Little Big Fraud Hard to Find…and the Madoff action figure
The Washington Times is reporting that the government is having a hard time detecting fraud. This really isn’t news to anyone – just as Bernie Madoff or Harry Markopolos. 
The news seems to be that despite all of the recent focus on fraud detection the federal law enforcement agencies apparently have had little success in finding and prosecuting instances of fraud at the nation’s major investment firms.
This Washington Times article was written in the context of Attorney General Eric Holder Jr.’s testimony to the Financial Crisis Inquiry Commission. In his testimony, Mr. Holder’s stated that while there are thousands of prosecutions against so-called “small
time” frauds for running things like mortgage scams (and ahem, hedge funds) there is a noted lack of such prosecutions against major Wall St. firms. Which harkens back to the failed prosecutions of two Bear Stearns hedge fund managers which had been accused of fraud by the government.
Here is a video introducing the Financial Crisis Inquiry Commission:
What is interesting to me is that the government in its prosecutions is attempting to draw a correlation among multiple types of fraud. Their theory may go something like this:
1) Fraud is bad;
2) Mortgage “fraud” contributed to the housing crisis;
3) There was a great deal of mortgage fraud we can prosecute;
4) Banks and Wall St. firms are involved in the financial markets which are also involved with mortgages;
5) Where there is mortgage fraud there must be other types of fraud
Unfortunately, this big bath type of thinking attempts to throw out the baby with th
e bathwater. Just because one type of fraud is prevalent does not necessary lead to the conclusion that other types of fraud are present.
The fact that the government is having difficulty finding such fraud may suggest that fraud is more prevalent not at the large Wall St. firms but rather there is more opportunity for fraud (particularly in the areas of operational risk) in smaller, less regulated and more private investment vehicles . Perhaps the government will go back to these institutions with a more fine tooth comb rather than shake the tree of largest firms and see what frauds fall out…
In other news, there is a Madoff action figure out (made by the same company which makes other extremely distasteful action figures of Saddam Hussein and Kim Jong Il ), which may be a nice compliment to the Madoff devil bobblehead. I’m sure it will be a big seller….
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