Did Anti-Terror Enforcement Help Fuel the Financial Meltdown?

The Times (of London) recently reported that “The F.B.I. has been forced to transfer agents from its counter-terrorism divisions to work on Bernard Madoff‘s alleged $50 billion fraud scheme.”

This might lead you to ask an obvious counter-question: Has the anti-terror enforcement since 9/11 in the U.S. helped fuel the financial meltdown? That is, has the diversion of resources, personnel, and mindshare toward preventing future terrorist attacks — including, you’d have to say, the wars in Afghanistan and Iraq — contributed to a sloppy stewardship of the financial industry?

The Times (of New York) followed with an article by Eric Lichtblau that at least partially answered the question:

Federal officials are bringing far fewer prosecutions as a result of fraudulent stock schemes than they did eight years ago, according to new data, raising further questions about whether the Bush administration has been too lax in policing Wall Street.

Legal and financial experts say that a loosening of enforcement measures, cutbacks in staffing at the Securities and Exchange Commission, and a shift in resources toward terrorism at the F.B.I. have combined to make the federal government something of a paper tiger in investigating securities crimes.

At a time when the financial news is being dominated by the $50 billion Ponzi scheme that Bernard L. Madoff is accused of running, federal officials are on pace this year to bring the fewest prosecutions for securities fraud since at least 1991, according to the data, compiled by a Syracuse University research group using Justice Department figures.

The degree of cause and effect here is an obviously broad and perhaps unanswerable question. Part of the problem is that we’ll never know how much something like “security theater” may prevent an actual attack.

Furthermore, just as it is hard to prove a negative in general, it is hard to prove that, e.g., a terrorist attack didn’t happen because of certain preventive measures. What we do know, however, is that governments in particular have a hard time focusing on more than a few big problems at once, so I don’t think it’s unreasonable to suspect that the anti-terror focus of the past several years has meant that less attention was paid to far more typical issues like financial fraud, etc.

More than anything, the Madoff fraud makes me appreciate (yet again) Warren Buffett‘s distaste for anything opaque and inexplicable. As he famously put it: “It’s only when the tide goes out that you learn who’s been swimming naked.”


Nice post -- can't wait for all the liberals to jump on board, using this "connection" to blame Bush for all the world's woes once again.

And regarding Buffett -- you might want to check out how much money his holdings and companies have lost on subprime and CDS. A lot.

Mudi Mahmoud

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Victor Galis

While it is certainly a possibility, I think it is also likely that enforcement of financial regulation was more lax because it was not a high priority under the Bush administration. Even in the absence of an alternative use of those resources, I think there would have been cutbacks motivated by the assertion that government is always the problem and not the solution. What shocks me most though is how little the anti-government types have learned from this crisis.

Lawrence Brandel

Is there an underlying assertion here that we need more protection from ourselves than from parties outside this county? In a Ponzi scheme one of the first protections a "victim" needs is from him or herself. How does the government do that other than making moves/policies/etc. that encourage greater responsibility in people?


Something else that might be worth noting in terms of this argument is the shift of the Secret Service from the Treasury Department to Homeland Security. Although this didn't change the agency's mission, it seems it could have inadvertently and subtly shifted focus from financial crime investigation to terrorism.


Is there any reason to assume that security theater will prevent any attacks at all?

The whole point of security theater is to placate the masses without adding any real security.

Cara Dearman

It's certainly true that the focus of most law enforcement shifted after 9/11, and with good reason. With most of the US questioning why this wasn't stopped, especially when we knew about a danger, people within the FBI would have been remiss to not shift gears to a large extent. Of course, there are only so many agents and so much time and this meant paying much less attention to white collar crime, which wasn't high on anyone's radar screen anymore (the Enron effect didn't last long).

In fact, when I was working for a US Attorney's Office last year, we discussed this very issue. it was joked that if I ever wanted to commit a crime between $50,000 and $250,000, now was the time because it was too big for local police, but too small for the FBI with it's focus on terrorism and other "violent" crime.

Madoff may not have been caught, but it is likely that there would have been more investigation of white collar crime had 9/11 never happened. None of that speaks to whether we are better off with the changed priorities (since it's also likely that the focus on terrorism has prevented terrorist acts), but it is certainly something to consider. Perhaps this also speaks to why the FBI is currently looking to hire hundreds of new agents. Like everything else, nothing abruptly puts dangers from yesterday into a mission for tomorrow like a crisis.



The financial crisis was not caused by a lack of regulation. It was caused by government policy, formed in congress, to subsidize housing loans. The House Financial Affairs Committee (Barney Frank, Chmn.) had plenty of warnings over many years from OFHEO, the regulator set up by Congress, and ignored them. Mr. Frank still wants to expand Fannie Mae, the central player in problematic housing finance.

The government had/has great influence over the ratings agencies (eg. S&P, Moody's, Fitch), and pressured them (it seems) to give AAA ratings to the bonds that financed housing loans, even the bonds built on subprime loans.

This caused $trillions of debt to be misevaluated, mispriced, and sold worldwide. The supporting details are at We Guarantee It ( http://easyopinions.blogspot.com/2008/10/we-guarantee-it.html ).

A lack of regulation was also not a factor in the Bernie Madoff swindle. Madoff was investigated by the SEC and cleared (!). We can have layers of "regulation", but how do you build a government regulatory bureaucracy that is competent. I would say that you can't, and certainly they weren't.

Further, many of Madoff's investors suspected that he was profiting from illegal activities. They thought Madoff was profiting illegaly ("front-running") from his public brokerage operations, and were happy to share in the gains. They didn't think Madoff would cheat them, just the others. See "Investing With Bernie Madoff" ( http://easyopinions.blogspot.com/2008/12/investing-with-bernie-madoff.html )


Ed Kay

The segment before this one (Eric A. Morris) referred to internalizing externalities:

"Economists generally encourage the internalization of externalities, so that actors pay the full social costs, not just the private costs, of their activities. This means the socially optimal quantity of a good will be produced."

The same thinking applies here. So, who should pay for this increased police activity? #4, Lawrence Brandel, is on the right track. Lots of other wanna be crooks (although we now sympathetically call them "victims"), besides Madoff gleefully participated in this fraudulent scheme, intending to get 15-20%, or more, return on investment while legitimate investments returned a small fraction of that. Many apparently did receive those returns for years.

Now they have technically lost their principal. But early participants had already made undeserved fortunes. They should not only be forced to pay back ALL of those ill gotten gains, they, as well as Madoff, should be charged the entire cost of the government's additional policing effort.

Even the johnny-come-latelies, so stupid as to as to get in on the end of this scheme, should be charged their fair share. The just results of stupidity should not excuse excessive greed.

If the government incurs additional costs in collecting these monies, then these costs should also be collected.



Only when all financial operatons are closely supervised by the government, and any and all claims that this or that scheme is guaranteed to be what it claims to be,but those mind altering substances have really gotten to me to entertain such a fantasy.

Mr. Winston

I think the recessionary prevention measures of 2001, e.g. holding rates at 1% for so long, had more to do with creating a bubble than did lax regulation. It was this bubble in real estate prices that helped encourage so much tag-teaming in the late stages by other players. Mortgage originators were being too aggressive, ditto for investment bankers packaging the mortgage debt, ditto for ratings agencies rating the mortgage paper, ditto for insurers engaging in CDS transactions insuring the paper. Nearly everyone, even the authors of this blog, thought were forever going to remain in "the great moderation." So to blame potentially misplaced $65,000/per year regulators on something that nearly the entire world did not see coming is plain silly.

steve long

"...to blame potentially misplaced $65,000/per year regulators on something that nearly the entire world did not see coming is plain silly."

No, what's plain silly is to think that the world did not see financial fraud coming and actually fell for the idea that the free market would "self-regulate" these folks. LATEST case in point:

Satyam Chief Admits Huge Accounting Fraud
NY Times January 7, 2009
The chairman, Ramalinga Raju, resigned after revealing that he had systematically falsified accounts...
that 50.4 billion rupees, or $1.04 billion, of the 53.6 billion rupees in cash and bank loans the company listed in assets for its second quarter, which ended in September, were nonexistent.


It's not the Times (of London). It's the Times (of the UK). Our broadsheet newspapers in the UK are not linked to cities in the same way that US newspapers are. The Times is a national newspaper not a London paper.


Do you give speeding tickets on a road without speed limits?

It seems to me that the decrease in securities prosecutions has more to do with the increase in deregulation than with Homeland Security issues.

John Monahan

My father was in J. Edgar's FBI in the 50's. They worked on crime. Not perfectly, but it was the emphasis. Counter espionage was maybe 50 agents total. FBI agents were known to be straight arrows. Now we have many more agents, many of whom work counter and anti terrorism. Which is not straight arrow work. This is obviously not working out. We need a domestic intelligence agency with no enforcement powers. Something like an internal CIA but they must convince someone else to enforce things. Crime and terrorism are not the same.


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