Madoff And ETFs

Last Updated: 22 February 2024

Jim, the amazing Madoff story is in some ways a test case for us to see how the regulatory system is or is not working, and how things might be changed.It’s also a salutary reminder for all of us involved in finance of how low public trust in our monetary system has now fallen.

I spent part of this morning reading Harry Markopolos’s testimony to Congress. It’s a real eye-opener, and well worth an hour or two of anyone’s time.

Basically, despite Markopolos’s submission of detailed analyses, over a period of eight years, to the SEC, effectively proving that Madoff ran a Ponzi scheme, the regulator did nothing.

As Markopolos concludes in his report, public trust in banks, brokers, insurance companies, rating agencies, hedge funds, investment managers and, above all, in the Fed, the US Treasury and the SEC has disappeared. He lambasts the lack of transparency from the public authorities, calling the Fed’s refusal to disclose which financial institutions are borrowing from the discount window, and how much, “the ultimate insult to investors.”

He adds that only total transparency can help restore trust in the system, however painful that might be – for example, to banks that are hoping for a recovery in the prices of depressed assets and are so far avoiding write-offs.

It’s difficult to disagree with this conclusion, but it’s also depressing to see how far we are from achieving that goal. By resurrecting more “bad bank” schemes, our political leaders seem addicted to the same off-balance-sheet shenanigans that caused the problems in the first place.

So, Jim, my suggestion that we’d be better off without any regulator was only partly tongue in cheek.

If the regulator’s role is to enforce disclosure and prevent monopoly behaviour, something you rightly point out as important, then I’m all for it. But regulators become all too prone to protecting the institutions that they are supposed to police. There’s been a revolving door between certain Wall Street firms and the highest-level positions in government, for example, and it’s becoming increasingly evident that this can work against the public interest.

Bringing ETFs into the frame, the tracker industry’s virtues of disclosure, low fees and fund liquidity have justifiably resulted in huge investor inflows over recent months. In theory, ETFs should continue to benefit from investors’ demand for openness.

But a reading of the gory details of the Madoff case makes me wonder how many members of the public must now be thinking “a curse on all of them” and swearing never to invest in a financial product ever again.

  • Luke Handt

    Luke Handt is a seasoned cryptocurrency investor and advisor with over 7 years of experience in the blockchain and digital asset space. His passion for crypto began while studying computer science and economics at Stanford University in the early 2010s.

    Since 2016, Luke has been an active cryptocurrency trader, strategically investing in major coins as well as up-and-coming altcoins. He is knowledgeable about advanced crypto trading strategies, market analysis, and the nuances of blockchain protocols.

    In addition to managing his own crypto portfolio, Luke shares his expertise with others as a crypto writer and analyst for leading finance publications. He enjoys educating retail traders about digital assets and is a sought-after voice at fintech conferences worldwide.

    When he's not glued to price charts or researching promising new projects, Luke enjoys surfing, travel, and fine wine. He currently resides in Newport Beach, California where he continues to follow crypto markets closely and connect with other industry leaders.

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