The Madoff Scandal: Who is Watching the Watchmen?

As if the economic meltdown, the dog-and-pony shows from Detroit and Wall Street, and the Federal Government’s ham-handed attempts to regain control over the nation’s finances were not bad enough: Former NASDAQ chairman and respected money manager Bernard L. Madoff, has for years been running what is possibly the largest Ponzi scheme ever--$50 billion. When I read about it, I was not surprised. Madoff’s crime was merely one of the various crimes and crises that have afflicted Wall Street over the last decade. It was not the first to come to light and I promise you, it will not be the last.

The SEC Surprise

What was a surprise was a story on Yahoo News that reported:

On Tuesday night, [Securities and Exchange Commission] SEC Chairman Christopher Cox ordered an internal investigation of what went wrong and offered a scathing critique of the conduct of his staff attorneys. He said they never bothered to seek a formal commission-approved investigation that would have forced Madoff to surrender vital information under subpoena. Instead, the staff relied on information voluntarily produced by Madoff and his firm.

Credible and specific allegations regarding Madoff's financial wrongdoing going back to at least 1999 were repeatedly brought to the attention of SEC staff, said Cox.

The story also reports that one of the SEC attorney’s that were tasked with looking into Madoff’s activities from 1999 to 2004 was recently married to Madoff’s daughter.

Just as other Federal agencies—not to mention Congress and the White House—failed to head-off the any of the financial crises facing us now (especially since they did so much to create the problem in the first place), the SEC failed to deal with one old Wall Street guy and his Ponzi scheme. That the SEC failed in so elementary a task and for so many years has little or nothing to do with incompetence on the part of those who should have been protecting investors from predators like Madoff. These SEC attorneys were not stupid and the case did not “fall through the cracks.” To imagine that the attorneys were stupid, or that the case did, indeed, slip through a crack, would presuppose a variety of other circumstances that would likewise have to be proven correct for them to be true. Since—regardless of what politicians would have you believe—the simple answer is usually the right one, it will most likely come out that these people simply looked the other way.

Who Trusts the Government?

So, as if we needed less confidence in the Federal Government, this really does beg the question of who can be trusted.

We don’t trust the Congress, we don’t trust the White House, we barely trust the courts (but they certainly rate higher than the other branches of government). Illinois government at all levels is an ocean of corruption, with Chicago being the drop-off at the edge of the continental shelf, but other states localities are catching up. It is as if the financial crisis has served to reveal the dark underside of American government and everything that has been festering there for years. Even Obama, who was swept to office on a message of change, has been touched by his association with members of the Illinois Democratic Machine. Only time will tell if that touch turns to a taint.

The Bottom Line

Like it or not, government is a teacher of values. For good or ill, what the government does, people do. Recently, we have learned that you can drive a company to ruin and that pain will be taken away by taxpayer money. We have also learned that being is debt can’t stop you from doing what you like. What has the SEC taught us? That if you have connections, you can run a criminal enterprise and defraud people of millions.

These sorts of lessons have got to stop.

Newt Gingrich said it best when he remarked that big government means big corruption. That is what we have, big government, and now we are dealing with the results. If we are going to have trust in our government again, if Obama really wants to stand apart as a clean, uncorrupted politician, there must be a general housecleaning in our government and truly strict anti-corruption measures need to be adopted.

If the new President does not act and set an agenda that really does clean up government in this country, restoring these agencies to their original mandate to protect the people, then the quote from Juvenal’s Satires (taken over by a popular comic book) may become very relevant indeed:

Quis custodiet ipsos custodes?

Who is watching the watchmen?