Jim, the amazing Madoff story is in some ways a test case for us to see how the regulatory system is or is not working, and how things might be changed.
It’s also a salutary reminder for all of us involved in finance of how low public trust in our monetary system has now fallen.
I spent part of this morning reading Harry Markopolos’s testimony to Congress. It’s a real eye-opener, and well worth an hour or two of anyone’s time.
Basically, despite Markopolos’s submission of detailed analyses, over a period of eight years, to the SEC, effectively proving that Madoff ran a Ponzi scheme, the regulator did nothing.
As Markopolos concludes in his report, public trust in banks, brokers, insurance companies, rating agencies, hedge funds, investment managers and, above all, in the Fed, the US Treasury and the SEC has disappeared. He lambasts the lack of transparency from the public authorities, calling the Fed’s refusal to disclose which financial institutions are borrowing from the discount window, and how much, “the ultimate insult to investors.”
He adds that only total transparency can help restore trust in the system, however painful that might be – for example, to banks that are hoping for a recovery in the prices of depressed assets and are so far avoiding write-offs.
It’s difficult to disagree with this conclusion, but it’s also depressing to see how far we are from achieving that goal. By resurrecting more “bad bank” schemes, our political leaders seem addicted to the same off-balance-sheet shenanigans that caused the problems in the first place.
So, Jim, my suggestion that we’d be better off without any regulator was only partly tongue in cheek.
If the regulator’s role is to enforce disclosure and prevent monopoly behaviour, something you rightly point out as important, then I’m all for it. But regulators become all too prone to protecting the institutions that they are supposed to police. There’s been a revolving door between certain Wall Street firms and the highest-level positions in government, for example, and it’s becoming increasingly evident that this can work against the public interest.
Bringing ETFs into the frame, the tracker industry’s virtues of disclosure, low fees and fund liquidity have justifiably resulted in huge investor inflows over recent months. In theory, ETFs should continue to benefit from investors’ demand for openness.
But a reading of the gory details of the Madoff case makes me wonder how many members of the public must now be thinking “a curse on all of them” and swearing never to invest in a financial product ever again.