When it Comes to Bernie Madoff, Congress is More to Blame Than the SEC

My question of the day is, "Why is Congress having hearings to investigate the Securities and Exchange Commission?" If it's looking for the real culprit to blame in the Bernie Madoff Ponzi scheme, Congress needs only to look in its collective mirror.

Before I became a "recovering attorney," I practiced law for 15 years, several of them as an enforcement attorney at the SEC. I was ready to fight fraud! I was ready to investigate! I was ready to take on the bad guys!

Reality, however, didn't take long to set in. My new business cards were barely back from the printer when I realized that the SEC staff is always fighting an uphill battle and would never be able to truly protect investors and fight fraud in any significant way. The bureaucracy was too overwhelming, the procedural hoops too daunting and the staff would never have the resources it needed to do the job the right way.

Why? Money and influence. Two things the SEC needs and has little of. Two things that corporations and investment bankers have in buckets. Remember Enron? WorldComm? Den of Thieves?

The tag line of the SEC has long been "the investor's advocate." But the agency's effectiveness has been taken apart piece by piece because of the ridiculous beliefs held by many that self-regulation in the economic marketplace was a logical thing. Even Alan Greenspan is now shocked that he was so wrong for so long about his theories that ultimately replaced the initial premise of why a federal securities regulator was needed -- to compel corporations to tell the truth their securities and to make brokers, dealers and stock exchanges put the interests of investors first.

The SEC's noble purpose was probably doomed from the start. Sure, it can keep an eye on some things going on in the markets. But as a relatively small federal agency, it has always been underfunded and understaffed. The odds have been stacked against the Commission when it comes to keeping corporate greed at bay.

On top of that, many people who decide to work there do so to develop an area of expertise so they can leave in a few years and go make the real bucks in the private sector. The SEC suffers from constant turnover and loss of institutional knowledge. A great case might be underway, but if the attorney who's worked on it for two years leaves, someone else has to pick it up and learn it all over again, delaying an investigation or putting it on the back burner permanently.

The world that the SEC regulates knows that and counts on the perennial lack of resources and staff turnover. The individuals and corporations I investigated did everything they could to stall and draw out the process, by contesting subpoenas for documents and testimony they knew they would eventually have to comply with or by complaining to my supervisors that I was on the wrong track, in the hopes that I would either leave or get bored and frustrated and move on to another case.

So as Congress is getting ready to point the finger at the SEC for falling down on the job and searches for the underling who will inevitably have to take the fall, it had better get ready to own up to its share of the blame. Congress decides how much money (and, therefore, power) the SEC gets, and I can tell you it's standard practice for Congress to whittle away at the agency's budget or to say it can hire many new attorneys, but then refuse to fund the positions.

There have been a few who have tried to change things to make the playing field more level. But they've failed. The corporations and entities that are regulated spend much time and money on lobbyists to protect their interests, not the interests of the investors. SEC attorneys don't have their own set of lobbyists; they only have their own personal motivation and professional pride to see things through. That just isn't enough.

The SEC needs some sharpened fangs, not just a new set of ill-fitting dentures, if anything is going to really change for investor protection. Even though Congress claims it's serious this time, I'm not holding my breath that the money for that trip to the regulatory dentist is going to happen any time soon.

Joanne Bamberger is a professional writer and political anaylst in Washington, D.C., and the founder of the political blog, PunditMom. She is also a Contributing Editor for Politics & News at BlogHer. Her commentary has appeared on CNN, Fox News, BBC Radio, and many others.

Comments

[Fremon]

One is led to wonder as to what is in it for her. There is no doubt that there is enough blame to go around. But to blame congress over the SEC laxity sounds a little like the Bush legacy tour. First, the SEC apparently was under the charge of Cox who agreed to the philosohy of this Admin not to go in deep looking at the financial and other major industries for any wrong doing. It was going to be a laizzez faire sort of term for Cox and business in general. You know "business is not the problem, it is the government". Oh how they hat Sarbanes Oxley put into place so that CEO's wouldn't have to take any blame for what their personnel (usually financial) were doing. Prime examples were World Com and others. Congress does have culpability, but it you put it all on them, why have any regulatory personnel personnel at all as SEC/FDA/Labor/etc?

[schatsie]

Just because Congress passes a law, does not mean Bush will enforce it, does it? After all he is the DECIDER and he is the one making all the 700 signing statements contradicting the law passed by Congress.... you have to be kidding me, he shakes them down and lets them go...Refer to the IRS Secret Letters in David Kay Johnsons book Free Lunch....

[kissy kai]

NO IT WAS THE GREEDY INVESTORS, IF IT SOUNDS TO GOOB TO BE TRUE. NOW THEY KNOW WHAT THE MIDDLE AND LOWER CLASS IS FILLING EVERYDAY.

[Sundialsvc4]

Joanne, I think that we are seeing a different sort of example of the "stonewalling" that you spoke of. Here it isn't a corporation that's trying to delay or prevent an investigation of itself: here, it's the Congress that's doing it.

To me, it all comes down to just one sentence... Article 2, Section 4 of the US Constitution. You know, the phrase that was put "off the table." It contains two important groups of words: "ANY Civil Officer," and "High CRIME."

High Crime is Real Crime. And every single one of us is a Plaintiff. When someone is in a high position of trust, he or she can exploit that position and its appointed powers to devastate thousands of people's lives, to kill a million soldiers, to allow hundreds of billions of dollars to "disappear," and ... to put any threat of prosecution or hindrance "off the table(TM)."

Law Enforcement has to be our number-one priority, and right now it isn't. The excuses and the finger pointing run thick in Washington DC, but that isn't what we sent those people there to do on our behalf. The consequences are very real, and they have cost us a terrible price.

[anfractuous]

As an indicator, let's report in a few months for whom Chris Cox and cronies ended up working . This should be standard practice for all political appointees, across party lines. Shine the spotlight on these whores and maybe at least few will shrivel up in shame.

[schatsie]

shrivel up in shame??? while they are laughing all the way to the bank... Refer to Robert Rubin, watch Paulson...

[research]

GOP and DINO congress.

[ILibertine]

I understand there may be problems with an agency being underfunded or de-fanged. Certainly this would be a function of deregulation in SEC's case. Yet I believe there must be a rather substantial staff and funding that we are expected to appreciate cannot do anything but go round in futile circles? I guess that would explain Iraq, and bubbles, and just about everything that seems to have caught this country with its collective pants down the past decade. In fact, the only matter that seems to have received prompt, effective attention (for some) is doling out hundreds of billions to crooks and/or negligent financial enterprises!

Congress is certainly more to blame for many of the matters vexing us than has been publicized and there should be more widespread information published about those members of Congress who have enabled some of these matters. Or perhaps the body, in its present form, has outlived its usefulness to the people and there needs to be a sharp-fanged Congressional watchdog agency (lest the electorate doesn't fulfill that role).

Yet I cannot agree that the SEC is blameless or somehow exonerated - just a party to the general malaise and collusion in the theft of conscientious governance and corporate responsibility.

[schatsie]

Who knows who they hired at the SEC...if they hired Pat Robertson's lawyers....

I agree that this is an executive branch duty and we all know where the buck stopped.. Hopefully Obama will be able to map out progress reports or duties so that the job can be done reasonably..I was reading in another column about a database and frankly, you get the database going, you randomly select categories/companies and you will be able to audit and have the sentinel effect at the same time.. I would also suggest time lines for responses and fines if the data is not provided... this is done for Medicare for millions of payments, it can be done for thousands of companies.... we need another revenue stream and this would help fund the agency...

[Fremon]

Does anyone by any stretch of the imagination that the SEC wanted more personell to do any kind of a job in regulation if that had more bodies? And, would congress and admin of Bush fund this entity when they wanted less regulation.

[taikan]

Bamberger needs to provide some more detail if she wants to argue that Congress, rather than the SEC, was responsible for the largest Ponzi scheme in history being allowed to continue for years after it was first reported to the SEC.

According to Bamberger, when she was an enforcement attorney at the SEC she wasn't able to accomplish anything significant because the "bureaucracy was too overwhelming, the procedural hoops too daunting and the staff would never have the resources it needed to do the job the right way." However, Congress doesn't mandate either the bureaucracy or the "procedural hoops" within the SEC. Each enforcement agency (including the SEC and the Justice Department) devises its own organizational model and creates its own systems (referred to by Bamberger as "procedural hoops") to ensure that those who have the ability to use the awesome enforcement power of the agency use that power appropriately. Of course there were (and are) resource issues. Every federal agency, with the possible exception of Defense, has fewer resources that it would like. As a result, they have to set priorities and use their limited resources in accordance with those priorities, to perform the agency's mission. However, generally those priorities are set by the agency itself, and not by Congress. The Madoff scheme and other problems with the securities markets make it clear that the SEC didn't perform its mission properly.

[Sundialsvc4]

Taikan, I for one am quite willing to believe that ... when a multi-billion dollar Ponzi scheme was in fact reported to SEC several times, and investigations were started ... someone above and beyond the SEC told them to quit.

I don't believe that SEC didn't know. I also don't believe that Congress didn't know.

Who, if they are a participant in a high crime, wants that crime to be stopped? Do we seriously think that being elected to Congress wraps one in a veil of incorruptibility? (Smirk... chortle... guffaw...) Ever since this Republic was founded, a great many suitcases went into the Senate Office Building, et al, and came out again weighing much less than before.

[timnel]

Great article I know everything is supposed to be Bush's fault but in reality congress has done nothing for decades they pass week legislation so they can always blame some one else

[LeftRight]

Granted Congress is partly to blame, but so is the leadership of the SEC for not correcting the problems that they can, and doing their best to correct the problems caused by Congress. In addition there is the little part about bush appointees (and daddy appointees, and raygun appointees, and probably Clinton appointees......) not actually DOING what they could with what they had!