How To Prevent Another Madoff Scandal
For those of us that did not lose money, it is fun to dish about Bernard Madoff, but plenty of people and charities were hurt. We, as a capitalist nation, need to find a way to prevent this from happening again or, at the very least, make it harder.
In some ways, the entire past year was the financial world's equivalent of 9/11. We need to react in a similar fashion. After 9/11, the Bush administration moved quickly to establish the new Department of Homeland Security with its infamous color-coded warnings.
The Obama administration needs to create a Financial Consumer Safety Agency for all financial products including investment along the lines of the Food and Drug Administration (FDA) or the Consumer Safety Products Commission. The mission of the agency would be to protect and educate the consumer about a wide range of financial products, not to punish the transgressor.
This agency should be staffed with savvy market professionals, not just lawyers. It should monitor investment products, credit cards, and mortgages. Currently, the regulation of consumer financial products is assigned to the agency that regulated the issuing institution instead of by the consumer that uses the product. No financial regulatory agency in Washington is focused on the consumer.
Many may question why I am advocating for the establishment of a yet another potentially useless bureaucracy instead of calling for the revamping of the Securities and Exchange Commission (SEC). In my opinion, the SEC is so broken that it can not be fixed. Incredibly, in these financially turbulent times, the SEC has reduced staff by 10%.
The SEC likes to think of itself as Wall Street's cops. The beat cop in my neighborhood once derided this description and I agree with him. They are not cops. They are tasseled-loafer wearing lawyers who prefer to sit behind a desk rather than burning the shoe leather necessary to solve and prevent crimes.
The numbers bear me out. The New York Times reported that "U.S. government officials are on pace this year to bring the fewest prosecutions for securities fraud since at least 1991." For the first 11 months of this year, there were 133 prosecutions. This is down from a high of 513 prosecutions in 2002. This is a 75% decline in prosecutions in a time period when the discovery of fraud has multiplied exponentially.