The Madoff Scandal: Where was the SEC?

Regular readers of "A Dash" know that we are generally more sympathetic to government actors than the investment punditry.  We think this stems from more direct experience with those in government and our disciplined effort to look at a problem from all perspectives.

Despite this perspective, there is one institution that gets a consistently low grade:  The SEC.  A few days ago we suggested that investors monitor potential changes at the SEC.  We continue to believe that this would be important to the long-term health of the market.  If the new leadership were to suspend mark-to-market accounting rules pending clarification, it could even have a short-term effect.

Likely Changes at the SEC

Here is what we wrote earlier today on RealMoney:

The Madoff scandal is yet another black mark for the SEC and
Chairman Christopher Cox. In past comments I have noted that his
official term of office extends until June of 2010, although Obama
could appoint a new chairperson. In fact, several top SEC staff members
announced their resignations
right after the election. Cox himself has indicated plans to step down
at the end of the Bush term, although he is willing to
serve longer until a replacement is found. Gary Gensler (Treasury and
Goldman Sachs) is the transition official in charge of the search. Some
think that he might also be a candidate. Others mentioned include
former SEC Commisioner
Roel Campos, also on the transition team. Some speculate that Robert
Pozen (former Fidelity vice-chair and now Chairman of MFS Investment
Management) is a leading candidate.

The issues facing the SEC are deeper than just the personnel.
There will be some effort at comprehensive reorganization to get rid of
the gaps among the SEC, the Fed and the CFTC.

Charlie Gasparino just reported that the SEC is saying that
they get many tips like the one received on Madoff. One of the
critcisms of Cox is that he did not go after the budget authority needed to fulfill the enforcement responsibility.

Conclusion

This upcoming change is a market positive that is not yet on most radar screens.  A good dissertation topic for someone in political science and public policy would be the study of Presidential transitions and why timing created over 200 years ago no longer works.

We give President Bush high marks for his attempts at handling the crisis and turning over the reins.  Despite the "country first" attitude, the delay in implementing new programs is contributing to the economic distress.

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2 comments

  • VennData December 13, 2008  

    I look at the SEC a bit differently. Yes, their leverage ruling in 2004, removal of the uptick rules, not bothering with off shore capital etc… etc… are just plain crazy.
    But the Autumnal ban on short sales got me thinking: all of Cox’s actions make perfect sense if he’s personally been shorting the heck out of the market from some secret Cayman Islands-type account. The short sale ban stopped everyone from piggybacking him just when things began to bear fruit.
    Circumstantial? Yes. Conspiracy Theory? Definately. Tin-foil-hat-type kooky? Without Question. …but if there’s only one explanation that makes sense, that’s got to be it. In a nod to Occam, call it Madoff’s razor.

  • Jeff Miller December 16, 2008  

    Venn Data — thanks for the smile!