FT.com / Companies / Financial Services - SEC staff failed over Madoff.
The US Securities and Exchange Commission missed many chances to exposeBernard Madoff’s giant “Ponzi” scheme because the staff either did not know what to do or failed to follow up on detailed complaints, the agency’s internal watchdog has concluded.
In spite of eight credible complaints over the years, including one as recently as March 2008, “a thorough and competent investigation or examination was never performed,” said a summary of the findings, released on Wedesday. The SEC “never took the necessary, but basic, steps to determine if Madoff was operating a Ponzi scheme.”
I am not surprised. The efficient market hypothesis said pricing was always right. regulatiors assumed the market delivered what investors wanted. The assumption that prices could be fixed was scorned upon.
Regulation failed here, but it did so because it assumed the market is always right.
The answer is simple: change the assumption. Turner proposed that. Look what the City said.
Which is why he's right and they're wrong.
Much tougher regualtion is the answer. And regulators must assume those they regualte are crooks. Why would they need regualtuion if they weren't?
Which is also why self regulation can never work.
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Come off it. The regulations were fine (Madoff broke them), but the investigations were poor. Despite numerous tip-offs investigators allowed themselves to be fobbed off and their managers backed down when they should have been pursuing him vigorously. They failed to make even the most simple chacks such as verifying whether Madoff was making as many third party hedging trades as he claimed..
So the lesson you’ve taken away from this sorry story of the the SEC’s complete inablity to do its job is that it should be given greater responsibility? Giving witless statutory bodies regulatory responsibility simply acts as risk compensation since, in the case of the FSA, people seem to think that authorisation means some of their DD has been done for them.
As for your penultimate paragraph, I’m glad to see that the concept of innocent until proven guilty doesn’t chime with you. Can we assume then, that you’re a criminal? After all, it’s the police’s job to make sure that members of the public like you comply with the law.
“The efficient market hypothesis said pricing was always right.”
No, the EMH says market prices reflect all available information. Thus, and the caveat is extremely important, prices are right given the available information.
Information that is not known to the market (Bernie Madoff is a crook) will obviously not be reflected in prices.
Just as, of course, information not known to regulators (Bernie Madoff is a crook) will not be reflected in action by the regulator.
Quiet why you seem to have a problem with thte EMH I don’t understand. It’s so close to being an identity that it’s obviously true.
I think it would be progress if the regulators accepted that those whom they regulate may quite possibly be crooks. These regulators couldn’t accept the possibility that that nice Mr Madoff could indeed be a villain. No we don’t have to abandon “innocent until proven guilty” but a regulator can’t assume innocence either if he is to do his job.
Tim
When you tell me something is obviously true I am sure I am right to question it
And few serious people now believe the EMH
So why the heck do you? You can’t honestly believe people rationally appraise available data, surely?
And if so when the mass of data to the contrary is becoming so strong?
Richard
Richard, what I’ve described there is known as the weak to medium version of the EMH. Yes, just about everyone agrees with it. Even John Quiggin (very much a social democrat/Keynesian type) who is writing a book about which economic ideas the current problems have shown false agrees with it.
The strong version was never really believed by even those who proposed it like Eugene Fama. It was a thought experiment more than anything else.
The major difference between weak and strong version of the EMH is the value placed on the word “right”. The weak says this is the best we can do with the information available. The strong says this is “correct”, as in reflecting some mystical true value a la Aquinas and so on. Given that people like me who support markets support the idea that values are determined by markets that there is no such thing as “true value” a la Aquinas, us believing in the strong version of the EMH would be a little odd.
But back to the beginning. Just about everyone serious agress with the weak version of the EMH: for it is so close to being a truism that there’s little point in not. Market prices reflect all the information available to the participants in that market.