bernie madoff has been on my mind lately, partly because of the financial problems of one of his investors, the wilfongs, owners of the new york mets baseball team.
how could financial regulators miss this big of a financial scam?
financial regulators need to be more trained. they are not from the financial industry, generally.
financial veterans who know the business would have sniffed out madoff 15 years ago.
most of today's financial regulation is check off regulation where they go down the check list. big firms have the questions and know how to play the examiners.
madoff had his own clearing firm where he could put out fake statements. if you don't look, you can't find.
when the accounting firms come in, they park for weeks and look at all kinds of irrelevancies. young examiners feel overmatched when dealing with powerful financial entities. they go in with modules and checklists; the big firms know what these examiners are looking for.
the investigations are NOT critical analysis or healthy skepticism.
when an investigator gives someone up the chain grief, your home office gets a phone call and the lead examiner is asked to move the personnel around.
a lot of these things started after killing the glass-steagall lawof 1932 in 1998. glass-steagall era law that separated commercial banking from investment banking. commercial banks couldn't be traders. almost the whole congress, with a dissenter or two noted the repeal.
during the 1990s, the big investment houses went from partnerships to corporations. in the partnerships, the owners were personally liable for losses.
once that left, a lot of things changed. their willingness to take on risk rose logarithmically.
goldman's partners became their employees. they received $20 billion in bonusses last year, or the year before. the firm paid $500 million to their investors, who absorbed all of the goldman risk. thats 1/40th to the stockholders, while goldman stock went from $160 to $80.
were goldman still a partnership, the workers may have had to return their bonusses.
sleep well folks; the flying fickle finger of finance is guarding our money.
the deer's cry