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Dec 20, 2008 5:36 pm


The SEC as Watchdog



The SEC’s failure to detect Bernard Madoff’s giant Ponzi fraud (his sons figured it out and turned him in) raises anew the question of how we should view regulation. Does this colossal failure invalidate all securities regulation (and perhaps all regulation)?

This failure was indeed a whopper. The SEC had received warnings for years about Madoff, as the Wall Street Journal detailed on December 18. But Madoff was also a respected figure in Wall Street, from whom Arthur Levitt Jr., chairman of the SEC during the Clinton years, sought advice.

One could argue that in the case of criminal acts such as fraud, the SEC is in way over its head. After all, its original goal (going back to 1933) was simply to require “full disclosure” of securities-related information.

Trouble is, over the years its powers and interests have stretched way beyond the initial task, something that often happens with regulation. And, as George Stigler famously pointed out, regulators almost always get cozy with the people they are supposed to regulate.

Yet the public is lulled into confidence that the government regulator is watching out for them. In this case, an extraordinary array of sophisticated people, firms, and charitable organizations were gulled.

Like the firms that are “too big to [let] fail,” Madoff Investment Securities was too big to even have doubts about. For years, the SEC went along blithely, throwing its weight around over minor matters, but blind to the securities fraud of the century.


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