When it comes to those who see increased government regulation as some kind of panacea for food safety problems, the case of Bernard L. Madoff and his alleged $50 billion Ponzi scheme offers instruction. It turns out that the S.E.C., the regulator body that oversees securities markets and is supposed to protect investors, did nothing and so theNew York Times now reports: S.E.C. Issues Mea Culpa on Madoff:
The Securities and Exchange Commission said Tuesday night that it had missed repeated opportunities to discover what may be the largest financial fraud in history, a Ponzi scheme whose losses could run as high as $50 billion.
The commission said it received credible allegations about the scheme at least nine years ago and will immediately open an internal investigation to examine why it had failed to pursue them aggressively….
Mr. Madoff kept several sets of books and false documents and lied to regulators when they questioned him in previous examinations of his firm, Bernard L. Madoff Investment Securities, said Christopher Cox, the chairman of the S.E.C.
Investigators never used subpoena powers to obtain information, but rather “relied on information voluntarily produced by Mr. Madoff and his firm,” Mr. Cox said….
Besides investigating Mr. Madoff, regulators are now in the embarrassing position of examining whether they should have caught him sooner.
“Our initial findings have been deeply troubling,” Mr. Cox, the S.E.C. chairman, said in his statement. The commission received “credible and specific allegations regarding Mr. Madoff’s financial wrongdoing,” but did not respond aggressively.
“I am gravely concerned by the apparent multiple failures over at least a decade to thoroughly investigate these allegations or at any point to seek formal authority to pursue them,” Mr. Cox said.
Moreover, Mr. Cox said, the commission will investigate “all staff contact and relationships with the Madoff family and firm, and their impact, if any, on decisions by staff regarding the firm.” Mr. Cox added that he had ordered S.E.C. staff to recuse themselves from the investigation if they had “more than insubstantial personal contacts with Mr. Madoff or his family.”
Many who have thought the FDA to be doing a bad job have blamed the Bush administration for starving the FDA of resources and resisting regulation. For example, Marion Nestle, one of the nation’s most esteemed commentators on food policy wrote a letter to the Pundit in which she said:
I’m following your following of the tomato incident with great interest, to say the least. Your piece, What Would FDA Do With ‘Preventive Authority,’ raised important questions.
This one, I see differently. I don’t think the issue is totally FDA incompetence, although I agree there is plenty of that around. I think it is politics.
The Commissioner is a political appointee whose job it is to carry out the will of the administration. This administration doesn’t like regulation much and has made sure that the FDA can’t do too much of it.
Von Eschenbach got spanked when he asked Waxman for more money, and he sure hasn’t tried that again. Acheson would be fired if he spoke up, and he’s the best they’ve got, so it would be a shame to lose him.
My experience in government, limited as it was, taught me that the only way to maintain integrity is to have one foot out the door at all times and to be willing to be fired at a moment’s notice.
That’s a lot to ask of public servants. So what to do? Keep the pressure on, which is what you are doing. Thanks for doing it.
— Marion Nestle
Steinhardt School of Culture, Education and Human Development
New York University
Fair enough, but this example of negligence on the part of the S.E.C. goes all the way back to the Clinton administration, so the problem seems to be far broader than just the inclinations of one administration. It may speak to an inherent limitation of federal regulation: It encourages passivity by others in the chain.
Just the other day, we ran a piece that pointed out that Peter Schiff, president of Euro Pacific Capital, had been remarkably prescient about the financial crisis and accompanying recession. You can find the piece here.
Now Peter Schiff is quoted with a rather insightful comment on the Madoff Mess:
“Of course, the fact that the SEC routinely audited Madoff’s investment company and found nothing wrong is further proof that government regulation of the securities industry is ineffective and has done more harm than good,” he said.
“Rather than protecting investors, it merely lulls them into a false sense of confidence. If government stayed out, private-sector due diligence would do a much better job of ferreting out such massive and poorly conceived scams.”
It is an interesting question. In a sense government regulation, with its promise of safe banking, secure investing or safe food, tends to devalue branding.
Although it is practically a truism to say in the produce industry that consumers make no distinctions between producers and so a food safety incident affects everyone, perhaps this is only true because consumers believe everyone operates under the same umbrella of regulation. They have no reason to believe that, say, Fresh Express is more rigorous in food safety practices than Brand X.
We don’t know, and may never really know, why the S.E.C. didn’t aggressively follow up on “credible accusations” it had. Just as we don’t really know why the local authorities didn’t clean up the 7th Street Market in Los Angeles, as we discussed here. We also don’t know why the local authorities didn’t head off the rats in the New York KFC, which we discussed here.
What all these examples add up to, though, is a certainty that wishes don’t make things so and that simply charging a regulatory body with keeping food safe is no more likely to make it so than charging the S.E.C. with keeping accounts safe made that so.