Madoff, sentenced Monday to 150 years in prison for bilking investors of billions, should be exhibit A in why the dark world of totally unregulated private money managers and hedge funds should be opened to the light of systematic government supervision. Instead, he is being treated as an aberrant menace, with the danger removed once the devil incarnate, as his victims describe him, is locked up and the key thrown away.
For goodness’ sake this was not some sort of weird outsider who flipped out, but rather a key developer of the modern system of electronic trading and a founder and chairman of Nasdaq. Madoff often was called upon to help write the rules on financial regulation and therefore became quite expert at subverting them.
Money for proper oversight was not allocated because the prevailing ideology regarding private investment firms—embraced by President Bill Clinton ever as fervently as President George W. Bush would later—was the gospel of radical financial deregulation, a practice that has landed us in the larger banking mess. As with the trading in unregulated derivatives, all of the operations of private investor groups, such as hedge funds, were thought not to require government supervision because these were conducted by professional financiers dealing with sophisticated investors who knew what they were doing. If the investment went south, it was on their dime and there would be no innocent victims.
As we saw with the collapse of AIG and now Madoff, that notion is false because private investment contracts can involve the resources of charitable organizations and pension funds and can end up costing the homes, savings and jobs of ordinary citizens who have no idea of which end of this arcane stuff is up.
