Friday, January 16, 2009
"[C]onsider the strange story of Harry Markopolos [HM]. [HM] is the former investment officer with Rampart Investment Management in Boston who, for nine years, tried to explain to the [SEC] that Bernard L. Madoff couldn't be anything other than a fraud. Mr. Madoff's investment performance, given his stated strategy,was not merely improbable but mathematically impossible. And so, [HM] reasoned, Bernard Madoff must be doing something other than what he said he was doing. ... He had no direct financial interest in exposing Mr. Madoff--he wasn't an unhappy investor or a disgruntled employee. ... To judge from his letter, [HM] anticipated mainly downsides for himself: declined to put his name on it for fear of what might happen to him and his family if anyone had found out he had written it. And yet the S.E.C.'s cursory investigation of Mr. Madoff pronounced him free of fraud. What's interesting about the Madoff scandal, in retrospect, is how little interest anyone inside the financial system had in exposing it. It wasn't just [HM] who smelled a rat. ... The fixable problem isn't the greed of the few but the misaligned interests of the many. ... Our financial catstrophe, like Bernard Madoff's pyramid scheme, required all sorts of important, pluffed-in people to sacrifice our collective long-term interests for short-term gain. ... Everyone now knows that Moody's and Standard & Poor's botched their analyses of bonds backed by home mortgages. But their most costly mistake--one that deserves a lot more attention than it has received--lies in their area of putative expertise: measuring corporate risk. ... The American International Group, Fannie Mae, Freddie Mac, General Electric and the municipal bond guarantors Ambac Financial and MBIA all had triple-A ratings. ... These oligopolies, which are actually sanctioned by the S.E.C., didn't merely do their jobs badly. ... In pursuit of their own short-term earnings, they did exactly the opposite of what they were meant to do: rather than expose financial risk they systematically disguised it. ... As far back as 2002, a hedge fund called Gotham Partners published a pursuasive report, widely circulated, entitled: 'Is MBIA Triple A?' (The answer was obviouly no.). ...The SEC now promises modest new measures to contain the damage that the rating agencies can do--measures that fail to address the central problem: that the raters are paid by the issuers. But this should come as no surprise, for the SEC itself is plagued by similarly wacky incentives. Indeed, one of the great social benefits of the Madoff scandal may be to finally reveal the SEC for what it has become. Created to protect investors from financial predators, the commission has somehow evolved into a mechanism for protecting financial predators wth political clout from investors. ... The instinct to avoid short-term political heat is part of the problem; anything the SEC does to roil the markets, or reduce the share price of any given company, also roils the careers of the people who run the SEC. ... Preserving confidence, even when that confidence is false, has been near the top of the SEC's agenda. ... If you work for the enforcement division of the SEC, you probably know in the back of your mind, and in the front too, that if you maintain good relations with Wall Street you might soon be paid huge sums of money to be employed by it. The [SEC's] most recent director of enforcement is the general counsel at JPMorgan Chase; the enforcement chief before him became general counsel at Deutsche Bank; and one of his predecessors became a managing director for Credit Suisse before moving on to Morgan Stanley. A casual observer could be forgiven for thinking that the whole point of landing the job as the SEC's director of enforcement is to position oneself for the better paying one on Wall Street. ... 'In [HM] conversations with [Meagan Cheung, SEC NY branch chief], I did not believe that she had the derivatives or mathematical backgrond to understand the violations.' ... The problem is systemic. The new director of risk assessment was no more likely to grasp the risk of Bernard Madoff than the old director of risk assessment because the new guy's thoughts and beliefs were guided by the same incentives: the need to curry favor with the politically influential and the desire to keep sweet the Wall Street elite", my emphasis, Michael Lewis and David Einhorn, 4 January 2009, at http://www.nytimes.com/.
Similarly, isn't the SDNY US attorney's job to get a NY BigLaw partnership? Let's ask Mary Jo White. My experience with the SEC and DOJ is: everyone I encountered at either agency was innumerate. IRS agents are much better at what they do. Further, I never encountered an IRS agent who I felt had a hidden agenda. Never have I questioned an IRS agent's integrity. SEC and DOJ employees are interested in who is the "relator" and if the "relator" can do something for or to them. The underlying facts are irrelevant. The SEC opened 671 cases, my 9 December 2008 post, mostly insignificant, not 67 cases, each involving over $1 billion. The rating agencies are paid by the issuers. Aren't CPA firms? What has the SEC done about CPA firm compensation in 32 years? Spawned the absurd PCAOB! A related post, 20 December 2007: