SEC Set to Ward off "the next Madoff" with Hiring of Markets Scholar

Hu, who has researched how complex securities and credit derivates pose systemic risk, will lead SEC staff members who identify areas of potential abuse and analyze the costs and benefits of regulating them, said the sources, who declined to be identified because the announcement is not yet public, according to Bloomberg. Hu will report to SEC Chairman Mary Schapiro.

“We are creating a new focus on risk assessment so we can look at those areas of the industry that create the biggest risk for investors,” Schapiro said in an interview for Bloomberg Television’s “Conversations With Judy Woodruff.” The effort will give the SEC “a much better chance of catching the next Madoff much earlier,” Schapiro said.

The news report notes that the SEC has drawn fire from Congress for missing Bernard Madoff’s $65 billion Ponzi scheme and for letting Bear Stearns Cos. and Lehman Brothers Holdings Inc. load up on mortgage- backed securities before they collapsed last year. The agency now has two separate units that anticipate new areas of wrongdoing and evaluate how to regulate them.

Hu “is one of the leading scholars in law and financial markets,” said Darrell Duffie, a finance professor at Stanford University’s Graduate School of Business, who co-wrote a paper with Hu in 2008 on U.S. competitiveness in the global derivatives market. Hu is particularly focused on “disclosure of derivatives positions related to corporate governance issues,” he said, according to Bloomberg.

In June, Hu told a Senate committee that innovation in derivatives markets threatens to leave regulators unaware of certain products and the risks they pose. He told lawmakers he has urged creation of a centralized clearinghouse to collect information on over-the-counter derivatives since 1993. The news report said Hu has also testified to Congress on the collapse of hedge fund Long-Term Capital Management LP in 1998, the regulatory implications of the New York Stock Exchange’s public listing in 2006, and the role of credit-default swaps in the financial crisis last year. In 2007, he spoke on an SEC panel about the rights of shareholders to choose corporate directors.