WASHINGTON — The scandal at Madoff Investment Securities LLC touched off a fight Monday among lawmakers over whether more regulation could have helped uncover the alleged fraud, or whether regulators failed to use authority they already had.
The debate broke along largely partisan lines, with Democrats arguing for an increase in resources for the Securities and Exchange Commission to detect and combat fraud and Republicans saying the scandal had discredited the agency.
At a subcommittee hearing, House Financial Services Committee Chairman Barney Frank said the case, in which the money manager Bernie Madoff is accused of running a Ponzi scheme where high-net investors lost billions, showed more regulation was needed.
"There have been arguments … that investor protection could be confined to people of lower income," Rep. Frank said, noting many hedge funds require individuals to invest at least $1 million. "It is not simply people who have under $1 million to invest who need protection."
Regulation can be crafted so it does not choke off innovation in the hedge fund industry, he said. "Regulation done properly is very pro-market."
The hearing, which was called to show how the Madoff scandal proved the need for regulatory reform, devolved into partisan finger pointing.
Both Rep. Frank and Rep. Paul Kanjorski, D-Pa., the chairman of the House Financial Services capital markets subcommittee, argued that Democrats had pushed for increased enforcement capability at the SEC in the past, only to be rebuffed by Republicans. But Rep. Spencer Bachus, the lead Republican on the Financial Services Committee, said the SEC's problems went beyond funding. The agency did not utilize existing resources, he said, and creating new regulations would not necessarily help.
"While the failures of regulatory and private-sector due diligence exposed by the Madoff matter are obvious, they do not lead me to conclude at this stage of inquiry that what is needed are broad new legislative or regulatory mandates on the rest of the securities industry," Rep. Bachus said. "What we may have in the Madoff case is not necessarily a lack of enforcement and oversight tools, but a failure to use them."
He was backed by Rep. Scott Garrett, R-N.J., who said, "Regulators had numerous chances to uncover the scheme."
Their disgust with the SEC was shared by some Democrats.
"Many of us have lost confidence in the SEC," said Rep. Carolyn Maloney, D-N.Y., and the failure to follow up on whistle-blower complaints was "pretty pathetic."
She asked a witness during the hearing: "For those of who don't trust the SEC anymore, what additional authority should be given to other regulators? Where can we go to get proper oversight? I don't believe we received it from the SEC."
Rep. David Scott, D-Ga., agreed that there is "a credibility problem with the SEC."
The hearing was meant to kick off a week of congressional efforts to focus on financial services issues. But a hearing planned for Wednesday on oversight of the Troubled Asset Relief Program was indefinitely postponed.
The hearing was scheduled to feature Federal Reserve Board Chairman Ben Bernanke and Federal Deposit Insurance Corp. Chairman Sheila Bair and cover ways the Treasury Department should use the program's remaining $350 billion.
The committee is still scheduled to hold a hearing Friday to examine Federal Housing Administration loan originations. Witnesses have not been announced.