First Reaction to Madoff Report: W-o-w

The inspector general has dropped a big fat report on us why the SEC blew the Bernie Madoff investigation over a period of ... 16 years. That's right. The securities industry watchdog could have caught Madoff's investment Ponzi scheme as early as 1992. The executive summary (here, on a WSJ blog) is 22 pages crammed with missed opportunities so stunning they'll leave you breathless.

The short version of why the SEC investigators screwed up: Inexperience. Incompetence.

I'm not entirely satisfied with either of those explanations, and I hope to have time to return to this subject tomorrow. But I wanted to weigh in on this quickly because I think there's a more common-sense, fundamental reason the SEC failed, again and again, to catch a multi-billion-dollar Ponzi scheme that wasn't executing any trades (which no one bothered to check!!!!)

Here it is: The SEC is the securities industry "cop on the beat" right? When you want to hire a good cop/detective, what do you look for? Someone who is innately skeptical. Who is a digger. Who isn't satisfied by the first answer he gets. Who invests a little "shoe leather" in tracking down answers. Who, if he doesn't understand something, finds someone who does -- and has that person explain it to him, nice and slow. To be a good securities cop, you don't necessarily have to have an IQ of 170 and understand all the intricacies of options trading -- but you need to be smart enough to know where you have knowledge deficits and dogged enough to fill them.

This is where the SEC messed up, big time. I don't know who it has hired to fill its positions. Maybe the HR department is just massively dysfunctional. But what is clear is that our top securities cops are temperamentally and constitutionally unfit for their jobs. It's that simple. The hell with the inexperience part. The trouble is, they don't think like friggin' cops. You don't hire Fred the Meek 9-5 Insurance Actuary to investigate a string of killings on the west side.

Bold idea: dissolve the agency and reconstitute it. Let's stop pretending it's only this guy making a mistake here, or that guy over there. If you think that's a draconian solution, read the IG's report. The problems are really, really deep-rooted. I don't think they can be solved by firing a few people. Hell, maybe the agency should advertise for a few law enforcement officers and learn how a real cop investigates possible crimes.