THOMASSON: SEC in the hot seat

• Article
• Comments ()
• Click-2-Listen
• Videos

By Dan K. Thomasson

COMMENTARY:

With the disclosure of the gigantic swindle perpetrated by some dude most Americans never heard of - Bernard L. Madoff - one doesn't have to look hard to find at least a partial enabler in this stultifying drama. It is, of course, the Securities and Exchange Commission, the institution created during the Great Depression to stop just such an activity.

It's indisputable that the SEC failed in almost every way to stop Mr. Madoff's Ponzi scheme fraud, which cost an estimated $50 billion to investors. Only a couple of years ago the agency's investigators gave Mr. Madoff's "institution" a clean bill of health. It finally took an inability of the crooked financier to meet his obligations in a faltering economy to convince him to make a clean breast of his years of stealing.

At the same time, it turns out the recent failure of the Indy Mac Bank was helped along by another federal regulator, the Office of Thrift Supervision in the Treasury Department, which apparently allowed the bank to falsify its position and exaggerate its financial health only two months before it collapsed. According to the department's inspector general, the same person in the OTS who facilitated the Indy Mac fiction did about the same thing previously for other shaky institutions, including Washington Mutual and Countrywide Financial, before they had to be taken over. He was disciplined earlier for his duplicity in these cases but was allowed back in the game.

Whirl in your grave, Franklin Roosevelt, right next to another new Dervish, Joe Kennedy.

It was Roosevelt who ignored all advice and appointed the crafty and more-than-somewhat tarnished financial genius, Kennedy, to be the first director of the SEC, the Depression-era institution designed to prevent shady operators from just the kind of swindles Mr. Madoff designed and perpetrated for longer than anyone wants to admit. The politically savvy president reasoned that if anyone knew the schemes that could and did manipulate the market, it was Kennedy. There could be no one better to draft the regulations to meet every contingency, Roosevelt decided.

He couldn't have been more correct. Through the decades since those dark days of the 1930s, Kennedy's lingering influence has served the SEC well. But suddenly the byword became not regulation but deregulation, and, with that, obviously diminished oversight. During the huge financial failures of the last 12 months or so, it seemed that the SEC and OTS and others were nowhere to be seen. SEC Chairman Christopher Cox was roundly criticized for his lack of perceptiveness.

Clearly, at least in the money markets, deregulation has not worked. The new administration, with the help of Congress, will have to take drastic measures to protect not only the billions already approved to bail out banks but also the nearly trillion dollars' worth of new money that will be assigned to propping up the economy. As one who often has been critical of Joe Kennedy's political manipulations, it is not easy to say what this country needs is someone like him - a hardnosed financier and sometimes bootlegger who his president son once said told him that all businessmen are SOBs. He, of course, was most adept at identifying them under the old adage that it takes one to know one.

Mr. Madoff fits that description to a tee, and he would have been found out much sooner if those who grew up under Kennedy's SEC model had been paying attention.

As for the OTS, it not only muffed its oversight assignment, it seems it was instrumental in furthering the problem. That allowed the reserve pool for risky loans to dwindle without raising a red flag, an utterly disgraceful policy that is topped only by its dismaying tolerance of a regulator who wasn't doing his job on purpose.

How could this happen? That is what a full-out investigation in Treasury is expected to determine. Americans, who now face the worst downward economic spiral since the Kennedy days, will want to know. As Plato asked, who shall guard against the guardians?

Dan K. Thomasson is the former editor of the Scripps Howard News Service.