Panel 1 of a Hearing of the House Financial Services Committee Hearing- Assessing the Madoff Ponzi Scheme and the Need for Regulatory Reform

PANEL I OF A HOUSE FINANCIAL SERVICES COMMITTEE HEARING
SUBJECT: ASSESSING THE MADOFF PONZI SCHEME AND THE NEED FOR REGULATORY REFORM
CHAIRED BY: REP. PAUL KANJORSKI (D-PA)

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Thank you. Now, with the greatest respect to my colleague, let me just pick up on that point that nobody saw this coming; we have to modernize. The short-sellers saw this coming. The short-sellers saw this coming and they invested in it, and they made billions.

What's troubling here is that -- and, as you say, Mr. Kotz, it's the SEC's job to find the information. In this case, though -- in this case the SEC was given the information. The SEC had repeated reports. The SEC had a whistleblower with a very long analysis. We had repeated attempts to contact the SEC and the analysis was all given to it, but in the end they really did nothing until it was too late. And I don't think you have to stay up late to figure out whether or not there are other occasions of this.

You know, there was a case earlier in the year, and, you know -- it was within the last year, so while you were there -- Gradient Analytics came up and reported about Washington Mutual's problems. And they pointed out that WaMu, over a year before it got in trouble, was not setting aside sufficient assets. A lot of short-sellers came into the market and bet against them. AIG, their own auditor, Pricewaterhouse -- again, long before problems developed there they reported that the company had, quote, unquote, "significant shortcomings" because of the way they were valuing the credit default swaps. They reported it to the SEC. It was public information.

That's the most troubling aspect of this for me, that the cops were informed, the law enforcement was informed and yet nothing happened. That's the difficult part. And, you know, I'm wondering -- you know, I've met with former SEC officials to ask them, what's the real problem here? Some of them have suggested to me that they're over-lawyered at the SEC and we don't have enough financial people. You know, these short-sellers, financial people, were able to diagnose this, bet on it in significant ways and make a killing here -- billions of dollars -- and yet the SEC, with the same information, refused to act, and that is troubling.

Some former SEC officials also suggested to me that in many cases the investigators are right out of school, very new, inexperienced, and they were simply -- in this case with Mr. Madoff, they were overmatched. The guy was on the SEC advisory board. That must be very intimidating for those, you know, newer investigators coming into that situation. Now you've been there a year and you see how these investigations go, and you know the personnel, you know who's doing these investigations, you know how much experience they have. Are they lacking in experience? Is this one of the shortcomings that we have? Do we have to shore this up? God knows there's going to be drastic change here. The SEC is going to be totally reformed. Maybe it's going to go away or merge with something else because this is just inexcusable, but is that something we have to look at? Are these investigators inexperienced, and is that costing us in the long run?

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Let me ask you one other thing, Mr. Kotz. In your investigations -- you know, a couple of weeks ago we had five billionaires sitting at that table. A lot of them had made a lot of money, Mr. Paulson and others, on short-selling against these type of deals. They recognized the weakness in the market in these firms and basically, though credit default swaps, were able to make a killing. Have you ever thought about pulling in some of those short-sellers who are so -- I mean, they are really -- they're much more informed and seem to be investigating the strength of these firms to a level of detail that I wish the SEC was investigating them. Did you even think of pulling some of these people in? I'm sure they would cooperate. You know, some of them would. Some of them are making too much money, but I'm sure some of them we could lure away, and, you know, help us -- help us strengthen this market because we've lost our credibility here, and this is all about restoring trust in the markets. That's your job and that's our job.

And I do want to say, I thank you for your patience in coming before the committee and helping us voluntarily -- because this isn't an official committee hearing -- but I do appreciate that both of you gentlemen have come here to help us with our work.

I yield back, Mr. Chairman.

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