Laughable SEC report on Madoff absolves SEC management of blame - 6-Sep-2009 - Generational Dynamics

I frequently write on this web site about the lethal combination of nihilistic Gen-Xers, managed by stupid, incompetent Boomers. There's no better example of this than the way the SEC handled Bernie Madoff, the man who defrauded hundreds of investors of $65 billion.

According to the report, the blame for the failure of the SEC to figure out what Bernard Madoff was doing was entirely on the young Enforcement staff, who were "confused" and "inexperienced." The confusion and inexperience apparently lasted 16 years, because that's how long they ignored warnings from various people.

"During the course of both these examinations, the examination teams discovered suspicious information and evidence and caught Madoff in contradictions and inconsistencies. However, they either disregarded these concerns or simply asked Madoff about them. Even when Madoffs answers were seemingly implausible, the SEC examiners accepted them at face value.

In both examinations, the examiners made the surprising discovery that Madoffs mysterious hedge fund business was making significantly more money than his well known market-making operation. However, no one identified this revelation as a cause for concern.

Astoundingly, both examinations were open at the same time in different offices without either knowing the other one was conducting an identical examination. In fact, it was Madoff himself who informed one of the examination teams that the other examination team had already received the information they were seeking from him. ...

Both examinations concluded with numerous unresolved questions and without any significant attempt to examine the possibility that Madoff was misrepresenting his trading and operating a Ponzi scheme.

The investigation that arose from the most detailed complaint provided to the SEC, which explicitly stated it was "highly likely" that "Madoff was operating a Ponzi scheme," never really investigated the possibility of a Ponzi scheme. The relatively inexperienced Enforcement staff failed to appreciate the significance of the analysis in the complaint, and almost immediately expressed skepticism and disbelief. Most of their investigation was directed at determining whether Madoff should register as an investment adviser or whether Madoff's hedge fund investors' disclosures were adequate.

As with the examinations, the Enforcement staff almost immediately caught Madoff in lies and misrepresentations, but failed to follow up on inconsistencies. They rebuffed offers of additional evidence from the complainant, and were confused about certain critical and fundamental aspects of Madoff's operations. When Madoff provided evasive or contradictory answers to important questions in testimony, they simply accepted as plausible his explanations.

Although the Enforcement staff made attempts to seek information from independent third-parties, they failed to follow up On these requests. They reached out to the NASD and asked for information on whether Madoffhad options positions on a certain date, but when they received a report that there were in fact no options positions on that date, they did not take any further steps. An Enforcement staff attorney made several attempts to obtain documentation from European counterparties (another independent third-party), and although a letter was drafted, the Enforcement staff decided not to send it. Had any of these efforts been fully executed, they would have led to Madoff's Ponzi scheme being uncovered."

When you read stuff like this you really realize that the inmates were running the asylum. Where were the (presumably Boomer) senior managers in all this?

Did senior management never review the findings of the young Enforcement Staff? Were they allowed to do whatever they wanted, without anyone supervising them? When the Enforcement staff issued opinions, did no one in upper management question them?

This is not a trivial matter, and it's a perfect example of what I call stupid Boomers managing (or failing to manage) nihilistic Gen-Xers.

If you read the report, you'll see that this entire farce is blamed on "confusion" and "inexperience" of the Enforcement staff, presumably a group of young Millennial (Gen-Y) auditors, supervised by Gen-X middle managers. Presumably they were all college graduates, many having studied finance and law. Presumably some were just out of college, but many others had been working for 10-20 years. And you're telling me that this group of people were confused and inexperienced? That's bullshit.

This is a total farce. Are you really going to tell me that when these professional auditors and investigators, and their supervisors, when faced with obvious lies, were so stupid that they did no follow up whatsoever? And that this went on for 16 years? This is the ultimate court defense: "I can't possibly be guilty, Your Honor, because I'm way too stupid to have committed this crime."

These people simply didn't do their jobs -- on purpose. Well, why not? The Enforcement staff were contemptuous of their managers and of the rules they were asked to enforce. That's the heart of Gen-X nihilism, just as failure to manage is the heart of Boomer stupidity. That's how Gen-Xers and Boomers work together to create disasters.

I've been criticizing the SEC for many years. My original point, that I first starting making in 2002, is that the SEC had been formed in the 1930s with the specific purpose of preventing a new stock market bubble like the one that occurred in the 1920s. They completely failed to stop the dot-com bubble of the late 1990s, and now you can see why. The people at the SEC didn't give a shit about anything.

The only good thing about this report is that you can see how pathetic this agency is. According to the report, there were unsupervised children running around conducting investigations, being distracted every time someone offered them a lollipop. Management is invisible in this report.

And the same people are still there. The former chairman, Christopher Cox, has been replaced by someone new, Mary L. Schapiro. But this report, written under Shapiro's direction, shows that Shapiro is just as incompetent as Cox was, and anyway, all the same "confused" employees are still in place

The biggest mistake that you can make, Dear Reader, is to assume that what happened here is unique to the SEC. The same kind of thing happened and is continuing to happen in millions of businesses and government agencies across the country (and, indeed, across the world).

The current financial crisis was brought about when almost every financial and real estate institution in the country (and the world) began practicing corruption and fraud on a large scale. The employees of these organizations are still there, screwing ordinary people, and collecting their million dollar bonuses.

Long-time readers of this web site know that I've been describing this corruption and fraud for many years now, and I've been repeatedly revolted, disgusted and infuriated by what I've seen going on. I received a lot of criticism for some things I said, but everything I've said, and more, have turned out to be true. I'm still sickened by the bumbling incompetence in the Administration, by the clown circus in Congress, by the continued fraud being practiced by financial institutions, and by the Pollyannaish garbage being put forth by CNBC, the Wall Street Journal, and other financial media.

What most people don't realize is that almost everyone is playing "kick the can," meaning that they're doing everything to cover up what's going on, hoping that the problem will go away.

You may recall that Citibank and other banks were forced to admit that the assets in their portfolios were virtually worthless, since they were structured assets based on worthless mortgage-backed securities. You may have thought that all of those worthless assets have finally been removed. That's not true. There are some $1 trillion (notional value) in additional securities that have no market value, and regulators are allowing them to continue to do so. These securities represent a fraud on investors, because they hide the true value of the institutions. Investors purchase stock in the institution, based on the phony notional value of the assets.

This is just one example of the widespread fraud and corruption that's continuing at this very time. Nothing has been learned in the last two years, since the credit crisis began. We're following exactly the same path that we followed in the 1930s, and we still have much farther to go down.

Generational Dynamics Web Log for 6-Sep-2009
Laughable SEC report on Madoff absolves SEC management of blame

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Generational Dynamics Web Log for 6-Sep-2009 Laughable SEC report on Madoff absolves SEC management of blame

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Generational Dynamics Web Log for 6-Sep-2009
Laughable SEC report on Madoff absolves SEC management of blame