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Wednesday, Jan. 21, 2009 10:35 pm

Put the bite back in our financial watchdog

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Rep. Paul Kanjorski, left, and the House Financial Services Subcommittee, discuss cracks in the regulatory system.
PHOTO BY CHUCK KENNEDY/MCT

After Bernard Madoff confessed in December to looting some $50 billion from investors through a long-running, widespread Ponzi scheme, Rep. Paul Kanjorski, D-Pa., complained that this massive fraud “fell through the cracks of our regulatory system.”

Indeed it did, but let’s be blunt — there are now a lot more “cracks” than “system” in America’s financial regulatory apparatus.

It’s not like Bernie was running some intricate, obscure and novel type of investment finagling. It was a Ponzi scheme — one of the oldest and simplest hustles that exists. And Madoff’s version of it not only was the biggest in history, but also one of the most glaring, having prompted plenty of formal complaints to the Securities and Exchange Commission, which is supposed to be the public’s watchdog against such ugliness.

But the dog didn’t bark, much less bite, even though SEC enforcement officials have received numerous credible and specific allegations about Madoff’s shady doings. One of the most prominent complaints came in a 2005 letter from a well-known securities executive, Harry Markopolos, who titled his missive so boldly that even the most obtuse regulator couldn’t have mistaken the message: “The World’s Largest Hedge Fund Is a Fraud.”

Hello. Anyone home? No. Again and again, the SEC either conducted no investigation into the complaints or only a cursory one, even exonerating him in a 2007 case based on “facts” that were supplied by a helpful concerned citizen: Madoff himself!

The real story of the Madoff mess is not him, but the mess — the fact that under both Bill Clinton and George W. Bush there has been a deliberate, fantasy-based defanging of our financial watchdog. The fantasy is that in the laissez-fairyland of deregulation, bankers and brokers can be trusted to do what’s right.

This faith-based regulatory philosophy was enthusiastically embraced by a panelist at a 2004 session convened by the SEC to promote further deregulation of Wall Street firms: “You really have to start with the assumption that most of us in this industry really have their client’s interests, you know, coming first.”

That panelist was Bernard Madoff.

You see, Bernie was no stranger to the regulators. To the contrary, he was a trusted insider who served on numerous SEC advisory committees and was treated by agency officials as something of a market whiz who understood the system better than they did.

“He was the grownup in the room,” said a professor who served on SEC panels with Madoff. Not only did he know the cracks in the system, he worked from within to create more cracks. He nodded with approval as the agency’s enforcement budget and staff were slashed, as remaining investigators had their power neutered and as Wall Street firms came to be considered the agency’s “customers.”

Whether for Madoff or for the giant investment banks now teetering on the brink of broke because of their own jury-rigged Ponzi schemes, the watchdog became a tail-wagging lapdog. In 2000, the once-proud SEC prosecuted 69 cases of securities fraud; in 2007, it prosecuted nine — an 87 percent drop.

When it comes to Wall Street crime, the system is softer than Jell-O. Madoff stole billions, wrecking lives as well as investment portfolios — he even ripped off his sister for about $3 million! As a friend of the sister asked, “What kind of person scams their own sister?”

Yet, instead of having his sorry butt thrown in jail, he is confined to his $7 million luxury apartment on the Upper East Side of Manhattan. And instead of gruff guards outside his door, he was allowed to hire his own private security detail to watch ever so gently over him.

This sets a new standard for criminal deterrence — “Get caught, Go to your Penthouse.” Why coddle these thieves? Let’s put the cops back on the Wall Street beat, and let’s get some watchdogs with teeth. Good regulation has to have real bite to it.

Jim Hightower is a national radio

commentator, columnist and author.

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