Markopolos: “No one would listen: A true financial thriller”
Harry Markpolos’s book is a fun and informative read. He approached the SEC the first time in 2000 with documentary evidence and recommended an investigation of Madoff’s fund. We all know how this story ended in 2008. The book reads like a thriller, well worth your time in entertainment value and the insight you gain in the workings of the financial industry and its regulators. It also tells you about the toll on the whistleblower (and his family).
Markopolos started looking at Madoff’s sustained outstanding returns when his boss challenged him to create a competitive fund with similar performance. To make a long story short, he proved that the returns were impossible to achieve by the means claimed by Madoff. By 2000 he convinced himself that Madoff, who was paying clients 1-2% per month and intermediaries up to 4% a year when prevailing interest rates were about 5%, was running a Ponzi scheme (which pays investors’ returns with their own principal and must be fed continuously by more and more new money/customers, i.e. a house of cards which eventually must collapse.) The other possibility theorized was that Madoff, who also had a separate broker-dealer operation with his sons, must be ‘front-running’; it is suspected that this possibility was the one which fooled even sophisticated individuals into investing with Madoff.
Here are a few memorable points from the book:
-“99% of the structures products give the good 1% a really bad name”
-SEC had employees who were a complete mismatch of skills compared to the industry it was regulating (“the SEC pays peanuts and then wonders how it ended up with so many monkeys”). The SEC was captured by the industry; however they were not crooks, but incompetent. (However, he also mentions that the SEC hires new grads with little or no financial industry experience who are aspiring to move to the industry after a couple of years at the SEC…so the resulting behavior may not be explicitly corrupt, just tainted by conflict of interest.)
-market timers were picking the pockets of long-term investors, with the time-shift arbitrage between US and Asian/European markets.
-“the health care industry makes Wall Street look honest”
-“the unspoken industry code: if it’s not my business and it doesn’t affect my business, I am not going to get involved” (Markopolos came across during his investigation many in the financial industry who suspected or were convinced that Madoff was running a Ponzi scheme)
-The book’s epilogue is dedicated to a list of 15 “concrete steps that need to be taken as soon as possible if the SEC is to be transformed into a respected agency” and concludes that:
“Bernie Madoff didn’t just steal billions of dollars; he exposed the lack of government supervision of the financial industry to a public that had already been badly burned. Madoff is already a tragedy. It would be an even larger disaster if we didn’t take the steps necessary to create fair and transparent markets.”