Conservatives Never Met A Criminal They Didn't Like

The Bush Administration sure had a knack for letting criminals get away with it, didn't they? They failed to stop 9/11, never caught bin Laden, and now we're learning about the total incompetence of the SEC in responding to Bernie Madoff's Ponzi scheme.

The U.S. Securities and Exchange Commission repeatedly missed chances to catch Bernard Madoff’s $65 billion fraud over 16 years by assigning inexperienced investigators and accepting “implausible” explanations after catching him in lies, the agency’s internal watchdog said.

At least six warnings from sources including a money manager, a “respected hedge-fund manager” and a firm that studied Madoff’s business failed to spur a “thorough and competent” probe, Inspector General H. David Kotz wrote in a summary of a report released today. Madoff, in an interview with Kotz, said even he “was astonished” when investigators failed to check trading records that would have exposed his scam.

“Despite numerous credible and detailed complaints, the SEC never properly examined or investigated Madoff’s trading and never took the necessary, but basic, steps to determine if Madoff was operating a Ponzi scheme,” Kotz wrote.

This is not only an incredible report, it plays into a larger truth about the conservative conception of regulation as a needless bother rather than a diligent effort to protect the consumer. One incredible moment, referenced above but covered in detail by Zachary Roth, shows that Madoff basically thought he was caught and the scheme had been discovered by federal regulators, only to find himself safe once again.

The agency's biggest screw up, says the summary, was the fact that examiners never verified Madoff's trading through an independent third party.

The details of that failure are more astonishing still. Madoff at one point told examiners that all his trades were cleared through his account at the Depository Trust Company (DTC), a clearing agency -- and he gave the examiners his DTC account number. At that point, Madoff told Kotz in an interview, "I thought it was the end game, over. Monday morning they'll call DTC and this will be over." Amazingly, the SEC never followed up with DTC. Madoff said he was "astonished."

The summary almost makes clear that the SEC's right hand didn't know what the left was doing. It notes with astonishment that at one point, two Madoff examinations were going on at the same time within the agency, without either being aware of the other. It was Madoff himself who informed one team of the other's existence [...]

The final, failed Madoff investigation of 2006 -- triggered by a detailed Markopolos complaint -- was perhaps the most egregious. According to the summary, most of the investigative work was done by a staff attorney "who recently graduated from law school and only joined the SEC nineteen months before she was given the Madoff investigation. She had never previously been the lead staff attorney on any investigation, and had been involved in very few investigations overall. The Madoff assignment was also her first real exposure to broker-dealer issues."

According to the summary, that inexperience helps explain why, when Madoff told the examiners that he got such unprecedentedly good return simply because he had a good "feel" for the market, they took that nonsensical explanation at face value.

Bush's SEC didn't bother to check up on Madoff's dealings, and they took his explanations as good enough for them, because their attitude toward regulation was "don't mess with a good thing." Indeed, the entire stock market during the Bush years was kind of operating under a false reality in its own right. Madoff was a crook, but at least an honest crook. And even he couldn't get caught.

This is not just the story of one agency's embarrassing failure. The failure lied in the theory of government, existing to make profits for cronies and lay off the connected and the powerful. The failure to catch Madoff and the failure of conservatism are essentially the same stories.

Madoff To Jail

He got the maximum possible sentence.

ernard Madoff has been sentenced to the maximum 150 years in prison for his multibillion-dollar fraud scheme.

U.S. District Judge Denny Chin handed down the sentence in New York today.

Defense attorneys had sought 12 years, while prosecutors wanted the maximum. The federal probation department had recommended 50 years.

Chin called the fraud "staggering" and noted that it spanned more than 20 years. He said "the breach of trust was massive."

White-collar crimes that harm the victims as much if not more than outright theft should be handled with the same stern sentencing. I don't see how anyone could call this punitive. Madoff stole billions of dollars.

The court also stripped Madoff and his wife of $170 billion dollars in wealth, although most of that money was figurative. Ruth Madoff will retain $2.5 million in cash, which isn't a bad nest egg, considering how ill-gotten it was.

Go To Jail

Apparently when Bernie Madoff was remanded to a corrections facility pending sentencing the courtroom burst into spontaneous applause. I wouldn't normally feel thrilled about someone being sent to a cell the size of a walk-in closet, but I'll make an exception. Apparently Madoff was running his Ponzi scheme since THE RECESSION OF THE EARLY 1990s. Books could be written about how the SEC missed this for close to 20 years, and I'm sure they will be. For today, I have to be happy that the $7 million dollar penthouse apartment in Manhattan will be empty.

And The Horse He Rode In On

What I want to know is, why did it take this long for a Bernie Madoff plea to come together, when the Feds had documentary evidence of his crimes and a confession? Especially since there's no plea agreement? The guy has been living under penthouse arrest in his multimillion-dollar apartment in Manhattan for months, able to send out jewelry (and probably cash) to friends and relatives. I guess the hurdle was whether he would agree to be prosecuted without a grand jury indictment, which would take longer, but shouldn't that have been put into motion months ago?

It seems to me that Madoff got an extended furlough from prison for no discernible reason. He will meet his fate soon enough, but something about that is irksome. I don't see low-level liquor store thieves getting to spend 3 months hanging out at their house before sentencing.

America's Next Top Ponzi Schemer

This Sir Allen Stanford is a piece of work. Self-congratulatory, thinks he's related to Leland Stanford when he's not, knighted by the island of Antigua, and now, under arrest:

The Securities and Exchange Commission yesterday charged R. Allen Stanford, a prominent Texas businessman, and three companies under his control with carrying out a "massive, ongoing fraud" involving the sale of $8 billion in certificates of deposit.

The case is one of the largest alleged financial frauds in U.S. history and comes just two months after the SEC accused New York financier Bernard L. Madoff of orchestrating a Ponzi scheme of up to $50 billion.

Stanford and two colleagues, operating through a web of firms based in Houston and the Caribbean, lied to customers about how their money was being invested and how the firms' investment portfolios had performed in the past, the SEC said in a civil complaint filed in federal court in Dallas.

We knew that Bernie Madoff was but the beginning of this. You find out about fraud in the markets when they go down, not when they go up.

Stanford's a weird guy (just go to TPM Muckraker and keep scrolling. But he also hedged his bets on the fraud by cozying up to politicians of both parties and lavishing them with contributions. I don't know what's sicker - that a criminal thinks he can get away with his crimes through access to power or that it's so likely to work.

Penthouse Arrest

I actually watched a good bit of the replay of yesterday's incredible House hearings with Madoff scandal whistleblower Harry Markopolos and the SEC (yes, it was a rockin' Wednesday night), and they really are amazing. The extent to which government protects the rich and powerful was really on full display. Here are two clips that should be widely distributed.

We now know that Bernie Madoff was running a Ponzi scheme that defrauded investors out of tens of billions of dollars. We know that the SEC had everything it needed to stop the fraud years in advance and did nothing. And yet today, Bernie Madoff is still living in a fabulous New York penthouse instead of a jail cell, with a security detail that he pays for. As Markopolos says in this clip, "He's under penthouse arrest [...] He is leading a life of luxury. He does have serious complaints; he's not allowed to go out for his nosh."



More amazing altogether is the behavior of the SEC officials, who actually tried to assert executive privilege in refusing to discuss their failure in the Madoff case or of any resposible oversight of the financial industry at all.



Go Gary Ackerman. I think we've become so inured to random government officials using "executive privilege" as a get out of jail free card that we don't understand how extraordinary this is. We pay the salaries of these people. Every one of them should be fired.

Meanwhile, Emperor Paulson stole your money in the bailout.

The U.S. Treasury may have significantly overpaid for its investments in financial institutions, a government watchdog said Thursday, as criticism of the $700 billion financial rescue continues to build.

"Treasury paid substantially more for the assets it purchased under the [ Troubled Asset Relief Program] than their then-current market value," Harvard Law School professor Elizabeth Warren told the U.S. Senate Banking Committee.

Warren, who chairs a five-person congressional oversight panel overseeing the Wall Street rescue plan, said a report being released Friday by the group includes an analysis of 10 TARP transactions. Extrapolating that analysis for all of the purchases made by the Treasury in 2008 suggests Treasury paid $254 billion for assets worth approximately $176 billion, a shortfall of $78 billion.

"They did not price for risk, that's what markets do," Warren said, suggesting the Treasury's lack of consistency had made the government funds a better deal for some institutions.

And they're getting ready, under "new leadership" at Treasury in name only, to do it again. More on that in a different post.

It's a wonder that pitchfork and torch sales aren't through the roof.

They Wouldn't Be Able To Find First Base."

There is a rather remarkable hearing playing out right now on Capitol Hill. Harry Markopolos, the whistleblower in the Bernie Madoff scandal, is testifying to a House Committee, and he's basically calling out the SEC for its total incompetence - over a period of several years - in failing to identify the Madoff Ponzi scheme and put a stop to it. Markopolos, who went to the SEC in May 2000, when the Madoff scheme was only about $5 billion, is getting off line after line ripping the SEC a new one. TPM Muckraker has all the details. Some highlights:

• "If you flew the entire SEC staff to Boston, and sat them in Fenway Park, they wouldn't be able to find first base."

• Markopolos discusses Madoff's mob ties: "When you're that big and you're that secrective, you're going to attract a lot of organized crime money, and which we now know came from the Russian mob and the Latin American drug cartel, and when you are zeroing out mobsters, you have a lot to fear. And he could not afford to get caught, because once he was caught. And if he would've known my name and knew he had a team tracking him, I didn't think I was long for this world."

• Markopolos offered to go undercover wearing a disguise to catch Madoff.

• Perhaps the most telling statement: "They (the SEC) were a captive regulator. Mr. Madoff was too big," he just told Congress. "They looked at Madoff and said: 'he's a big firm, we dont attack big firms.'"

That really says it all. The real difference between Madoff's scheme and the rest of Wall Street was that Madoff was more explicitly criminal. But that's it. And the SEC's inability to go after anything substantive on Wall Street turned the place into a deregulated casino.

There is a populist uprising going on in the country right now, as more and more stories like this come out. Which is why Obama's limit on executive pay this morning was significant and important. But the stimulus is being caught in the crossfire, as anything from a position of power is becoming infected with all the talk of theft of taxpayer dollars. The Republicans are being very sanguine, and if they do derail the stimulus or render it ineffective, the next few years will be really terrible and people will just get angrier.

Not A Bug But A Feature

This Bernard Madoff Ponzi scheme is really kind of incredible, if only because we haven't seen such a con on a high level like this in so many years. In fact, probably not since Charles Ponzi, the original scam artist. Maybe in the future they will be called Madoff schemes. As Anonymous Liberal notes, this is a tragedy for the federal government as well, because there will be billions lost in expected capital gains tax revenue as a result of the crime. All these investor losses will be deductible, as well as rebates of past capital gains that they've paid, and the cost to the Feds could rival the amounts talked about in the auto industry rescue.

Now, I think there's a reason this will wind up to be such a massive loss for those involved, and that's because this is not separate from the current financial crisis, but part and parcel of it. Because in this era of trusting the market, in believing in magical men who make money appear in everyone's numbered back account, the SEC didn't come close to investigating the scheme.

Bloomberg reported yesterday that since Madoff registered the investment arm with the Securities and Exchange Commission in 2006, that agency hadn't got around to looking at the business's books. The SEC usually tries to go through the books of newly registered firms in their first year.

"If the SEC didn't come in and inspect (the Madoff hedge fund), then they have a hell of a lot to answer for," one expert told the Associated Press.

But the problem doesn't appear to have started in 2006.

As early as 1999, an executive in the securities industry had urged the SEC to probe Madoff, on the basis of the remarkably steady returns that his investment business seemed to provide. The executive, Harry Markopolos, argued that Madoff must be generating those returns by "front-running" -- that is, using the brokerage arm of his company to illegally provide information to the investment arm.

The SEC said in a statement that it had conducted two investigations into the brokerage arm -- not the investment arm -- of Madoff's company, in 2005 and 2007. The first, begun in response to allegations of front-running, found three violations of rules requiring brokers to obtain the best possible price for customer orders. That investigation appears to have led to Madoff agreeing to register with the SEC the following year, giving the agency access to far more information than it previously had. But the 2007 probe, conducted after Madoff registered, found no evidence of anything improper.

Investment firms were as off-limits under Clinton as they were under Bush. In fact, as long as everyone made money, regulators weren't much exercised to investigate. This is the same root cause that led us to the crisis. Nobody checked the derivatives, nobody checked the CDOs and the credit default swaps, and nobody checked out Bernie Madoff. In good times, these bullets could be dodged. Not so now.

This is why you can't base an economy on pushing paper and inventing sums of money to trade, dependent almost entirely on greed.