Obama makes financial reform one of his 'top priorities'

The United States has been “asleep at the switch” and a financial regulatory upgrade is needed in the wake of Bernard Madoff’s alleged $49.4bn (€34.5bn) fraud scheme and the $692bn (€484bn) Wall Street bailout, president-elect Barack Obama said today.

Mr Obama described Madoff’s alleged actions as “a massive fraud that was made possible in part because the regulators who were assigned to oversee Wall Street dropped the ball”.

He said the failure of oversight “has the potential to devastate our entire economy”.

Speaking at a press conference in Chicago, Mr Obama said: “In the last few days, the alleged scandal at Madoff Investment Securities has reminded us yet again of how badly reform is needed when it comes to the rules and regulations that govern our markets.

“Charities that invested in Madoff could end up losing savings on which millions depend – a massive fraud that was made possible in part because the regulators who were assigned to oversee Wall Street dropped the ball.

“And if the financial crisis has taught us anything, it’s that this failure of oversight and accountability doesn’t just harm the individuals involved, it has the potential to devastate our entire economy. That’s a failure we cannot afford.”

He said financial regulatory reform would be one of “the top legislative priorities” of his incoming administration.

He named Mary Schapiro as chairman of the Securities and Exchange Commission and Gary Gensler as chairman of the Commodity Futures Trading Commission.

Mr Obama said: ``We have been asleep at the switch.

“Not just some of the regulatory agencies, but some of the Congressional committees that might have been taking a look at this stuff.

“We have not been as aggressive and we had a White House that started with the premise that deregulation was always good.

“We are going to have to greatly strengthen our regulatory apparatus and update it from what worked for a 20th Century financial system to what works in a 21st Century financial system.”

He said his team would be releasing a detailed plan for how the “regulatory upgrade” would take place, but that that was premature at the moment.

Madoff is charged with running a “giant Ponzi scheme” which lost investors billions in what could be one of the largest fraud schemes in Wall Street history to date.

The former chairman of New York’s Nasdaq stock exchange, who presented himself as a champion of transparency and integrity, told his employees his operations were “all just one big lie”, according to court documents.

A Ponzi scheme is a fraudulent investment vehicle which pays very high returns to existing investors which are paid for by money put into the scheme by newcomers.

Yesterday, Madoff was granted $10m (€6.9m) bail and had to push his way through a swarm of media to reach his posh Manhattan apartment, where he is under a night-time curfew.

He must be at the Upper East Side residence from 7pm to 9am and must also wear an ankle-bracelet to monitor his movements.

His wife was ordered to surrender her passport.

Madoff’s lawyer, Ira Lee Sorkin, said: “This is a great tragedy and we are doing our best to minimise the losses.”

Cameras awaited Madoff as he walked out of the courthouse toward his black SUV. Minutes later, a smirking Madoff was swarmed by more cameras as he entered his apartment building, with the scrum at one point turning into a shoving match between Madoff and a journalist.

Madoff was then fitted with an electronic-monitoring bracelet and placed under house detention in the $7m (€4.9m) apartment.

His chaotic commute came on a day when the fallout over the scandal spread through Washington.

The Securities and Exchange Commission (SEC) has been criticised for failing to spot the fraud scheme earlier, despite investigating Madoff’s firm and Congress jumping into the fray.

On Capitol Hill, the chairman of the House capital markets subcommittee, Paul Kanjorski, announced that an inquiry would begin early next month into what may be the biggest Ponzi scheme yet and how the government failed to detect it.

The SEC is also looking into the relationship between Madoff’s niece and a former SEC attorney who reviewed Madoff’s business.

Also yesterday, US Attorney General Michael Mukasey removed himself from the probe because his son, Marc Mukasey, is representing Frank DiPascali, a top financial officer at Madoff’s investment firm.

The Justice Department refused to say when Mr Mukasey became aware of the conflict but confirmed he was removing himself from all aspects of the case.