As a parent it never fails that when one of my sons is confronted with a broken household item, unclaimed mess or injured sibling, he will predictably recite a list of previous misdeeds by one of his siblings in lieu of acknowledging culpability for the issue at hand. Unfortunately that is the same reaction taken by our leaders in Congress and at agencies like the Securities and Exchange Commission.
When faced with complaints over rising energy costs, Congress ignored the historically weak dollar, energy fundamentals (some of which were of their own making) and 35 years of failure to create an energy policy and went after speculators. When the explosion of leverage and lax oversight of investment banks helped to contribute to our current credit crisis the SEC went after short sellers.
That is why it was refreshing—though very long overdue—to hear SEC Chairman Chris Cox acknowledge that the SEC dropped the ball in regards to the latest scandal involving former NASDAQ Chairman Bernard L. Madoff and his firm Bernard L. Madoff Investment Securities, LLC.
With the financial media teeing up the hedge fund industry— even though Madoff did not run a hedge fund— Cox stated, “The Commission has learned that credible and specific allegations regarding Mr. Madoff’s financial wrongdoing, going back to at least 1999, were repeatedly brought to the attention of SEC staff, but were never recommended to the Commission for action. I am gravely concerned by the apparent multiple failures over at least a decade to thoroughly investigate these allegations or at any point to seek formal authority to pursue them.”
Quite an acknowledgement and one overdue. The SEC was behind the ball on Enron, the various telecom scandals earlier this decade, the investment bank analysts’ scandal and the repercussions from the creation and mislabeling of mortgage backed securities. In most of those cases the stink was uncovered by regulators with less authority and resources than the SEC or by market participants like short selling hedge funds who took the time to look under the hood of some high flying securities.
As we rush to implement scores of new regulation in response to the financial crisis we as a nation find ourselves in, it would be good to remember that much of the financial fraud and misdeeds that have occurred over the past decade could have and should have been uncovered under the current regulatory structure. Yes, certain market participants have been able to gain exemptions from oversight, that in retrospect was not a good idea. But in most cases the failure to uncover various financial frauds and misdeeds has been due to a failure to investigate conflicts of interest, regulatory incompetence or worse.
The call for greater regulation and oversight is often a smokescreen. It is a way to avert responsibility by saying, “We didn’t have the proper tools.” The bottom line is that the worst failures over the past decade involved entities operating under SEC jurisdiction. They had the tools and failed.
