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Robert Scheer: The System Is Evil, Not Madoff
How convenient for the judge and the media to paint Bernard Madoff as Mr. Evil, a uniquely venal blight on an otherwise responsible financial industry in which money is handled honestly and with transparency.
Madoff, sentenced Monday to 150 years in prison for bilking investors of billions of dollars, should be Exhibit A in why the dark world of totally unregulated private money managers and hedge funds should be opened to the light of systematic government supervision. Instead, he is being treated as an aberrant menace, with the danger removed once the devil incarnate, as his victims describe him, is locked up and the key thrown away.
For goodness’ sake, this was not some sort of weird outsider who flipped out, but rather a key developer of the modern system of electronic trading and a founder and chairman of Nasdaq. Madoff often was called upon to help write the rules on financial regulation and therefore became quite expert at subverting them.
As Securities and Exchange Commission Inspector General H. David Kotz testified before Congress, the inspector general’s office is looking into “(t)he extent to which the reputation and status of Bernard Madoff, and the fact that he served on SEC advisory committees, participated on securities industry boards and panels, and had social and professional relationships with SEC officials may have affected commission decisions regarding investigations, examinations and inspections of his firm.”
Those relationships were close (the personal ties included the marriage of one of Madoff’s nieces to an SEC official) and stretched out over the decades during which Madoff was a major player on Wall Street. At the very time back in 1999 when the SEC was being formally warned that a Madoff scam was under way, Madoff was consulting with then-SEC Chairman Arthur Levitt Jr. on regulatory matters. When Levitt retired a year later, Madoff was quoted in the trades as paying tribute to him: “He brought all of us to the negotiating table time and time again, on a whole host of issues, and to a greater extent than any other SEC chairman.”
Levitt wrote in a January opinion article in The Wall Street Journal, “I knew Bernie Madoff and had no reason to believe he was not a legitimate market maker, nor did anyone at that time know he was acting as an adviser to outside investors.”
Nor was he required to tell anyone. And even if he had been, it’s unlikely that part of Madoff’s business would have been looked into. In the deregulatory mania of the preceding two decades, it had been assumed that such managers did not need regulating, and funding for the SEC kept getting cut. As Levitt noted in the article, it would only get worse:
“Since 2002, the number of investment advisers — such as Madoff Securities — has increased 50 percent. Yet enforcement resources have been flat or even reduced. ... As a result, only about 10 percent of investment advisers can expect to be examined every three years, and the goal of inspecting every adviser once every five years — laughably light oversight in its own right — has been abandoned.”
Money for proper oversight was not allocated because the prevailing ideology regarding private investment firms — embraced by President Bill Clinton ever as fervently as President George W. Bush would later — was the gospel of radical financial deregulation, a practice that has landed us in the larger banking mess.
As with the trading in unregulated derivatives, all of the operations of private investor groups, such as hedge funds, were thought not to require government supervision because these were conducted by professional financiers dealing with sophisticated investors who knew what they were doing. If the investment went south, it was on their dime — and there would be no innocent victims.
As we saw with the collapse of AIG and now Madoff, that notion is false because private investment contracts can involve the resources of charitable organizations and pension funds, and can end up costing the homes, savings and jobs of ordinary citizens who have no idea which end of this arcane stuff is up.
When Levitt worked for Clinton as head of the SEC, he teamed up with Alan Greenspan, Robert Rubin and Lawrence Summers to destroy what remained of financial service industry regulation imposed by President Franklin Roosevelt in response to the Great Depression. In recent years, Levitt alone among that gang of four has criticized that action and accepted some personal responsibility for the subsequent financial meltdown.
He was right again when he stated in his January article: “The Madoff scandal should be a wake-up call for more consistent, uniform and rigorous regulation of investment advising ... the final prod for a fundamental reform of the financial regulatory structure.”
He gets it. Let’s hope that Congress does, too, and is not fooled by the argument of Wall Street lobbyists that Madoff was a lone rotten apple now safely discarded.
— TruthDig.com editor in chief Robert Scheer‘s new book is The Pornography of Power: How Defense Hawks Hijacked 9/11 and Weakened America. Click here for more information. He can be reached at .(JavaScript must be enabled to view this email address).
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» on 07.03.09 @ 09:59 PM
I believe that the title to your piece is misleading.
I hope that you are not saying that Mr. Madoff didn’t do something wrong. Yes, there was something wrong with the system but you state that Mr. Madoff isn’t an aberrant menace.
No one MADE him write the rules and then subvert them. No one MADE him live a lavish lifestyle off other people’s money. He had no integrity. He, for over 20 years, KNEW what he was doing was wrong. Just because there wasn’t regulations to stop him from doing these things is NOT a reason to say what he did wasn’t wrong.
Mr. Madoff had not scruples, lied to many, many people and lived off his lies. He deserves to be in jail for 150 years. Let him rot in jail. He knew what he did was wrong but lived off the crime for two decades.
» on 07.04.09 @ 06:51 AM
“The System Is Evil, Not Madoff”
How foolish to trade one false dichotomy—Madoff is evil, everyone else is ok—for another. “the system” is made up of people who share Bernie Madoff’s outlook, an outlook grounded in the myths of capitalism and “free markets”, based on a phony meritocracy that is a front for elitism and a sense of entitlement. Of course we need regulations to restrict these sociopaths who infest our institutions, but we need more than that—we need a change in our cultural outlook and a politically informed and aware populace, capable of critical thinking, people who make decisions aligned with, rather than opposed to, their self interest—people who, for instance, would know better than to vote for someone like Tony Strickland or John McCain and Sarah Palin.
» on 07.04.09 @ 07:42 AM
Unfortunately, today there is too much emphasis placed on gathering a pile of money. It does not seem to matter how you obtained the big pile is just that you have it. The road that someone travels is very important. Somehow we need to move our culture a different direction in terms of how we measure success. I love capitalism but not at the expense of screwing others and cheating. There are estimates out there that over $500 billion a year is the shortfall of uncollected federal taxes due to cheating. From doing johny’s homework, to writing his college entrance essay to hiring illegals and not paying taxes it is a widespread story. Just look at the over $7 billion of cash our military somehow lost in Iraq or the overshore tax evasion by Halliburton. What kind of role model is this for our children?
» on 07.04.09 @ 10:50 AM
Thank you so much for your reporting which correctly points to the culprits, not any lone individual, but the community that created the kind of deregulation that has provided us with the financial system’s collapse. The legacy of greed sponsored by Clinton and Bush, men who needed to be recognized as successful regardless of cost, is clearly noted. The question becomes how to correct this. Our public servants in Washington DC depend upon the corporate lucher for their re-election. As with the financial crisis, so goes the country’s quality of food supply, etc. - it all comes together in the wealthy hands of those who support and propel out Congress’ re-election plans and then define the content of work accomplished in our capitol through their lobbyists.
» on 07.04.09 @ 11:01 AM
When oh when will the pointy headed liberals ever learn psychology 101. So steeped in dogma is the left that they still don’t know the difference between bad behavior and a bad system. To the liberal the individual is never responsible for their own behavior. No they are only victims. Victims of a system which allows them to be greedy. What un-mitigated rubbish! Madoff was greedy, period end of story. Million, no billions of human beings deal with situations every day where they have to choose between right and wrong and they choose to do right. Madoff did not. He is guilty of something lacking in a liberalized society that removes the individual from responsibility, integrity. Integrity is that quality that drives a person to be the same whether in public or private or all alone. Madoff chose to be one thing in public while being a lecherous, lying, cheating, thief in private. This lack of integrity and a healthy dose of me first greed is what is broken. The liberals want everyone to believe that if you replace our system with a fully open regulated government run system that the brokenness of the individual will some how disappear. How wrong you are. The type of arrogant greed Madoff exhibited is just as wide spread in socialist and communist economies, fascist dictatorships or fuzzy feel good liberal societies. It exists in all cultures and religions. Greed is a human behavior, not an economic system and until you nut jobs figure that out you will always be the victim of your own ideology.
BTW – you cannot legislate integrity, it is a belief that is taught by actions not laws.
» on 07.04.09 @ 11:07 AM
Mr Scheer is asking for more regulation! Incredible!! It wasn’t the unregulated financial businesses that imploded it was the already highly regulated sector that has caused so much trouble. In fact there was even a whistle blower that recognized Madoff’s earnings for what they were and wrote several letters to the SEC about it. With more money and a bigger staff they now promise that they will do a better job next time. By the way, has anyone in those regulatory agencies lost their jobs?
Mr Scheer would also have Congress regulate more. These are the same clowns (i.e. Barney Frank and Chris Dodd) that now want Fannie and Freddy to ease up on Condo loan requirements. These two were the same knuckle heads that that insisted that Fannie and Freddie were just fine. We all know how “just fine” turned out.
Sorry Mr. Scheer, I have zero confidence in more regulation.
» on 07.04.09 @ 05:23 PM
Great article, although I don’t totally agree with the reasons for Madoff as described by Robert Scheer. The system does need to be fixed, but Madoff is evil. One who steals knowingly cannot be anything other than evil.
The second widely held misconception, supported by Mr. Scheer, is that somehow deregulation allowed Madoff to happen. The Investment Advisors Act of 1940 became law over 60 years ago. Under this law, that still controls all Registered Investment Advisors, hedge fund advisors are exempt from registration. In 2005, under the direction of then SEC Chairman Christopher Cox, the SEC reinterpreted the Act and required all hedge funds to register with the SEC by February of 2006. Madoff registered his firm that month because, as a hedge fund, it had been exempt until then.
Phillip Goldstein, of Bulldog Invesments in Connecticut, is a self-proclaimed hedge fund activist. He sued the SEC, lost but won on appeal when the US District Court of Appeals in DC overturned the original decision and determined that the SEC had overstepped its’ authority. As a result, Bernie Madoff’s hedge fund became exempt just four months after registering. This is the reason that the SEC could not audit his operation. Madoff was not a Registered Investment Advisor, it was a hedge fund and exempt.
Not a political issue, as I doubt that the judges on the US District Court of Appeals in DC were Republican appointees. Other than those important points, Mr. Scheer’s main point is that hedge funds, private equity funds, and other secretive investment operations should be regulated, audited, and overseen by a governmental authority are all very valid. Rep. Mike Capuano of Massachussetts has proposed a bill to require the registration of these secretive firms. We should all let our congresspeople know that it is important that this legislation pass. Confidence in our financial system will not return until the rules are established, enforced, and applicable to all. Until that happens, is isn’t a swine flu epidemic that we should worry about. It’s an epidemic of Investiphobia.
» on 07.04.09 @ 08:59 PM
Notwithstanding the fact, the burning reality, that our financial regulatory mechanisms are all loaded in favor of the one who takes money from others, your premise is hogwash. Madoff destroyed the lives of hundreds and damaged the lives of hundreds more. That’s all one needs, or society needs, to categorize this blatant and totally immoral thief as evil. He is evil incarnate. And all the pseudo intellectual blabbing you do about how it’s “the system” is complete and disingenuous twaddle.
» on 07.05.09 @ 03:53 PM
How about that BOTH were very seriously flawed?
Madoff could not have flourished without sustained look-the-other-way deregulation from the Clinton and Bush administrations. True.
But there are some brokers and investment counsellors who lived through those eras and maintained their balance and integrity even though they knew the odds were long that Larry Summers or Chris Cox (and his eunuch SEC) would ever come after them.
Clinton-Bush de-reg and campaign dollar corruption were the catalysts that let Enron and Madoff happen. But as WC Fields used to say, “You can’t cheat an honest man.”
Ken Lay and Bernie chose to step over the line and push the scummier edges of the
free marketplace. But Chris Cox didn’t make Madoff cheat any more than Bud Selig
made Barry Bonds or Manny Ramirez. They enabled them, but didn’t cause them, to
do it.
» on 07.12.09 @ 12:21 AM
The love of money and greed in the jewish society caused this. They say if its to good to be true?? They thought they where smarter than the rest of us….......
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