Saturday, December 20, 2008

My prespectives about the Madoff scandal

What happened here: in layman terms, this person took many from new customers and gave it in the form of interests to his old customers. This is called the PONZI scheme. It had to run out of gas sometime and what better time then the present crisis in the market where he did not have any new customers coming in.

What really hits me in this, is that we all these agencies with fancy names which are supposed to monitor activities in the market and they did not have a clue something like this was happening behind their back, well as it comes to light they did get some pointers which they never followed. At hindsight it is all 20/20.

Can we blame the agency in it's failure to prevent this scandal.

Look at all the mess which are happening, ENRON,Fannie Mae,AIG,Citibank,Wachovia. All this have a common theme, every time it is a different issue which is not possible to be tracked through a system which is very rigid and bureaucratic in nature.

Every time we learn from a mess, and then put check and balances around that issue and then later another issue crops up, becomes the song of the day and the story continues.

We see similar themes in corporate also, a customer gets into a bind because of bad service from your side, you fall head over feet to resolve that and then again after sometime some other problem creeps in and you are caught off-guard.

The point I am trying to make is we need a fundamental change in the way we address compliance issues. We need a sort of feedback loop with some person constantly looking at the defined parameters and doing course corrections as and when it is deemed fit. Knee jerk reactions will not solve the problem, it will only mask the issue and it will definitely come back to bite us.

Questions an organization can ask itself.

1) Can you first define the parameters which need to be measured which in your opinion will tell you a story,
2) Can you have your system to consistently capture the values for these parameters on a regular basis
3) Define threshold values for these parameters, and if the value exceed that value, escalate the same.
4) Finally ensure that each and every escalated value has a reason attached to the same.

You will need a single minded dedication to do this and it should be supported by the top management. Unless that happens it will just be a ritual.

I see that lot of people have lost money in this Madoff scandal, but the worst affected are the charities which lost their money from endowments.

Hopefully the new administration will put in some good checks and balances in place so at least the world will still believe that the US markets are fair and transparent.

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