Lessons Bernie Madoff Taught Us

By December 2008, I thought the financial pages would have exhausted their capacity to surprise. But nothing could have prepared us for Bernard Madoff, Ponzi schemer extraordinaire. Madoff has set off yet another round of cries for more regulation: CNN now reports that 59% of 1,000 surveyed complain that government regulates the stock market and financial institutions too loosely. Just a few months ago, only 50% thought we needed more regulation.

But if there is a lesson from the Madoff scandal it isn't that we need more regulation. Weren't Fannie Mae and Freddie Mac highly regulated entities?

Oversight, due diligence, common sense -- those were the critical elements missing in the new millennium. The biggest mistake regulators made was to assume that the captains of finance had taken a Hippocratic oath: "Never do harm" -- at least not to themselves. In the moment, it seemed a reasonable assumption that the likes of Bear Stearns or Lehman Brothers would not leverage themselves more than the typical hedge fund.

But virtually everyone on this planet had bought into the demise of financial risk. Regulators, politicians, and investors walked around as if they were doused in fairy dust. Poof! Risk had vanished. First the lords of all things high tech had conquered the Y2K threat. Surely, the capitulation of risk was just one algorithm away.

L'affaire Madoff is an exclamation point for all that has preceded in the last 18 months: It reveals to us who we are and what we have been in the first decade of the new century; naive adventurers in a world we didn't understand. We all accepted the easy money and the bull market as a divine right. We turned the other way when a few Cassandras cried that risk was alive and well. We shrugged when the credit rating agencies turned into lapdogs for Wall Street's financial engineers. Main Street investors were no different from Bernie's A-list investors.