The magnificent and multiple failures of financial regulators over the past few years have been rather alarming. From Ponzi schemes to massive brokerage implosions, we're no longer surprised by the multibillion dollar meltdowns; we're just surprised that it keeps happening under the careful watch of financial regulators.
Pessimists say regulators have had so many big misses that they might as well not have existed. But this is a shortsighted view. It also fails to appreciate that creating a bureaucratic dynasty takes careful planning.
In recent years, the Securities and Exchange Commission's pinnacle of regulatory success is illustrated by its "big" catches:
Exhibit A: The crucifixion of Martha Stewart has the SEC's trademark stamped everywhere. She was convicted of lying to investigators about a stock sale that involved purposely avoiding $45,673 in market losses. Stewart served five months in prison, with limited access to flowers and baking pans. Because of her imprisonment, the SEC almost single-handedly starved our nation. How many cookie snacks were missed during Stewart's detention? I'm glad to report most Americans have gained back all the pounds they lost.
Exhibit B: Allen Stanford is another outstanding example of "big" catches. He was allowed to become a billionaire after many years of being secretively watched but never caught. All fingers point directly to the SEC's faulty license revocation policy. While the agency has revoked plenty of series 6s, 7s, and 24s, it has yet to revoke anybody's license to steal. To salute his financial acumen, Antigua and Barbuda knighted Stanford as an official "Sir." But in Texas, where he grew up, he's still known as "cattywompus."
Exhibit C: A final case study is none other than Bernard Madoff, whose multibillion dollar investment scam to this day continues to awe crooks (and capitalists) throughout the world. According to some accounts, he became a millionaire by the age of 29 but only because he was a thief by the age of 16. The SEC, technically speaking, cannot count Madoff as a "big" catch, because they never caught him. He was ratted out by his sons. As a result, Madoff was found guilty and sentenced to 150 years behind bars, which is a pretty good deal. Did you know that in the Republic of Congo — for similar sins and offenses — they rope you to a tree and come back for you in three months?
For whatever it's worth, here is the general order of all securities rulemaking: Previous rules are replaced with new rules, which eventually get replaced with the previous rules. Meanwhile, as a team of government lawyers continually adds to the cesspool of existing rules, an even larger team of lawyers working for Wall Street exploits the loopholes like a hot knife slicing through butter. And whatever loopholes they miss, lobbyists have already begun to tackle. Ultimately, innovative rules lead to innovative rule-skirting.
For the quantitative-oriented minds that still don't understand this concept, here are the equations:
