The Times (of London) recently reported that “The F.B.I. has been forced to transfer agents from its counter-terrorism divisions to work on Bernard Madoff‘s alleged $50 billion fraud scheme.”
This might lead you to ask an obvious counter-question: Has the anti-terror enforcement since 9/11 in the U.S. helped fuel the financial meltdown? That is, has the diversion of resources, personnel, and mindshare toward preventing future terrorist attacks — including, you’d have to say, the wars in Afghanistan and Iraq — contributed to a sloppy stewardship of the financial industry?
The Times (of New York) followed with an article by Eric Lichtblau that at least partially answered the question:
Federal officials are bringing far fewer prosecutions as a result of fraudulent stock schemes than they did eight years ago, according to new data, raising further questions about whether the Bush administration has been too lax in policing Wall Street.
Legal and financial experts say that a loosening of enforcement measures, cutbacks in staffing at the Securities and Exchange Commission, and a shift in resources toward terrorism at the F.B.I. have combined to make the federal government something of a paper tiger in investigating securities crimes.
At a time when the financial news is being dominated by the $50 billion Ponzi scheme that Bernard L. Madoff is accused of running, federal officials are on pace this year to bring the fewest prosecutions for securities fraud since at least 1991, according to the data, compiled by a Syracuse University research group using Justice Department figures.
The degree of cause and effect here is an obviously broad and perhaps unanswerable question. Part of the problem is that we’ll never know how much something like “security theater” may prevent an actual attack.
Furthermore, just as it is hard to prove a negative in general, it is hard to prove that, e.g., a terrorist attack didn’t happen because of certain preventive measures. What we do know, however, is that governments in particular have a hard time focusing on more than a few big problems at once, so I don’t think it’s unreasonable to suspect that the anti-terror focus of the past several years has meant that less attention was paid to far more typical issues like financial fraud, etc.
More than anything, the Madoff fraud makes me appreciate (yet again) Warren Buffett‘s distaste for anything opaque and inexplicable. As he famously put it: “It’s only when the tide goes out that you learn who’s been swimming naked.”
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Nice post — can’t wait for all the liberals to jump on board, using this “connection” to blame Bush for all the world’s woes once again.
And regarding Buffett — you might want to check out how much money his holdings and companies have lost on subprime and CDS. A lot.
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While it is certainly a possibility, I think it is also likely that enforcement of financial regulation was more lax because it was not a high priority under the Bush administration. Even in the absence of an alternative use of those resources, I think there would have been cutbacks motivated by the assertion that government is always the problem and not the solution. What shocks me most though is how little the anti-government types have learned from this crisis.
Is there an underlying assertion here that we need more protection from ourselves than from parties outside this county? In a Ponzi scheme one of the first protections a “victim” needs is from him or herself. How does the government do that other than making moves/policies/etc. that encourage greater responsibility in people?
Something else that might be worth noting in terms of this argument is the shift of the Secret Service from the Treasury Department to Homeland Security. Although this didn’t change the agency’s mission, it seems it could have inadvertently and subtly shifted focus from financial crime investigation to terrorism.
Is there any reason to assume that security theater will prevent any attacks at all?
The whole point of security theater is to placate the masses without adding any real security.
It’s certainly true that the focus of most law enforcement shifted after 9/11, and with good reason. With most of the US questioning why this wasn’t stopped, especially when we knew about a danger, people within the FBI would have been remiss to not shift gears to a large extent. Of course, there are only so many agents and so much time and this meant paying much less attention to white collar crime, which wasn’t high on anyone’s radar screen anymore (the Enron effect didn’t last long).
In fact, when I was working for a US Attorney’s Office last year, we discussed this very issue. it was joked that if I ever wanted to commit a crime between $50,000 and $250,000, now was the time because it was too big for local police, but too small for the FBI with it’s focus on terrorism and other “violent” crime.
Madoff may not have been caught, but it is likely that there would have been more investigation of white collar crime had 9/11 never happened. None of that speaks to whether we are better off with the changed priorities (since it’s also likely that the focus on terrorism has prevented terrorist acts), but it is certainly something to consider. Perhaps this also speaks to why the FBI is currently looking to hire hundreds of new agents. Like everything else, nothing abruptly puts dangers from yesterday into a mission for tomorrow like a crisis.
The financial crisis was not caused by a lack of regulation. It was caused by government policy, formed in congress, to subsidize housing loans. The House Financial Affairs Committee (Barney Frank, Chmn.) had plenty of warnings over many years from OFHEO, the regulator set up by Congress, and ignored them. Mr. Frank still wants to expand Fannie Mae, the central player in problematic housing finance.
The government had/has great influence over the ratings agencies (eg. S&P, Moody’s, Fitch), and pressured them (it seems) to give AAA ratings to the bonds that financed housing loans, even the bonds built on subprime loans.
This caused $trillions of debt to be misevaluated, mispriced, and sold worldwide. The supporting details are at We Guarantee It ( http://easyopinions.blogspot.com/2008/10/we-guarantee-it.html ).
A lack of regulation was also not a factor in the Bernie Madoff swindle. Madoff was investigated by the SEC and cleared (!). We can have layers of “regulation”, but how do you build a government regulatory bureaucracy that is competent. I would say that you can’t, and certainly they weren’t.
Further, many of Madoff’s investors suspected that he was profiting from illegal activities. They thought Madoff was profiting illegaly (“front-running”) from his public brokerage operations, and were happy to share in the gains. They didn’t think Madoff would cheat them, just the others. See “Investing With Bernie Madoff” ( http://easyopinions.blogspot.com/2008/12/investing-with-bernie-madoff.html )