Mick Weinstein The Week's Best Stock Blogs

While more details emerged this week on the outrageous Bernard Madoff Ponzi scheme, econobloggers addressed some of the lingering questions: How was this not flagged earlier by the SEC? Why didn't Madoff's own investors catch wind of it years before? And what can everyone learn from this apparent crime? We all know the basic Madoff story, so here I collect only additional insight from the last few days, penned by some smart folks. As always, click through on any item that piques your interest.

Failure at the SEC

• StockJockey notes that the SEC had plenty of warning signs that the agency somehow ignored over the years: "Perhaps the next iteration of the SEC will evolve to the point they take into account the surveillance activities of people who actually have a clue - daily participants in the markets."

• But Paul Kedrosky does a bit of quantitative analysis and concludes: "it is interesting to see that any fraud here was sufficiently sophisticated such that the proffered performance numbers were credible from a distributional point of view... it shows that this (alleged) con was at least somewhat more sophisticated than some of the noisier critics out there have been saying."

• Megan McArdle: "at least several people at the SEC deserve to be fired for their pitiful oversight... That outright fraud is hard to detect doesn't mean that it's okay to let it go undetected for decades... [Madoff] was so successful because, like Jack Kelley, he kept his fraud modest."

• Harry Markopolos tried for years to get the SEC to look more closely into Madoff. As Markopolos' full story came to light in the Journal yesterday, Greg Newton quipped that "characterizing the SEC as The Keystone Cops does defamatory disservice to The Keystone Cops' investigative skills."

Madoff's Own Investors - Naive?

• Jeff Matthews: "How is it possible for people to have believed this guy? The answer is as old as Hamlet. Recall that play's tortured hero could not believe what his uncle had done, despite the appearance of his dead father's ghost to tell him so... People simply want to believe good stuff, not bad stuff. It's human nature."

• Henry Blodget presents 8 "key factors that had people begging to be allowed to invest with Bernie, and many of the world's smartest money minds doing what they have spent a lifetime telling other people not to do -- take his returns on faith."

• Mark Gimein explains how a court ruling in an earlier case of hedge fund fraud at Bayou left any Madoff investors who did question his results with a strange incentive NOT to withdraw their money - or call the authorities.

• That court precedent is called Fraudulent Conveyance, explains Roger Ehrenberg, and it means tat even those who withdrew funds from Madoff years ago could be required to pay back a large chunk of their original investment. Ehrenberg thinks this rule should be reconsidered: "The Madoff fraud is a tragedy of epic proportions, and there is almost no punishment sufficient for the monster that caused this widespread damage. However, those who innocently exited the situation should not have their lives turned upside down on a retrospective basis due to a highly legalistic ruling with little appeal from a common sense perspective."

• Madoff investors, including large institutional firms, somehow failed to demand reputable third-party accounting on their assets for all those years. Slate's Bonnie Goldstein finds an interesting document from the guy who signed off on Madoff's books. He may not be visiting such exotic European locales again any time soon.

• Bespoke Investment Group takes a look at the returns of a Madoff feeder fund and says, "if you ever see a chart like this, run away fast."

• The title of this one from Robert Chew at Time.com says it all: "How I Got Screwed by Bernie Madoff"

• John Hempton finds the website of one fund-of-funds that invested in Madoff has removed its prior statement that "Robust and thorough due diligence is at the heart of our firm's investment process." Hmmm.

Broken Confidence and Lessons Learned

• John Carney at Clusterstock: "The stage is set for the worst crisis of investor confidence since the Great Depression... In past times, it might have made sense to say we need radical reforms or new programs and regulations. But we've already had those and it didn't work."

• Felix Salmon: "if you're an investor, yes, you should be worried about losing your money to fraud -- but you should also be even more worried about losing it the old-fashioned way, by investing it with a hedge fund manager who blows up spectacularly."

• Avi Gelboim manages a fund-of-funds and says: "I do not believe... that the existence of a single Bernard Madoff should deter sophisticated investors from considering properly due diligenced, professional investment managers."

• But Rob Kellogg says it's time to outlaw hedge funds entirely: "How many blowups does it take for us to realize that unregulated greed in the name of "free market" demagoguery does not work for working people and the broader economy?"

So where does this leave the individual investor? I think Kurt Walter, a commenter on our site, has it right: "Just get educated about investing, open a discount brokerage account and handle your own money. Nobody cares about your money more than you."