Sunday’s episode of 60 Minutes featured a man named Harry Markopolos who repeatedly reported Bernie Madoff’s scam to the Securities and Exchange Commission. The SEC did not investigate.

Steve Croft: How many times did you send material to the SEC?

Markopolos: May 2000. October 2001. October, November, and December of 2005. Then again, June 2007. And finally, April 2008. So, five separate SEC submissions.

Croft: And in spite of all of the things that you did, it still ended up in disaster.

This is a reminder of what I observed in a recent post here called “A Real Regulator.” CNBC’s Erin Burnett had called for a “real” regulator in the wake of Madoff, to which I replied:

When regulators fail to address a problem ahead of time, when they regulate inefficiently, when they hand their rulemaking organs to the industries they are supposed to oversee, those are all the actions of real regulators. That’s what you get with real regulation.

Markopolos isn’t grinding this same ax against goverment regulation. He says, “… [S]elf-regulation on Wall Street doesn’t work.”

So the question is posed: What allowed this to happen?

I don’t think this huge fraud occured in a “self-regulatory” environment. It occured in a regulated environment. Regulators failed to do their jobs, but investors had abandoned their responsibility to look into the people and firms with which they placed their money. They believed that the SEC was taking care of that.

It wasn’t, so nobody was minding the store. Ultimately, the SEC served as a partner to the crime, providing the “confidence” that made a success of Bernie Madoff’s confidence game.

Back to Markopolos:

That’s typically how the SEC does it. They come in after the crime has been committed, they toe-tag the victims, count the bodies, and try to figure out who the crooks were, after the fact, which does none of us any good.

Is “self-regulation” the alternative to government regulation? No. And neither is deregulation. The alternative is market regulation, where individuals, responsible for the soundness of their purchases and investments, investigate and study who they do business with. Scams like Madoff’s would have shorter duration and do less damage if investors were not under the impression that they were protected by government regulators. Of course, our policymakers are likely to double-down on the bet on governmental regulation, even though we all just witnessed its failure.