That was some riveting theater the other day before the House Subcommittee on SomethingorOther when Harry Markopolos, the avenging angel of the Re-Regulation Forces, appeared to describe to the Committee his futile efforts to get the New York office of the SEC to do something about Bernard Madoff's massive fraud scheme. For fans of Schadenfreude, it was like Weinachten in February.
The comfy bureaucrats at the SEC had it made during the Bush years, of course, reveling in their sinecures as friends of the High and Mighty. The whole idea was to leave the securities industry alone and let the "invisible hand" of the market work its magic. You might say that certain miscreants took advantage of this libertine situation, and no one more than Bernie Madoff. Harry Markopolos was himself in the investment game, a self-described expert on derivatives with long experience on Wall Street, and he simply refused to believe that Madoff's "split-strike" strategy for returning about 12% to his investors, in good years and bad, was humanly possible. So, using a "Mosaic" technique, he spent years investigating Madoff with the assistance of his "team." He summed it all up in a long letter dated November, 2005, to the SEC, stating bluntly that it was his conclusion that it was "most likely" that Madoff was running the biggest Ponzi scheme in world history.
Markopolos never met Madoff, never interviewed anyone who worked in his organization. In some ways, what Markopolos did in that letter (which you can find in pdf by Googling "Markopolos letter to SEC") is reminiscent of the work of the legendary Polish cryptologist Marian Rejewski, who deduced the internal wiring and basic structure of the Nazi Enigma machine without ever seeing one, by using permutational mathematical analysis of German encrypted messages. Truly one of the astounding feats of mental deduction of all time. I wouldn't put Marko Polo's work in that category, but it's pretty good. He figured out that (a) Madoff was running a Ponzi scheme, (b) that the amount involved was somewhere between $20 and $50 billion, and (c) that Madoff had been a crook since at least 1991. All from studying the "performance" of the Madoff fund, Madoff's relationship with the places where he got his money, and Madoff's obsession with secrecy. A virtuoso demonstration of logical analysis.
Watching Markopolos testify, you couldn't help but think that he probably has a screw loose somewhere. For one thing, both testifying and in his Nov. 2005 letter, Harry is a little, how to say it, egotistical. A tendency toward the grandiose, describing himself (with his business degree from Boston College) as one of the few people in the world with the mathematical background to understand derivatives well enough to do the analysis he did. Actually, I read his letter, and on the basis of my own very limited experience with securities litigation, I was able to follow it pretty easily. You just need to know a few basic concepts, such as what an option is, what a put versus a call is, what "out-of-the-money" means as applied to options, and a few other things, and you've got the basic hedging strategy that Madoff claimed to be running. You don't really need to have a PhD in mathematics as so many of those brainiacs who devised the algorithms for Long Term Capital Management possessed, who might even go a little deeper in math than Harry Markopolos.
That, I think, was sort of the problem with Harry for the SEC. In addition to his borderline megalomaniac tendencies, Marko kind of presented himself as a Wall Street Maxwell Smart, offering to go undercover, to disguise himself, and warning of the grisly fate that awaited him if his cover was blown. I don't doubt that physical danger was a serious threat when you're dealing with that much money and with a crook as bent as Bernie Madoff. But if Harry Markopolos presented about 30 "red flags" in his letter re: Madoff, then the SEC probably found as many red flags about Harry in Harry's letter to them. Which is what the SEC really wanted to find, because the last thing they wanted to do was to take on Bernie Madoff.
So natually, just as Harry predicted, the SEC sided with Madoff, because Bernie was a Wall Street maven, a Mensch, a power player who was in on the ground floor of the establishment of NASDAQ. The New York office decided that Markopolos was a jealous whistleblowhard (to coin my own term), maybe a little nuts, and not someone they should allow to tell them what to do.
Man, did they pay for that dismissive attitude. What's worth YouTubing and playing is Rep. Gary Ackerman's smackdown of the entire top brass (minus the weasly Christopher Cox) of the SEC on national TV. This New York Democrat absolutely tore the counsel staff a new one in unsparing, scathing terms, telling them they couldn't find their ass with both hands in a room with the lights on. They're all going to get canned, they know that, and anyway they're all mostly holdovers from the Bush Roaring Aughts Era.
The problem for the SEC is that Harry Markopolos, one citizen working with an ad hoc "team," figured the whole thing out right down to the ground. He was right about everything, astonishingly so, and he was right over three years ago. How much additional money was lost because the SEC sat on their hands? Billions and billions and billions. Markopolos predicted the cascading failures in other hedge funds as the High Net Worths all scrambled to liquidate and cover their Madoff losses, the collapse of the "feeder funds," of private banks in Europe which were heavy into Madoff. Harry saw it all coming, laid it all out for the SEC, and the SEC did nothing. And then had to sit silently and listen as Harry Markopolos described, in excruciating detail, their incompetence, their corruption and their utter worthlessness.
One of those days where it just feels good to be alive. Thanks, Marko Polo.
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