December 18, 2008

The global credit crisis has been characterized by experts as largely a crisis of confidence. That's why Rep. Paul Kanjorski is on the mark in planning hearings on an alleged $50 billion global Ponzi scheme that occurred under the noses of federal regulators. It's hard to see how investors can have confidence in the markets without some explanation as to how the alleged scam occurred.

Rep. Paul Kanjorski, chairman of the House Financial Services Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises, will conduct an inquiry in January not only on the dealings of high-flying Wall Street money manager Bernard Madoff, but on how he allegedly conducted so massive a swindle amid regulatory oversight.

A Ponzi scheme is a type of securities fraud in which the promoter typically promises high returns, but then pays original investors with new investors' money. New investors constantly must be found in order to keep the scheme afloat, often as the promoter skims substantial amounts for himself.

Mr. Madoff, a former chairman of NASDAQ, has been charged with securities fraud and is being held without bail as the criminal investigation continues.

That inquiry might well shed some light on why regulators failed to intervene in what investigators say is one of the worst fraud cases in history. But specific congressional hearings into that question are needed, and soon, as one component of reassuring jittery investors.

Mr. Madoff's alleged scheme drew in wealthy individuals, businesses, banks and, tragically, many charitable organizations around the world - some of which have been ruined by its collapse.

Incredibly, the Securities and Exchange Commission took a look at the Madoff operation in 2005 and found nothing wrong. While investigators claim that Mr. Madoff cooked his investment firm's books, that is exactly the sort of thing that regulators are supposed to be able to detect.

The ongoing financial crisis assures a new regulatory regime going forward. The Madoff case is an exclamation point for that need, and Mr. Kanjorski is correct to move swiftly toward finding some answers.