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Posts Tagged ‘Fraud’

Our Bloated, Ineffective Regulatory State

Lawrence Auster, in a discussion of a documentary regarding Jewish master-criminal Bernie Madoff, notes the following:

The program also goes into the SEC’s total failure to investigate Madoff despite the credible accusations made against him by Harry Markopolis. When you see the SEC’s enforcement chief Linda Thomsen being grilled by a congressional committee, it becomes clear that she didn’t do anything. She didn’t do the simplest thing that would have revealed the truth about Madoff’s Ponzi scheme in one day, i.e., demanding that Madoff show the records of his trades with the companies he was supposedly trading with. Since no such records existed, because no such trades had ever taken place, his entire fraud would have been exposed by the posing of the simple demand, “Show us your transactions.” But they didn’t make that demand. Alternatively, they could have looked at the lists of the companies Madoff was supposedly investing with, gone to five of those companies, and said, “Has Madoff purchased these stocks from your company?” The truth would have been revealed in one day. But the SEC didn’t do that.

The SEC people give new meaning to the term “empty suit”–a person who is supposedly filling a certain job and carrying out certain functions, but in reality is doing nothing. There’s no one there, except a self-important non-entity receiving the salary, perquisites, and respect accruing to the job that he is not performing and hasn’t the slightest interest in performing.

This is, indeed, the worst aspect of government involvement in so many areas of our lives.  It creates massive costs, paperwork burdens, and anxiety for ordinary people.  On the other hand, certain lawless people that are willing to deliberately flout the system often get away with it, because the regulators are so incompetent and lazy.  We get the worst of both worlds: high costs and reduced freedom without the benefits of protection from predatory criminals.

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Wall Street will always be greedy and profit-minded. That is a given.  But the extent of the rot is really alarming.  The failure of all forms of regulation–internal, public, and market-based, such as bond-rating agencies–will leave a cloud over capital markets for some time.

The fearlessness by participants suggests that non-market considerations–friendships, loyalty, ethnic and religious ties, habit, absent moral compasses, and incompetence by regulators–have at least as much to do with where and how money is spent as ordinary considerations of profit and loss.  Of course, this is not always bad, as Francis Fukuyama pointed out in his research on the importance of trust in risky business transactions. But American business, particularly at the top level, has long been tempered by a broader notion of fair play:  rejection of nepotism and bribery, standardized procedures, meritocracy, some respect for “good birth,” the habits of good education and conscience, and a strong culture of fiduciary duties by officers to shareholders and other stakeholders.

This culture has come undone on Wall Street in particular, where cleverness and deception have displaced wisdom and hard work as the hallmark values.  The real value of investment instruments are increasingly hidden from outsiders through dishonest and opaque instruments, whether “barges” ten years ago or asset-backed-securities today.  Consider the headlines:  A $50B (!) ponzi scheme by Bernard Madoff. A lawyer hocking $380M in fake promissory notes. The scale, brazenness, and long-persistence of these frauds suggests that something is deeply wrong on Wall Street that no regulator alone can fix.  Something must happen to the culture, which likely depends on banning a great many people from any kind of dealings in complex financial matters, revising the famous bonus structure of Wall Street firms, a revolt by shareholders and commercial banks, and sending a great many people to jail for a very long time.

The banker of old was a staid, somewhat humorless, but universally respected symbol of prudence and rectitude.  He made a good living, but his living depended on the survival of the institution with which he was affiliated.  The Wall Street impresario of today is a 30 year old castle collector who went to Ivy League schools and learned how to do regression analysis and also that “God is dead.”  He’ll switch jobs 3-4 times in a decade, and his entire compensation structure is directly proportional to the risks he takes with the money of others.  He represents an alien value system that has taken root on Wall Street.  It is un-American, untied to the broader moral traditions of western civilization, and we are witnessing its self-destruction.  The return of that earlier ethic of sturdy, sober, WASP Americana–an ethic that all social climbers, whether immigrant or “low born,” were expected to follow–is part of the solution to what’s wrong with Wall Street, which for too long has taken the Michael Douglas film as a “how to.”

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