Holman W. Jenkins Jr. swats away the predictable outcry for more regulation, and observes that when one finds oneself with a problem involving lemons, one should simply make lemonade.

Where was the SEC? Such is the plaint lofted in the wake of the Bernie Madoff scandal.

Huh?

When has the Securities and Exchange Commission ever found a fraud except by reading about it in the newspapers? ...

What makes the Madoff story interesting, though not evidence of systematic failure of the regulatory or legal system, is that Mr. Madoff and some of his clients had dealt on a basis of trust for more than a generation. True Ponzi schemes, in which early investors are paid a “return” out of funds deposited by later investors, tend to falter at the first market downturn. Waning investor enthusiasm dries up new funds required to pay off earlier investors. The scheme collapses.

In all likelihood, Mr. Madoff was not running a pure Ponzi scheme, but had real assets. He was operating a blind pool, in which investors had no real idea what they owned or how it was performing, relying on Mr. Madoff who reported metronomic returns, brooked no nosiness into his methods, and seemed always willing to pay off investors who wanted to withdraw their money.

He may have been casual from the start about what money he used to pay withdrawals. It is almost inconceivable, though, that he could have built a true Ponzi scheme to a height of $50 billion, in which there were never any real assets, just his superhuman 40-year juggling act to ensure new investors were recruited as needed to provide funds to meet withdrawal requests from earlier investors.

If so, he is a genius who should immediately be put in charge of the Social Security and Medicare trust funds.

New York Times:

Prominent liberal blogger Jerome Armstrong has agreed to pay nearly $30,000 in fines in a settlement with the Securities and Exchange Commission over allegations that Armstrong touted the stock of a software company on Raging Bull, an Internet bulletin board, in 2000, without disclosing that he was being paid to do so.

Armstrong, the co-author of “Crashing the Gate: Netroots, Grassroots, and the Rise of People-Powered Politics,” with Markos Moulitsas of Daily Kos, and the founder of the Democratic activist site MyDD.com, consented to a civil penalty of $20,000, plus disgorgement of $5,832, and $3,235 in interest.

SEC litigation release.

The SEC is proposing redefining the financial criteria for accredited investor status, needed to invest in hedge funds, limited partnership, and angel investments, dramatically upward.

The Securities and Exchange Commission has redefined what it means to be rich.

In looking for ways to better regulate hedge funds and other “private money” pools, the SEC in December proposed raising the net-worth requirement for people who are eligible to invest in the funds. Since the SEC has always taken a light regulatory approach to hedge funds, assuming they’re for rich people who can take care of themselves, the SEC’s definition of a hedge-fund investor has often been used a proxy for the government’s definition of “rich.”

And being rich today, it turns out, requires more than twice as much money as it did in the 1980s.

The SEC proposal says investors need to have investible assets of at least $2.5 million,excluding equity in any homes or businesses, to be eligible to sign on a hedge fund’s dotted line. That’s a huge jump from the current requirement, which says individuals have to have a net worth of at least $1 million, including the value of primary residences, or an annual income of $200,000 for the previous two years for individuals or $300,000 for couples.

The SEC says it’s just trying to keep up with inflation and the explosion in the number of millionaires in the U.S. The $1 million threshold was set in 1982, long before the stock-market boom of the 1990s and real-estate run-up of the past five years. The agency says so many people are now worth $1 million that they may not be financially savvy enough to understand the risks of investing in hedge funds.

According to the latest data from the Federal Reserve Surveys of Consumer Finance, households worth $1 million or more (including the value of their homes) represented more than 8% of total U.S. households in 2004. The new definition of rich would apply to only about 1% of the population, the SEC says.

Read the whole thing.