Saturday, December 13, 2008

Madoff Case Proves Danger of Trusting Government

Bernard L. Madoff's Ponzi Scheme Loses $50 Billion of Investors Money

. . . And Illustrates How Government Regulation Creates/Enables Financial Fraud

Ambulance-chasers who exploit this financial-fraud train-wreck for a power-grab to increase the government regulatory burden fail to understand history and human nature.

Ivar Kreuger "The Match King" created a post-WWI, massive, international Ponzi scheme including mortgage/asset-backed securities that finally imploded during the Great Depression. (hat tip: Energyecon)

  • Regulators created the Securities Act of 1933, the Securities Exchange Act of 1934, and the Section 4 Securities and Exchange Commission (SEC) as more "never again" empty promises that were supposed to prevent another Kreuger but failed to prevent Enron, Madoff, etc.
  • Regulators created the 1934 SEC and Glass-Steagall Act of 1933 to prevent more financial fraud/collapses but failed to prevent Madoff even during the red flags (or whistleblower Harry Markopolos' complaints dropped in the SEC's lap) in 1992 and 1999 (before the alleged deregulations of pro-regulation George W. Bush (pro-SOX, pro-TARP)).
  • Regulators created the post-Enron Sarbanes-Oxley Act of 2002 (SarbOx or SOX) as another "never again" empty promise that failed to prevent Madoff or any of the housing/financial-bubble fraud or the current global financial crisis.
  • Regulators not only failed to stop Madoff but instead the SEC lavished him with a special privilege named after him, the "Madoff Exception" (hat tip: Trader Walt):
    Madoff Exception mentioned in: "Regulation SHO, Rule 202T – Temporary Rule related to Establishment of a Pilot Program"

    "The SEC’s Short Sale Rule (Exchange Act Rule 10a-1) states that a listed security must be sold short at a plus tick price or at a zero-plus tick with two exceptions (the equalizing exemption (Exchange Act Rule 10a-1(e)(5)) and the Madoff exception). Rule 2O2T is a temporary rule that creates procedures for the Commission to establish a Pilot Program to analyze the necessity and effectiveness of current tick test restrictions. The Pilot Program established will exclude designated securities from the requirements of the tick test (or any other SRO-specific price test) from May 2, 2005 until April 28, 2006." (CHICAGO STOCK EXCHANGE, INC. MARKET REGULATION DEPARTMENT INFORMATION MEMORANDUM, MR-05-6, 4/27/05)
The SEC's Madoff Exception is a classic example of how government creates/enables fraud by granting ANTI-free-market, ANTI-competitive powers to special interests, even criminals.

Madoff paid political contributions to officials including (home of Wall Street) New York Senators Chuck Schumer and Hillary Clinton.

"SEC Official Married into Madoff Family"
"Madoff boasted of his 'very close' relationship with a SEC regulator, chuckling as he said, 'in fact, my niece even married one.'" Former SEC assistant director of the Office of Compliance Inspections and Examinations Eric Swanson married Madoff's compliance lawyer, niece Shana Madoff.

The SEC then insulted the American public by, after the SEC shepherded the fraud's "stunning . . . duration" through 2 decades of inaction or rewarding Madoff, boasting that it was moving "quickly and decisively":
"Our complaint alleges a stunning fraud -- both in terms of scope and duration," said Scott Friestad, the SEC's deputy enforcer. "We are moving quickly and decisively to stop the scheme and protect the remaining assets for investors." ("Bernard
Madoff arrested over alleged $50 billion fraud," Edith Honan and Dan Wilchins, Reuters, 12/12/08
Why Government Regulations Fail To Do What They Promise:

When the Insider Trader IS the Government Regulator: HUD/Feds Knew Subprime Mortgage Danger 1 1/2 Years Ago [2005/2006].

Federal Reserve Blind to Housing Bubble: BLS OER V. Case Shiller HPI.

Did Government Create Mortgage Securities Mess? Is It about To Repeat Its Mistake?

SEC NRSRO Causes Asset Mispricing?

New Deal, Sarbanes Oxley (SOX), Homeland Security, Resolution Trust Corps (RTC) Recidivism: Financial Regulation Stupidity Roundup.

FDIC Fails. WaMu Bank Refuses to Cash Federal Check.

Abolish the Federal Reserve Central Bank: Declararation of Financial Independence.


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Alex Preece
Bad with my money, great with other peoples!
(I am based in London, England so excuse the weird times you get this email!)
Giant Investments
T: 01273 224002