Monday, January 05, 2009

The Strange Case of Harry Markopolis

Vanity Fair contributing editor Michael Lewis has a brilliant piece in today's New York Times in which he dissects the systemic, institutional failure of Wall Street. One of the anecdotal illustrations he uses involves Harry Markopolis and the Cassandra-like nature of his failed 10-year campaign to expose the now infamous Bernard L. Madoff:

"Mr. Markopolos is the former investment officer with Rampart Investment Management in Boston who, for nine years, tried to explain to the Securities and Exchange Commission that Bernard L. Madoff couldn’t be anything other than a fraud. Mr. Madoff’s investment performance, given his stated strategy, was not merely improbable but mathematically impossible. And so, Mr. Markopolos reasoned, Bernard Madoff must be doing something other than what he said he was doing.
In his devastatingly persuasive 17-page letter to the S.E.C., Mr. Markopolos saw two possible scenarios. In the “Unlikely” scenario: Mr. Madoff, who acted as a broker as well as an investor, was “front-running” his brokerage customers. A customer might submit an order to Madoff Securities to buy shares in I.B.M. at a certain price, for example, and Madoff Securities instantly would buy I.B.M. shares for its own portfolio ahead of the customer order. If I.B.M.’s shares rose, Mr. Madoff kept them; if they fell he fobbed them off onto the poor customer.


In the “Highly Likely” scenario, wrote Mr. Markopolos, “Madoff Securities is the world’s largest Ponzi Scheme.” Which, as we now know, it was.

Harry Markopolos sent his report to the S.E.C. on Nov. 7, 2005 — more than three years before Mr. Madoff was finally exposed — but he had been trying to explain the fraud to them since 1999. He had no direct financial interest in exposing Mr. Madoff — he wasn’t an unhappy investor or a disgruntled employee. There was no way to short shares in Madoff Securities, and so Mr. Markopolos could not have made money directly from Mr. Madoff’s failure. To judge from his letter, Harry Markopolos anticipated mainly downsides for himself: he declined to put his name on it for fear of what might happen to him and his family if anyone found out he had written it. And yet the S.E.C.’s cursory investigation of Mr. Madoff pronounced him free of fraud.


What’s interesting about the Madoff scandal, in retrospect, is how little interest anyone inside the financial system had in exposing it."

Lewis' article is a fascinating trip through the corridors of astonishingly high-powered corporate incompetence. If you wonder what happened to your retirement plan, it's a terrific read:

http://www.nytimes.com/2009/01/04/opinion/04lewiseinhorn.html?em

4 comments:

  1. Thanks for linking this! I find the insider's view of this mess extremely interesting.

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  2. I agree, thanks for the link. Harry Markopolis is an incredible man with great integrity and unwaivering devotion to doing what is "right". I watched the entire interview on C-SPAN and Mr. Markopolis is simply a direct, honest,intelligent man who knows how to speak in "financial lingo" and who can also speak and make sense to us non-finance people. He appears to have common sense and integrity. I hope our current gov't puts his talent and integrity to good use. WOW...I'm so impressed with him. He gives me hope that there are honest people with common sense who want to do the right thing. He is amazing. Kudos Mr. Markopolis. I hope "good" finally prevails. I have hope now that it can. Thank you. Sincerely, A Hopeful American Citizen

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  3. Do not lose sight of the fact that Mr. Markopolis was a Green Beret and Officer in the U.S. Army... people who understand trust, honesty, and integrity implicitly.. He elected to stand
    alone because he was right.. even when it endangered his life and that of his family.. love your country.. fear your government..

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  4. I wasn't aware of that anon. Thanks. I agree that we should all love our respective countries but never fear your government. Make your government fear you, your wrath, your indignation, your vote. That is how we find our way out of this cloak of madness.

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