped some names and then waited to be cuffed. All the investigators had to do, after all, was check with Wall Street's central clearinghouse to see that he made no trades at all. "If you're looking for a Ponzi scheme, it's the first thing you do," Madoff told Kotz. It "would've been easy for them to see."

But none of the investigators saw anything. Over and over again the feds acted on a complaint or a tip regarding Madoff and found nothing. It would be reassuring if the IG discovered that some of the investigators were on the take or that Madoff had offered them Wall Street jobs when they grew up. But this was not the case. The investigators were honest -- just blazingly incompetent.

They were also, in their own fumbling way, accessories to Madoff's crime. Each time they cleared him of any hanky-panky, he used it as a recommendation. "When potential investors expressed hesitation about investing with Madoff, he cited the prior SEC examinations to establish credibility and allay suspicions or investor doubts," Kotz told the Senate Banking Committee in September. The IG found that Madoff often volunteered that he had been investigated. Clean as a whistle. No flies on him.

Madoff's face ought to hover in the sky over every Gotham City in our fair land. He represents the failure of a smug ideology and of a stock market so removed from the actual production of wealth that even smart investors had no idea what was going on and instead believed in financial alchemy: Madoff could make gold out of lies. Give the man your money. Let him do his thing -- "Do do that voodoo that you do so well," as Cole Porter might have put it.

But there is another lesson here, and it has to do with those fools at the SEC. It is easy enough, as I have just done, to call them names and conclude that the government cannot do anything right.

Another lesson is more apt. After years of Republicans (and some Democrats) insisting that the market was always right, that it was always self-correcting, that it was both magical and sexy, a manifestation of God and what he intends, and that government, that foul-breathed picker of your pocket, could do nothing right, you finally got a government that, at least in this case, actually could do nothing right. Talent went into the private sector, where not only the money was but the prestige as well. The respected public servant morphed into the loathed bureaucrat -- not the solution to any problem, but the problem itself, in the simplistic formulation of Ronald Reagan, whose contributions to the woes of our times have yet to be fully appreciated.

Reading Kotz's testimony is just plain sickening. Lives were ruined. Charitable people were bankrupted and the philanthropies themselves closed their doors. Congress is looking at what happened and how it happened -- and it will certainly, as is its wont, blame this or that person or agency. But unless Congress is determined to make structural changes, to approach this debacle as the vaunted private sector would and establish a system where talent is recruited and paid well, and where government work is again honored, then it will have learned nothing from the Madoff calamity. Madoff expected more from government. Why shouldn't we?


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