Abolish the SEC

Jan 21, 2009 | Updated May 25, 2011

The Securities and Exchange Commission should be closed down, pronto. It should not exist.

This is not because Wall Street does not need regulation. Heaven knows it does. And this is not because the people working at the SEC are not good people, because I believe they are. Alas, they were given an impossible task that doomed the agency to failure. The US financial markets are way too complex to be effectively regulated by any government bureaucracy, no matter how competent. Moreover, the mere existence of the SEC gives investors false confidence, lulling them into reduced vigilance and making them think they are protected when they are not.

In the Madoff Ponzi scheme, the very rudimentary exam and some elementary questions would have raised grave suspicions. Virtually anyone could do that, and yet few did. Instead of watching their own affairs, investors delegated critical due diligence tasks to the SEC, abdicating their responsibility over their own investments.

I do not blame the SEC staff, nor do I blame its leadership. People simply expect too much from government in general, and have unrealistic expectations from the SEC in particular. The fraud carried out by Bernard Madoff was perpetrated on wealthy people and large professional money management organizations. These people have resources, they have access to the best lawyers and accountants, they can afford private investigators, they have well-paid, competent staff, and they are well connected and experienced, having investments with dozens of funds. They also were watching their OWN money. And even they were fooled. How can we expect government employees, who are not overseeing their own money and are not as well paid, and thus not as well incentivized as the principal owners, to uncover these frauds? The SEC was hopeless to begin with, in way over its head.

In fact a regulatory agency overseeing Wall Street, with its convoluted and complicated myriad of businesses, has only imagined power. Financial regulation almost never protects investors. It is not very different from what happened with Freddie Mac and Fannie Mae, where hundreds of federal employees came to work every day solely for the purpose of supervising just those two mortgage companies. Nevertheless, for decades both Fannie and Freddie ran an outrageous scheme that ended in their implosion, together with our housing market. The federal regulators, watching over other people's money, could not do the job. The law has its limits.

Instead of blaming the SEC employees or its commissioner, I hold Congress responsible for assigning them a mission they could not possibly fulfill. I also blame those investors that, incredibly, hoped a government agency would do for them what large private organizations could not. We all must uproot the habit of relying on the government to think for us, protect us from ourselves and bail us out of financial difficulties. Adults should not need a nanny in Washington DC. It is not only useless, but also misleading. Investors should perform their own due diligence. And anyone that feels unqualified to perform such due diligence should not be investing in these funds.