I don't know the answer to the following questions, but I'll take wild guesses:
1. Were Madoff's regulators fired? (My guess: they weren't, it wasn't even weighed as a realistic option by whoever should fire them.)
2. Was there an investigation into whether they were bribed, as there should be when someone is so spectacularly incompetent at their job that it's hard to reconcile with having the mental skills necessary to get the job in the first place? (My bet: there was no investigation whatsoever.)
On number (2), you forgot the other major (and very probable) option: the regulators were told, by the legislature, to shut up and stop doing their jobs like competent professionals, because Congress's friends don't need no regulation (♫ they don't need no bank control ♫). They were probably also defunded by Congress, leaving them with too small a staff to do their job well.
I can't believe all the comments saying pretty much what you said.
How much bloody staff do you need to take a peek at the securities kept at a fund's bank account? We aren't talking "complex" stuff like rating agencies putting AAA ratings on junk (and BTW S&P was slapped on its wrist with a >$1B fine over that after an investigation). We're talking about a guy with almost no staff who paid "returns on investments" from his pool of investments.
The sum of the securities he'd keep would thus fall far behind the number following from his reports. Not noticing can only result from not checking. Not checking that much after multiple warnings results from defunding?! Perhaps, if there was just the janitor left and all the regulators were fired. Was that the case?
(You know what could be a probable cause other than incompetence or taking bribes? A desire to be employed by a Wall Street firm after resigning as a regulator, and a belief that it wouldn't work out if Madoff were checked and found clean, or even if checked and found guilty. But is it more than a convoluted bribe?)
It's easy to know, after the fact, that Madoff was a Ponzi scheme, and say he should have been investigated. But that neglects two important numbers: how many prospective Ponzi schemes were there to investigate, and of those, how many actual Ponzi schemes, out of which Madoff's was only one?
Regulators can only make decisions based on the information they have, which ultimately comes from the people they're trying to regulate. Eventually the wheels come off, but you can give plausible numbers to the government for a long time before that happens.
Your assumption they were either bribed or incompetent is unwarranted.
To spot a Ponzi scheme you only need to look at the balance sheet, not? Do regulators not have a right to do so, especially having gotten multiple warnings (from people who, unlike public employees, have an actual stake at the game because they competed with Madoff and figured his official returns on investment were impossible?)
If the SEC cannot look at the actual balance sheet as maintained by banks etc. until "the wheels come off" and until then they can only rely on what the org says its balance sheet is, things are really bad but somehow I doubt that's the case.
>To spot a Ponzi scheme you only need to look at the balance sheet, not?
No, actually. This is wrong. You can't spot a clever Ponzi scheme if the person who provides the balance sheet is willing to put down false information.
As an auditor all you can do is correlate the bits of information you have. If the criminal is intelligent you won't spot anything until it's too late.
The "warnings" they got were that Madoff's fund was making money too consistently. That's useless.
Well, you can go to the bank where he actually keeps the securities if you don't trust the declarations. His bankers for instance were tipped off by his balance sheet and shorted him. Why couldn't the SEC look at the real balance sheet as maintained by the bank(s)?
As to the warnings being useless - you mean that the likelihood of such warnings does not correlate with the real state of things enough to justify action? As in, every legitimate money manager is suspected by many competitors of being a fraud and the SEC is overwhelmed with meaningless warnings to that effect? I doubt it somehow.
The most relevant [ETA: US] case I can think of is the Hyatt Regency Walkway Collapse (http://en.wikipedia.org/wiki/Hyatt_Regency_walkway_collapse) in which over 100 people died and the engineers involved lost their licenses. No one went to jail, and this case was actually noteworthy for professional consequences being imposed for negligence.
That's not a 1:1 analogy. Civil engineering is a mature field, and the best practices in design / methods for analyzing structures are very well defined at this point. Effectively regulating the finance industry requires more than following the rules to the letter - also involves who you know, creativity in catching new kinds of misbehavior, and a bit of luck.
There is an argument to be made that we shouldn't allow the finance sector this much creativity. Banking has worked for hundreds of years, and most problems seem to be caused by new phenomena. It may be better to over regulate and then remove certain regulations only when the activities can be proven safe, rather than let everyone go crazy with our money and bankrupt millions of Americans every decade or so.
Right. New financial products/services should be, essentially, "guilty until proven innocent". Regulations should be very tight in the beginning, and then slowly relaxed - say, over 50 years.
By way of analogy, if I create a new kind of medical device, the FDA does not say, "We don't have any regulations that cover that, so it's completely unregulated until we see the need to write some." No way.
But a new financial product, while it can't kill anyone, it can still cause massive damage. (We just got a case study in this in 2008.) The default for any new financial idea should be regulated, not unregulated.
And "but it's not a bank!" doesn't cut it. Mortgage securitization wasn't a bank activity, but it still nearly destroyed the world economy. Repo isn't a bank activity, either, but it played a significant role in the crash. Both are "bank-like" enough that they needed serious regulation. Since the risks were not yet understood, any regulation in place was not nearly stringent enough.
This sounds like Paul Krugman's thesis that the run on the (unregulated) shadow banking system was at the "core of what happened" to cause the crisis and if only it was regulated, the crisis wouldn't have happened.
I am 100% sympathetic to that argument. Every time I hear someone bashing Sarbox because it "stifles innovation" I want to reach into my radio and slap the person who said it. I don't want "innovation" from my retirement fund. I want good stewardship of my money.
"Innovation" is almost always another way of saying "We found another way to gamble with the customer's money."
The entire premise that the banks brought down the economy is complete BS. They just make an easy scapegoat.
The regulators, rating agencies, mortgage lenders, government, GSEs all contributed to people overleveraging, but thats not even the real issue.
The real problem is that the economy has changed, and all but the high skilled jobs are going overseas or being done by machines.
Bankers are not going to jail because they didn't break any laws. People need to stop being parrots and making claims about things they dont understand.
Where did I say banks brought down the economy? Where did I say bankers should go to jail? Did you just see some words you can identify and decide to hang rant #47 on a reply to my comment?
One could say exactly the same thing of the software industry.
You look at the software industry, what do we see? Mild amateurs not encrypting personal data, or not protecting their sensitive data against hacking 101 attacks (we still see sql injections attacks in this day and age!). You see a very large shady industry prospering on invading the privacy of unsuspecting users (and not just the adclick of this world: google, facebook!). In a corporate environment, developers have a similar bad reputation than house builders in term of creating projects that very often take a lot longer that expected, fail, or simply are not fit for purpose.
Does it have no consequences? It has massive consequences and the worst data leaks are probably yet to come. Should we impose heavy regulations on the software industry and curb toxic innovation? It is certainly not an absurd debate. Obviously most people in the software industry will react to this with hostility. They will argue it would negatively affect innovation and progress, that there are good and bad apples, and that one cannot judge an entire industry without a minimum understanding of how it works and how it benefits the economy.
Well guess what: it is the same with the financial industry!
Don't know if this was ever enforced, but in the Code of Hammurabi (~1754 BC), Sections 229 and 230 prescribed capital punishment in the event a builder constructed a house, which then fell and killed someone.
Mass loss of money, while not as direct a cause and effect, can be far more lethal. People not going for checkups they can no longer afford. People scaling back budgets resulting in less healthy choices. People forgoing using costly medication. People moving to cheaper (and less safe) neighborhoods due to money lost. The general increase in stress with the money lost.
Far harder to measure but magnitudes greater damage.
Madoff was sentenced to more prison time than many murderers. Murder and fraud may not be equivalent, but that does not mean that one must necessarily be less serious than the other.
Financial crimes in the US carry some pretty draconian penalties in terms of sentence length. They have to, because if people think financial institutions are going to run off with their savings the whole industry collapses.
In Madoff's case there was an additional issue - the people he defrauded were mostly wealthy and powerful.
You really want the surgeon who is only doing his best due to fear to be operating on you?
None of those listed professions at any time motivate their training
due to fear of imprisionment. It is a complete non factor and it's
only effect is to shovel more pain and tragedy on already tragic
situations to the illusion of relief for a small porportion of the
parties aggrevied.
You really want the surgeon who is only doing his best due to fear to be operating on you?
I don't care why he's doing his best. It would be nice if he was doing his best because he's a dedicated professional, but doing his best out of fear is far better than being operated on by some slacker not giving their best.
So the answer to your question is yes, please, I want the surgeon who is doing his best; not the one who is slacking.
I know of people who have been arrested. They were upper management, though, not engineers. They tried to ignore the FDA, and they got walked out in handcuffs. (This was not in relation to Therac-25.)
What about when police officers wantonly kill people or CIA operatives torture the innocent?
Of course they should go to jail, justice is blind, the law applies to all, look up the magna carta. When some are more equal than others injustice and corruption occurs, we see it vividly throughout the US corporate-fascist complex.
It's not necessarily invalid, at least not for the reason you give.
Lifeguards can go to jail (in Europe, at least) for manslaughter, as can ski marshals, if they're deemed sufficiently negligent when someone dies. It's pretty rare, but certainly something on the equivalent scale to causing a global economic crisis would warrant it.
Nor should they unless they were colluding with him or accepting bribes.
The punishment for just being bad at your job should be getting fired, not jail. Of course, I doubt many lost their job either.