It was bound to happen.
Just when we thought we’d seen it all, along comes Bernie Madoff with the biggest rip-off in history.
With the economy in a shambles and the government wringing its hands over the next move, Madoff’s Ponzi scam was a welcome relief.
Now the debacle that is Wall Street has a real poster child, Bernie Madoff.
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As the press swoops in like vultures looking for their last meal, the real question is how something of this magnitude, $50 billion, could happen right under the noses of the regulators who were supposed to be watching the store.
Layers of Protection
But who was watching the regulators to make sure they were doing their job?
It’s not as if Madoff created some new and obscure financial instrument that no one had seen before. It was just a good old fashioned case of fraud.
If the economy hadn’t tanked, Madoff would still be at it.
His problem was that he ran out of schmos. In other words, redemption demands from Madoff’s panicked “investors” outpaced the amount of money he could lasso from new, unwitting marks.
Just the Symptom
Apparently, because Madoff was one of one of Wall Street's leading lights, he was able to fly under radar. He ran Nasdaq, for goodness sakes.
As egregious as his crimes might be, Madoff is a symptomatic outgrowth of the culture of non-regulation that has pervaded our financial industry for the past decade.
Despite the presence of a regulatory structure that could have and should have seen the red flags, this White House, and to a lesser extent the Clinton administration before it, took a laissez faire – hands-off – approach to Wall Street.
The assumption has been that these guys knew better than us, and that their continued financial success would be ours. The abiding belief in Washington was that the free market was the best regulator, and that the fellows at the top of the pyramid wouldn’t shoot themselves in the foot.
Did He Believe in Utopia?
Recently, in an anguishing mea culpa that left even longtime Wall Street watchers speechless, former Fed Chair Alan Greenspan – America’s most indefatigable defender of the free market wisdom – admitted that he had gotten it wrong.
For most of his professional life, Greenspan said that he believed that the best and brightest on Wall Street would always act in their own best interests, which in turn would benefit the economy as a whole. In testimony before a House subcommittee examining the root causes of the financial meltdown, Greenspan expressed his personal shock when he discovered the error of his core predicate.
Today, Treasury Secretary Hank Paulson is headed back up to Capitol Hill to seek congressional permission to spend the remaining $350 billion in TARP funds. He insists that the next group that needs bailing out is commercial real estate developers.
It makes you wonder what Hank’s been smoking.
No Answers. Isn’t That Worrisome?
During the past week, members of the financial press have been asking the previous beneficiaries of first $350 billion to explain how they have been using our money to reignite the economy. None of the banks have been forthcoming.
Their contention is that transparency was not a pre-condition to receiving federal bailout monies; and they’re right.
As if reading from the same media handbook, the banks have fallen back on the old standards like “we’re improving our balance sheets,” or “we’re moving forward to improve the lending environment.”
Here’s one thing we do know. Banks like Goldman Sachs and JP Morgan will be using our money to pay out billions in year end bonuses; and there’s nothing we can do to stop them.
Why? you ask. Because they don’t have to.
John Cohn is a senior partner in the Globe West Financial Group[ based in West Los Angeles. He may be contacted at www.globewestfinancial.com
