It has become a cliché to advocate financial regulation as a remedy for social injustice. But the effects of regulation in real life do not bear out this faith.
“When a money manager is dogged by widespread rumors of fraud or even less drastic legal trouble, most clients typically head for the exit and the manager is forced to close the shop. …. Given the critical role of reputation, how did Bernard Madoff manage to shake off several published news stories as well as persistent rumors that he was engaged in some sort of scam?
Paradoxically, the more regulators examined him, the better he looked. His business received almost-clean bills of health time and again. Repeated investigations by the SEC and FINRA found only minor infractions, technical issues that were correctable. The examinations must have stressful for the con artist but were blessings in disguise for his scheme.
The regulatory environment would prevent fraud, Madoff himself told a conference audience in 2007. That people believed this helped him.
While his persuasive ability sounds uncanny, he could not have kept up the pretense without the assurance the government in effect provided for him. There was no skimping of regulators’ resources; on the contrary, they paid him persistent attention. It looked like he’d been vetted through and through, and no fraud was found….”
Tags: Bernard Madoff, fraud, Regulation
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