Prof. Jayanth R. Varma's Financial Markets Blog

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Prof. Jayanth R. Varma's Financial Markets Blog, A Blog on Financial Markets and Their Regulation

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Tue, 10 Feb 2009

What if Markopolos had blogged?

Ray Pellecchia writes on his blog that Markopolos could have stopped Madoff simply by writing a blog after his complaints to the SEC fell on deaf years. There is a serious problem with this suggestion – the SEC itself.

Regulators around the world may be too dense to understand the niceties of Madoff’s purported split strike conversion strategy, but they are smart enough to act and act quickly agaist somebody trying to spread what appear to be malicious rumours. (Please remember that there is no such thing as an anonymous blogger when the state is after you.)

The very fact that the SEC investigated the complaint and found no merit in the complaint would have made it evident that that blog post was just a baseless rumour. Add in the fact that Markopolos was a rival hedge fund manager and the grounds for acting against the rumour mongerer are plain as daylight. From whatever I have seen of regulators anywhere in the world, it would have been suicidal for Markopolos to write that blog.

This is an example of how a regulator makes things worse merely by its existence. Absent an SEC or an FSA or a SEBI, a Markopolos could stop a Madoff by blogging. Because such a regulator exists, Markopolos is powerless!

Posted at 17:46 on Tue, 10 Feb 2009     4 comments     permanent link


Naveen wrote on Wed, 11 Feb 2009 09:54

Re: What if Markopolos had blogged?

Prof Varma , I completely agree with you with your opinion that presence of regulator actually prevented people like Madoff being uncovered. My question here is how comfortable would you be in expanding this argument as a research paper or making a policy recommendation for minimising the role of any regulator to the very essential ( if at all they are required) so that market forces can take care of itself.

Consider the points below as my comments to your reply to me in the last blog entry.

1. I could not understand how high frequency data would reduce insider trading. My understanding is that insider trading is based mostly on qualitative information which gets reflected as hard data only a little later. Even if we assume that the company gives out data every month, it is hard to accept that insider trading can be reduced by even a percentage. 2. In the case of satyam , don’t you think even Government (state) is party to the whole scandal. Also it is not very difficult to think of a scenario where there is no implicit or ecxplicit government support and still the market forces operating, as some one would be interested in taking over satyam at some price ( a price that is market determined), and satyam reaching the right management. Wouldn’t that be a more fair outcome. Now look what happened, the person who is appointed as CEO by the new board is himself accused of insider trading of not so small proportions. My point is.. this argument for stakeholder interest is borne out of a faulty process (that governemnt is implicitly supporting the firm) in its first place. How can we legitimize such a faulty process.

Paresh wrote on Wed, 11 Feb 2009 10:53

Re: What if Markopolos had blogged?

"Because such a regulator exists, Markopolos is powerless!"

Although this is true, no one can design a selective regulatory system. The rules of regulation have to be the same for all, either you have complete regulation (hopefully complete, if the regulatory agencies are efficient and capable) or no regulation.

Madhu wrote on Wed, 11 Feb 2009 12:04

Re: What if Markopolos had blogged?

Prof, Makopolos has mentioned in his testimony that he was fearful of safety of his family and that he undertook this investigation with great personal risk.

There is no way he could write a blog and stop this because of the contacts Madoff had.