Taki Magazine

Madoff, the SEC, and that Goldman Boy

by Richard Spencer on October 17, 2009

Put simply, Bernie Madoff never could have gotten away with it for as long as he did if weren’t for the Securities Exchange Commission. It’s easy to forget this fact as the agency has been granted greater regulatory powers and a few good people, Harry Markopolos most prominently, have gotten praised as whistleblowers and truth-tellers. Madoff’s scheme, which duped not just celebrities and charities but hedge funds and major Swiss institutions, is boggling in the simplicity of its design: old investors were paid off with funds from the new ones. Simple as that. SEC regulators who couldn’t pick up on this were either criminally negligent or else in on it. (As mentioned in the Inspector General’s report [pdf] on the scandal, in 2005 the SEC received a memo entitled, “The World’s Largest Hedge Fund Is a Fraud.” It had little effect.)   

While most Ponzi schemers promise their victim-clients profits undreamed of, Madoff took a very different tack—he offered returns that were consistent and reliable, boring even. Most investors suspected something was up, but few thought that Madoff was pulling off something as brazen and déclassé as an actual Ponzi scheme. The most common theory was that he was using his know-how as a market-maker to “front-run” trades, that is, learn about big institutional buys and sells before they happen and then ride the wave. Again, the tacit assumption must surely have been that the SEC regulators were either oblivious buffoons or else getting a cut. The fact that SEC compliance official Eric Swanson was dating Madoff’s niece, Shana—and eventually married the woman—certainly gave people the impression that a great conviviality had arisen between regulator and regulatee. 

Those who put their money with Madoff because they actually believed he was an investment maestro were, in part, taken in by the inherent moral hazard of any SEC-like organization: If “the authorities” put the stamp of approval on a business operating in the mostly highly regulated industry in the country, then why bother with due diligence?

No one at the SEC has been fired over Madoff, and many have been promoted. Arthur Levitt, the chair of the SEC from ’93-2001 (big years for Madoff), has moved on … to a top position at The Carlyle Group, a private equity firm known for its close ties with the Military Industrial Complex. 

But that’s all history… But my mind has been revisiting the Madoff-SEC relationship a lot recently, especially after I learned that a 29-year-old Goldman Sachs vice president, one Adam Storch, has been named the new chief operating officer of the Security Exchange Commission.

It simply wasn’t enough for Goldman to have its former Co-CEO, Hank Paulson, in charge of the Treasury under Bush—not enough to have Timothy Geithner, a protégé of another Goldman Co-CEO, Robert Rubin, as the head of the Treasury now—not nearly enough that the firm received some 50 billion in bailouts from the Fed, Treasury, and FDIC—not even close to being enough that Goldman was the chief beneficiary of the AIG bailout und so weiter, und so weiter…  Bernie kept a low profile, relatively speaking, just churning out consistent phony profits. Goldman, on the other hand, has taken over Washington with an up-front, so-what-you-gonna-do-about-it bravado, installing its men at the top. 

Storch is an interesting development, in that this graduate of SUNY Buffalo seems more Boiler Room than Wall Street. John Carney, who acquired the only known photo of Storch, has also dug up this amusing tidbit: 

Interestingly, Storch seems to be a big fan of Bill Clinton. At Stern, he created a website asking people to vote for Bill Clinton in the 2008 election. “Don’t stand for the 22nd Amendment!” the website implores.

Clearly, this doofus is not intended to be a power-player… Instead, he’ll serve his purpose as an insecure, timid soul who’ll defer to his old boss on everything.

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