Madoff's European Web Widens

The grisly discovery of yesterday’s suicide by U.S.-based French banker Thierry Magon de La Villehuchet—co-founder of Access International Advisors, who may have incurred as much as $1.5 billion in Madoff-related losses—features prominently in a number of business publications today. But behind that story, new details continue to emerge. The European fallout includes Union Bancaire Privée, a private Swiss bank with $700 million of client money invested. The New York Times reports that representatives of UBP met with Madoff as recently as Nov. 25. The Wall Street Journal has Vienna-based Bank Medici as one of the most exposed European banks, with around $2.1 billion invested with Madoff. The Journal strings together a number of recent findings and suspicions to paint a fuller back story of the missed opportunities to catch the alleged fraud before it swallowed so many investments. The Journal says that "in 1991, a consultant hired to review a corporation's investments with Mr. Madoff made in the late 1980s grew suspicious about his returns." And the deceit was reportedly quite transparent: "Mr. Madoff claimed to have traded more options than had been traded in the entire market on a given day, meaning his strategy would have been impossible to execute. That pattern was apparent on client statements from as recently as 2006, meaning Mr. Madoff had been making the same improbable claims to his investors for at least 17 years."

Who’s at fault? A couple of interviews result in the expected finger-pointing. The Financial Times has Bill Brodsky, head of the Chicago board Options Exchange, saying that "inspector-level SEC staff had not received enough training to enable them sufficiently to check for fraud." The target for much of the reproach, outgoing SEC Chairman Christopher Cox, offers an interview to the Washington Post. He's proud of SEC's enforcement record, so don't expect any Madoff-related second thoughts yet: "That's why Madoff is such a big asterisk," he added. "The case is very troubling for that reason. It's what the SEC's good at. And it's inexplicable." Elsewhere, he touts his "steady hand," assuring that any rules changes "take into account unintended consequences and gives ample notice to market participants." Cox reveals that "the biggest mistake of his tenure was agreeing in September to an extraordinary three-week ban on short selling of financial company stocks." But it was Paulson’s and Bernanke’s fault: They "were of the view that if we did not act and act at that instant, these financial institutions could fail as a result and there would be nothing left to save," according to Cox.

After giving Cox his time, the Post calmly offers its own blistering assessment. It reports, "Treasury and Fed officials viewed Cox and his staff as nonplayers who had failed to foresee the brewing problems, according to people who were involved in those efforts but spoke on condition of anonymity because of the sensitivity of the matter. They said Cox was often brought in for consultation only after major decisions had been made by Treasury and Fed officials." And it reports that the Office of Risk Assessment, which once had slots for seven people, eventually dwindled to just one. " 'That office withered away,' said Bruce Carton, a former SEC enforcement lawyer. 'It died on the vine under Cox.' " The Post also reports that overall agency staff fell by more than 300 members, almost 10 percent, during Cox's tenure.

A new administration and a Congress it hopes will be pliant are working on a big fiscal stimulus package that could approach $1 trillion. But how to spend the money? The Washington Post reports on some of the internal debates. "In one of the first internal struggles of the incoming Obama administration, environmentalists and smart-growth advocates are trying to shift the priorities of the economic stimulus plan that will be introduced in Congress next month away from allocating tens of billions of dollars to highways, bridges and other traditional infrastructure spending to more projects that create 'green-collar' jobs." But apparently those green jobs are harder to find, while there's enough "shovel-ready" transportation projects ready to go. The Post reports, “Senior aides in the new administration and the congressional leadership privately predict that they will be able to please both camps but suggest that there have been delays in identifying enough of the environmentally friendly projects to reach a dollar level that will truly jump-start the economy."

Meanwhile, a couple of voices say something else entirely is needed. Former top Reagan economic adviser Martin Feldstein thinks the circumstances make it a perfect time to be spending more on defense: "The increase in government spending needs to be a short-term surge with greater outlays in 2009 and 2010 but then tailing off sharply in 2011 when the economy should be almost back to its prerecession level of activity. Buying military supplies and equipment, including a variety of off-the-shelf dual use items, can easily fit this surge pattern." What’s more, you can train workers and build up a bigger Reserve corps; Feldstein says it would therefore "make sense to depart from the military's traditional enlistment rules and bring in recruits for a short, two-year period of training followed by a return to the civilian economy." In a self-loathing New York Times column, Thomas Friedman laments "America’s sorry excuse for a bullet train" and New York's JFK Airport’s "ugly, low-ceilinged arrival hall." Friedman's a green-collar fan, but he calls for stimulus spending oriented to the long term. "It has to go into training teachers, educating scientists and engineers, paying for research and building the most productivity-enhancing infrastructure—without building white elephants."

Finally, Cox gets a bit of redemption, and one white elephant might be put to bed, with possible enforcement actions against one company in one industry whose failure precipitated government intervention on a scale far larger than the auto bailout or the AIG rescue. That’s the demise of the Reserve money-market mutual-fund family, whose Lehman holdings led it to lose money in September and led the Fed and Treasury to create all kinds of new support programs to keep commercial paper and “safe money” flowing. The Wall Street Journal reports that the Reserve has said the SEC is taking some kind of enforcement action against the company. What kind of enforcement? "It's unusual that they don't say what the SEC is charging them with," the Journal quotes a lawyer representing a company suing the Reserve. But "there's been a lack of transparency from the Reserve all along."