Bernard Madoff, a disaster foreseen

by Frank James

The more I learn about the Bernard Madoff and his alleged Ponzi scheme, the more it reminds me of the Space Shuttle Challenger disaster.

That 1986 calamity, as you'll recall, was preventable. Engineers at the Thiokol rocket division at the company, then known as Morton Thiokol, had warned that the solid rocket boosters leaked hot gases, especially when the shuttle was launched during colder temperatures, because of faulty seals called o-rings.

But the early warnings of the engineers were ignored by their superiors and NASA officials who launched the shuttle on a cold January day in Florida and we all know what happened.

As in the Challenger case, there were early warnings about Madoff. As we have learned ever since last week, the Securities and Exchange Commission was warned about him repeatedly especially from one knowledgeable Wall Street-type named Harry Markopolos who in 1999 actually accused Madoff in a letter to the SEC of running a Ponzi scheme.

As the Wall Street Journal reports, the SEC opened an investigation into Madoff in 2006 but closed it after being misled by him into believing he wasn't doing anything that was major-league illegal.

An enforcement system that relies on the truthfulness of conmen is a system with faulty o-rings.

In the end, SEC officials appear to have responded the same way those NASA and Morton Thiokol officials did: Well the thing hasn't blown up yet so let's keep our fingers crossed.

It can be argued that if the SEC had looked at Madoff more skeptically in 2006 it might have uncovered the alleged Ponzi scheme then. That's certainly the message to be drawn from the WSJ's story.

A lot of people would still have been burned, but the unmasking of Madoff in 2006 would have at least prevented the more recent victims from investing with Madoff and that would have been a good thing.

Disaster experts often say that there's never one factor behind major accidents, that there's typically a series and combination of causes, including the presumed safeguards failing.

From rockets to finance, that appears to be true.