Monday, January 26, 2009

Regulation as a Magnet for Corruption

NYT this morning attempts to understand how Bernie Madoff pulled off his $50 billion scam. NYT reports in part:

During the decades that Mr. Madoff built his business, he cast himself as a crusader, protecting the interests of smaller investors and bent on changing the way securities trading was done on Wall Street. To that end, like a burglar who knows the patrol routes of the police and can listen in on their radio scanners, he also actively wooed regulators who monitored his business.

“He once mentioned to me that he spent one-third of his time in Washington in the early 1990s, late 1980s,” says a person who has known Mr. Madoff for years but requested not to be identified because he does not want to be drawn into continuing litigation

“He was smart in understanding very early on that the more involved you were with regulators, you could shape regulation,” this individual adds. “But, if we find out that the Ponzi scheme goes back that far, then he was doing something much smarter. If you’re very close with regulators, they’re not going be looking over your shoulders that much. Very smart.”
Those who get close to regulators are doing it for a reason. The solution to this problem is counter intuitive. It is not more regulation, it is less regulation. There is safety in the dispersion of power and the dispersion of checks and balances, so that there is no center of power that bad guys can corrupt.

Anyone hanging around regulators is doing so to corrupt regulation in their favor.

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