Semi-Random Thoughts About Bernard Madoff

Bail

Fifty billion is missing and presumed lost or stolen. Lacking a clear picture of how much of that is lost and how much is stolen, is $10,000,000 really an adequate bail amount? Madoff needed to send only an equal amount offshore during the course of his scheme to be ready for a sudden need to disembark from the shores of the United States. Further, while I understand that bail, if set, has to be somewhat achievable by the defendant and that presumably, Madoff's domestic assets are now frozen and unavailable for things like bail, in view of the magnitude of the crime and the corresponding impetus to flee, two one hundredths of a percent of the amount of the alleged crime seems an absurdly disproportionate bail amount.

His Accomplice

Bloomburg columnist Jonathan Weil wonders what other slightly more legal "Ponzi" schemes government regulators are deliberately looking away from. In fact, he correctly points to this as yet another reason that government should not bail out any company, any industry, any time.

So why have other Ponzi-esque operators emerged scot-free (so far) with taxpayer bailouts, while Madoff gets pinched?

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Yet perhaps the best explanation can be found in a Dec. 4 speech by SEC Chairman Christopher Cox on why the government needs an exit strategy to unwind its myriad bailout commitments.

"From the standpoint of the SEC, the most obvious problem with breaking down the arm’s-length relationship between government, as the regulator, and business, as the regulated, is that it threatens to undermine our enforcement and regulatory regime,” Cox said.

When the government becomes both referee and player, the game changes rather dramatically for every other participant. Rules that might be rigorously applied to private-sector competitors will not necessarily be applied in the same way to the sovereign who makes the rules.

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He’s right. The government can’t live up to the task, even if it wanted to.

Madoff probably wasn’t the biggest Ponzi-scheme artist out there. He’s just the first of his size to get nailed during the current bear market.

He also knew he was fair game for the government. The people running companies with taxpayer bailout money know there’s an excellent chance they won’t be. As long as that remains true, this crisis of confidence isn’t over by a long shot.

An Erroneous Knee-Jerk Reaction

Meanwhile, President-Elect Barack Obama has vowed to implement tougher regulations "to ensure that a crisis like this can never happen again". Is there one action that Bernard Madoff took as he carried out his Ponzi scheme that was legal? Even one? Respectfully, the President-Elect is off base. As with the Station Night Club fire, what faciliated this crime was not a lack of regulation but an absence of will to enforce existing laws. The only question now is what evoked such an extreme laissez-faire attitude on the part of the regulators.