Why the Regulators Always Lose
The SEC makes a practice of being wrong.


Rich Lowry

With $7 trillion in wealth disappearing in the U.S. in the past year, it hasn’t been a banner time for anyone involved in the financial markets. But it may be the Securities and Exchange Commission that has taken the biggest bath.

The storied investment banks that it oversaw have basically disappeared — out of business or transformed into bank holding companies. And on top of that comes the Bernard Madoff scandal, in which the Wall Street figure operated a $50 billion Ponzi scheme under the SEC’s nose despite repeated warnings that he must be defrauding investors.

The 2005 letter from investment maven Harry Markopolos to the SEC arguing that Madoff had to be a scammer has become justly famous. Titled “The World’s Largest Hedge Fund is a Fraud,” Markopolos outlined no fewer than 29 red flags raised by Madoff’s operation. According to The Wall Street Journal, the SEC and other regulators examined Madoff at least eight times in the course of 16 years and found nothing more than technical violations.

An egregious failing, of course. But Peter Van Doren of the free-market Cato Institute points out the difficulties inherent in the SEC’s task. The average SEC examiner’s inbox must be flooded with complaints and leads, many of which have no merit, in a chaotic environment characterized by trillions of dollars of trades a day. The SEC is in the position of the old British Foreign Service official who after a career spanning 1903-1950 recalled, “Year after year the worriers and fretters would come to me with awful predictions of the outbreak of war. I denied it each time. I was only wrong twice.”

Except the SEC makes a practice of being wrong. It missed the Enron and WorldCom debacles. In response, it successfully petitioned for a massive heap of new financial regulations in the form of Sarbanes-Oxley, which didn’t make a whit of difference as the SEC missed the impending implosion of the investment banks and one of the most notorious financial frauds in U.S. history.


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