Sunday, January 04, 2009

Harry Markopolos: American hero

If you want to understand the financial crisis---and it's understandable if you don't---a must-read piece in today's NY Times, by Michael Lewis and David Einhorn:

...Consider the strange story of Harry Markopolos. 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. It wasn’t just Harry Markopolos who smelled a rat. As Mr. Markopolos explained in his letter, Goldman Sachs was refusing to do business with Mr. Madoff; many others doubted Mr. Madoff’s profits or assumed he was front-running his customers and steered clear of him.

Between the lines, Mr. Markopolos hinted that even some of Mr. Madoff’s investors may have suspected that they were the beneficiaries of a scam. After all, it wasn’t all that hard to see that the profits were too good to be true. Some of Mr. Madoff’s investors may have reasoned that the worst that could happen to them, if the authorities put a stop to the front-running, was that a good thing would come to an end..."

The rest of the piece here.

Labels: ,

6 Comments:

At 5:43 PM, Anonymous kwk said...

One can find similar misleading data much closer to home. The SFBC claims it is "10,000 members strong," but there is nothing in their web page data to support the implication that there are 10,000 current residents of San Francisco who are also members of the SFBC.

Perhaps over the past decade the SFBC has had 10,000 people sign on, but the demographic of the majority of its members (white males, age mid-30s, check out the photos on FCJ) is very transitional and many, or most, of the 10,000 have most likely moved elsewhere. Or don't use their bike. Or both.

A more realistic number would the 1,234--the total number of members who responded to the SFBC questionnaire published November, 2006. That's "1,234 Members Strong" in a city of 800,000.

One thousand two hundred and thirty four. Period.

/kim

 
At 5:58 PM, Blogger Rob Anderson said...

I assume you meant to post this comment to the item on the mountain bike people trashing McClaren Park. Still your point is worth making. Seems like every time Leah Shahum is quoted in the media, the SFBC has 1,000 more members!

 
At 10:06 PM, Blogger murphstahoe said...

Wrong.

I tried to use my SFBC membership card to get the 10% discount at Rainbow last week, I was denied because my membership had expired. So I wasn't even counted in the 10,000, nor was my wife. Call it 10,002 then.

And I'm 41, my wife is not a male.

Maybe 10 years from now we can be called heroes for blowing the whistle on the pyramid scheme that is the thought that we can put a few more million people in the Bay Area without moving them out of their cars.

Obligatory Rob Anderson - today on MUNI, the 33 had no trouble with the dozens of cyclists on Arguello, but was stymied in the Haight not once but twice by double parked cars, including a Mercedes on Ashbury that prevented the bus from continuing up Ashbury until the driver returned - flipping off the driver in the process of course.

 
At 10:43 PM, Blogger Rob Anderson said...

Bummer about the Rainbow discount, Murph. Thanks for sharing these intmate details of your heroic life. Yes, future generations here in Progressive Land will long remember the sacrifices you and Leah, Thornley, and David Smith have made for the Cause.

 
At 4:22 PM, Anonymous kwk said...

Rob wrote, "I assume you meant to post this comment to the item on the mountain bike people..."

No, the comment was meant to show analogy between the way Madoff gave faulty information to get people to invest and the way the SFBC seems to be giving faulty information to get the people of SF to "invest" in expensive and permanent alterations to the city roadway infrastructure.

/kim

 
At 4:21 AM, Blogger Venus said...

Given that the US Securities and Exchange Commission ignored Harry Markopolos' investigation on Bernard L. Madoff's "suspect" hedge fund company for over a decade, it must be the most disfunctional US Government regulatory office.
Please visit our blog at http://boneseconomics.blogspot.com

 

Post a Comment

Links to this post:

Create a Link

<< Home