Business Brief: Deregulation of Wall Street allowed Madoff to thrive

Mar 17, 2013

In this edition of the Business Brief, New York Times financial reporter Diana Henriques, who wrote The Wizard of Lies: Bernie Madoff and the Death of Trust, tells WHQR’s Rachel Lewis Hilburn why current investor protections are woefully inadequate, and how she finds calls for further deregulation of the industry baffling.

RLH:  “What about the idea that capitalism regulates itself?

DH:  “Well, how’d that work out in 2008?  The evidence is abundant that if you unleash people to pursue the profit motive, without any regulatory restraint at all, you are subjecting your economy to the law of the jungle.” 

It’s here that Henriques invokes the name of Adam Smith – who is best known for authoring The Wealth of Nations:  widely considered the first modern treatise on economics – and specifically capitalism.  Smith wrote that a properly-regulated marketplace would allow capitalism to flourish.   

DH:  “The notion that smart regulation is the enemy of capital growth is not supported by any evidence at all. In fact, it begins to look like the better-regulated the marketplace is, the better people feel about investing there.  You don’t see a lot pension funds rushing off to invest in places like Nigeria with very high corruption indices.” 

After chronicling the collapse of the markets in 2008 – and the rise and fall of Bernie Madoff, the world’s largest Ponzi schemer, Henriques lectures across the country about the misperceptions that allowed so many smart people to become victims of Madoff. 

“It really is a mission of mine to try to persuade people that most of what they know about Ponzi schemes and Ponzi schemers is wrong or obsolete.” 

But beyond teaching investors how to minimize their risk, the veteran financial journalist says some simple regulatory adjustments would fundamentally improve overall investor protections. 

The first change:  make the Securities and Exchange Commission self-funding.

“Let it use the money it brings in to meet the problems it faces rather than having it turn over money to the federal government that it, itself needs to deal with the growth in the market that generated that additional money.”

Requiring third-party custodians to hold assets for money managers is another good security measure, according to Henriques.    

“A Ponzi scheme is almost impossible if somebody else has to hold the stakes.  If somebody else has to hold the stocks or the bonds or whatever is supposedly being purchased on your behalf.”

Thirdly, Henriques would strengthen the Consumer Finance Protection Bureau – or CFPB -- a government agency set up in 2010 to be a watchdog of financial service firms as well as a consumer advocate and educator. 

The CFPB is not yet meeting the benchmarks spelled out in the Dodd-Frank Consumer Protection Act, says Henriques.  The agency needs a full-time director.  

But the appointment of Richard Cordray to the post has evolved into another partisan battle on Capitol Hill.  Cordray’s nomination is tied up in the Senate – where a Republican majority says they’ll block his confirmation until structural changes are made to the CFPB.  Democratic Senator Elizabeth Warren recently called those tactics a way to keep the game rigged so that consumers remain in the dark and a few bad actors can rake in big profits. 

For Diana Henriques, the intractability on Capitol Hill is a head-scratcher.    

“I’m not sure why people feel that they’re helpless to demand better of their politicians.  Perhaps it has to do with the role that big money and big powerful lobbying interests seem to have in Washington these days.”

Until some of those regulatory changes are made, Henriques continues her mission to educate the average investor.  The most important precautions, she says, are also some of the simplest. 

“Even if Madoff had been completely honest, Rachel, what he was offering was an unregistered money management service that wasn’t even advertised on his website, that didn’t use a third-party custodian, that was highly-secretive, and that few people knew about.  Well, in what parallel universe is that a sensible investment for a middle-income investor?”

Doing the financial homework isn’t easy, says Henriques.  But in this new era of do-it-yourself pension planners, it’s an assignment that just about everyone will have to undertake. 


Diana Henriques, author of The Wizard of Lies:   Bernie Madoff and the Death of Trust, will speak at UNCW on March 20th. 

Tickets will be available for purchase at the door, 7:30 p.m., Wednesday, March 20, at the Burney Center. The cost is $8 each for OLLI members and $10 each for the general public.

Her talk is sponsored by the Osher Lifelong Learning Institute (OLLI) and the Cameron School of Business.  

Diana Henriques is also speaking to students and faculty on March 20 as a part of Business Week.