Bernie Madoff’s wife and (surviving) son were on 60 Minutes Sunday. This is big news; 60 Minutes is apparently still a thing. Which exists. GO FIGURE. Watching the Pats/Steelers game*, I was bombarded with the same ad spots ad nauseam. The endless promotion got me thinking about Bernie Madoff. He committed the largest financial fraud in American history. From Wikipedia:
In 2004 Genevievette Walker-Lightfoot, a lawyer in the SEC’s Office of Compliance Inspections and Examinations, informed her supervisor branch chief Mark Donohue that her review of Madoff found numerous inconsistencies and recommended further questioning. However, because of agency pressure to investigate the mutual fund industry, she had to conclude work on the probe. Donohue’s boss, Eric Swanson, an assistant director of the department,[50] married Shana Madoff, after the investigation concluded in 2005.[51] A spokesman for Swanson, who has left the SEC, said he “did not participate in any inquiry of Bernard Madoff Securities or its affiliates while involved in a relationship” with Shana Madoff.[52]
While awaiting sentencing, Madoff met with the SEC’s Inspector General, H. David Kotz, who is conducting an investigation into how regulators failed to detect the fraud despite numerous red flags.[53]Madoff said he could have been caught in 2003, but bumbling investigators acted like “Lt. Colombo” and never asked the right questions.
“I was astonished. They never even looked at my stock records. If investigators had checked with the Depository Trust Company, a central securities depository, it would’ve been easy for them to see. If you’re looking at a Ponzi scheme, it’s the first thing you do.” Madoff said in the June 17, 2009, interview that SEC Chairman Mary Schapiro was a “dear friend,” and SEC Commissioner Elisse Walter was a “terrific lady” whom he knew “pretty well.”[54]
Bernie Madoff survived and his Ponzi scheme flourished because regulators are people, not ideal accounting machines. He intentionally committed systematic fraud for decades, stealing and lying every minute of every day under a blind (if not complicit) regulatory eye. But where’s the fallout? Where’s the real harm? So very wealthy people became less wealthy. Some Democrats had to give back campaign contributions. The world and the economy kept turning.
On the other hand, consider Frannie Mae:
Beginning in the mid-1990s, home prices in many American cities began a decade-long climb that proved to be an irresistible opportunity for investors. Along the way, a lot of people made a great deal of money. But by the end of the first decade of the twenty-first century, too many of these investments turned out to be much riskier than many people had thought. Homeowners lost their houses, financial institutions imploded, and the entire financial system was in turmoil.
In the WSJ, Charles Calomisis details how and why Fannie and Freddie decided that risk wasn’t risky:
On April 1, 2004, Freddie Mac risk manager David Andrukonis wrote to Tracy Mooney, a vice president, that “while you, Don [Bisenius, a senior vice president] and I will make the case for sound credit, it’s not the theme coming from the top of the company and inevitably people down the line play follow the leader.”
Risk managers had already experimented with lower lending standards and knew the dangers. In another email that day, Mr. Bisenius wrote to Michael May (another senior vice president), “we did no-doc lending before, took inordinate losses and generated significant fraud cases. I’m not sure what makes us think we’re so much smarter this time around.”
On April 5, Mr. Andrukonis wrote to Chief Operating Officer Paul Peterson, “In 1990 we called this product ‘dangerous’ and eliminated it from the marketplace.” He also argued that housing prices were already high and unlikely to rise further: “We are less likely to get the house price appreciation we’ve had in the past 10 years to bail this program out if there’s a hole in it.”
He concludes:
Taxpayer losses at Fannie and Freddie alone may exceed $300 billion. The costs of the financial collapse and recession brought on by the mortgage bust are immeasurably higher. Unfortunately, the Obama administration has perpetuated the low underwriting standards that gave us the crisis and encouraged the postponement of foreclosures by lending support to various states’ efforts to sue originators for robo-signing violations.
Now they are trying to deflect blame from Fannie and Freddie by suing the originators who fulfilled the politically motivated demands of the government-sponsored agencies that drove the mortgage crisis. If successful, all of those efforts will further postpone the ability of banks to grow the supply of credit, and they will sow the seeds of the next mortgage bust.
Bernie Madoff did just as bad as one person possibly can, financially. Politicians and their pet GSE’s undertook knowingly risky behaviors because of rhetoric, partisanship, and public choice problems. Which one collapsed the economy? The challenge is for OWS protestors and the Obama administration to explain, cogently and calmly, how private enterprise caused the recession, and why it shouldn’t be unshackled going forward.
*And terrifying Izzy with my rage. Pittsburgh fans are the worst.