If there is anything we have learned from the crisis in the financial sector, it's the urgent need for more regulation. Had federal regulators been more vigilant or wielded greater powers, all this suffering and heartache might have been averted. That's the story we've been told, and it must bring a rare smile to the face of Bernard Madoff.
Madoff was the manager of a Wall Street investment fund that he allegedly confessed to his sons was "one big lie" and "a giant Ponzi scheme." But "giant" fails to capture the scale of his fraud, which may have lost $50 billion, more than the entire gross domestic product of most of the countries on Earth.
Also striking is that his alleged victims were not rubes and simpletons but individuals of exceptional wealth and financial acumen -- including various tycoons, as well as managers for banks, pension funds and hedge funds. Even Madoff's own son, who worked for his father's firm, invested millions of dollars of his own money in the supposedly phony fund.
A Ponzi scheme, as it happens, is not a scam of dizzying complexity. It's the oldest scam in the book. You take money from new investors to pay off previous investors, and you keep doing it until the new infusions can't keep up with the withdrawals. It's about as simple as financial trickery gets.
So if regulators had been paying attention, they would have detected what was going on, right? After all, as one expert noted, Madoff was conspicuously unable to attract a lot of big institutions. "There's no Harvard management, there's no Yale, there's no Penn no State of Texas or Virginia retirement system," James Hedges IV of LJH Global Investments told Fortune magazine.
Why not? "Because when you get to page two of your 30-page due diligence questionnaire," said Hedges, "you've already tripped eight alarms and said, 'I'm out of here.'"
So you would think all this would have caught the eye of any regulators who were half-awake. But regulators, it turns out, were not oblivious to what was going on. Nor were they lacking in means to rein Madoff in.
In fact, as The Wall Street Journal reported the other day, the Securities and Exchange Commission had been suspicious of his methods for a long time. It had even heard in 2005 from a competing investment executive who drafted a 21-page report arguing that Madoff was running a Ponzi scheme.
The government had actually investigated him -- not once or twice, but "at least eight times in 16 years," according to the Journal. Yet it "never came close to uncovering" the operation, which may have begun as early as the 1970s.