Origin of Wall Street’s Plunge Continues to Elude Officials

By GRAHAM BOWLEY                    WATCH THE MARKET LIVE ON THURSDAY!

Published: May 7, 2010            

A day after a harrowing plunge in the stock market, federal regulators were still unable on Friday to answer the one question on every investor’s mind: What caused that near panic on Wall Street?

Traders applauding Duncan L. Niederauer, chief of NYSE Euronext, on Friday. He had defended his exchange in an interview.

Through the day and into the evening, officials from the Securities and Exchange Commission and other federal agencies hunted for clues amid a tangle of electronic trading records from the nation’s increasingly high-tech exchanges.

But, maddeningly, the cause or causes of the market’s wild swing remained elusive, leaving what amounts to a $1 trillion question mark hanging over the world’s largest, and most celebrated, stock market.

The initial focus of the investigations appeared to center on the way a growing number of high-speed trading networks interact with one another and with venerable exchanges like the New York Stock Exchange. Most investors are unaware that these competing systems have fractured the traditional marketplace and have displaced exchanges like the Big Board as the dominant force in stock trading.

The silence from Washington cast a pall over Wall Street, where shaken traders returned to their desks Friday morning hoping for quick answers. The markets remained on edge, as the uncertainty over what caused Thursday’s wild swings added to the worries over the running debt crisis in Greece.

In a joint statement issued after the close of trading, the S.E.C. and the Commodity Futures Trading Commission said they were continuing their review. And the two agencies indicated they were looking particularly closely at how different trading rules on different exchanges, which temporarily halted trading on some markets while activity in the same stocks continued on other markets, might have contributed to the problem.

“We are scrutinizing the extent to which disparate trading conventions and rules across various markets may have contributed to the spike in volatility,” the statement said.

A government official who was involved in the investigation said regulators had moved away from a theory that it was a trading mistake — a so-called fat finger episode — and were examining the links between the futures and cash markets for stocks.

In particular, this official said, it appeared that as stock trading was slowed on the New York Exchange when big price moves started, orders moved automatically to other, electronic exchanges that did not have pricing restrictions.

The pressure in the less-liquid markets was amplified by the computer-driven trades, which led still other traders to pull back. Only when traders began to manually respond to the sharp drop did the market seem to turn around, said the official, who spoke on the condition of anonymity because the investigation was not complete.

On Friday evening, another government official directly involved in the investigation said that regulators had not yet been able to completely rule out any of the widely discussed possible causes of the market’s gyrations.

This official, who also spoke on the condition of anonymity, said that regulators had collected statistical and trading data from stock and futures exchanges, and had begun cross-analyzing that with trading reports from brokerage firms and large market participants. Regulators have also gathered anecdotal accounts of what happened from hedge funds and other trading firms.

The two major regulatory agencies — the Securities and Exchange Commission and the Commodity Futures Trading Commission — have generated multiple memos detailing what they have found and offering possible causes for the market events. Among the issues discussed in the memos, the official said, were the disparate rules that different stock exchanges have for dealing with large price movements on the same securities and how prices on futures markets and stock exchanges appeared to lead or follow each other’s movements down and back up.

The lack of a firm answer, more than 24 hours after the market’s plunge Thursday, left some on Wall Street frustrated.

“The problem is you don’t come in and find out what the clear answer is,” said Art Hogan, the New York-based chief market analyst at Jefferies & Company. “We don’t have the clear explanation for how it happened.”

Others, however, said it would take time to pinpoint what happened given the increasingly complex nature of modern stock trading.

Over the last five years, the stock market has split into a plethora of new competing hubs and trading outlets, a legacy of deregulation earlier this decade and fast-paced technological change. On Friday, the rivalry between the two main exchanges erupted into view as each publicly pointed the finger at the other for being a main cause of the collapse on Thursday, which sent shockwaves around the globe.

“This is the sort of situation that has been a worry for a long time, but the markets have changed in a way that has made things more difficult,” said Robert L. D. Colby, former deputy director of trading and markets at the S.E.C. “They’ve become more fragmented, so it’s harder for any one exchange to see the full picture and take action.”

On Friday, President Obama sought to provide reassurance that regulators were working to find the root of the problem.

“The regulatory authorities are evaluating this closely with a concern for protecting investors and preventing this from happening again,” the president said.

The absence of a unified system to halt trading in individual stocks led to bitter accusations between exchanges on Friday. Robert Greifeld, chief executive of Nasdaq OMX, appeared on CNBC to criticize the New York Stock Exchange for halting trading for up to 90 seconds in half a dozen stocks on Thursday.

“Stopping for 90 seconds in time of crisis is exactly equivalent to not picking up the phone,” Mr. Greifeld said.

A few minutes later, Duncan L. Niederauer, chief executive of NYSE Euronext, responded in an interview on CNBC, blaming Nasdaq’s computers for continuing trading while the market was in free fall.

“These computers go out and just find the next bid they can find,” he said.

Mr. Niederauer acknowledged the need to introduce circuit-breakers along the lines of those already in place on the Big Board, and his views were echoed by some chief executives of the new exchanges.

Five Lessons From Your ’09 Tax Return

From MoneyWatch.com:

These Money-Making Tips Will Help you Analyze Last Year’s Finances in Order to Lower Your Taxes in the Future

(MoneyWatch.com)  This story, by Jill Schlesinger, originally appeared on CBS’ Moneywatch.com

Your 2009 taxes are done. Congratulations! But you’re not done yet. (Sorry.) While you have all your 2009 tax forms and documents handy, this is the perfect time to analyze last year’s finances and use those insights to lower your taxes in 2010 and beyond.

The sooner you get started, the more you can save. So, take a big breath and then take these five steps:

1. Avoid a Big Tax Refund

You think you love getting a tax refund. What’s not to like about found money? But a refund is really just the return of a year-long, interest-free loan that you extended to your spendthrift Uncle Sam.

You can do much smarter things with that money, like putting it into a retirement plan or a college savings fund. So if you will be receiving a 2009 refund of more than a few thousand dollars and you’re an employee, adjust your withholding at work. If you’re self-employed, lower your quarterly estimated tax payments accordingly.

If your 2010 income will be less than $75,000 ($150,000 if you’re married and will file jointly), be sure your tax withholding has been properly adjusted for the new Making Work Pay Tax Credityou’re entitled to receive this year. This credit (up to $400 for singles and $800 for couples) should be reflected in the amount of taxes taken out of your paycheck. But you may need to submit a revised W-4, especially if you’re holding down multiple jobs or you’re married, since your employer wouldn’t know about your extra work or your spouse’s income.

2. Save More in Your Retirement Plan

If you are not maxing out your employer-sponsored, tax-deferred retirement plan, you’re missing outon the single best opportunity to save on taxes.

I know that the idea of saving more may be difficult these days, as so many people are just getting back on their feet. But if you can squeeze just an extra 1 or 2 percent out of your paycheck and pour that cash into the plan, you’ll reduce your taxable income and your 2010 tax bill.

Doing so might also bring your income under certain thresholds that will let you qualify for bigger tax breaks you’d otherwise miss – such as personal exemptions, itemized deductions, an Individual Retirement Account, the Child Tax Credit, the Child and Dependent Care Credit, and the Hope and Lifetime Learning Credits for college.

Here’s an example, courtesy of Research401k.com: Say you’re a single person earning $50,000 and in the 25 percent tax bracket. Without making a 401(k) contribution, you might owe $12,500 in taxes this year. By contributing $4,000 to the plan, however, you’d lower your taxable income to $46,000 and might owe $11,500 in taxes. Essentially, the government lends you $1,000 to invest for your future and you don’t have to pay the loan back until you withdraw the money from the 401(k) in retirement.
3. Look into Muni Bonds and Funds

If you have money in interest-paying bank accounts, CDs, money market funds, or taxable bonds or bond funds, you could be adding to your tax liability. High-income taxpayers need to be especially concerned since their tax liability will rise as a result of the passage of health care reform.

You may want to consider moving some of those taxable savings and investments into tax-free municipal bond funds. I’m a fan of ones from Vanguard (VWITX), T. Rowe Price (PRTAX) and Fidelity (FLTMX).

After a stellar 2009, muni funds are not quite as good a deal as they were last year, compared with taxable investments. Still, if you are in a high tax bracket, muni funds could offer a better tax-exempt yield. To see how much more in your case, use this taxable-equivalent yield calculator. Just be aware that the sweet yields on munis come with some extra risk, since there’s always a possibility that a few bond issuers won’t make their payments. Historically, that risk is pretty slim, but it’s not zero.

4. Lower Your Mutual Fund Taxes

As the equity and fixed income markets recover from the financial meltdown, be on the lookout for mutual fund taxable distributions. A distribution is one of the most aggravating features of a managed mutual fund: You are on the hook for capital gains on the fund’s investments as well as the fund’s tax liability. You may even be taxed on gains the fund incurred before you owned it!

One way to limit the damage before you invest is to ask the fund company if it will be making a distribution soon. If the answer is “yes,” hold off buying until afterward.

Or you might invest in funds with low turnover ratios, such as index funds, since they’ll be less likely to throw off taxable distributions. A turnover ratio below 10 percent is generally tax-efficient. (A fund’s annual report will show its turnover rate.) Morningstar’s Fund Screener tool can help you find low-turnover stock funds.

One class of mutual funds, tax-managed funds, is all about keeping your tax liability down. These funds do so by keeping turnover low and avoiding dividend-paying stocks. Some tax-managed funds own stocks; some own stocks and bonds. Morningstar and Yahoo! Finance’s Mutual Funds Center can help you find them.

5. Keep Better Tax Records

Organizing your tax records might not only lower your tax liability, it could help you get rid of the tax-filing headache sooner. Create a file called “Taxes 2010” and throughout the year toss into it business receipts; bank, brokerage, and mutual fund statements; W-2s; 1099s; property tax bills; and mortgage interest statements. And keep track of your purchase price, commission, and sales price for any investment transactions in 2010. You’ll thank yourself in April 2011.

• Last-Minute Tax-Filing Strategies

• How to File for an Extension

• What if You Can’t Pay the IRS?

• Save Time Filing Your Taxes

• Lower Your Taxes in 2010

Also important: self employment tax information, paying your estimated taxes

Goldman exec in alleged fraud to testify on Hill

Because You Need To Know What is Happening in the Latest Goldman Sachs Scandal

By DANIEL WAGNER (AP)

WASHINGTON — The Goldman Sachs trader at the center of fraud charges filed by the Securities and Exchange Commission will testify before a Senate subcommittee next week, the panel announced Thursday.

Fabrice Tourre, who was named along with Goldman & Co. in the charges filed last week, will testify Tuesday before the Permanent Subcommittee on Investigations, the panel said.

The hearing is the fourth in a series examining the causes of the financial crisis. It also will include testimony from Goldman CEO Lloyd Blankfein, chief financial officer David Viniar and four other current and former Goldman executives.

The SEC charged that Tourre marketed an investment that officials say was designed to lose value. He failed to tell investors that the mortgage securities in the deal were selected by a hedge fund that was betting they would fail, the agency alleges.

The SEC complaint quotes from an e-mail Tourre sent in January 2007 in which he bragged about being the “only potential survivor” of a forthcoming financial meltdown.

After the system toppled, he wrote in the e-mail, he would be “standing in the middle of all of these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstrosities!!!”

Tourre’s lawyer declined Thursday to comment on the matter.

Goldman has called the charges unfounded and says it plans to fight them.

The SEC is conducting a broad probe of the way banks profited from questionable activity ahead of the financial crisis. They are investigating other Wall Street banks besides Goldman.

The case against Goldman has brought attention to high-risk dealings on Wall Street. In particular, it’s shed light on complex products called synthetic collateralized debt obligations that amount to side bets on an investment’s performance. Synthetic CDOs are linked to the values of other investments — in the Goldman case, pools of mortgage securities — but don’t actually contain those investments.

Investment bankers have said there were numerous other cases in which hedge funds designed deals they expected would lose value. The SEC wants to know if banks other than Goldman marketed these deals without telling investors they were designed by people who would profit if investors lost money.

The Senate subcommittee is using Goldman Sachs as a case study to examine the role of investment banks in the financial bubble that led to a worldwide credit freeze in the fall of 2008.

It already has held hearings on the role of subprime lenders and federal bank regulators. On Friday, it will examine how credit rating agencies helped banks sell risky investments by labeling them as safe.

AP Business Writer Stevenson Jacobs in New York contributed to this report.

Copyright © 2010 The Associated Press. All rights reserved

How Much Damage Did the Market Crash Do to Retirement Security?

from TaxVox: the Tax Policy Center blog by Howard Gleckman

The stock market collapse of 2007-2009 was the worst since the 1930s, and rivaled in modern times only by the crash of 1973-74. But the real question for those counting on equities to help fund their retirement security is: “What are my long-term prospects in the wake of the carnage?”

In a new paper, TPC’s Eric Toder, along with the Urban Institute’s Karen Smith and Barbara Butrica, look at how investors would fare under three post-crash market scenarios. And what they found may surprise you a bit. Under one, your portfolio gets back to where it would have been, absent the crash, by 2017. That would take large, but not unprecedented, stock gains over the next decade. If equities merely revert to their historic annual returns from the market’s December 2008 level, you’ll permanently remain far behind where you would have been if there had been no collapse. And if stocks respond as they did in the decade after the 1970s crash—well, you don’t want to know.

Now for the numbers. First, the researchers used the S&P 500 Index. Based on historical data, they assumed a real, inflation-adjusted, average growth rate in the index of 3.5 percent. Add in reinvested dividends and subtract 1 percent in administrative costs, and stock portfolios “normally” increase by 5.5 percent. You should also know they measured future returns from December 31, 2008, and not from the March, 2009 market bottom that was 27 percent lower.

If you had invested $100 in December, 2007 and the market hadn’t crashed, you’d have had $171 (in 2008 dollars) by 2017. The authors figure you still can get there, but it would take an implied average real annual growth rate of 9.4 percent in the index until 2017. That’s less than the 13 percent we saw in the 90s and the 12 percent from 1955 to 1964, but it is awfully robust.

If instead, the S&P index had simply resumed its historical 3.5 percent real growth rate after 2008 as if nothing had happened, you’d have just $100 in 2017—exactly where you started in December, 2007. But it could be worse. If we get a repeat of 1974-82, when the S&P grew at an average annual rate of minus 4 percent, your 2007 nest egg of $100 will turn into a whopping $60 by 2017. Ouch.

Aha, you say, all these scenarios are far too pessimistic. After all, the market has recovered about half of its losses since it bottomed last spring. But remember the 1930s. The market lost 86 percent of its value between 1930 and 1932, rebounded strongly until 1937 but crashed again. In the end, it took nearly three decades for the Dow to find its 1929 high. What matters to future retirees is the long-term trend, not a nine-month rebound.

Keep in mind that there will be big differences in how the crash affects individuals’ retirement prospects, depending on their age and income. Older people are likely to lose more because they had more invested before the crash and have less time to recover their losses before they retire. But younger people may benefit because they’ll have the chance to buy stocks at bargain prices. Because the wealthy are likely to own more stocks, they’ll lose more if the market does not bounce back, but gain more if it recovers. In contrast, low and middle-income individuals own few stocks and rely mostly on Social Security for their retirement. They are little affected by the market crash and most can recover their losses by working for an additional year.

There is, of course, no way to predict the future. But this paper will give you a sense of just how bad the last couple of years were for our retirement savings.

Will the beginning of a new decade bring an end to the Great Stagnation?:

from Economist’s View by Mark Thoma

The Big Zero, by Paul Krugman, Commentary, NY Times: Maybe we knew, at some unconscious, instinctive level, that it would be an era best forgotten. Whatever the reason, we got through the first decade of the new millennium without ever agreeing on what to call it. The aughts? The naughties? Whatever. …

But from an economic point of view, I’d suggest that we call the decade past the Big Zero. It was a decade in which nothing good happened, and none of the optimistic things we were supposed to believe turned out to be true.

It was a decade with basically zero job creation…, private-sector employment has actually declined — the first decade on record in which that happened.

It was a decade with zero economic gains for the typical family. Actually, even at the height of the alleged “Bush boom,” in 2007, median household income adjusted for inflation was lower than it had been in 1999. And you know what happened next.

It was a decade of zero gains for homeowners…: right now housing prices, adjusted for inflation, are roughly back to where they were at the beginning of the decade. … Almost a quarter of all mortgages … are underwater, with owners owing more than their houses are worth.

Last and least for most Americans — but a big deal for retirement accounts, not to mention the talking heads on financial TV — it was a decade of zero gains for stocks, even without taking inflation into account. Remember the excitement when the Dow first topped 10,000…? Well, that was back in 1999. Last week the market closed at 10,520.

So there was a whole lot of nothing going on in measures of economic progress or success. Funny how that happened.

For as the decade began, there was an overwhelming sense of economic triumphalism in America’s business and political establishments, a belief that we — more than anyone else in the world — knew what we were doing. …

Let me quote from a speech that Lawrence Summers, then deputy Treasury secretary…, gave in 1999. … [quote] … Mr. Summers — and … just about everyone in a policy-making position at the time — believed … America has honest corporate accounting; this lets investors make good decisions, and also forces management to behave responsibly; and the result is a stable, well-functioning financial system.

What percentage of all this turned out to be true? Zero.

What was truly impressive about the decade past, however, was our unwillingness, as a nation, to learn from our mistakes.

Even as the dot-com bubble deflated, credulous bankers and investors began inflating a new bubble in housing. Even after famous, admired companies like Enron and WorldCom were revealed to have been Potemkin corporations with facades built out of creative accounting, analysts and investors believed banks’ claims about their own financial strength and bought into the hype about investments they didn’t understand. Even after triggering a global economic collapse, and having to be rescued at taxpayers’ expense, bankers wasted no time going right back to the culture of giant bonuses and excessive leverage.

Then there are the politicians. Even now, it’s hard to get Democrats, President Obama included, to deliver a full-throated critique of the practices that got us into the mess we’re in. And as for the Republicans: now that their policies of tax cuts and deregulation have led us into an economic quagmire, their prescription for recovery is — tax cuts and deregulation.

So let’s bid a not at all fond farewell to the Big Zero — the decade in which we achieved nothing and learned nothing. Will the next decade be better? Stay tuned. Oh, and happy New Year.

Fed Chairman Bernanke: Frequently Asked Questions

From Fed Chairman Ben Bernanke: Frequently Asked Questions. Dr. Bernanke discusses four questions:

1. Where is the economy headed?
2. What has the Federal Reserve been doing to support the economy and the financial system?
3. Will the Federal Reserve’s actions lead to higher inflation down the road?
4. How can we avoid a similar crisis in the future?

On inflation, Bernanke says he expects “inflation to remain subdued for some time.” On the economy:

Where Is the Economy Headed?
… Recently we have seen some pickup in economic activity, reflecting, in part, the waning of some forces that had been restraining the economy during the preceding several quarters. The collapse of final demand that accelerated in the latter part of 2008 left many firms with excessive inventories of unsold goods, which in turn led them to cut production and employment aggressively. This phenomenon was especially evident in the motor vehicle industry, where automakers, a number of whom were facing severe financial pressures, temporarily suspended production at many plants. By the middle of this year, however, inventories had been sufficiently reduced to encourage firms in a wide range of industries to begin increasing output again, contributing to the recent upturn in the nation’s gross domestic product (GDP).

Although the working down of inventories has encouraged production, a sustainable recovery requires renewed growth in final sales. It is encouraging that we have begun to see some evidence of stronger demand for homes and consumer goods and services. In the housing sector, sales of new and existing homes have moved up appreciably over the course of this year, and prices have firmed a bit. Meanwhile, the inventory of unsold new homes has been shrinking. Reflecting these developments, homebuilders have somewhat increased the rate of new construction–a marked change from the steep declines that have characterized the past few years.

Consumer spending also has been rising since midyear. Part of this increase reflected a temporary surge in auto purchases that resulted from the “cash for clunkers” program, but spending in categories other than motor vehicles has increased as well. In the business sector, outlays for new equipment and software are showing tentative signs of stabilizing, and improving economic conditions abroad have buoyed the demand for U.S. exports.

Though we have begun to see some improvement in economic activity, we still have some way to go before we can be assured that the recovery will be self-sustaining. Also at issue is whether the recovery will be strong enough to create the large number of jobs that will be needed to materially bring down the unemployment rate. Economic forecasts are subject to great uncertainty, but my best guess at this point is that we will continue to see modest economic growth next year–sufficient to bring down the unemployment rate, but at a pace slower than we would like.

A number of factors support the view that the recovery will continue next year. Importantly, financial conditions continue to improve: Corporations are having relatively little difficulty raising funds in the bond and stock markets, stock prices and other asset values have recovered significantly from their lows, and a variety of indicators suggest that fears of systemic collapse have receded substantially. Monetary and fiscal policies are supportive. And I have already mentioned what appear to be improving conditions in housing, consumer expenditure, business investment, and global economic activity.

On the other hand, the economy confronts some formidable headwinds that seem likely to keep the pace of expansion moderate. Despite the general improvement in financial conditions, credit remains tight for many borrowers, particularly bank-dependent borrowers such as households and small businesses. And the job market, though no longer contracting at the pace we saw in 2008 and earlier this year, remains weak. Household spending is unlikely to grow rapidly when people remain worried about job security and have limited access to credit.

Inflation is affected by a number of crosscurrents. High rates of resource slack are contributing to a slowing in underlying wage and price trends, and longer-run inflation expectations are stable. Commodities prices have risen lately, likely reflecting the pickup in global economic activity and the depreciation of the dollar. Although we will continue to monitor inflation closely, on net it appears likely to remain subdued for some time.

Risk exists for another Madoff-type scam

MSNBC.com

WASHINGTON – Monday brought some closure to Bernard Madoff’s victims, who were swindled out of $65 billion in the largest recorded financial fraud — a scheme that was exposed in part because the plummeting stock market led investors to demand repayment of money that was long gone.

With Madoff on his way to jail, attention is shifting to the next fraud — and to the agency responsible for preventing it.

The Securities and Exchange Commission lost credibility when it emerged that a tipster had been trying to blow the whistle on Madoff for years but had been brushed off repeatedly. Since Madoff’s case came to light, the agency has announced a series of changes it hopes will improve enforcement, making it easier to detect and root out fraud before it approaches this massive scale.

But obstacles remain, including the finding in a recent oversight report that agency lawyers lack necessary support staff and resources. And even with the benefit of hindsight, experts say, eliminating fraud is about as likely as eliminating greed.

Here are some questions and answers about what the SEC is doing to shore up its examination and enforcement actions, and how far these changes will go to prevent the next Madoff-style scandal.

Q: Could a Madoff-style fraud happen again?

A: Of course it could. Enforcement is by definition a backward-looking process, with officials exposing and punishing wrongdoing only after it’s been committed. As far as the SEC knows, there are more Madoffs starting up right now.

But officials say fraud on Madoff’s scale is unlikely because he was an uncommonly talented crook, quietly gaining the trust of investors, regulators and power brokers over decades in the financial world.

Q: Does that mean they’re not doing anything to stop the next Madoff?

A: Regulators are doing quite a bit to prevent similar Ponzi schemes from bilking more investors.

The examinations division, which is responsible for day-to-day oversight, will be improving examiners’ expertise in fraud detection and in complex financial products, looking more closely at firms deemed more likely to commit fraud and improving handling of tips and complaints. That’s according to a speech this month by Lori Richards, who directs the SEC’s Office of Inspections and Examinations.

SEC Chairman Mary Schapiro has installed a new director of the Division of Enforcement: Robert Khuzami, a former federal prosecutor. He has launched efforts to improve the SEC’s enforcement capabilities, including streamlining key processes, and advocates pouring vast resources into hiring new staff.

Testifying before Congress in May, Khuzami said, “Not a day goes by that I don’t think about how we can stop the next big fraud.”

The agency also will introduce a new computer system intended to track and sift through the complaints that come in, which number between 750,000 and 1.5 million a year.

Q: That all sounds nice, but aren’t there some concrete loopholes the SEC needs to close to prevent future scams?

A: Madoff exploited the opportunity to act as both investment adviser and custodian of his clients’ assets. That meant there was no one to verify whether the assets existed, or whether he was making the trades he claimed.

The SEC proposed a new rule that would require third-party verification of the assets, effectively closing that loophole.

But closing loopholes doesn’t prevent future abuses, warns Laura Unger, a former commissioner and acting chairman of the SEC.

“Disclosure and rules are always changed after the crisis,” she says. “You’re hard-pressed to prevent the next thing before it happens because it’s always going to be something different.”

Q: With so many attempts at reform going on all at once, how can we be sure the SEC even understands where the problems were?

A: In August, SEC Inspector General David Kotz is expected to release a long-awaited investigation of the breakdowns that allowed Madoff to pull off his scam undetected. It will examine information sharing between the examination and enforcement divisions, and attempt to explain why a tipster with information on Madoff’s fraud was unable to attract the agency’s attention for over a decade.

Even before the formal recommendations come out, Schapiro has said she will address any weaknesses that come to her attention.

Q: Now that the SEC is stepping up its game, can investors rest easy?

A: Never.

Investors who want to feel safe misunderstand the agency’s role, says Unger, the former SEC commissioner. As more people have investments, “there’s this increasing sense that there’s no longer any risk in investing, that it’s like putting money in a bank,” she says.

But investments earn higher returns than savings accounts precisely because they carry risks — and fraud is one of those risks, Unger says.

“We can’t end fraud because we can’t end greed and stupidity,” she says. “But you can make an impact in reducing it and make other people sensitive and thoughtful about it.”

© 2009 MSNBC.com