The tough questions after Madoff

June 30, 2009

Matthew Goldstein— Matthew Goldstein is a Reuters columnist. The views expressed are his own —

Even as Ponzi king Bernard Madoff goes away to prison for the rest of his life and then some, there are still so many unanswered questions — both big and fundamental.

Were Madoff’s sons involved? What did his wife Ruth know? Were the operators of the giant feeder funds that sucked in tens of billions of dollars in investor money in on the charade?

Those questions, though important, ultimately pale when compared with the bigger ones that remain about the root causes of the worst financial crisis since the Great Depression.

Indeed, for all the misery Madoff and his Ponzi brethren have caused, none of those scam artists were the cause of the crisis that brought the financial system to the brink. If anything, it was the financial crisis that helped flush out Madoff and his scurrilous ilk, as many investors rushed for the exits at the same time.

So that’s why Congress needs to act quickly to get up and running a bipartisan commission to study the underlying causes of the financial crisis. House Speaker Nancy Pelosi likens this new 10-member panel to the Pecora Commission, the famous Depression-era investigative committee that led to passage of Glass-Steagall — the 1933 law that drove a wall between commercial and investment banking.

The 1999 repeal of Glass-Steagall contributed mightily to the current crisis by opening the door to an anything-goes mentality on Wall Street and allowing far too many banks to become too big to fail.

This new commission, armed with the power to subpoena witnesses and documents, is meant to investigate all aspects of the crisis, including regulatory lapses, Wall Street excesses and deceptive behavior by lenders and securities traders.

A first order of business for the commission should be looking at the Federal Reserve’s dereliction of duty for missing the warning signs of trouble. Congress can’t consider acting on the Obama administration’s proposal to upgrade the Fed’s status to supreme financial regulator before there’s a full accounting of its missteps.

But there are already worrying signs that this commission will lack the political nerve to tackle the tough issues, let alone ask the right questions.

Reuters reported last week that some of the people being considered for the commission include many former Congressmen, governors and familiar talking heads from Washington think tanks. Let’s hope that will not be the case because the financial system can’t truly be fixed until there’s a candid assessment of who let things get so out of control.

Sure, put some wise political statesmen on the commission. But also allow room for some longtime Wall Street critics, derivatives traders and hedge fund managers — the kind of people who know the system from the inside out.

Maybe, even include one or two people who were sharp enough to stay away from Bernie Madoff.


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Read Glass Steagall and John Kenneth Galbraith. Goldman Sachs was leveraging stocks to ridiculous extremes and selling it overrated. The manipulated commodities as well. They are largely blamed for the market crash and subsequent bank failures leading to the Great Depression.

I find it interesting no one wants to say we are in another depression. Lehman, Stearns ,Goldman, Morgan Stanley are all commercial banks. As investment banks they survived the depression. They all got out this time around.

In 1933 almost 280,000 properties were foreclosed, the worst year of the Great Depression. Currently the American economy is losing that many properties to foreclosure every month. Our population has not increased 12 fold.

Posted by Anubis | Report as abusive

Correction: Lehman is no longer in business!

Posted by Anubis | Report as abusive

Good article with good ideas!

Posted by Mark | Report as abusive

A ‘bipartisan’ commission of politicians is impossible. They all have an agenda of some kind. A committee of Americans from various disciplines
would be much more independent and bipartisan.

Of course that will never happen. Most politicians crave a stage to pontificate in pretense of duty.
Meanwhile the legal groundwork they laid to make this economic debacle imminent, delivered via derivitivs, goes largely ignored or misunderstood.

The band plays on while the Captain yields the wheel to the pirates and joins the party…

Posted by Folklight | Report as abusive

Wow, I sure hope they put people on this commission that actually know something about the industry. The last thing we need is yet another politician that has never even run a lemonade stand.

Posted by James | Report as abusive

I don’t think ANY discussion of the causes of our current economic crisis (the new depression if you will) is complete without looking at the 1977 Community Reinvestment Act.

Although the Fed adamantly denies any causation between incentives for predatory lending practices inherent in the CRA (so loved by Fannie Mae and Freddie Mac) and the predatory lending practices that led to the sub-prime frenzy, the subsequent securitizing of those loans, and the credit default swaps (so loved by AIG), I for one am not convinced.

Would love to learn the author’s thoughts on the CRA the debate on it’s role in our economy.

Posted by Nazz | Report as abusive

Bernie offered a plan old ponzi scheme. By the end of all this we will hear about the DEBT PONZI SCHEME. quite simply bankers leverage companies with debt to pay share holders inflated returns. These increasing yeilds increased underlying assest prices (artificially) and more debt was taken on to once again increase returns to shareholders. Bernie gets 150 years and the bankers get bailed out. Sounds like a scapegoat to me. Regulators could stop this from happening again by stopping companies paying returns to shareholders with anything but real profits! Not like the ones the banks have been reporting lately

Posted by gd | Report as abusive

The greatest danger inherent in this panel is not that it isn’t ‘bipartisan’ enough, or even that the people who make it up have some sort of personal or idealogical axe to grind. The greatest concern should be time.

What made the Glass-Steagall proceedings effective was that the depression in question lasted nearly 10 years. The focus was constant and the problem ever-present. Witht he short attention span of the government process these days, the committee may run out of political will to make significant change. In short, those irresponsible parties that got us into this mess could be just running out the clock on comprehensive reform for transparency and legitimate rating systems for finacial instruments.

Posted by Rob | Report as abusive

I read that in this case there was about $170 billion in principal investments while Bernie’s fraud charge involves $13 billion. I’m under the impression that many of the existing account holders expecting $65 billion in value have nothing. If so, the disbursements have offset most of the original inflows. $13 billion is a big deal representing about 8 percent of the principal investments.

I’m not apologizing for Bernie Madoff. But consider how much money people lost recently in other investments. Think about the decline in market values after the dot-com disaster. How many people in the investment industry have bought and sold equities at fair value? Nobody knows because our perception of value is volatile and subjective. Sales people will sell garbage if they are compensated accordingly.

Obviously the man committed a crime and deserves to be in jail. But I sometimes feel that way about others in the industry. The S&P fluctuates wildly up and down within a given month. Bad things happen in the world and prices go up. Nothing happens in the world and prices go down. It just seems highly artificial and manipulated. So to me Bernie Madoff represents larger entrenched problems affecting the entire industry.

I bought my first stock when I was still in my teens. But now I can’t stand the stock market. I hate everything about it. There’s no rational behavior to it. Even here on Reuters I routinely read statements like, “Market await retail sales for signs of hope.” It’s like somebody wants to pump the markets higher with improved retail sales numbers, which will later be reported as declining, later reported as sharply higher.

Bernie Madoff just doesn’t seem that bad to me – not in the total scheme of things. Sure he’s a crook. I can’t argue about him going to jail. But I guess this was a hedge fund supposedly held by sophisticated investors. Plus all of those people in the process – the administrators, accountants, sales people – they were totally in the dark, right? Madoff was the only person handling the bank accounts? Even the banks weren’t involved in the bank accounts, I suppose.

Posted by Don | Report as abusive

The government finance of debt through Treasuries and Social Security are ponzi schemes. Albeit legal ones. If only Bernie could have printed money like the FED.

Posted by Anubis | Report as abusive

Or issue IOU’s like California. Investing principles in USA is a joke. Poor Chinese owning so much worthless US treasuries.

Posted by gd | Report as abusive

Don is correct, no one has a long term commitment to any thing in Washington except the “Status Quo” and the “Quid” that comes with it. Reelection campaign contributions(legal bribes).

Posted by Anubis | Report as abusive

Correction, Rob is correct about Washington long term commitments.

Posted by Anubis | Report as abusive

If congress really wants to confront the real problem, they should hold hearings in front of a big mirror.

Posted by TWM | Report as abusive