Posts filed under “Regulation”

What Does Regulation Regulate?

Here’s one of the simple truisms that gets lost in the political (i.e., bumper sticker) discussions.

Don’t regulate the free markets! Don’t interfere with innovation! Don’t stifle incentives!

What bullshit.

One of the best ways to win a debate is to control the language used. This was one of the elements George Orwell was discussing in 1984, and why the language in the novel was degraded to phrases like “double plus good.” All nuance was dismissed. He who controls the language controls the political economy is what Orwell was saying. In modern times, its done not with boot-jacks and guns, but with catchphrases and clever marketing. Its not as heavy handed, its just more insidious.

When we discuss “Regulations,” we are talking about regulating human behavior. And that behavior can range from following misplaced incentives to falsifying accounting data to overtly legal but destructive actions — like putting people into loans they knew (or reasonably should have known) were likely to default.

What a terrible sham the no “regulation cry” has been. It is really a vote for no rules against illegal and/or criminal behavior . . .

Category: Bailouts, Legal, Regulation

Regulating After the Fact

Tom Toles: via Washington Post

Category: Bailouts, Humor, Markets, Regulation

Madoff Red Flags Were There All Along

In 2001, reporter Erin Arvedlund wrote an article for the financial weekly Barrons that was skeptical of Bernard Madoff’s strategy and performance on Wall Street. She questioned how Madoff was able to offer good returns. She talks with Steve Inskeep about the impetus for her story and what she learned in the process.

Morning Edition, December 18, 2008

Category: Financial Press, Legal, Regulation, Video

Audit Interview: Jack Dolan

Columbia Journalism Review interviews the Miami Herald reporter whose series we have highlighted here many times. JD: I expected there would be some criminal histories. There’s gonna be a few pot possessions and stuff like that. The law said that they were supposed to screen brokers for crimes involving fraud, dishonesty, and “moral turpitude”, which…Read More

Category: Financial Press, Legal, Regulation

SEC Ignored Detailed 2005 Complaint re: Madoff

What follows is the Harry Markopolos complaint to the SEC, circa November 2005, identifying 29 red flags that Madoff was a fraud. This highly detailed complaint was filed regarding the apparent Fraud at Madoff Securities. It was ignored by the Christopher Cox SEC, which was too busy concocting schemes to dismantle the SEC rather than…Read More

Category: Hedge Funds, Legal, Regulation

Cost of Banks

Consider that one year ago Royal Bank of Scotland paid US$100 billion for ABN Amro. That seemingly impossible amount would now buy: Citibank $22,5 billion (74% down) Morgan Stanley $10,5 billion (-72%) Goldman Sachs $21 billion (-67%) Merril Lynch $12,3 billion (-77%) Deutsche Bank $13 billion (-71%) Barclays $12,7 billion (-71%) And still leave $8…Read More

Category: Bailouts, Credit, M&A, Regulation

Hedge Fund Partners vs Managed Account Investors

Today’s NYT (and Monday’s WSJ) each have articles which compare Madoff investors with those of recent $400 million dollar hedge fund fraud Bayou Group. I believe this misunderstands the applicable law of partnership, fraud, and investing. Hedge fund investors are limited partners, and as such, they have a fiduciary duty to their other partners. Regardless…Read More

Category: Hedge Funds, Legal, Regulation

Vast Under-Investment in Due Diligence

With everyone tsk-tsking the Madoff scandal — the amount lost, the after-the-fact obviousness, the SEC incompetence — I thought now was as  good a time as any to look at the actual research, due diligence and manpower thrown at investigating managers and funds. Not surprisingly, it is tiny — at least, when compared with the…Read More

Category: Bailouts, Hedge Funds, Investing, Legal, Regulation

SEC Under Fire; $50 Billion Fraud

Atkins was republican SEC commissioner from 2002 to 2008; Cox says SEC failed to act on allegations against Madoff; Investors lost up to $50 billion in Madoff’s alleged scheme; Analysis by Paul Atkins, Former SEC Commissioner

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The Madoff Scandal – Interview with Former SEC Chairman Arthur Levitt

Category: Legal, Regulation, Video

S.E.C. Chairmen, 2001-08

Here’s an excerpt from Bailout Nation, about a subject under much discussion today: The incompetence of the S.E.C.

Part IV: Market Failure
Chapter 14. Casting Blame

Over the course of two terms, Bush appointed three SEC Chairmen, each ill-suited for the position. It was a veritable parade of poor choices for the role of regulating stock markets. His first appointment, Harvey Pitt, was a securities industry defense attorney and was wholly unsuited to the position. Instead of representing the interests of investors, Pitt was an industry lapdog. Pitt pledged a “kinder and gentler” SEC just when the opposite was needed in the midst of a huge run of corporate misfeasance.

In an era of corporate accounting scandals, Pitt had close ties to the accounting industry. And for inexplicable reasons, Pitt met with the heads of companies under active SEC investigation. As a Wall Street lawyer, Pitt had “recommended that clients destroy sensitive documents before they could be used against them – advice that seemed to find echoes in the SEC’s investigations into Enron and its shredder-happy auditor, Arthur Andersen.” Pitt had to recuse himself from many of the SEC’s votes — they were frequently about the clients he had represented as a defense attorney. By July of 2002, Senator (and future GOP presidential candidate) John McCain was calling for Pitt’s resignation.

Pitt, not surprisingly, demoralized the agency. To investor advocacy groups, having Pitt as SEC chief was like putting Osama bin Laden in charge of Homeland Security.

The next SEC Chairman Bush appointed was William Donaldson. He is the one who allowed the net-cap rule to be exempted for the five biggest banks in 2004. Instead of 12 to 1 leverage, banks levered up 30 and even 40 to 1 after the waiver. It isn’t glib to say the financial meltdown was three times as bad as it might have been for Donaldson’s SEC agreeing to this waiver. It would be charitable to call his chairmanship undistinguished.

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Category: Legal, Regulation