I will freely admit to enjoying the SEC’s management getting berated in this video. I am not a fan of incompetence at any level, but especially at senior levels.

Back ten years ago now, I worked in Risk Management for a now-infamous investment bank writing the software that actually calculated our risk (and I wrote the risk models themselves, ironically the part of the system that no one else in the IT group was interested in). Initially, I did market risk (attempting to predict how well or poorly our trading positions would do as market conditions changed) and later counterparty credit risk (calculating our net exposure to other banks, private bank customers, hedge funds, etc. so we could ensure that collateralization agreements were being met). I loved calculating net positions, by the way. Something about distilling down a huge pile of seemingly unrelated trades into a set of concise, useful information was (and still is) beautiful to me.

Occasionally, I would sit down to talk to the regulators as they did their scheduled audits and what were essentially inspection tours. I would get called in to explain exactly how this number or that number came to be on the computer screen, once because it was a bug but usually just as some sort of gotcha game to make sure we could prove that the computere was saying what we wanted it to say.

They were universally the most under- and un-qualified people I interacted with in a professional capacity during my tenure in investment banking. We would routinely find ourselves explaining not just intricacies but fundamentals of how the business of foreign exchange worked–to the people who were supposed to be able to regulate us!

I asked one of the Directors if this was a normal level of regulatory competence, and he assured me it was. To paraphrase his response, “Why would anyone who understood this stuff be working for the government at a fraction of what they could make actually doing it?”

As this video demonstrates, even an activist SEC wouldn’t have caught Madoff. The Director of Enforcement doesn’t even know how they failed. While his scam delivered returns that anyone qualified to be in the business knew were impossible, there were enough people unqualified to be in the business at the brokerages, banks and regulators that he could keep the party rolling for years.

h/t to Blah3 for the video.