Liberals would have us believe that lack of federal government regulation caused the financial market meltdown last year, with Wall Street firms such as Goldman Sachs and Bear Stearns taking unreasonable risks with investors' money.  In particular, they fault these firms for investing in derivative securities based on, among other financial instruments, high-risk mortgages, and they say that government regulation could and would have prevented them from going astray.

But what do Wall Street types think about this?  Most of them have been fairly close-mouthed about it, probably because they fleeced the feds for billions of dollars in bailout money and don't want to kill the goose that's laying the golden egg.  However, a few days ago the Massachusetts Attorney General's office released transcripts of a conversation between convicted broker/swindler Michael Madoff and officials of the Fairfield Greenwich Group, a company accused as acting as a "feeder fund" (using another, "master" fund to invest assets investors have place with the feeder for safekeeping) for Madoff's "master" fund.  Fairfield has just settled with the state for $8 million without, presumably, admitting guilt, for its role in the scandal, but what the transcripts reveal about Madoff and the Securities and Exchange Commission is much more interesting.  

The conversation was Madoff's attempt to coach Fairfield executives in their dealing with a 2005 SEC investigation into Madoff's investing practices.  Much of the conversation focused on how Madoff decided where and when to invest, the two key decisions any fund manager faces, and the details he provided to Fairfield actually outlined a reasonable investment strategy - had it been real.  Anyone who wants to read about it can find the transcripts here:

http://www.cbsnews.com/htdocs/pdf/Fairfield_Exhibit_1.pdf

The details are gory unless you're a financial geek, but what Madoff tells Fairfield to say would have made sense to someone in that industry, as Madoff outlined how he was using models to invest using 95% confidence intervals for returns on investments.  Unfortunately, the models Madoff described to Fairfield were bogus, and it ultimately developed that Madoff wasn't really investing at all.  He was operating a multi-billion dollar Ponzi scheme, whereby money obtained from recent investors was used to pay off people who had invested earlier.  Even more unfortunately, the SEC failed to recognize the scam for what it was.

But Fairfield's coached testimony ultimately convinced the SEC investigators that all was as it should be, just as Madoff said it would.  He accurately predicted that "the [Securities and Exchange] Commission has no idea what the hell is going on" so that Fairfield didn't have to worry.  After all, "you don't have to be too brilliant with these guys."  Apparently, Madoff's low opinion of the people who were investigating him was well justified.

Then, however, Madoff revealed another reason why the SEC might roll over on his scheme, besides the fact that its investigators were ignorant of financial derivatives.  He went on to add, "these guys they work for five years at the Commission [and] then they become compliance manager at a hedge fund."  So they don't want to dig too deeply into these funds' strategies and maybe make them mad, because they want one of the companies to hire them in a few years.  That's understandable, since these civil servants are lucky to be making over $100,000 a year, while a hedge fund compliance manager can make many times that on Wall Street.  Still, anyone who thinks these SEC investigators are protecting the individual investor is dreaming, as liberals frequently do.  And supposing that increased regulation will be the cure for Wall Street chicanery, or even honest mistakes, is purely the stuff of which fantasies are made.

I mentioned all of this to a liberal of my acquaintance, and wouldn't you know that this person's take on the situation was that it was all the Republicans' fault that the SEC isn't more vigilant, because it was Republicans that stripped the SEC of its investigative clout.  Of course, Madoff's been running this scam since the early 1990s, when that good Republican Bill Clinton was President, but why let facts get in the way of your fantasy?  It's so inconvenient.

The moral of this story, then, is that regulation isn't the answer.  Not only is it not the answer, it can actually make the situation worse, by providing the illusion that all is well in the investing world because the feds are looking out for the individual investor.  Folks, they're not looking out for you, and your best defense is to become a smart investor, or at least know who you can trust based on reputation, and forget the regulation.