Wednesday, February 11, 2009

Linda Thomsen, Fool or Knave?

"Lawmakers expressed frustration at regulators' explanations for failing to catch Bernard L. Madoff's alleged multibillion-dollar fraud but drew little blood because officials declined to discuss details of the case. Linda Thomsen, chief of the [SEC's] enforcement division, suggested in Tuesday's hearing at the Senate Banking Committee that federal prosecutors may pursue charges against Mr. Madoff over what they believe were his past lies to SEC officials during past examinations. ... 'We want to be sure to preserve the integrity of any criminal investigation,' she told the committee. ... An SEC spokesman declined to comment beyond Ms. Thomsen's testimony. The US. attorney's office decline to comment. ... SEC officials said they were understaffed to deal with the fast-growing investment-advisory business and tried to conduct examinations are frequently as they could", my emphasis, Kara Scannell at the WSJ, 28 January 2009.

"Government and industry regulators were put sharply on the defensive Tuesday at a Senate hearing over their failure to uncover the multibillion-dollar fraud scheme that Bernard Madoff allegedly carried out under their noses. ... SEC Enforcement Director Linda Thomsen said the SEC is committed to finding ways to bolster fraud detection after its breakdown in the Madoff case", Marcy Gordon at the Houston Chronicle, 28 January 2009.

If you read carefully, Thomsen said: the SEC didn't corroborate anything Madoff said. Now should the US attorney's office investigate Madoff, or the SEC as a securities fraud co-conspirator? Should the US attorney's office dust off the "ostrich instruction" and inform some SEC personnel, they will be indicted and were at best "wilfully blind" to the obvious. The SEC chose not to corroborate Madoff's statements. Why? The SEC is always understaffed. For what?

How will the SEC "bolster fraud detection"? Will it corroborate statements made by future Madoffs?


Printfaster said...

You keep looking for government socialism to handle investment fraud detection.

Investment fraud detection needs to be privatized. It is clear that the government is incompetant to the task, and private industry needs to take over.

Let's just sweep aside the curtain from the Wizard of Oz and expose him for what he is. Nothing. Investors need to step up to the plate and do their own.

Government needs only to be involved when the investor is incompetent, ie widows and orphans.
Even then, private investment services like a Consumer Reports can certify investments to be safe, at their own peril, eg insurance.

Investment ratings by the way are silly. Investment insurance on principle puts the risk where it belongs, presuming that the capital exists to issue the insurance. I see this sort of thing only for small accounts, and yes for this the funds can be public, such as SIPC. There does need to be a premium and risk management procedures need to be in place.

Time to bring the actuaries and risk analysts to step forward.

Anonymous said...


You want a whole industry to melt away?

Most investment management for "little folks" is marketing... look at the volume of mutual fund adverts around New Years...

I don't know exactly... the old model is a rotten pile of nonsense and there's no new way yet...

Oh and Ms. Thomsen? I vote both fool and knave...

Printfaster said...

You are getting it. The investment marketing community is build on castles in the air. Blue sky.

People need to be able separate blue sky from investment. Today they are one.

My favorite example of the idiotic marketing to the public was a Sunday insert in the LA times, similar to what a discount store would do. This was to market a penny stock. Horrible. Getting fools to part with their money. Las Vegas casinos come to mind. Fine for discretionary cash. Not fine for investment funds.

I know the CDSs were supposed to be a form of investment insurance, except they were never scrutinized by risk managers, yet they were sold by AIG. Again the aim is to try to apply insurance thinking to them.

Though I admit, the insurance industry has failed to apply decent risk processes, given their failure to deliver in hurricanes and earthquakes. For investments those risks can be quantified, and can even be backstopped by the government given certain catastrophes. For example, 911 was an investment catastrophe. Government did backstop many of the losses. These should be predefined, not pulled out of the air during crisis. Earthquake and flood insurance are the models here. The problem would be defining what is blue sky and what is investment, and keeping the government from backstopping blue sky. Like you don't want the government selling flood insurance to a home flooded out every three years.

Anonymous said...

OK Printfaster... I hear all you say... and at the core is division of public/private risk and regulated and unregulated returns.

I used to think we had a pure model of capitalism... but now I know we have a hybrid model... time to move our investment industry to match our political economy.

BTW Printfaster... I'm surprised you have a spare second... with Zim Ben running the presses as hot as he has I thought you would be swamped...

Printfaster said...

Yes Anon
I have used the handle for a while.

What you could see coming is that the federal government could never pay back the debt issued with the currency available. Printing is the only answer. Default, too hard to contemplate. Involves too many complicated choices, usually they include the guillotine for government officials.

What I had not contemplated is the degree the government and private sector share the debt problem. Fannie and Freddie are the simple examples. Others include organizations that offer debt to manage cash flows to the government, and those that offer credit where the government is sucking the currency dry to pay taxes.

So yes, since credit cannot distinguish private from public, there needs to be a hybrid model of banking and credit between public and private that recognizes that catastrophes are political issues, and even military ones. The private sector needs to be viable to provide a healthy, human environment, where choice abounds, and where choices are constantly created and destroyed.

Where government steps into to destroy choice, it wanders into oppression and stupidity. Favorite examples are the old EPA CAFE rules that eliminated the station wagon by foisting mileage limits on car manufacture. That choice re-emerged as the monster SUV, totally destroying the goal set out of limiting gas consumption. Another are the CFL light bulbs, which they are telling everyone to dispose of properly. Guess how many CFLs will end up in your local landfill, dumping their mercury in it?

So yes, a hybrid public/private, neither fascism where they are one, nor socialism where private is gone. Think roads and bridges, where they are government owned, and the cars and trucks are private.

OSR said...

The HR Financial Services w/ Markopolos was almost farcical. I'd have to say that Linda Thomsen was being a team player. Unfortunately, we're not on her former team.