How Did Madoff Fool the SEC?

Kara Scannell has been looking at the SEC's Madoff memos:

The 2005 review and Mr. Markopolos's report prompted the SEC to open an enforcement case, a notch more serious in the SEC's world than the previous examination. "The staff is trying to ascertain whether" the allegation that Mr. Madoff "is operating a Ponzi scheme has any factual basis," according to the SEC case memo...
"The staff found no evidence of fraud," according to the SEC case memo.

Henry Blodget asks the obvious question: how on earth can you fail to uncover a Ponzi scheme when it's right in front of your face and it's exactly what you're looking for? He concludes:

The SEC made mistakes, but Madoff's combination of broker-dealer, reputation, track record, happy clients, twin sets of books, sophisticated explanations, and patient approach would have required a highly aggressive investigation to uncover.

I'm not entirely sure about this. If you're looking for a Ponzi scheme, you only really need to ask one question: is the money there? Madoff at this point was admitting to the SEC that he was running billions of dollars, so the SEC just needed to ask to see the money. If the SEC got in return statements from Madoff's own brokerage, then that implicates not only the investment-advisory group on the 17th floor, but the main brokerage as well, including Madoff's brother and sons.

In the case of Madoff, it should have been even easier, since he claimed to be extremely liquid and mostly invested in Treasury bills whenever there was a down market. Where were the Treasury bills? Did it not occur to the SEC to ask? I'm not sure such a question really counts as "highly aggressive" -- it's the first question you ask if you're investigating the thesis that all of the funds are in fact fictitious.

Still, the main lesson here is highly sobering: investors simply cannot rely on regulators to protect them. Either there's an explicit government guarantee, like the one on bank and brokerage accounts, or you're basically on your own.