Madoff scandal raises issue of Obama nominees regulating financial markets

December 22, 2:24 PMPolitical Issues ExaminerJudah Freed

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Bernard Madoff (AP Photo/Jason DeCrow)

On the heals of the mortgage and investment banking collapse, the latest $50 billion fraud allegedly perpetrated by Wall Street mogul Bernard Madoff adds to the growing concern about whether incoming President Barack Obama will support effective regulation of the financial industry.

The latest latest fiasco centers around Bernard L. Madoff, chairman of Madoff Investment Securities. He was arrested Dec 11 on a securities fraud charges after confessing to his family and employees that that he'd been running what amounts to a "giant Ponzi scheme."

Madoff allegedly used large payments from new clients to cover regular but modest dividends to established clients, pocketing the difference instead of investing the funds as his clients expected. The fraud has crippled thousands of individuals and institutions, including numerous nonprofits that have no been forced to close their doors.

Click here for a slideshow about Madoff's record of ruin.

Three key question unanswered.

First, given that questions had been raised by the press and within government about Madoff's practices, how did he get away with such a blatant fraud for so long?

Second, what other financial frauds or massive business failures are suspected or expected but have not yet been revealed to the general public?

Third, as we study the people President-elect Barack Obama is nominating to key financial positions in his administration, will they have the willingness and the vision to re-regulate the financial markets that have been deregulated under every Republican and Democratic administration since Ronald Reagan?

More accurately, the problem is not so much deregulation as "unregulation."  If the laws now on the book had actually been enforced, such as full disclosure on mortgages and investments, we would not be in the mess we're in today.

Look at the nominees to see why I'm concerned.

Obama last week tapped Mary Schapiro to lead the U.S. Securities and Exchange Commission. A former SEC commissioner, she  now heads the Financial Industry Regulatory Authority, which oversees all U.S. brokerages selling securities. Because her agency should have caught Madoff, charges that she was asleep at the wheel raises doubts about her suitability to run the whole SEC.

Similar questions have been raised about Obama's pick last week of former U.S. Treasury undersecretary Gary Gensler to lead the Commodity Futures Trading Commission. Instability in the commodities markets now cause observers to wonder if agriculture or mining will be the next major business sectors seeking a bailout at the public trough.

An ex-partner at the failed Goldman Sachs Group and a leading financial advisor to Hillary Clinton's presidential campaign, Gensler has not yet shown to critics that he has the cajones to aggressively curb the wild commodities speculation that further threatens to undermine the U.S. economy.

As other examples, Obama named New York Federal Reserve chief Timothy Geithner as his Treasury Secretary along with naming former Treasury Secretary Lawrence Summers as his chief economic advisor. Neither of these Washington insiders has ever strayed far from the deregulation mantra.

Those of you following this column for awhile already know that I believe the modern obsession with "free market capitalism" is contrary to the original vision of Adam Smith. The father of capitalism actually was a social progressive who opposed the unfair concentration of wealth in the hands of an aristocratic elite.

Smith favored government regulation whenever the "invisible hand" of free enterprise abused the rights of individuals and small business to enjoy the benefits of liberty, which sadly is the case today.

From what I can tell, the people being nominated by Obama to the top financial governance positions mistakenly believe in the false god of unregulated free markets that Adam Smith never condoned. Obama promised a change, but these nominees look like more of the same.

As a consequence, I fear that the people Obama is putting into place will not have the courage to enforce the regulations now on the books, let alone create new regulations, such as strictly controlling the fantasy investment instruments called "derivatives." Without such regulatory rigor, a full economic recovery will be postponed or even derailed.

Perhaps I am mistaken in my concern. I hope I am mistaken. Meanwhile, I will be waiting and watching.

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