What regulators are good for: Cleaning up

Hedge fund manager and poker ace David Einhorn was the speaker at the 17th annual Graham & Dodd breakfast Friday morning. I arrived too late to get a seat, and left early because I was starving, but I did write down this quote:

Regulators are good at cleaning up fraud after the money is gone. Government doesn't really know what to do when it catches fraud in progress.

Einhorn was talking mainly about his long-running battle with investment firm Allied Capital over its accounting practices. He's got a book about the saga coming out next year, and if the excerpt he read at the breakfast--about a grilling he underwent at the hands of two SEC lawyers--was any indication, it should be pretty entertaining.

But the lesson is a broader one: It is incredibly hard for government officials to step in and try to stop behavior that they think is illegal or unwise at companies that seem to be making lots of money off this behavior. It's even harder if it's an entire industry, such as, say, the subprime mortgage lenders of a couple years ago. Try to crack down while the party is still going and you're likely to get hauled in front of Congressional committees, lambasted in the media and attacked by aggressive company lawyers. Wait until it all falls apart and, while you'll still get lambasted a bit, most of the discussions in the media and Congress will be about how to give you more resources and power in the future.