O caso Madoff (3)

Madoff and Markets no WSJ

Among the stranger arguments in the wake of Mr. Madoff’s disclosure is that this proves the case for regulating hedge funds. Huh? Hedge funds were among the main victims here, along with well-heeled individual investors, nonprofit endowment funds and foreign financial companies.

As a broker-dealer, Mr. Madoff’s firm was already heavily regulated, and news reports say the Securities and Exchange Commission investigated him in 1992 without finding anything wrong. The SEC said in a statement Friday that its New York staff also conducted inquiries into Mr. Madoff’s firm in 2005 and 2007. Mr. Madoff’s separate investment company registered with the SEC in 2006, which is all that hedge funds would have had to do under the SEC’s proposed (but failed) hedge-fund rule of a few years back.(…)

Yet Mr. Madoff pulled off his alleged con despite all of this market supervision. We are now supposed to believe that the same SEC lawyers who couldn’t detect a fraud at a firm for which they were directly responsible would somehow have done so if only they had been able to examine other hedge funds that invested in Madoff Securities. Thus does every enforcement failure become an excuse for more enforcement, especially among law-school professors and journalists who specialize in hindsight. Mr. Madoff, by the way, was a big donor to Democrats who favor tougher financial regulation. Perhaps that was also part of his strategy to avoid more scrutiny.(…)

The real lesson here is about men, not markets. Human nature doesn’t change, and crooks will always be with us. For investors the lessons are the eternal ones of diversification and diligence. Don’t trust your life savings with any single money manager or investment. Don’t assume that passing some new federal law will banish financial fraud, any more than “campaign finance reform” will stop the likes of Rod Blagojevich from trading political favors for money. As Shakespeare understood, the fault is not in our stars, but in ourselves.

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