Markets depend upon information to be efficient. This NYT story on Madoff indicates that information was in short supply, and a disaster ensured.
The outsize impact on the industry may have resulted largely because Mr. Madoff (pronounced MAY-doff) managed his funds much the way that real estate leaders have operated successfully for decades: He provided little information and demanded a lot of trust.
So, where were the government regulators, those charged with ensuring that the market provide the necessary disclosures so that investors can rationally make their “risk” decisions? Absent, according to a Washington Post op/ed:
Those who support regulation also say that hedge funds should disclose more of what they do. Well, Madoff did make some disclosures; it’s just that they weren’t true. As SEC Chairman Chris Cox has all but admitted, the scandal doesn’t show that his agency lacked the power to regulate; it shows that it failed to exercise it. Responding to this scandal with more regulation would be like thrusting more pills on a patient who refuses medication.