How, many people have asked since news broke about Bernie Madoff’s $50 billion ponzi scheme, could regulators have let such a blatant criminal slip through their fingers?
We know, now.
The Securities and Exchange Commission is the sheriff of the financial industry, looking for crimes such as Bernard Madoff’s Ponzi scheme, but a new government report obtained by ABC News has concluded that some senior employees spent hours on the agency’s computers looking at sites such as naughty.com, skankwire and youporn as the financial crisis was unfolding.
"These guys in the middle of a financial crisis are spending their time looking at prurient material on the Internet," said Peter Morici, a professor at the University of Maryland and former director of the Office of Economics at the U.S. International Trade Commission.
"It’s reckless, and indicates a contempt for the taxpayer and the taxpayer’s interest in monitoring financial markets," Morici said.
...One senior attorney at SEC headquarters in Washington spent up to eight hours a day accessing Internet porn, according to the report, which has yet to be released. When he filled all the space on his government computer with pornographic images, he downloaded more to CDs and DVDs that accumulated in boxes in his offices.
Clearly, they already had their hands full.
Quite a few of them did. Another SEC accountant tried to access porn sites 1,800 times in two weeks, and had more than 600 pictures on his hard drive. Yet another even took the time to upload his own videos. Still another used a flash drive to get around firewalls, and deliberately disabled a Google filter to access these sites.
One employee even indulged his entrepreneurial urges.
Investigators found employees in separate offices operated private photography businesses out of the commission:
An employee repeatedly and flagrantly used Commission resources, including Commission Internet access, e-mail, telephone and printer, in support of his private photography business for several years.
The IG's office recommended "disciplinary action up to and including dismissal." In turn, the report notes, "management suspended the employee from duty and pay for nine calendar days."
When asked about the report, Deputy Director for Public Affairs John Heine said, "In each of these [cases] there is some sort of response from the Commission. We don't have anything to say beyond that."
(Turns out this isn’t exactly a new story: ProPublica had it back in December 2008. The full report is here.)
Now, honestly, it’s not the pornography that I have a problem with. It’s that these folks were were smart enough to be hired to some pretty important positions, but not smart enough to know that you don’t do your porn surfing at work. Or at least only under certain conditions. Like, if things are really slow at work, and there’s absolutely nothing to do.
Maybe that was true for the SEC at the time. After all, there wasn’t a crisis underway, like there is now.
Except that it wasn’t quite that way. For starters, the SEC blew multiple chances to bust Madoff.
The Securities & Exchange Commission had several chances to uncover Bernard Madoff’s huge Ponzi scheme dating back to 1992 but failed because of a combination of inexperienced staff, inadequate preparation, bureaucratic inaction, and the simple failure to ask the right questions. That’s the theme of the executive summary of the SEC Inspector General’s report on the fraud, released on Sept. 2. It’s unlikely to make Madoff’s victims--who lost billions of dollars in the scheme--happy.
"[D]espite numerous credible and detailed complaints, the SEC never properly examined or investigated Madoff’s trading and never took the necessary, but basic, steps to determine if Madoff was running a Ponzi scheme," Inspector General H. David Kotz said in the report. "Had these efforts been made with appropriate follow-up at any time beginning in June of 1992 until December 2008, the SEC could have uncovered the Ponzi scheme well before Madoff confessed."
The investigation found that between 1992 and 2008, the SEC received six credible complaints that "raised significant red flags" about Madoff’s operations and was also aware of two articles in business publications, published in 2001, that raised questions about Madoff’s remarkably consistent returns. The SEC conducted three examinations and two investigations of Madoff during that time period, but either accepted Madoff’s explanations or failed to follow up on questions and inconsistencies in the information the agency was given.
Six credible complaints? Raised "significant red flags"?
Three examinations? Actually it was five. Five times the SEC investigated Madoff and five times they missed it.
The SEC opened inquiries five times in a 16-year period. But in each instance, inexperienced officials, at times ignorant of other agency probes into Madoff, took his explanations at face value and did little to verify them.
Madoff himself told the inspector general that he was "astonished" that the SEC did not verify whether he was carrying out the billions of dollars of trades he claimed to be making after he supplied the agency with account details.
"The SEC never properly examined or investigated Madoff’s trading and never took the necessary, but basic, steps to determine if Madoff was operating a Ponzi scheme," the inspector general, H. David Kotz, concludes in the report.
The extensive number of contacts between the SEC and Madoff raises questions about whether the agency is capable of spotting and stopping other financial frauds. The SEC has said it doesn’t have the resources necessary to oversee the exploding number of financial firms and can review many of them only once every few years. It became aware of Madoff’s fraud only when he confessed to it in December.
One warning came from an SEC investigator, who smelled something rotten in 2004.
Genevievette Walker-Lightfoot, a lawyer in the SEC’s Office of Compliance Inspections and Examinations, sent e-mails to a supervisor, saying information provided by Madoff during her review didn’t add up and suggesting a set of questions to ask his firm, documents show. Several of these questions directly challenged Madoff activities that much later turned out to be elements of his massive fraud.
But with the agency under pressure to look for wrongdoing in the mutual fund industry, she wasn’t able to continue pursuing Madoff, according to documents and two people familiar with the investigation, and her team soon concluded its work on the probe.
But she got redirected to investigate mutual funds, along with a dozen more of her colleagues.
Another warning came from Harry Markopolos in 2005, in the form of a 20 page memo.
And it wasn’t just Madoff, either. There’s Bank of America, too.
Our story starts on December 8, 2008, shortly before Merrill Lynch was taken over by Bank of America. Bank of America shareholders had already approved the merger. Merrill gave out $3.62 Billion worth of bonuses, or 22 times the size of the AIG’s bonuses that caused such a stir. 36.3% of the money came from TARP funds and only employees making over $300,000 were eligible for the bonuses. Merrill’s Compensation Committee determined executive bonuses before the disastrous Q4 earnings had been calculated.
This was a departure from normal company practices. Bank of America was aware of Merrill’s intentions to award huge executive bonuses, but failed to tell its own shareholders prior to the vote. In fact, on August 3 they had released a proxy statement that Merrill wouldn’t pay year-end bonuses before the takeover without consent.
Eventually the SEC was shamed into action. After months of investigation the SEC decided that it had built its case and approached Bank of America with a settlement offer that basically amounted to a slap on the wrist.
But then something amazing and unprecedented happened: the sitting judge, Jed Rakoff, demanded accountability and disclosure.
The judge wondered immediately why, given the "serious questions" raised in its complaint, the SEC wasn’t going after more facts. If BofA and Merrill conspired to lie to shareholders about bonuses that had been agreed to when the merger was signed, then why isn’t the SEC trying to figure out who is responsible? "Was it some sort of ghost? Who made the decision not to disclose [the bonuses]?" said Rakoff.
Judge Rakoff called the settlement a "contrivance", which allowed the SEC to appear to be a regulator, but doing nothing substantially. The SEC was only asking for a $33 million fine and didn’t seek to punish any executives, or even to release their names. At least one Merrill executive got a bonus larger than $33 million.
And in the run-up to the crisis, its oversight was so non-existent that it was barely an afterthought.
Four years ago, the SEC made what appears to be a fateful decision. As ProPublica  and others have reported, the commission exempted major investment banks from limits on how debt versus cash they could have. After the change, the debt held by the firms soared. And many, including a former SEC official, have pointed to the change as one of the roots of the current crisis .
Today’s New York Times explains exactly how the SEC came about its decision . It's not pretty. The paper zeros in on "a brief meeting on April 28, 2004"...
Only one commissioner questioned the proposal, noting "We’ve said these are the big guys, but that means if anything goes wrong, it’s going to be an awfully big mess." (The Times helpfully posts the full audio  of the meeting.)
The proposal, which was quickly passed, also included a provision that would have allowed the SEC to get a clearer picture of just what deals the investment banks were making with the new leverage. But as the Times notes, "The agency never took true advantage of that part of the bargain."
The firms were only required to self-report their holdings. As for verifying the companies’ numbers, the SEC did not exactly  make it job number one...
It becomes, in some ways, difficult to tell who the SEC regulators were actually working for. Like people who live with each other for so long that they start to resemble each other, the SEC and the banksters it was supposed to regulate during the Bush era look practically like family. So it’s no wonder they missed Madoff. After all, he was family.
A top Securities and Exchange Commission compliance official who worked for the SEC when it found no problems at Bernard Madoff’s firm in 2005, later began to date and married Madoff’s niece, who was a compliance lawyer for the company.
A spokesman for Eric Swanson, who has since left the SEC, said Swanson "did not participate in any inquiry of Bernard Madoff Securities or its affiliates while involved in a relationship" with Shana Madoff.
The failure of the SEC to detect the alleged fraud carried out by Madoff, estimated by Madoff himself at $50 billion, has raised questions about the SEC’s performance.
"The Securities and Exchange Commission failed the American people," said Senator Charles Grassley (R-IA).
Since 1992, the SEC has at least twice dismissed concerns about Madoff’s firm, following complaints.
Call it complicity, call it collusion, call it a strange sense of loyalty, but at some point a choice what made. A choice not to regulate, but to busy themselves with something else, while disaster approaches for someone else. Much like Alan Greenspan, among others, ignored repeated warnings of the crash that finally came.
At some point, you realize that it took real, hard work to remain that clueless in the face of so many warnings.
Now, with the resurfacing of the SEC web porn story, it just seems like more of that "devout neglect" that is part and parcel of conservative governance.
It seems inherent in conservative philosophy to see disaster approaching, to know where and whom it will strike, and to simply stand out of its way. The problem is that the person stepping into that intersection, about to get mowed down, is all of us. Or at least the 99.2% of us who are not, have never been, and never will be members of the ownership society.
Even if that disaster can be averted, it shouldn't be. That's the heart of both the conservative love of deregulation and reluctance to intervene that makes economic disasters like this likely to happen, and to happen on large scales like the metastasizing subprime crisis, and on the small scale of millions of personal stories ranging from foreclosure to bankruptcy to never-ending debt.
There's a motive for letting simply letting it all happen, though. It's very simple. As easy as it might be to write off that kind of "devout neglect" to the plain old mean-spirited notion that survival -- economic or otherwise -- "is a matter of privilege," the bottom line is actually the bottom line. None of this would have happened, or been permitted to happen, unless somebody -- and not just anybody, but people already significantly privileged when it comes to economic survival -- stood to profit from it.
In a sense, it’s the same regulatory onanism that led to this crisis and it’s consequences. It’s the same as it ever was.
After all, Nero fiddled while Rome burned and the SEC... well, you get the idea.