The hearing, initially to be held Thursday, has not been rescheduled.

The second storyline found Pfizer, the pharmaceutical giant, forced to pay a record-setting $2.3 billion to the government for the fraudulent marketing and promotion of four of its drugs.

Big stories both. But if the Pfizer saga revealed why for-profit corporations can’t be trusted to regulate themselves for the sake of consumer protection, then the Madoff narrative is a clear warning that government oversight alone is no panacea.

No system of oversight is perfect, of course. But as John Morton Blum, history professor emeritus at Yale University, has pointed out, Democratic leaders could start by installing regulators who believe in regulation.

“The people the Bush administration has put in the regulatory positions are wolves guarding the hens,” Blum said last year as the financial sector began to crash. “You’ve had a personnel problem as much as a legislative one.”

That’s a lesson Congress would do well to consider as it prepares to tackle health reform legislation that aims to weed out Medicare fraud, and climate change legislation that would require close new monitoring of the nation’s big polluters.

The three books are “Too Good to Be True: The Rise and Fall of Bernie Madoff” by Erin Arvedlund, “Betrayal: The Life and Lies of Bernie Madoff” by Andrew Kirtzman, and “Madoff With the Money,” by Jerry Openheimer.

Among the highlights, according to reviewer Carlos Lozada:

Madoff’s heartlessness was breathtaking.

On the day of Madoff’s sentencing, Judge Denny Chin described a letter he received from a widow who went to see Madoff after her husband died of a heart attack. Bernie put his arms around her and said, “Don’t worry, your money is safe with me.” She lost everything and had to sell her home. It was such personal betrayals, as much as the financial losses, that transformed Madoff into one of the most vilified men in America.

The warnings from Madoff competitor Harry Markopolos to the feds regarding his scheme were detailed, complete, and totally on the mark.

Markopolos’ November 2005 memo to the SEC, a 21-page document titled “The World’s Largest Hedge Fund is a Fraud,” belongs in the Unheeded Warnings Hall of Fame, the financial world’s answer to “Bin Laden Determined to Strike in U.S.”

In the end, Madoff’s swindle wasn’t all that hard to figure out. It was just an ordinary, run of the mill Ponzi scheme:

Maybe there is just not much to say about Bernie Madoff, no great depths to plumb. He may simply be a heartless man of middling intellect who felt no compunction in defrauding strangers and loved ones. His scam was not some devious piece of financial engineering and technical know-how; for years, he simply deposited investors’ cash in a bank account, taking vast amounts for himself and hoping to pull enough in to keep the scheme going. Madoff does not embody the perils of a turbulent marketplace; in fact, the market did him in.

As Lozada points out, it’s too early to comprehend Madoff’s legacy just yet, but undoubtedly as more details leak out regarding his operation, we’ll know and understand more. In the meantime, the books about him so far don’t add up to a portrait of an evil genius. As Lozada puts it, Madoff certainly may have been evil. But a genius he was not. Which makes his swindle all the more fascinating, for those of us still trying to figure out how so many rich and powerful people got totally taken in by it.

–

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Sen. Richard Durbin (D-Ill.) (WDCpix)

During George W. Bush’s ill-fated push to privatize Social Security, conservatives condemned the use of surplus retirement taxes to help offset the deficit. But few Democrats or Republicans decry the government’s custom of padding its coffers with fees from an agency with a mission that’s more significant than ever: the Securities and Exchange Commission.

For two decades, the SEC has made more money in fees from the entities it regulates than it receives from Congress through the budget process – about $350 million more in this year alone. With the agency taking heat for its Bush-era enforcement lapses, most notably the failure to stop Bernie Madoff’s infamous fraud, lawmakers and advocates are debating the right amount to spend to ensure stronger financial cops on the beat.

Illustration by: Matt Mahurin

Sen. Dick Durbin (D-Ill.), chairman of the appropriations panel that funds the SEC, unveiled a bill Wednesday that would give the agency $1.13 billion for the next fiscal year – an increase of $100 million, or nearly 10 percent, above the Obama administration’s request.

Debating budgets for financial regulators may sound “as dry as dust,” Durbin acknowledged at a hearing of his subcommittee last month.

“But if you step back for a moment and translate their work into the real world,” he added, “you realize that their oversight … protects the savings and futures of American families, and ensures that economies in countries around the world will view our economy and the way we run it with respect.”

Given those stakes, the argument for beefing up enforcement spending at the SEC appears easy to make. Yet the tight fiscal times pose challenges; Sens. Chuck Schumer (D-N.Y.) and Richard Shelby (R-Ala.) won approval in April to give the agency an extra $20 million in 2010, but appropriators in the House have signed off on only half that number.

The money makes a real difference for SEC officials, who have seen their technology budget shrink by more than half since 2005 and their numbers of investigative attorneys remain more than 11 percent below 2004 levels, according to a recent Government Accountability Office study.

“It’s an ongoing problem the agency has dealt with,” Barbara Roper, director of investor protection at the Consumer Federation of America, said in an interview. “In the past couple of decades, there hasn’t been a careful review of the resources the agency needs to do its job effectively, what the real funding level of the agency should be.”

SEC Chairman Mary Schapiro told Senate appropriators last month that the White House budget request for 2010 would not allow her to hire more staffers than the agency has already brought on board this year.

Schapiro is seeking to add 1,000 positions for 2011 – nearly as many people as now work in SEC enforcement – which still would leave the agency smaller than the Federal Deposit Insurance Corporation.

The FDIC supervises about half as many financial institutions as the SEC.

Bill Black, who served as a senior banking during the 1980s savings-and-loan (S&L) scandal, offered a blunt assessment of the consequences of years of inattention. “Congress probably doesn’t know how” to appropriately arm financial fraud monitors, he said in an interview.

“I don’t mean this in an insulting way,” continued Black, now an associate professor of economics and law at the University of Missouri-Kansas City, “but to know what makes enforcement effective, it pays to know what’s going on at an institution, what goes on at the SEC. And they simply had not conducted meaningful oversight for most of the decade.”

After the S&L crisis, as Schumer and Shelby noted in their legislation, strike forces in 27 cities were set up to monitor financial fraud, backed by 1,000 FBI agents. Black recalled training federal prosecutors during that time on in the ins and outs of complex cases as well as serving as a free expert witness for the government.

Since Schapiro took the helm, the SEC has moved rapidly to restore its tarnished enforcement record. The agency has targeted 23 Ponzi schemes so far this year – with Allen Stanford’s alleged $8 billion fraud topping the list – and charged Angelo Mozilo, former CEO of Countrywide, with insider trading.

But the SEC is hardly the only agency with a checkered past to overcome.

Regulators at the Office of the Comptroller of the Currency and the Office of Thrift Supervision also have fallen down on the job of monitoring the health of the nation’s banks, advocates say. Recent weeks have been even harsher for the agencies, with the OTS on the brink of elimination under the Obama administration’s financial reform plan and the OCC losing a Supreme Court case in which it sided with the banks it policed – and against states that sought stricter consumer protections.

Unlike the SEC, the OCC and OTS are funded by fees they levy on banks. And though the SEC can face a rough road to securing more money from Congress, that fate is better than an agency getting cash from its regulated entities, U.S. PIRG consumer program director Ed Mierzwinski said.

“It’s the worst of both worlds,” Mierzwinski said in an interview. “They’re never dragged before appropriators. They don’t have to fight for their money.”

Regulators did fight over which would attract banks’ business, however, as “charter shopping” and lax enforcement became more common.

So should a financial regulator seek its budget in the politicized climate of Capitol Hill or from the companies it oversees? The question could be a central one as lawmakers take up legislation this month on the administration’s proposal for a Consumer Financial Protection Agency.

Mierzwinski supports funding the new agency through a combination of congressional appropriations and user fees paid by regulated entities.

That mix also appeals to Ira Rheingold, executive director of the National Association of Consumer Advocates. But ensuring proactive enforcement involves more than providing an independent revenue source, he added.

House Financial Services Committee Chairman Barney Frank (D-Mass.) introduced a bill late Wednesday that would fund the new consumer agency in a manner similar to the SEC, with Congress okaying a budget and the agency asked to “recover the amount of funds expended” through fees on the companies it regulates.
Those fees, like the SEC’s generated revenue, will go to the general Treasury – and potentially help balance the government’s books.
Still, ensuring proactive enforcement involves more than providing an independent revenue source, Rheingold noted.

“Moving forward, we need to recognize that these regulatory agencies – no matter how you structure them – may be captured, may be subject to political whims,” Rheingold said. “The way you build safety valves into the system is if you have multiple enforcement mechanisms.”

Frank’s plan would open up two potential enforcement paths. First, the new agency would have the authority to ban forced arbitration in banking contracts, allowing private citizens to pursue certain fraud claims in court instead of being forced into private dispute resolution.

The bill would allow states to set stronger limits on financial practices of national banks without the threat of federal preemption, taking the handcuffs off state attorneys general, such as New York’s Andrew Cuomo and Illinois’ Lisa Madigan, who have doggedly pursued fraud cases.

Some analysts have suggested using the financial overhaul bill to strengthen the SEC’s protections for whistleblowers who report alleged fraud, although this provision was not included in Frank’s draft.

In the end, however, the best way to help regulators elevate enforcement efforts may be a matter of cold, hard cash. The SEC’s budget for policing rule-breakers was lower last year than in 2005, and is still smaller than the amount of fees the agency sends, no questions asked, to the Treasury.

“If you look at what we’ve now spent on the bailout because we weren’t willing to spend money up front on proper regulation,” Roper of the Consumer Federation remarked, “the cost of poor regulation dwarfs the cost of actually funding these agencies.”

The proposal, still being drafted, is likely to give the Federal Reserve more authority to supervise financial firms deemed too big to fail. The Fed may inherit some SEC functions, with others going to other agencies, the people said. On the table: giving oversight of mutual funds to a bank regulator or a new agency to police consumer-finance products, two people said.

The 75-year-old SEC, chartered to oversee Wall Street and safeguard investors, has seen its reputation tarnished as some lawmakers blamed it for missing the incipient financial crisis and failing to detect Bernard Madoff’s $65 billion Ponzi scheme. Any move to rein in the agency is likely to provoke a battle in Congress, which would need to approve the changes, and draw the ire of union pension funds and other advocates for shareholders.

In addition to the SEC proposal, the Obama administration also is considering creating a regulatory commission with broad authority over consumer financial products such as mortgages and credit cards, according to The Washington Post.

That idea mirrors a proposal of top TARP watchdog Elizabeth Warren, who has long argued for the creation of a Financial Products Safety Commission. The purpose of such a commission would be to provide safeguards so consumers would understand exactly what they were getting into when they signed up for mortgages and credit cards.

As Bloomberg noted, financial regulatory overhaul is likely to spur a tough turf battle, as agencies like the SEC or the Office of Thrift Supervision lose some powers or mergeinto other agencies.  And as TWI has pointed out, Warren has become a lightning rod for right-wing critics, who see her as too biased on behalf of consumers.

The fact that the Obama administration is seriously considering her pet project provides a glimpse of which way those in power already are leaning. Score one for Warren, in the long financial regulatory turf war to come.

Some of the victims apparently were able to state the size of the annual returns they wanted from Madoff. Their accounts soon would reflect those returns, some of which regularly reached as high as 100 percent. The Journal cites people familiar with the investigation as its source.

That’s not quite the way investing works for most of us, which is why the SEC must be interested.

Here are some of the victims — who may not be victims after all — according to The Journal:

Jeffry Picower and Stanley Chais, two philanthropists who invested heavily with Mr. Madoff, and Carl Shapiro, one of the money manager’s oldest friends, are among at least eight Madoff investors and associates being scrutinized by the U.S. attorney’s office in Manhattan.

Lots of people have wondered how Madoff got away with his scheme for so long. If these allegations are true, it gives a clearer picture of how it happened. And, if proven, it also means that Madoff wasn’t the only criminal behind the scheme.

Yikes!

“The regulators who were assigned to oversee Wall Street dropped the ball” in this economic downturn and “reminded us yet again how badly reform is needed,” Obama said. For this reason, he noted, “I’m announcing these appointments months earlier than past administrations have.”

To head the Securities and Exchange Commission, Obama appointed Mary Schapiro. Schapiro is an SEC veteran, having served as a commissioner from 1988 to 1994, including two months as acting chairwoman in 1993. She is currently the chief executive of the Financial Industry Regulatory Authority, an independent oversight organization whose “chief role is to protect investors by maintaining the fairness of the U.S. capital markets,” according to its website. In confirmed, she will be the first woman to hold this post.

The SEC has come under fire in recent months. During the presidential campaign, John McCain said that if he were president, he would fire SEC head Christopher Cox for allowing the financial crisis, although it’s unclear that he would have the authority to do so. Now, the SEC has been accused of sleeping at the wheel during Bernard Madoff’s $50-billion Ponzi scheme.

“As the events of the past year, even the past week, have shown us, this is a perilous time for investors,” said Schapiro. She and Obama both stressed the need for increased regulation to get Wall Street back on its feet.

Obama also announced the appointment of Gary Gensler to lead the Commodities Futures Trading Commission. Gensler spent 18 years at Goldman Sachs before serving as assistant secretary of the Treasury from 1997 to 1999 and undersecretary of the Treasury from 1999 to 2001. He also worked on Obama’s economic transition team.

Finally, Obama named Dan Tarullo, whom he called “one of my trusted economic advisers,” to an open seat on the Federal Reserve Board. Tarullo, a Georgetown law professor, differs from the other Fed governors in that he does not have an academic background in economics or a professional background in finance, according to Bloomberg. Instead, his expertise is in law and international trade. He served as President Bill Clinton’s representative at several Group of Eight summits.

Tomorrow, Obama is expected to announce the appointment of Rep. Ray LaHood (R-Ill.) as his transportation secretary.

President Franklin D. Roosevelt signs the Tennessee Valley Authority Act in 1933. (tva.gov)

President-elect Barack Obama is confronting a cascading economic crisis, which seems to worsen by the day, not the week. As venerable banking houses collapse, once-mighty industries teeter on the brink of oblivion and unemployment mounts, the air thickens with recollections of the Great Depression of the 1930s, and comparisons between Obama and President Franklin D. Roosevelt.

But let’s define our terms. So what exactly was the Great Depression, and what did FDR do about it?

Illustration by: Matt Mahurin

The short answer is: The Great Depression was a rare political opportunity, and Roosevelt made the most of it — to the nation’s lasting benefit.

A longer answer would acknowledge that the Great Depression was a catastrophic economic crisis that Roosevelt failed to resolve – at least not until World War II came along, some eight years after he took office.

A still longer answer would recognize the connection between FDR’s short-term economic policy failure and the New Deal’s long-term political success. Much misunderstanding surrounds this matter.

“At the heart of the New Deal,” the distinguished historian Richard Hofstadter once wrote, “there was not a philosophy but a temperament.” In a kind of caricature of Hofstadter’s view, a New York Times writer not long ago said that Roosevelt “threw a slew of policies at the wall, and whatever stuck became the New Deal.”

That accepted view of the New Deal — as a kind of harum-scarum frenzy of random, incoherent policies that failed to slay the Depression demon — has become deeply embedded in our national folklore. But it is woefully and mischievously mistaken.

The fact is that Roosevelt purposely forged in the crucible of the nation’s most harrowing economic crisis a set of reforms that cohered in a more systematic pattern than is dreamt of in most philosophies. The essential logic of that pattern fairly leaps from the pages of the historical record. It can be described in a single word: security.

A Great Depression bread line, as depicted at the FDR Memorial in Washington, DC (Flickr: Tony the Misfit)

It is altogether fitting and proper that the New Deal’s most durable and consequential reform bears that very word in its title: the Social Security Act of 1935. A even greater measure of security was the New Deal’s gift to millions of Americans — farmers and workers, immigrants and blue-bloods, children and the elderly, as well as countless industrialists, bankers, and merchants, not to mention enormous tracts of forest, prairie, and mountain.

Forget about the colorful creations of the decidedly frenzied and much ballyhooed Hundred Days — like the Civilian Conservation Corps and the National Industrial Recovery Act. Most of them were attended by much sound and fury, but signified little, and strutted the briefest of hours on history’s stage.

But all the New Deal reforms that endured – the Federal Deposit Insurance Corp., the Securities and Exchange Commission, the Federal Housing Administration, the National Labor Relations Board, the Fair Labor Standards Act and, above all, the Social Security Act — had a common cardinal purpose. Roosevelt’s goal was not simply to end the immediate crisis of the Great Depression, but to make life less risky, to temper for generations thereafter what FDR repeatedly called the “hazards and vicissitudes” of life.

The New Deal provided more assurance to bank depositors (FDIC), more reliable information to investors (SEC), more safety to lenders (FHA), more stability to relations between capital and labor (NLRB), more predictable wages to the most vulnerable workers (FLSA), and a safety net for both the unemployed and the elderly (Social Security).

Those innovations re-wove the very fabric of national life. They profoundly shaped the fates of Americans born long after the crisis of the Great Depression had passed. With the exception of the FDIC, none dates from 1933.

Had economic health been miraculously restored in the fabled Hundred Days, a swift return to business as usual might have meant politics as usual as well — and none of those landmark reforms would have come to pass. Indeed, there would have been no New Deal as we know it.

Roosevelt understood this. He was a deeply strategic political actor and an astute student of history. He keenly appreciated what the engines of history had wrought and what they might be made to yield in the uniquely enabling circumstance of the Depression.

FDR had sketched the broad outline of his grand design well before the Great Depression descended. Proposals for old-age pensions, for example, dated back to the platform of the Progressive Party in 1912, which nominated for president his beloved cousin and political role model, Theodore Roosevelt. FDR publicly endorsed the idea as early as 1930.

But FDR also told his fellow Democrats throughout the 1920s that his comprehensive reform agenda must wait “until the Republicans had led us into a serious period of depression and unemployment.” He eventually confronted a more dangerous depression than he could have anticipated — but he realized the opportunity that it afforded.

The Chinese character for “crisis,” we are told, is a melding of the characters for “danger” and “opportunity.” FDR did not read Chinese, but he appreciated the logic of that etymology.

In his extraordinary second Inaugural Address, delivered Jan. 20, 1937, Roosevelt crowed about the actually quite modest recovery since 1933. “Our progress out of the depression is obvious,” he said. Then he added something altogether novel in the annals of presidential addresses: “Such symptoms of prosperity may become portents of disaster!” Roosevelt went on to describe the “one-third of a nation ill-housed, ill-clad, ill-nourished,” whose plight made a mockery of the American dream.

The context made it clear that he was not then speaking about the victims of the transient depression crisis, which he saw as ending, but about the accumulated social and human deficits spawned by more than a century of let-‘er-rip, swashbuckling, unregulated American capitalism — deficits not yet fully redeemed.

Solving that problem was what he meant when he said that “this generation of Americans has a rendezvous with destiny.”

“We are going to make a country,” Roosevelt once remarked, “in which no one is left out.”

In that unadorned sentence, Roosevelt summed up his highest purposes and his lasting accomplishments. The New Deal’s legacy was to give countless Americans, who until then had never had much of it, a strong sense of security. And with it, Roosevelt gave them a deeper sense of having a stake in their country and a bond with their countrymen.

Obama’s chief of staff, Rahm Emanuel, seems to have taken this essential history lesson on board. “You don’t ever want a crisis to go to waste,” he said recently. “It’s an opportunity to do important things that you would otherwise avoid.”

Like Roosevelt, Obama faces an urgent economic crisis. Like Roosevelt, Obama must use the (now considerably greater) powers of government to restore economic health. But like Roosevelt, Obama will ultimately be judged not simply on whether or how he ended this crisis, but on how he used it.

We have our own accumulated social and human deficits. Some, like the lack of universal health care, have been begging for attention since Roosevelt’s time. Others, including a crumbling infrastructure, struggling public schools, climate change, energy dependence, environmental degradation, widening income disparity and illegal immigration, have been festering merely for the last several decades.

If this generation is to have its own rendezvous with destiny, and if Obama wants to stand in FDR’s company, those matters can no longer be avoided.

David M. Kennedy is the Donald J. McLachlan Professor of History at Stanford University. He won the 2000 Pulitzer Prize for History for “Freedom From Fear: The American People in Depression and War, 1929-1945.”

Sen. John McCain (WDCpix)

PHOENIX—Lost amid the Senate’s Wednesday night passage of a $700-billion Wall Street bailout plan was an effort by Sen. John McCain and others to “fix” an accounting rule that they believe has helped create the crisis.

The Securities and Exchange Commission and the Financial Accounting Standards Board, or FASB, on Tuesday issued “clarifications” regarding the rule, known as mark-to-market. The new directive allows companies to value their assets according to their estimated future cash flow, rather than current market prices.

Illustration by: Matt Mahurin

There are few buyers for many of the assets on the books of financial institutions, especially mortgage-backed securities. That makes them difficult to value. The price uncertainty has driven their market value down as much as 80 percent, threatening the solvency of many banks.

Banks and securities firms have already written down $500 billion worth of mortgage-backed paper as home prices have fallen and foreclosures skyrocketed.

The Senate bill calls for the SEC to issue a report to Congress on the effect of mark-to-market accounting on the financial industry within 90 days of the legislation becoming law. It also gives the SEC authority to suspend the mark-to-market rule.

The bill now moves to the House, where a vote is expected Friday. Members of the House Republican Study Committee are saying they want the mark-to-market rule scrapped.

McCain first called for repeal of the accounting rule in March. His presidential campaign issued a statement Tuesday supporting the SEC decision to relax the rule.

“John McCain is pleased to see that the SEC had finally decided to permit alternative accounting methods to mark-to-market accounting for securities where no active market exists,” McCain’s senior policy advisor Doug Holtz-Eakin said.

The American Bankers Assn. also praised the SEC’s action, saying “This guidance will help auditors more accurately price assets that are difficult to value under current market conditions.”

Critics, however, contend that allowing companies to base the value of their assets on unknown future cash flows will only cloud their true financial condition.

William Black, former deputy director of the Federal Home Loan Bank Board, said Tuesday that the SEC’s decision to relax the rule is an attempt to “cover up” the extent of the financial problems facing lenders. Black blames a similar accounting change for worsening the savings and loan blowup in the 1980s.

The SEC, McCain and others “want to use the same phony accounting to try and cover up losses, which will only make the losses much greater in the future,” said Black, now an assistant professor of law and economics at the University of Missouri at Kansas City.

But many economists, business leaders and politicians are urging modification or suspension of mark-to-market accounting for lenders holding huge amounts of mortgage-related securities that have no market.

“Assets should not be marked to unrealistic fire-sale prices,” wrote William Isaac, former Federal Deposit Insurance Corp. chairman, in a Sept. 19 Wall Street Journal op-ed article.

Bob McTeer, former president of the Federal Reserve Bank of Dallas and now at the National Center for Policy Analysis in Texas, said on NYTimes.com on Wednesday that suspending the mark-to-market rule “would make a big difference” in easing the financial turmoil. “Mark-to-market was never intended for use in a declining market,” he said.

And in a commentary appearing Monday on Forbes.com, former House Speaker Newt Gingrich urged Congress to suspend the mark-to-market standard to “relieve stress on banks and corporations.”

Accounting groups, consumer advocates and bank analysts, however, oppose scuttling the mark-to-market rule.

The Center for Audit Quality, a nonprofit group funded by accounting firms, sent a letter Tuesday to Congress urging lawmakers not to abandon the rule, arguing that proposals to revoke it “are not in the best interest of investors or the capital markets.”

“The principles of mark-to-market accounting are rooted in the fundamental virtue of transparency and are central to informed market decisions and efficient allocation of capital,” Cynthia M. Fornelli, the group’s executive director, stated in the letter.

Representatives of the nation’s big four accounting firms also object to the rule change. “It’s just bad for investors,” Beth Brooke, global vice chair at Ernst & Young LLP, in Washington, told The Wall Street Journal Wednesday. “Suspending mark-to-market accounting, in essence, suspends reality.”

And Barbara Roper, director of investor protection for the Consumer Federation of America, told The Journal that, “Allowing companies to lie to investors and lie to themselves is not the solution to the problem–it is the problem.”

Black, the former bank regulator, said there is substantial evidence that many lenders have already abandoned mark-to-market accounting by overstating the value of their mortgage-related assets. He said the recent takeovers of Washington Mutual by JP Morgan Chase and Wachovia by Citigroup revealed that losses at the two acquired banks were far greater than anticipated.

“These were enormous losses in the subprime mortgage market that they pretended didn’t exist,” Black said. “That’s called fraud.”

Rather than suspend mark-to-market accounting, Black said federal regulators should conduct more thorough bank examinations of all lenders heavily invested in the mortgage-backed securities. “Look for the ones that have heavy subprime exposure and take supervisory control of the institutions,” Black urged.