What Madoff Made-Off With

As Securities and Exchange Commission Chairman, Christopher Cox, examined his own agency’s performance of Bernard Madoff’s investment firm, which unraveled into a colossal $50 billion Ponzi scheme (the largest in history), he offered a scathing review of the SEC’s failed process. The agency relied only on information provided voluntarily by Madoff’s firm, did no independent investigation, that since1999, the agency ignored credible complaints of wrongdoings, and former SEC attorney, Eric Swanson, who married Madoff's niece, Shana, in 2007, was a part of SEC compliance team the looked into Madoff's securities brokerage operation in 1999 and 2004.

Free on $10 million bail (where did Madoff get that money?!), wearing an ankle bracelet that monitors his movements (he’s support to stay in his townhouse most of the time), Madoff kept two sets of books: one that reflected the mega-losses and the other that provided information to investors and gullible SEC lawyers. The story seems like an isolated crime story, albeit of legendary proportions impacting way too many people and institutions, but it reflects a governmental laissez faire attitude that allowed new major financial sectors and tradable securities to flow through the system with relatively little federal oversight. Credit rating agencies (who are paid by the entity creating the debt instrument) compounded the pain by standing behind stupid offerings so that they could just keep getting big fees.

The underlying assumption was that rich folks and big business should be left to do whatever they like with their money, that they can afford competent financial and legal advice, and hence sectors that catered to high-net-worth individuals and companies – like private equity and hedge funds – and derivatives which were most purchased by larger financial institutions and not intended for the average investor – skipped along without much scrutiny. If you want to see how this all unraveled, look back to my Tipping Points Revisited blog and see how it all unfolded.

The problem with all of these horrific assumptions about rich folks may be less that the rich folks got slammed than that these unregulated structures and securities were based on an American economy that is 70% consumer driven. Thus no matter how sophisticated and well-represented these wealthy folks were, the damage caused by not regulating or insufficiently regulating their activities profoundly impacted a world so far beyond their aggregate personal net worth; it decimated the entire economy and the economic well-being of ordinary people who had counted on their government to protect them against the tyranny of economic manipulation by the rich and powerful.

The system has totally and completely betrayed the American people. All those champions of a “free market” (who glibly used the hard-to-define “stop the path to socialism” mantra) actually assumed that there was in fact a free market. That there are tax breaks for long-term investors, special deductions for certain special interests (like the oil depletion allowance) and direct subsidies (well before the notion of a bailout) for specific industries (like farming) tells you that there really never was a “free market.” Further, if you want to allow anyone to sell tainted food or toxic pharmaceuticals without regulation, then you might actually be a free market purist.

Had people known that there really was no real governmental oversight, would they have been so cavalier about their financial and political choices? It is the existence of federal and state agencies that is supposed to “take of the stuff we as individuals cannot do ourselves” that makes this betrayal that much more difficult to take, engendering righteous anger across the land.

How do Americans feel about all this? December 17, 2008 Washington Post report: “A new Washington Post-ABC News poll also found that a rapidly increasing share of Americans -- 66 percent, up from just over half a year ago -- are worried about maintaining their standard of living. Nearly two in 10 said they or someone living in their household had lost a job in the past few months, and more than a quarter said they had their pay or hours reduced. And 15 percent said that at some point in the past year they fell behind on their rent or mortgage… The number of those who said they have been hurt financially by the recession, 63 percent, is higher than the 53 percent who said they felt the pain of the 1991 recession.”

I believe that roughly half of what sustains this meltdown is the mindset of the people – the loss of consumer and business confidence in the government and our financial structures – and that the new Administration must focus as much on making people believe that the system is actually being fixed and feel that there is a future that can allow us to be the Americans we once thought we were. What Madoff and the U.S. government “made off with” is our trust.

I’m Peter Dekom, and I’m angry too.