Madoff Scandal Reveals Corruption, Incompetence

Harry Markopolos is the guy next door who knew from common sense that something was terribly wrong in the biggest financial scandal in American history. Testifying before the House capital markets subcommittee on February 4, he explained that in May 2000 he wrote his first letter to the Securities and Exchange Commission expressing concern over the operations of Bernard Madoff, the former NASDAQ chairman and Ponzi-scheme operator who has been revealed as the plotter in a $50 billion fraud.


Over the years, as assets under Madoff’s control continued to balloon from just a few billion, Markopolos wrote to the SEC four more times in an attempt to explain that Madoff’s whole operation was suspicious.


What is most interesting is that Markopolos is no business school genius. He knew from really simple clues that Madoff was phony. One clue was a positive straight-line graph that Madoff offered to show his results. Markopolos observed that the growth chart simply was not realistic. Second Markopolos knew from published financial reports that Madoff claimed to be managing more money than was available in the system.


And so you have a Securities and Exchange Commission that could not even process the simplest of clues and that allowed Madoff to operate unhindered.


Like they say, close is good enough for government work.


Markopolos, who lives in Massachusetts, testified: “I gift-wrapped the largest Ponzi scheme in history for them,” yet, the SEC failed to act and continued  “to roar like a mouse and bite like a flea.”


Markopolos then expressed frustration that the SEC Boston office was involved in a bureaucratic turf war with the New York office. New York does not like to receive tips from Boston,” Markopolos said.


Isn’t it encouraging that our government is always on the job, defending the public interest and putting petty interests aside!?


Markopolos continued that SEC’s investigators had little knowledge of the complex financial transactions that Madoff ostensibly was engaged in. Only problem is that Madoff’s real transactions ultimately involved passing new investor money to previous clients in a chain-letter type of action known to every college kid in America.


Meanwhile, Madoff’s own niece Shana Madoff, who worked as a lawyer in his firm, dated and then married a top SEC lawyer in 2007. So Madoff was playing the fraud from the inside and the outside…


Markopolos said that he kept his own identity as secret as possible because he feared for his life.


What this whole episode tells us is three things:


First, it is important to remember that Madoff is a big-time liberal New Yorker who gives virtually all his campaign contributions to Democrats.


Second, if you look at the roots of this overall financial crisis you will find liberals and Democrats at the heart of virtually all of it, including the three biggest collapses – Citigroup (where Clinton administration Treasury secretary Robert Rubin was calling the shots); Fannie Mae, (with Clinton White House budget director  Franklin Raines having earned more than $100 million as CEO of Fannie Mae and having cooked the books for years before his departure); and Lehman Brothers (whose last two CEOs were James Johnson, a major Democrat operative, and Richard Fuld, a big-shot Democrat donor).


One of the CEOs that congressman Barney Frank called before his committee on February 10 was Lloyd Blankfein who is a big Democrat donor. Another was Jamie Dimon, who gave all contributions to Democrats. Another was John Mack who has given lots of money to Democrats. Yet somehow we are supposed to believe that the people who screwed everything up are all Rich Republicans. If only it were so.


Quite the opposite is true. Barney Frank himself said in 2005 that Fannie Mae was safe and sound. And by the way, who set off the “run” on IndyMac Bank of California last summer? Democrat Charles Schumer, US senator from New York, who released a letter saying that IndyMac was on shaky ground. This panicked IndyMac depositors. Was Schumer trying to spark a crisis?


Third, the Democrats who overwhelmingly populate our federal bureaucracy like the Securities and Exchange Commission, are not competent or honest enough to do the citizens’ work.


“Bureaucrats and attorneys do not understand the complexities of the market,” said subcommittee chairman Paul Kanjorski, Democrat of Pennsylvania about Madoff’s transactions. But that is not the point. The point is that bureaucrats and attorneys don’t care what their job is when they are supposed to be working for the federal government. They are people who feed at the public trough and do as little work as possible.  And Democrats have taken over the government apparatus and then bring their political friends and cronies into the system. No wonder this thing got out of control.


To guard against such frauds in the future, Markopolos suggested that SEC be combined with other regulators for form a super-agency with centralized databases. But that will  not work. By nature the bureaucracy cannot sustain credibility.


The real cure is a smaller regulatory apparatus that is light on its feet. How about a guerilla war against corruption, using private citizens like Markopolos to provide information to the regulators and who would get a bounty for each actionable tip? This would be the equivalent of the reporting network in New York City that asks citizens who see something suspicious that looks like it could be terrorism: “If you see something say something.” In other words, the people are the eyes and ears when the police and regulators cannot be everywhere.


Democrats will oppose any reform. They want the bureaucracy controlled by their party. But the Madoff scandal shows that this current system is untenable. Ten-thousand Harry Markopoloses would be a much more effective weapon against corruption.


Please visit my website at www.nikitas3.com for more. You can print out for free my book, Right Is Right, which explains why only conservatism can maintain our freedom and prosperity.