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Madoff— pronounced 'made off'

The machers at the Palm Beach Country Club must be shell shocked. They must be walking around the manicured greens muttering to themselves about how yesterday they had money enough to float above the sturm und drang of life, and now their millions have evaporated like the water in their Hyatt-size backyard pools during a dry Florida winter.

How is it that no one noticed that someone managing $50-billion in assets, a former chairman of Nasdaq, was really just a sticky fingered flimflam artist with no magic formula for maximizing returns beyond robbing Jacob to pay Isaac? How can possibly the biggest Ponzi scheme ever devised have been perpetrated on the guys who are the smartest ones in any room they enter? The ones who can read a 100-page prospectus, including footnotes, with one eye tied behind their backs?

Despite all their investor savvy, the New York to Palm Beach Borscht Belt cognoscenti allowed themselves to be scammed. It's almost as if they gave their bank account number to a Nigerian prince in exchange for promised millions.

Had they only thought harder about those dependable double-digit returns that seemed to defy market gravity, or Bernard Madoff's murky methods, or that he hadn't bothered registering as an investment adviser with the Securities and Exchange Commission until 2006, maybe they would have walked away. Hindsight is 20-20 carat gold.

Even Mort Zuckerman, billionaire owner of the New York Daily News, got snagged when a fund manager at Ascot Partners invested his $30-million charitable trust almost entirely with Madoff. Others too lost millions through this back channel.

We could say they weren't paying close enough attention. Or we could say the truth of the thing, which is that government regulators fell down on the job.

Here is the lesson that I hope every small-government, caveat emptor conservative takes to heart: Everyone needs a regulator. Everyone needs a cop on the beat. Modern capitalism, especially.

As Zuckerman said on the News Hour, for confidence in the financial sector to be rebuilt, money market funds, hedge funds, investment banks and private equity funds are going to have to be regulated. All of them. Everything.

It was a government failure that the SEC was warned about Madoff a decade or more ago but then didn't pursue him aggressively. But it was also a government failure for the Federal Reserve under Alan Greenspan to ignore warnings about the predatory lending practices in the subprime mortgage market.

Greenspan didn't want to spoil the moneymaking "innovations" of lenders and mortgage brokers, so he refused to direct them to stop offering newfangled risky loans.

He obviously felt as other Free Marketeers did — and I've heard this plenty — that if people didn't understand the terms of those adjustable-rate mortgages they were signing, well, you can't legislate against people's stupidity.

Except you can and we do it all the time.

What are usury laws except government protection for borrowers who might be tempted to agree to extortionist interest rates? What are laws that give people a few days to get out of contracts, so that high-pressure sales tactics can be countered by a light-of-day perspective?

There are all sorts of ways that government protects people from being taken advantage of due to their own lack of sophistication or failure to do due diligence.

But Free Marketeers have fought against those protections for decades, and we now have the payday lenders, credit card "gotcha" fees and subprime lending market to show for it.

The last of which led to the collapse of our financial system.

My hope for the Obama administration is that a new deal is struck with the investor class. Regulators will look out for their interests with more investigations of Madoff-like operations, new rules on exotic financial instruments and investment funds and new demands for transparency. And in exchange, the little guy will also enjoy some relief from the industries that prey on him and his gullibility.

After all, anyone can get taken.

Madoff— pronounced 'made off' 12/20/08 [Last modified: Wednesday, December 24, 2008 10:31am]
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