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Comment by _yosefk | Hacker News Reader

You know who never goes to jail? Regulators.

Madoff, for instance, moved from Wall Street into a cell where he belongs, refuting the above headline. His regulators, however, weren't even charged with anything AFAIK. That despite their inaction for many years being either criminal negligence or the result of being bribed.

(From http://www.bloombergview.com/articles/2014-01-07/jpmorgan-pa... - "The government regulators, led by the Securities and Exchange Commission, also didn't catch Bernie Madoff, even though they were his regulators and that was literally their job. And while yes JPMorgan ignored some red flags, so did the SEC. Like, the many many credible letters they got to the effect of "Bernie Madoff is a big ol' Ponzi scheme." Should the SEC be paying an even bigger penalty than $1.7 billion?")

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> You know who never goes to jail? Regulators.

Nor should they unless they were colluding with him or accepting bribes.

The punishment for just being bad at your job should be getting fired, not jail. Of course, I doubt many lost their job either.

> The punishment for just being bad at your job should be getting fired, not jail.

You should keep that in mind next time you get surgery. :-)

Or building a bridge.

Or coding software for medical machines.

Or being a pilot or a bus driver.

Or construction.

> Or coding software for medical machines.

I don't believe anybody was arrested for the Therac-25[1] accidents.

[1] https://en.wikipedia.org/wiki/Therac-25

I know of people who have been arrested. They were upper management, though, not engineers. They tried to ignore the FDA, and they got walked out in handcuffs. (This was not in relation to Therac-25.)

You really want the surgeon who is only doing his best due to fear to be operating on you?

None of those listed professions at any time motivate their training due to fear of imprisionment. It is a complete non factor and it's only effect is to shovel more pain and tragedy on already tragic situations to the illusion of relief for a small porportion of the parties aggrevied.

You really want the surgeon who is only doing his best due to fear to be operating on you?

I don't care why he's doing his best. It would be nice if he was doing his best because he's a dedicated professional, but doing his best out of fear is far better than being operated on by some slacker not giving their best.

So the answer to your question is yes, please, I want the surgeon who is doing his best; not the one who is slacking.

A bad engineer who designed a bridge that later collapsed and injured/killed people will go to jail, in addition to being fired.

People dying is not equivalent to people loosing money.

Mass loss of money, while not as direct a cause and effect, can be far more lethal. People not going for checkups they can no longer afford. People scaling back budgets resulting in less healthy choices. People forgoing using costly medication. People moving to cheaper (and less safe) neighborhoods due to money lost. The general increase in stress with the money lost.

Far harder to measure but magnitudes greater damage.

Madoff was sentenced to more prison time than many murderers. Murder and fraud may not be equivalent, but that does not mean that one must necessarily be less serious than the other.

Financial crimes in the US carry some pretty draconian penalties in terms of sentence length. They have to, because if people think financial institutions are going to run off with their savings the whole industry collapses.

In Madoff's case there was an additional issue - the people he defrauded were mostly wealthy and powerful.

Can anyone verify that there are cases of criminal negligence where engineers have been imprisoned as a penalty?

No need. We can use the example of medical negligence, if your rather.

http://en.wikipedia.org/wiki/Maccabiah_bridge_collapse is one in Israel.

http://en.wikipedia.org/wiki/Versailles_wedding_hall_disaste... another Israeli example.

Don't know if this was ever enforced, but in the Code of Hammurabi (~1754 BC), Sections 229 and 230 prescribed capital punishment in the event a builder constructed a house, which then fell and killed someone.

http://mcadams.posc.mu.edu/txt/ah/assyria/hammurabi.html#Ham...

The most relevant [ETA: US] case I can think of is the Hyatt Regency Walkway Collapse (http://en.wikipedia.org/wiki/Hyatt_Regency_walkway_collapse) in which over 100 people died and the engineers involved lost their licenses. No one went to jail, and this case was actually noteworthy for professional consequences being imposed for negligence.

That's not a 1:1 analogy. Civil engineering is a mature field, and the best practices in design / methods for analyzing structures are very well defined at this point. Effectively regulating the finance industry requires more than following the rules to the letter - also involves who you know, creativity in catching new kinds of misbehavior, and a bit of luck.

There is an argument to be made that we shouldn't allow the finance sector this much creativity. Banking has worked for hundreds of years, and most problems seem to be caused by new phenomena. It may be better to over regulate and then remove certain regulations only when the activities can be proven safe, rather than let everyone go crazy with our money and bankrupt millions of Americans every decade or so.

Right. New financial products/services should be, essentially, "guilty until proven innocent". Regulations should be very tight in the beginning, and then slowly relaxed - say, over 50 years.

By way of analogy, if I create a new kind of medical device, the FDA does not say, "We don't have any regulations that cover that, so it's completely unregulated until we see the need to write some." No way.

But a new financial product, while it can't kill anyone, it can still cause massive damage. (We just got a case study in this in 2008.) The default for any new financial idea should be regulated, not unregulated.

And "but it's not a bank!" doesn't cut it. Mortgage securitization wasn't a bank activity, but it still nearly destroyed the world economy. Repo isn't a bank activity, either, but it played a significant role in the crash. Both are "bank-like" enough that they needed serious regulation. Since the risks were not yet understood, any regulation in place was not nearly stringent enough.

How did repos play a role in the crash?

This sounds like Paul Krugman's thesis that the run on the (unregulated) shadow banking system was at the "core of what happened" to cause the crisis and if only it was regulated, the crisis wouldn't have happened.

A great writeup about this by someone a bit more credible than Krugman can be found at http://blogs.wsj.com/economics/2010/02/23/so-what-exactly-ca...

Written by Yale and Wharton Professor Gary Gorton, who has held positions at the Bank Of England, the Federal Reserve and the FDIC.

I am 100% sympathetic to that argument. Every time I hear someone bashing Sarbox because it "stifles innovation" I want to reach into my radio and slap the person who said it. I don't want "innovation" from my retirement fund. I want good stewardship of my money.

"Innovation" is almost always another way of saying "We found another way to gamble with the customer's money."

The entire premise that the banks brought down the economy is complete BS. They just make an easy scapegoat.

The regulators, rating agencies, mortgage lenders, government, GSEs all contributed to people overleveraging, but thats not even the real issue.

The real problem is that the economy has changed, and all but the high skilled jobs are going overseas or being done by machines.

Bankers are not going to jail because they didn't break any laws. People need to stop being parrots and making claims about things they dont understand.

Where did I say banks brought down the economy? Where did I say bankers should go to jail? Did you just see some words you can identify and decide to hang rant #47 on a reply to my comment?

One could say exactly the same thing of the software industry.

You look at the software industry, what do we see? Mild amateurs not encrypting personal data, or not protecting their sensitive data against hacking 101 attacks (we still see sql injections attacks in this day and age!). You see a very large shady industry prospering on invading the privacy of unsuspecting users (and not just the adclick of this world: google, facebook!). In a corporate environment, developers have a similar bad reputation than house builders in term of creating projects that very often take a lot longer that expected, fail, or simply are not fit for purpose.

Does it have no consequences? It has massive consequences and the worst data leaks are probably yet to come. Should we impose heavy regulations on the software industry and curb toxic innovation? It is certainly not an absurd debate. Obviously most people in the software industry will react to this with hostility. They will argue it would negatively affect innovation and progress, that there are good and bad apples, and that one cannot judge an entire industry without a minimum understanding of how it works and how it benefits the economy.

Well guess what: it is the same with the financial industry!

I don't know the answer to the following questions, but I'll take wild guesses:

1. Were Madoff's regulators fired? (My guess: they weren't, it wasn't even weighed as a realistic option by whoever should fire them.)

2. Was there an investigation into whether they were bribed, as there should be when someone is so spectacularly incompetent at their job that it's hard to reconcile with having the mental skills necessary to get the job in the first place? (My bet: there was no investigation whatsoever.)

firing a public employee is like pulling teeth from healthy gums

Regulators can only make decisions based on the information they have, which ultimately comes from the people they're trying to regulate. Eventually the wheels come off, but you can give plausible numbers to the government for a long time before that happens.

Your assumption they were either bribed or incompetent is unwarranted.

To spot a Ponzi scheme you only need to look at the balance sheet, not? Do regulators not have a right to do so, especially having gotten multiple warnings (from people who, unlike public employees, have an actual stake at the game because they competed with Madoff and figured his official returns on investment were impossible?)

If the SEC cannot look at the actual balance sheet as maintained by banks etc. until "the wheels come off" and until then they can only rely on what the org says its balance sheet is, things are really bad but somehow I doubt that's the case.

>To spot a Ponzi scheme you only need to look at the balance sheet, not?

No, actually. This is wrong. You can't spot a clever Ponzi scheme if the person who provides the balance sheet is willing to put down false information.

As an auditor all you can do is correlate the bits of information you have. If the criminal is intelligent you won't spot anything until it's too late.

The "warnings" they got were that Madoff's fund was making money too consistently. That's useless.

Well, you can go to the bank where he actually keeps the securities if you don't trust the declarations. His bankers for instance were tipped off by his balance sheet and shorted him. Why couldn't the SEC look at the real balance sheet as maintained by the bank(s)?

As to the warnings being useless - you mean that the likelihood of such warnings does not correlate with the real state of things enough to justify action? As in, every legitimate money manager is suspected by many competitors of being a fraud and the SEC is overwhelmed with meaningless warnings to that effect? I doubt it somehow.

On number (2), you forgot the other major (and very probable) option: the regulators were told, by the legislature, to shut up and stop doing their jobs like competent professionals, because Congress's friends don't need no regulation (♫ they don't need no bank control ♫). They were probably also defunded by Congress, leaving them with too small a staff to do their job well.

"Starve the beast", remember?

I can't believe all the comments saying pretty much what you said.

How much bloody staff do you need to take a peek at the securities kept at a fund's bank account? We aren't talking "complex" stuff like rating agencies putting AAA ratings on junk (and BTW S&P was slapped on its wrist with a >$1B fine over that after an investigation). We're talking about a guy with almost no staff who paid "returns on investments" from his pool of investments.

The sum of the securities he'd keep would thus fall far behind the number following from his reports. Not noticing can only result from not checking. Not checking that much after multiple warnings results from defunding?! Perhaps, if there was just the janitor left and all the regulators were fired. Was that the case?

(You know what could be a probable cause other than incompetence or taking bribes? A desire to be employed by a Wall Street firm after resigning as a regulator, and a belief that it wouldn't work out if Madoff were checked and found clean, or even if checked and found guilty. But is it more than a convoluted bribe?)

It's easy to know, after the fact, that Madoff was a Ponzi scheme, and say he should have been investigated. But that neglects two important numbers: how many prospective Ponzi schemes were there to investigate, and of those, how many actual Ponzi schemes, out of which Madoff's was only one?

What about when police officers wantonly kill people or CIA operatives torture the innocent?

Of course they should go to jail, justice is blind, the law applies to all, look up the magna carta. When some are more equal than others injustice and corruption occurs, we see it vividly throughout the US corporate-fascist complex.

Invalid comparison. Failure to prevent something is not the same as personally perpetrating it.

It's not necessarily invalid, at least not for the reason you give.

Lifeguards can go to jail (in Europe, at least) for manslaughter, as can ski marshals, if they're deemed sufficiently negligent when someone dies. It's pretty rare, but certainly something on the equivalent scale to causing a global economic crisis would warrant it.

There are plenty of examples of regulators acting abusively or in bad faith. They can get away with this because there are no repercussions.

There's no real incentive for regulators to regulate if you think about it. If you DO regulate you're less likely to have exit jobs to Wall Street. If you DON'T regulate and things go well, everything will be good and you'll go through the revolving door to work for big banks and big bucks. If you DON'T regulate and everything goes very badly (you know like a financial meltdown) it's "not your fault."

That doesn't make any sense. The more you regulate, the more banks need in-house regulatory folks and the more opportunities you have to go through the revolving door.

Deregulation is not a good thing for people who want to go in-house doing regulatory work.

That's wrong. That kind of regulation comes from the legislature. It's an outside force. The effects of a regulator's actions on their ability to join banks afterwards are measured independently of legislature regulation. What I'm talking about is the people whose job it is to enforce that regulation (the people we call "regulators"). Their incentive is to not enforce it as strongly as they could or should. They "adapt" their policy enforcement to fit what people believe in industry right now, which is why they let all these banks peddle bad loans and commit massive fraud. The reason they "adapt" is contained in my original post.

Congress only lays out the general contours of the regulatory scheme. It's the regulators that impose the specific requirements and define what they mean.

That is the case with Dodd-Frank. That is not usually the case with regulation. Normally it goes "here are the rules, execute." Dodd-Frank is a nightmare exactly because they just have an outline full of blanks. It turns out regulators are not that good at 1. Enforcing regulation or 2. Writing regulation. The reason for this is because they have no incentive to.

A friendly, helpful regulator will get job offers to work for the firms he is regulating.

A tough regulator will not.

And yet Wall Street is highly regulated (it might not be very effective, but there is a huge amount of regulation nonetheless), so it seems like there must be forces at work beyond what you're considering here.

See my response talking about legislature regulation versus regulators whose job it is to enforce that regulation (It is the comment above).

It is kind of like the prisoners dilemma. If a regulator defects(doesn't do his job) he gets a high paying bank job. If he doesn't defect (does his job right) then he is stuck as a government employee with shrinking budgets.

Any industry that gets regulated, has a strong motivation to take control of the regulation of their own industry. This process is called regulatory capture.

Once regulatory capture has happened, incumbents in the industry are incentivized to use regulations to create barriers to entry.

The result is a lot of regulation, lots of work around regulatory compliance, and very little that accomplishes the purported purpose of said regulation.

Every so often regulatory failures become so bad that government steps in, creates more rules, and we get more bureaucracy. But the status quo inexorably reasserts itself.

>You know who never goes to jail? Regulators.

Are they paid enough for that increase in risk? I don't know what they make, but other government positions are already underpaid compared to their private sector equivalents. Making them come with a risk of jail time for failing ones job too badly will only result in even less qualified people filling those positions.

I've often thought that we should pay financial regulators competitively with what they could make in the private sector AND in conjunction institute some kind of sweeping moratorium (e.g. you may not take any corresponding job in the private sector for at least 10 years after your government service ends.)

I'm sure this would be politically untenable. Headlines would cry about absurd salaries being given to government employees.

However I'm equally confident it would save us money in the long run. The current system seems almost designed to create toothless regulators and a revolving door.

I dare say the majority of government waste and other problems are simply a case of 'you get what you pay for'.

Why would someone go to prison for being bad at their job? I don't think you know what a crime is.

You've heard of criminal negligence, right? Where someone is so outrageously bad that it can only be intentional, with something important at stake that gets hurt.

With the amount of money in play, the implication is that they were being bribed to look the other way. If nothing else they should get audited down to their grade school allowance to be sure they were merely grossly negligent.

> "If nothing else they should get audited down to their grade school allowance to be sure they were merely grossly negligent."

That would not even be sufficient, because for all we know they were bribed with hookers and cocaine. It would not be the first time.

Everyone should read http://lawcomic.net/guide/?p=18

> criminal negligence

A regulatory agency that serves a liberal (or at least pro-regulation) administration failing to catch a crook is indeed bad at its job, and yes people should probably get fired.

A regulatory agency that serves an anti-regulation administration (and in particular Bush's SEC) failing to catch a crook, is doing exactly what the American people voted for it to do, which is nothing at all.

You can't win an election on the platform that someone's job shouldn't exist, he shouldn't have the tools to do it, and we shouldn't be paying his salary, then suddenly turn around and want to throw him in jail for not doing that effectively enough.

I wonder if that's the idea voters have of Reaganomics.

Weren't Madoff's regulators paid a salary?

What tools did they lack to check the warnings they got from numerous sources? Do they not have the right to check which securities the fund actually holds in its bank accounts?

What's the basis for sending regulators to jail? Will you send cops to prison when crimes happen, because they failed to prevent them? This is somewhat of a pre-cog/ Minority Report dilemma. I think law makes a reasonable distinction between crimes of commission and crimes of omission. Proving motive and intent are important parts of the judicial process. Madoff intended to defraud.

You can prevent a person with malicious intent from causing further damage by imprisoning them. You 'deter' people who commit crimes of omission by keeping them away from whatever they proved incompetent at (debar lawyers, de-license doctors and regulators, fire engineers, etc.)

> You know who never goes to jail? Regulators.

Clever way to divert a discussion.

> You know who never goes to jail? Regulators.

Not true. They go to jail when they're caught getting corrupted by those they should regulate, which unfortunately happens often enough.

That's a moot point, it's a revolving door between wall street and the regulators. It's the same people.

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