Economy

Fraudster Bernie Madoff could spark the biggest regulatory reform since the Depression: Bartholomeusz

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Bernie Madoff was the 70-year-old architect of one of the world’s biggest and longest-running Ponzi schemes.

You would think that with more than $US700 billion of losses within the US banking system and $30 trillion wiped off its markets, it wouldn’t be difficult to find a list of people to blame, or excuses for reviewing the regulatory structures that stood back and allowed the global financial crisis to develop.

For a while it looked like the popular nominees as crisis culprits were the CEOs of the Wall Street investment banks and banks who raked in hundreds of millions of dollars each in salaries and bonuses while presiding over institutions that took massive and reckless risks with other people’s savings. Or maybe the hapless Henry Paulson, with his erratic, bumbling responses to the developing disasters.

But they are all very bright, largely respectable guys in very expensive suits who were living what for the past decade and a half has been the American dream of making a fortune on Wall Street. Not your normal arch villains.

Then along came Bernie.

Bernie Madoff was the 70-year-old architect of one of the world’s biggest and longest-running Ponzi schemes. Charities, Hollywood producers and an A-list of the rich and powerful were among the victims who have lost an estimated $US50 billion. Now there’s a villain!

And now there is a simple focus for a debate about regulatory failure and reform that, until now, had been confined to polite discussion about accounting and prudential standards.

On Monday night the US House of Representatives committee on financial services had a hearing on the topic: “The Madoff Ponzi scheme and the need for regulatory reform.”

The chairman of the sub-committee on capital markets, insurance and government-sponsored enterprises, and a senior member of the financial services committee, Paul Kanjorski, opened proceedings by saying the Madoff fraud raised troubling questions about the effectiveness of the US regulatory system.

He closed it by referring to his hope that the US would undertake the most substantial rewriting of the laws governing US financial markets since the Great Depression.

Other members of the committee spoke of the need to completely overhaul the Securities and Exchange Commission, which is, according to the testimony of its Inspector-General David Kotz, is already experiencing the start of what will be a comprehensive review of its oversight (or lack of it) of Madoff during his decades of prominence on Wall Street.

“I firmly believe that the circumstances surrounding the Bernard Madoff matter may very well dictate a more expansive analysis of commission operations,” Kotz said.

The SEC is on a hiding to nothing, given the length of time Madoff was operating the scheme under its nose, the warning signs that went unheeded, the scale of the fraud and the political clout of the victims. It will be remade, or at least severely shaken up.

A big fraud with innocent victims provides a far simpler rationale for restructuring regulation and the regulatory agencies than the mind-numbingly complex detail of how billions of dollars were lost by institutions trading and investing in exotic synthetic securities markets.

If the US economy is eventually burdened with reform of its regulatory structures that makes Sarbanes-Oxley look like light-handed regulation, the unmasking of Bernie Madoff and the timing of the collapse of his scheme may come to be seen as the decisive development that made comprehensive change inevitable.

This article first appeared on Business Spectator

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