Earn What You Spend

There is a fair amount of news to digest this morning, but what I find the most interesting is that Congress will hold their first hearing into the massive Madoff Ponzi Scheme: 

The House Financial Services Committee is scheduled to hear from one of Madoff’s alleged victims, securities law experts and the SEC’s inspector general,David Kotz, who’s probing the agency’s handling of the matter. Harry Markopolos, the former money manager who says regulators didn’t act on his tips about Madoff, canceled his appearance.

Who will bear the brunt of the ire of Congress today?  Obviously not Madoff, or even those who enabled him for so long.  Rather, it will likely be the SEC, the regulatory agency in charge of policing people such as Madoff. The argument against the SEC is simple: 

Bernard L. Madoff Investment Securities LLC was examined at least eight times in 16 years by the Securities and Exchange Commission and other regulators, who often came armed with suspicions.

The serial regulatory failures will be on display Monday when Congress holds a hearing to probe why the alleged fraud went undetected. Among the key witnesses is SEC Inspector General David Kotz, who was asked last month by the agency’s chairman, Christopher Cox, to investigate the mess.

Take a look at some of the recent investigations of Madoff’s first by the SEC: 

Source: WSJ

For a truly damning account of their failure to address an issue that was repeatedly brought to their attention, read Michael Lewis and David Einhorn’s Op-Ed in yesterday’s NYTimes. It’s a far-reaching indictment of a number of parts of our financial industry, but the authors give specific attention to the failure of the SEC to address the scandal back when it was first brought to their attention: 

What’s interesting about the Madoff scandal, in retrospect, is how little interest anyoneinside the financial system had in exposing it. It wasn’t just Harry Markopolos who smelled a rat. As Mr. Markopolos explained in his letter, Goldman Sachs was refusing to do business with Mr. Madoff; many others doubted Mr. Madoff’s profits or assumed he was front-running his customers and steered clear of him. 

After witnessing the embarrassment wreaked upon the auto execs, I think today’s Congressional hearings could hold more of the same.