Why the Democrats’ pork-stuffed stimulus package won’t help the economy

By Alyssa A. Lappen
FrontPageMagazine | Feb. 6, 2009

When are earmarks not earmarks? When Congressional Democrats add them to New Deal-style legislation.

According to Congressional Democrats, “there are no earmarks” in the American Recovery and Reinvestment Act of 2009, the massive $1.1 trillion stimulus bill under debate in the Senate this week. In fact, there is little except earmarks in the pork-laden legislation the Obama administration is marketing to skeptical Americans as the urgent cure for the country’s ailing economy.

As things now stand, less than 10 percent of the stimulus bill’s proposed projects could be expected to generate real economic uplift, mostly through tax credits and infrastructure funds. On the other hand, more than 90 percent of the bill would channel taxpayer funds to “special-interest earmarks,” state-level bailouts, and “permanent spending” increases for what will in effect be social engineering by the federal government.

Pork abounds in the bill. For instance, there is $88 million for a new Coast Guard polar icebreaker, $13 billion to repair and weatherize public housing, $2.25 billion for national parks, and $1 billion for the National Railway Passenger Corp. (Amtrak), which hasn’t earned one red cent since its original 1971 government rescue from Penn Central’s ashes. And that’s just the beginning.

The Senate bill greatly expands welfare spending. There are $13.3 billion earmarked to raise health insurance for unemployed workers, $27.1 billion for increased unemployment benefits, and $11.1 billion for “Other Unemployment Compensation.” Another $20 billion will go to raise maximum Supplemental Nutrition Assurance Program benefits (i.e., food stamps).

Elsewhere, the bill looks like a vehicle for Barack Obama’s campaign plan to foster a national “green economy.” To that end, there is $18.5 billion set aside for energy efficiency and renewable energy programs, another $2.4 billion for demonstrations of how to safely remove atmospheric greenhouse gas, $2 billion for a Matoon, Ill. FutureGen near-zero emission power plant, and $600 million for federal government employee hybrid vehicles.

Despite its grand billing as a national life preserver, House Speaker Nancy Pelosi, in a telling demonstration of what Democrats once called “the politics of fear,” had earlier warned that “five hundred million” Americans would loose their job each month if the stimulus package were not passed…,” the bill is increasingly becoming liberal politics by other means. All in all, the bill packs in $136 billion for unproven ideas to create 32 new open-ended federal programs—most of which failed close inspection in earlier Congressional sessions.

While the bill will vastly increase the federal government’s reach, it is noteworthy that the government has never profitably managed a single enterprise. A by-no-means-exhaustive list of government failures might include mortgage giants Fanny Mae Freddie Mac, the mismanaged Federal Reserve Bank and US Postal Service, and the insolvent Social Security, Medicare, Medicaid systems. They’re all bankrupt, as are 40 of the 50 states, each of which is now begging for handouts from a federal government effectively just as bankrupt. As pundit David Coughlin asks, “Why do we think the people who caused these problems are able to fix them …?”

The stimulus bill amounts to a major opportunity missed. Bankruptcy—not a government bailout—is often the road back to solvency. Consider that six major airlines—including United, Delta, Northwest, and Continental—all filed for Chapter 11 and emerged with real hopes for profit. Such large and small steel companies as National Steel, Bethlehem Steel, Wheeling-Pittsburgh, Kaiser, Bayou, Weirton Steel, and many others have leveraged Chapter 11 to emerge as stand-alone companies—or to sell a leaner version of themselves to competitors. Pacific Gas & Electric and Kmart are healthy again, too, following their Chapter 11 filings.

No surprise, then, that over 100 economists are petitioning the Senate against the stimulus and 200 oppose financial bailouts in general. The public seems to agree. Support for the Senate stimulus plan has plummeted to just 37%, according to Rasmussen. Cooler heads are even starting to prevail in the Senate. President Obama called “centrist” Maine Sen. Susan Collins to the White House this week to discuss cutting the plan’s price tag to $700 billion, and to focus on tax cuts and spending to specifically generate jobs. That means spending of dubious stimulative potential—$780 million to prepare for a flu pandemic, for example—may soon be trimmed from the bill.

Still, it’s too bad that no one has managed to convince President Obama to eliminate the idea of “stimulus” spending all together. The U.S. already has squandered nearly $1 trillion in bailouts, to no avail. We got here “by spending and investing money that didn’t exist,” notes Oklahoma Sen. Tom Coburn. As a good physician, Coburn wisely prescribes treating the disease, not its symptoms.

The generic term for raising holdings in a tanking stock is “doubling down.” But great investors only do that for successful companies. The stimulus bill is something else entirely. If the Senate passes this “stimulus,” it would merely be doubling down on legislative pork. In the end, not even calling such proposals “job-creating investments” can disguise the fact that the bill won’t actually create jobs.

Can America really spend its way out of recession?

By Alyssa A. Lappen
FrontPage Magazine | Jan. 27, 2009



In the first sweep of his Presidential pen, President Barack H. Obama proclaimed Jan. 20 a “National Day of Renewal and Reconciliation” to hearten Americans in a “season of trial” and discord. Obama asked citizens to shoulder the “glorious burden” of U.S. democracy with service to a “common purpose,” that is, “remaking this Nation for our new century.” (And that, ironically, the same day Rev. Joseph Lowery insulted all Americans by implying that heretofore whites always embraced what is wrong.)

Renewal sounds great in theory. But Obama apparently proposes to remake the U.S. economy into the “fixer-upper” bought by two hopeful newlyweds in the popular 1986 comedy, The Money Pit. They poured their love and life’s savings into the house. In the end, the structure literally crashed down around them, and their marriage nearly went with it. Obama may now be on his honeymoon with most U.S. voters. But such a remake, America doesn’t need.

Trouble is, Obama’s renewal thesis erroneously hinges on $825 billion more in government aid—euphemistically labeled the American Recovery and Reinvestment Act (ARRA). If it passes, that would be $550 billion in new spending and $275 billion extra tax relief—more than most U.S. government spending sprees in history, and some 3% of gross domestic product (GDP) through 2010. Proposed January 16 in the House, that spending would top upwards of $2.7 trillion exhausted in 2008, not counting $167 billion in emergency tax rebates—and at least $7 trillion allocated to “economic rescue.”

The ARRA plan includes some great ideas. For example, it proposes $32 billion in support for a “smart electrical grid” to vastly improve energy efficiency, as initiated in Europe in 2005, mandated by the 2007 Energy Independence and Security Act, and detailed by President Bush’s Department of Energy. Also potentially valuable are $20 billion in renewable energy tax cuts and credits and $6 billion to weatherize modest income homes.

But most of Obama’s ARRA proposals amount to run-of-the-mill programs, conveniently lumped under the “economic renewal” label for political expediency. The bill allocates $32 billion to transportation projects, $31 billion for government building and public infrastructure repair, $19 billion to water projects and $10 billion for railways. It proposes $79 billion for state-level fiscal relief to prevent educational aid cuts, $41 billion for local school districts, $21 billion to modernize schools and $16 billion for science and rural internet facilities.

Conceivably, at least, those funds could be well used. But legislators traditionally squabble over federal aid, which is also bridled with red tape, terribly inefficient—and usually lined with pork.

Obama well understands how and why to serve legislative pork. Chicago schools, for example, did not fare well during his Illinois State and U.S. Senate tenures. In 2005, teachers in suburban Chicago’s Thornton Township earned an average of $83,000 for nine months of five-hour and forty-five minute school days. By Obama’s account, Thornton’s children wanted longer school days. But his Chicago Teachers Union supporters rejected that. Thus Chicago spent $10,500 per student in 2008, 15% over the 2006 national average. But last year only 34% of Chicago students met or exceeded reading standards on the Prairie State Achievement Exam (PSAE), and 28%, its math standards. Sure, scores on Chicago’s Illinois Standards Achievement Tests (ISAT) appeared improved from 2005 to 2008. Yet only 55% of Chicago students graduated in 2007.

Also masquerading under Obama’s economic renewal act is $154 billion for health care—$90 billion to bolster state Medicaid funds, $39 billion in health insurance subsidies for the officially unemployed, $20 billion for health-information technology modernization, and $4 billion for preventive care. Improving health-information technology might fall under economic renewal. But what do $134 billion in health care subsidies have to do with it? Perhaps they’re meant to jump-start Obama’s controversial nationalized health care plans even before Congress discusses the subject.

As for $275 billion in proposed tax relief, how do $140 billion in personal tax cuts for two years ($500 per worker and $1,000 per couple) differ from the Bush Administration’s ineffective 2008 emergency relief program? Most of the rest would cover more subsidies: $1,000-per-child tax credits for the working poor, expanded earned income credits for families with three kids, $2,500 college tuition credits, and permanent forgiveness on repayment of $7,500 tax credits for first-time home buyers. The only real economic stimuli, two of which duplicate one other, are tax credits on past profits for currently unprofitable businesses, “bonus” depreciation for new plant and equipment purchases, doubling small business capital investment and new equipment write-offs, and tax credits for companies hiring “disconnected youth and veterans.”

Obama’s economic team, including Treasury Secretary-designate Tim Geitner, posits that all this spending will magically stabilize things and “create or save” nearly 4 million new jobs by 2010. On Jan. 21, Geitner reiterated that to the U.S. Senate Finance Committee, arguing that the Congressional Budget Office (CBO) had miscalculated its projection that the U.S. cumulative budget deficit would reach nearly $2 trillion by 2013, since the office had not factored in Obama’s proposals. The full Senate approved Geithner’s nomination Jan. 26, by 60 to 34.

Mind you, the CBO is neither authorized nor mandated to base economic projections on draft proposals of presidents-elect. Moreover, the CBO projected budget issues for the next ten years on Jan. 8, over a week before House Democrats introduced the ARRA. And ARRA would pump most of the total into government programs, not directly into the economy.

Yet Geitner insisted, had the CBO only factored in such Obama provisions “as the bonus depreciation and fiscal aid to the states” and less traditional accounting “assumptions of the spend-out rates,” it would have concluded that the proposed bill would “ensure the fast-acting spend-out rates that would be needed fiscal stimulus [sic] over the next few years.” He neglected to note that the Federal Reserve Board can’t provide further economic rocket fuel by slashing the “federal funds rate” charged on overnight interbank loans. That barrel is dry.

“What has been tried hasn’t worked,” former Sen. Finance Committee chairman Sen. Charles Grassley noted, suggesting that Congress fix the broken financial system before adopting yet another stimulus package. Geitner ignored that point.

Unfortunately, the Committee voted, 18 to 5 (based on Geithner’s unpaid past taxes, Grassley opposed), to send the nomination to the full Senate, which like the Senate Finance Committee ignored Grassley’s point. So much for bi-partisanship.

They should: In three months, the U.S. Fed doubled the monetary base—total bank reserves plus U.S. currency—to no avail. The Fed wasted all this money creating a “liquidity trap.” No one is borrowing.

Notably, printing money has failed abysmally worldwide. The U.K. expended nearly £500 billion to “restore confidence in Britain’s major lenders,” bolster bank shares and guarantee loans. British investors gained zero confidence. Rather, the British pound hit a 23-year low on Jan. 21, after the Bank of England announced it would increase the money supply to keep inflation over 2.0%. Likewise, Swiss Economic Minister Doris Leuthard last October injected bailout funds into UBS and Credit Suisse, mainstays of an industry supplying 11.4% to her country’s GDP. But UBS wrote off $550 billion of its asset value to cut balance sheet leverage to 3%.

Spain invested $41 billion into illiquid Spanish bank assets. Standard & Poors nevertheless downgraded Spain along with Greece as their risks of public debt default rise and put Ireland and Portugal on negative watch lists. Iceland officially went bankrupt last year. Hungary neared bankruptcy and this year expects at least 1.7% economic decline despite monetary easing.

The short-term failures of money-printing are everywhere visible. The “European Central Bank, the Bank of England and the central banks of India, China, Australia, Norway, Sweden South Korea, the Czech Republic, Switzerland, Japan and even Indonesia” all aggressively eased monetary policy to buoy faltering economies, notes famed economist A. Gary Shilling,—who like myself predicts deflation—not inflation. Nothing worked. Now “central bank rates are approaching zero at which point, … they’ll stop falling,” he jests darkly. In Asia, Sinagpore predicts economic contraction of 2% to 5% this year, following an annualized decline of nearly 17% in its domestic product from October through December.

Long term, even Obama’s stridently Keynesian team members realize that printing money is no cure all. Brookings Institution economist Jason Furman wrote last year that government tax and spending stimuli should be short-lived and “not increase the already large long-run budget deficit,” lest they also increase inflation and tighten the money supply.

Likewise, Obama budget director nominee Peter Orszag focuses on “putting the budget on a more sustainable course.” Obama wants to establish national universal health care, but has already floated the idea of cutting Social Security and Medicare. Interesting.

Despite his bluffs at the Senate Finance Committee, Obama economic point man Tim Geithner knows the projected $1.2 trillion 2009 U.S. budget deficit, and $412 billion 2008 interest bill—above 9% of the U.S. budget—are serious causes for concern. He also knows that interest bills will only rise with increased spending, not least since interest rates themselves have nowhere to go but up.

The U.S. national debt, now $10.6 trillion, equals $34,868 for each of 304 million U.S. citizens. But Americans filed only 143 million tax returns for 2007, a number likely to fall sharply as unemployment rises. Every dollar the U.S. government spends must be paid back some time. Taxpayers will inevitably shoulder the gargantuan, ill-conceived burden.

Do Americans really want change that remakes the U.S. into a national Money Pit?

The U.S. economy is on dangerously thin ice.

by Alyssa A. Lappen
FrontPage Magazine | Jan. 19, 2009

Upon his January 20 arrival in the Oval Office, President-elect Barack Obama will face the worst recession to hit the U.S. economy since World War II, the Congressional Budget Office reported to the Senate Budget Committee on January 8. The U.S. Treasury deficit—what the government spends over and above its income—will nearly triple in 2009 alone, to $1.19 trillion. Worse, the cumulative U.S. budget deficit will reach almost $2 trillion in the next five years.

To put things in perspective, last October, the projected $1.2 trillion 2009 deficit was 8.2 percent of the nation’s gross domestic product (GDP). That’s still far more than the minimum 3% to 5% “savings rate” economists expect of average Americans this year, which in turn is a vast improvement from savings rates in recent decades. Meanwhile, the economic soothsayers also predict gross U.S. production, already falling, will slump at least 4% to 5% by next December, while federal revenues also drop some 6.6%.

All this only spells big trouble for overburdened U.S. taxpayers and businesses now keeping the government afloat. It will be like trying to stretch a 10-inch diameter buckskin over the head of a 30-inch diameter drum. And taxpayers and businesses will be asked to do most of the stretching.

Assuming that U.S. economic policies remain unchanged—and the Federal Reserve Board has already expended most available economic rocket fuel by cutting to nearly zero the “federal funds rate” charged on overnight interbank loans—Obama can’t do much more than that besides printing money.

And print money, Obama surely will.

In fact, the Bush administration gave the greenback presses a galloping start. Since August, the Fed issued “tons of newly created dollars into the economy,” doubling the monetary base—the nation’s total bank reserves plus U.S. currency— a “phenomenal increase” that had some (erroneously) worrying about the potential for steep inflation, reports the Wall Street Journal. [Update Jan. 19, 2009: On the contrary, the Consumer Price Index (CPI) fell 0.7% in December—the fifth consecutive decline. Consumer prices rose hardly at all—only 0.1%, against the 1.5% to 2% rate of price increases preferred by the Fed.]

The federal government has already allocated at least $7 trillion to the nation’s “economic rescue,” including the $700 billion Troubled Asset Relief Program (TARP), last year’s $168 billion Economic Stimulus Act, the $300 billion loan-loss backstop for Citigroup and $152 billion AIG rescue. Of those allocations, the U.S. has already torn through upwards of $2.7 trillion—not counting $167 billion in emergency tax rebates granted to consumers.

In this light, Fortune magazine’s October 2008 prediction that Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson could handle the mess looks far too optimistic. The empty Federal Reserve tool chest resembles that of 1935, when Chairman Marriner Eccles had lowered discount rates as much as possible to create “easy money.” You “cannot push on a string,” a Maryland Democratic congressman had noted back then. “One cannot push on a string,” Eccles agreed.

Now too, massive Fed and Congressional stimulation have not altered the U.S. economy’s downward trajectory. Indeed, the U.S. economy in 2008 lost an aggregate 2.6 million jobs, more than in any year since World War II, putting 7.2% of the work force in the “unemployment” lines. Add in all part-time, volunteer and self-employed workers considered fully employed by conventional unemployment measures, and the key “unemployment” statistic undoubtedly has already have hit double digits. Factory orders, housing construction and retail sales decline precipitously and banks foreclose on millions of American homes.

The Fed has again created what “some economists” call a “liquidity trap.” Printing money is a “vastly overrated” economic stimulant “even in ordinary times,” according to Wall Street Journal veteran George Melloan. The “liquidity” the Fed has injected into the U.S. economy is like trying to “push on a string.” Americans are not interested in or able to borrow. Whatever savings they have gets deposited in banks, for which deposits are liabilities that must be invested to keep banks afloat.

For the time being at least, the U.S. Treasury has profited nicely from this ugly dilemma. As investors and banks seek “safety,” U.S. Treasuries have become a haven, bolstering the formerly beleaguered U.S. dollar, and pushing rates on 30-year Treasury bonds to just 3.06% and 10-year bonds only 2.39%.

But cheap credit does not spur new investment or economic growth. In his 1993 study of more than 5,000 U.S. manufacturing companies from 1971 to 1990, economics professor Steven Fazari found that business invest based on overall economic health and the growth in their own sales and profits. “Weakness in the economy is more likely to reduce investment than lower interest rates are to stimulate it.” But low rates can and will spring like a jack knife if and when investors find other outlets for their “easy” liquidity-induced cash.

Meanwhile, U.S. taxpayers still face the extraordinary deficit burden already heaped upon them—and only likely to grow under the Obama administration. As Melloan noted, in the 1990s, “Japan tried to spend its way out of its post bubble malaise,” but merely accumulated “a mountain of debt” and lost a decade to “little or no economic growth.”

Even if the national deficit increases no further, national debt would grow more onerous in the case of a Great Depression-like deflation tornado, such as shredded the U.S. economy and in 1933 raised unemployment to 24%. The debt will remain the same or even grow until it is paid off, while incomes and the tax base shrink. Keep in mind, as in 1933, interest rates and stocks have already declined steeply.

Moreover, to cover the U.S. deficit, taxes will certainly rise. In an inflationary environment, those new taxes could broadly pass to willing (or resigned) consumers. Now, however, in a contracting economy, they must be spread more narrowly to shrinking companies and a shrinking pool of workers. Companies are likely to respond by further slashing jobs, thus adding to the very grave potential for a deflationary spiral.

That such an enormous economic disaster could compound current financial woes is not hard to imagine, given the massive deflation already seen in basic commodities like oil: On January 14, the European Central Bank cut interest rates to 2%. “It looks odds-on that Eurozone consumer price inflation will fall well below 1.0% during 2009, and a brief period of deflation is very possible,” IHS Global Insight chief European and UK economist Howard Archer informed his research clients. Moreover, he expects European interest rates to halve again, to 1.0%.

For all the horrors of galloping inflation, massive deflation is exponentially worse.

The Ponzi fraud made fools of his investors, Wall Street, and federal regulators.

by Alyssa A. Lappen
FrontPage Magazine | Dec. 22, 2008

“The fool is obstinate, and doubteth not; he knoweth all things but his own ignorance.”
— Akhenaten (d. 1336 BCE)

No doubt, 16th century British writer Thomas Tusser (“A fool and his money are soon parted”) and 19th century showman P.T. Barnum (“There’s a sucker born every minute”) would have recognized them among an ever-rising number of glamorous clients victimized by the decades-long alleged Ponzi scam of former hedge fund manager and NASDAQ chairman Bernard Madoff. Some $50 billion evaporated, a figure also likely to grow in what may be remembered as the greatest investment fraud of all time.

Madoff is now on a collateral-secured $10 million bond, confined to his $7 million New York apartment with an electronic monitor and 24 hour daily curfew. Death threats reportedly assail the former hedge fund manager.

But the biggest fools may be at the U.S. Securities and Exchange Commission (SEC), which failed to properly police the U.S. financial markets. The Securities and Exchange Act of 1934 established rules to prevent such fraud. Observed SEC Chairman from 1937 to 1939 and Supreme Court Justice William O. Douglas, “without an SEC ‘shotgun in the closet,’ there was little incentive for an industry self-regulatory organization [SRO] to perform the unpleasant task of disciplinarian.”

The SEC long ago shelved its shotgun, too often letting financial villains escape with little or no punishment. University of Texas law professor Robert Prentice in 2002 cataloged a long history of abuses showing the need for stringent federal securities industry oversight.

Madoff was but one more case, albeit a giant one. He “kept several sets of books and false documents, and provided false information involving his advisory activities to investors and to regulators,” said SEC chairman Christopher Cox, admitting concern over possible SEC corruption. In 2007, Madoff’s niece and compliance attorney, Shana Madoff, married former SEC attorney and inspections officer Eric Swanson, who left the commission in 2006.

Over the years, plenty of fingers pointed at Madoff. The SEC could have collected sufficient evidence to lower the boom. It was certainly available.

As long ago as 1991, according to my former colleague Jack Willoughby, “the SEC charged two Florida accountants with raising $440 million in unregistered investment pools run by an unnamed broker who ultimately turned out to be Madoff. The funds were shut down.” Madoff, though, kept operating.

In 2000, a Boston securities trader and army reservist in intelligence and unconventional warfare, Harry Markopolos, alerted the SEC to his suspicions. Madoff attributed his investment prowess to buying and selling options on 30 to 35 stocks in the Standard & Poor’s 100 index, while also owning those same stocks. However Markopolos concluded, given the sums he claimed to manage, there were simply too few S&P 100 options then available to yield Madoff’s purported 12% annual returns.

After a colleague also questioned those results, Markopolos tested his thesis. The Boston trader attempted but failed to duplicate Madoff’s results, even using Madoff’s supposed market-neutral, “collar” or “split-strike conversion,” methodology. So Markopolos bought Standard & Poor’s 100 Index puts (rights to sell specific stock at a certain price on a set date) and sold out-of-the-money calls (rights to buy stock at set, higher-than-market price on a certain date) for the blue-chip stocks he also owned. The idea was to limit gains on a stock while preventing steep share price declines, thus producing good returns regardless of the market environment. No dice. The strategy did not work as Madoff claimed.

Markopolos then consulted Boston financial mathematician Daniel DiBartolomeo. He confirmed that Madoff’s strategy could literally not achieve his purported results. Markopolos and DiBartolomeo were not alone. In 2001, Barron’s reported that Madoff competitors, and some former investors had also likewise determined the strategy did not compute. They speculated that, as a trader, Madoff probably profited by “front-running” his customers—buying stocks before them, at lower prices, and quickly selling at slight markups. Any “seasoned hedge-fund investor knows the split-strike conversion is not the whole story,” one former Madoff investor told Barron’s. “To take it at face value is a bit naive.”

Also in 2001, the London-based MAR Hedge Fund Report questioned the ability of Madoff’s “feeder” Fairfield Sentry and Tremont Advisor funds “to provide such smooth returns with so little volatility.” One mutual fund with a similar method had since 1978 “experienced far greater volatility and lower returns during the same period.” It looked especially fishy, since Madoff Securities claimed to take no management fees, but to profit only from incentive fees off returns.

Meanwhile, Madoff not only managed the funds. His firm also executed commission-generating trades, and even cleared them—a clear conflict of interest. MAR cited over 15 traders, options strategists and hedge fund managers, wondering aloud why no one could match him. Former investors also disliked his secrecy, demands for asset custody and clearing, and his inability to explain specific results.

Increasingly suspicious of fraud, Markopolos continued pursuing his quarry more zealously. On Nov. 7, 2005, “under section 21A(e) of the 1934 Act” prohibiting front-running customer orders, he filed a 19-page memo entitled “The world’s largest hedge fund is a fraud.” Based on mathematical calculations concerning options and derivatives, statements from Madoff investors, Markopolos argued that Madoff ran a Ponzi scheme. He also noted that the fund was not organized as a hedge fund, but acted and traded like one, allowing third party fund of funds “to private label hedge funds” that in turn provided his broker-dealer and Electronic Communications Network (ECN) “with equity tranch funding.”

“Thanks,” the SEC New York branch chief replied the same day. Whatever later transpired, Madoff continued operating.

In 2006, another warning came in. The SEC interviewed Madoff as well as former SEC official Jeffrey Tucker, who had then operated Madoff’s Fairfield Sentry “feeder” fund. The SEC concluded Fairfield Sentry “hadn’t properly disclosed to investors” Madoff’s direct control over its investments. Madoff registered, but kept operating.

Meanwhile, the SEC had foundered for decades as it empowered the financial industry to police itself through self-regulatory organizations (SRO) like the Washington, D.C.-based Financial Industry Regulatory Authority (FINRA). In 1977 the SEC blessed creation of the Securities Industry Conference on Arbitration (SICA), a group of SROs, the Securities Industry Association and “public members” to create a Uniform Code of Arbitration (UCA).

Had SEC officials considered more carefully, they might have noted the folly of trusting financial bodies and commercial institutions to protect investors while also governing themselves. Alas, the 1980s UCA code required U.S. investors, securities brokers, and their staff to accept, in advance, involuntary contracts requiring all future securities-related disputes to be resolved via binding arbitration. Even the Supreme Court played a critical role: It ratified these measures, in 1987, 1989 and 1991 decisions, mandating that even securities-related racketeering [1] charges be processed through binding arbitration.

A large percentage of those whom Madoff “exploited” were prominent Jewish community leaders and organizations, including film-maker Steven Spielberg, humanist and Holocaust survivor Elie Wiesel. publisher Mort Zuckerman. New Jersey Senator Frank Lautenberg, Hadassah and New York’s Yeshiva University. Hadassah, which runs Jerusalem’s world-famous Hadassah Hospital, lost $90 million, nearly a fifth of its $500 million endowment.

On Manhattan’s Upper East Side, Fifth Avenue Synagogue members, including synagogue chairman Ira Rennert, lost some $2 billion. That community is particular devastated since synagogue president J. Ezra Merkin’s investment firm had introduced many clients to Madoff. Merkin’s Ascot Partners lost some $1.8 billion in the fraud. Former L.F. Rothschild banker and the onetime mayor of Fort Lee, N.J., Burt Ross, also reportedly lost $5 million, virtually all of his personal financial assets.

The massive declines have now also begun to compromise FBI counter terror investigations, as the agency is forced to shift federal agents to the Madoff case, to determine how such a vast fraud escaped notice for so long.

Meanwhile, lobbyists and politicians reportedly received some $400,000 in Madoff donations over the years.

The biggest fool may have been Madoff, who inadvertently destroyed himself.

But besides his investors, the SEC and the Courts were also made to look like fools. Swift justice.

NOTES
[1] Stephan Landsman, “ADR and the cost of compulsion; The Civil Trial: Adaptation and Alternatives,” Stanford Law Review, No. 5, Vol. 57, Apr. 1, 2005, Pg. 1593.
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Alyssa A. Lappen is a former Senior Fellow of the American Center for Democracy, former Senior Editor of Institutional Investor, Working Woman and Corporate Finance, and former Associate Editor of Forbes. Her website is www.AlyssaaLappen.org.