Yes, but is it good for the Jews?

That's the punch line of a long-running joke among those of us who grew up among Jewish parents and grandparents whose first reaction to almost any event would be to calculate how it would affect the tribe.

Looking at life through such a parochial lens is hardly unique to Jews, but for generations of Jews who were subject to various forms of persecution and discrimination, the instinct became ingrained. Arthur Goldberg to the Supreme Court: good. The espionage trial of Julius and Ethel Rosenberg: not so good. The "Godfather" movies breaking box-office records: good (puts spotlight on some other ethnic group). Sandy Koufax refusing to pitch a World Series game on Yom Kippur: bad (encourages anti-Semitism among Dodger fans).

For some, this instinct survives to this day. JTA, a Jewish news service, last week put out an upbeat story on the Blagojevich scandal in Illinois by noting that the governor's arrest has greatly improved the odds that Congresswoman Jan Schakowsky -- a Jew untainted by the scandal -- might be appointed to the Obama seat.

All of which brings us to Bernie Madoff -- "the Jewish T-bill" as he was known affectionately in Palm Beach and on Wall Street because of his reputation for delivering solid, reliable returns to his investors. The Madoff scandal is definitely not good for the Jews -- a shanda far die goyim, as my grandmother would have whispered in Yiddish so as not to upset us children. It's not only that this macher of the Jewish community may wind up holding the world indoor record for financial fraud with his alleged $50 billion Ponzi scheme. Even worse, many of his alleged victims were well-known Jews or Jewish philanthropic organizations, among them the Jewish Federation of Greater Washington, which placed about $10 million of its endowment with Madoff.

The fallout from the Madoff scandal extends well beyond Jews, however. It's also an unmitigated disaster for Wall Street, which already stood accused of using complex new financial instruments to create the worst financial and economic crisis since the Great Depression. With the Madoff story, it is now revealed that the masters of the universe aren't just too clever by half -- they're not clever at all. For years, they not only allowed themselves to be bamboozled by a con artist but also willingly and enthusiastically served as his market agent, offering friends, relatives and favorite charities the opportunity to invest with their good pal, Bernie Madoff. (So much for the idea that wealthy individuals and "sophisticated" institutional investors don't need the protection of government regulators.)

L'affaire Madoff has also revealed a dirty little secret about a corner of the hedge-fund world known as funds of funds. These are hedge funds that raise money from pension funds, university endowments and wealthy individuals and, for a fee of 1.5 percent a year, invest it in other hedge funds, which charge even higher fees. In return for paying double fees, these middlemen claim to offer investors access to the best hedge funds, which can be choosy about whose money they accept. They also offer the peace of mind that goes with knowing that the funds have been thoroughly checked out.

Now it turns out that some of these funds of funds had parked billions of dollars of their clients' money with Madoff without asking how he could so consistently produce returns in up market or down, or demanding to know why his books were audited by a three-person firm that nobody ever heard of operating out of a broom closet on Long Island. Britain's Man Group, Spain's Banco Santander and Switzerland's Union Bancaire Privee all had funds of funds that lost big money with Madoff. But none put more faith in Bernie than Ascot Partners, a fund of funds run by J. Ezra Merkin, who invested virtually all of the $1.8 billion that had been entrusted to him with Madoff, a close friend and fellow trustee of Yeshiva University.

It will be a while before the full story behind Madoff's scheme finally comes out. But it is already possible to see that this is just the most recent case of a financial disaster that could have been avoided if the professional gatekeepers had done their job.

That was certainly the story behind the failures of Enron, WorldCom and the other blowouts from the stock market bubbles, when auditors allowed their desire to preserve lucrative consulting contracts to warp their judgment and override their concerns about how these companies were keeping their books.

In the more recent fiasco involving mortgage-backed securities, collateralized debt obligations and credit-default swaps, it was the failure of the rating agencies to adequately assess the risks of complex securities that led to massive losses for investors who thought, or wanted to believe, that they were buying AAA paper. And in Madoff's case, there seems to be little doubt that competent and uncompromised auditors would have quickly discovered that the firm's investment arm was paying out returns it didn't earn.

It doesn't take a PhD in finance to see the pattern here: Accounting firms and rating agencies are too easily compromised by the fact that they are chosen and paid by the management of the companies whose books they are auditing and securities they are rating. There are simply too many built-in conflicts of interest.

The solution is equally obvious: turn these firms into something akin to a regulated public utility. For any public company or investment fund, or for any newly issued security, auditors and raters should be assigned by exchanges or regulators at random and on a rotating basis. The firms would be paid from the proceeds of a small tax on transactions and new issues, based on rates competitively bid at the beginning of each year. Those firms that make serious mistakes would be subject to significant fines; those that screw up more than that would lose their licenses.

As you might expect, the accounting firms and ratings agencies hate this idea and conjure up all sorts of reasons -- a few of them credible, most of them bogus -- why the system should remain pretty much as it is. What they don't offer is any remedy more credible than "It wasn't our fault, but we won't let it happen again." The vehemence of their opposition probably correlates pretty well with the degree to which their interests are no longer aligned with those of the investing public.

After a decade of these scandals, something needs to be done to restore the public's faith in financial markets. The quickest way to do that is to assure the competence and independence of the system's gatekeepers. That would be good for Wall Street, good for investors and good for companies in desperate need of capital. My guess is that it would also be good for the Jews.

Steven Pearlstein will host a Web discussion today at 11 a.m. on http:/ / washingtonpost.com, where he is also moderator of a new Web site, On Leadership. He can be reached at pearlsteins@washpost.com.