Something’s Wild About Harry

No One Would Listen: A True Financial Thriller
Harry Markopolos

Harry Markopolos is a stand-up guy. And stand-up guys  finish seventh.

Surely you remember Harry? He’s the guy who got slightly more than his 15 minutes of fame when the Bernard Madoff financial fraud came to light. Harry, it seems, was early on the case and had been trying to get someone, anyone to listen to him on the merits for almost a decade. As we all know, no one did.

The Madoff mess ended up being the largest financial fraud in history. That’s saying something considering that past contenders include John Law‘s nearly bankrupting 18th century France and, more recently, such fabulous cases of misfeasance as Adelphia Communications, Worldcom and Enron. But hey, everybody’s got to be best at something, right?

All Ponzi schemes are cons in the most fundamental sense of the word. What Bernard Madoff sold was not an investment product or a guaranteed return. What Bernie sold was himself as the answer to folks who needed to believe someone wasn’t out to fleece them. A wolf in sheep’s clothing, one of the oldest tricks in the book.

Bernard Madoff: Financier, Phlianthropist, Fraud Master

Madoff is probably a sociopath. He certainly had no compunction in ripping off not just the community in which he worked, but the ethnic community in which he was known and respected. One of the more interesting tidbits in this first-hand recounting of stumbling onto the scheme and the official disinterest that followed is that Markopolos and his teammates never suspected the fraud went beyond the financial industry itself. Therein lies a big part of the difference between fame and infamy.

The tale begins with Markopolos manning a desk at Rampart Investment Management in Boston. Harry is a quant–a math nerd capable of figuring out how to profit from inefficiencies in the marketplace. His specialty is derivative securities. He says of himself, “Very few people in the world (emphasis added) have the mathematical background needed to manage these types of products but I am one of them.”

If I’ve already lost you let me try it in plain English. Harry Markopolos was a portfolio manager, a professional paid to manage pools of investment money. He specialized in option securities. In the simplest example, these are financial instruments that enable you to buy or sell a stock at a predetermined price at a predetermined time.

The Black-Scholes Options Pricing Formula (understanding of differential equations required)

Sounds simple. So why do you need to be a math whiz to manage a portfolio? Well, because financial derivatives are secondary securities–pegged to an underlying asset that changes in value–and they have a time component. Yet they are not the same thing as the asset itself. So almost instantly it’s a question of how to reconcile a range of possible outcomes within specific periods of time. And just like that, an ability to do calculus and differential equations becomes an asset. Take a look at the equation above. If you understand that then you, too, can build options-based portfolios.

In the investment business any good idea–and for the uninitiated a good idea is  anything that can be sold to investors regardless of its value–is going to be copied. So Harry finds himself staring at a prospectus for a fund and being asked to knock it off. And straightaway he knows it’s not for real because the math can’t work. The genius behind a fund that delivers constantly steady returns: Bernard Madoff claiming he uses a split-strike options based strategy.

Thus begins our hero’s quest and it follows the familiar path of all quests. He convinces a few people. They join him in his travail. He labors, along with his teammates, at amassing evidence. He brings it to the authorities. He is, alternately ignored and rebuffed. He gets skittery, convinced he’ll be killed to ensure his silence. His paranoia grows. Ultimately, the scheme collapses and our hero is vindicated, called to Congress to scold the SEC (Securities and Exchange Commission).

Chalres Ponzi The man who gave us the scheme.

I’m not being fair. If you want to add to your understanding of the financial industry and gather more anecdotes of how the players interact, it’s an interesting read. But it’s hardly the thriller the subtitle promises. After all, we know the outcome from the start and Markopolos was never really in danger although I think he probably believes he, his family and friends were.

There’s  more to be said for the book as a snapshot of regulatory capture.  The SEC does not look good in this telling. But honestly, they’ve had a decades-long run of screw-ups. It’s pretty clear that at least the staff with whom Harry dealt had limited ability to understand fraud or advanced math. They did, though, have a great understanding of paperwork.

And yet the evidence was overwhelming, So why was Madoff allowed to persist?I think the book offers two reasons, one of which is demonstrated rather than stated. The stated reason is a lot of people in the financial industry had reason to doubt Madoff. But too many people were making money. And on Wall Street, money talks and all else is malarkey.

Harry Markopolos testifying in front of Congress.

The demonstrated reason is the messenger himself. As I read this I began thinking Markopolos pictures himself as a super-hero. He’s certainly got a stronger sense of right and wrong than a lot of people, let alone people in finance. And admirably he’s wiling to act on it. But (and I squirm at saying this, fearing it applies to me as well) he’s a mite insufferable and, worse, pretty humorless. That’s a deadly combination. (I’ll be fair: there are plenty of examples of what strikes Harry as funy. I just don’t find any of them so.)

His voice is unmistakable and it’s not the typical corporate/bureaucratic one. It’s almost blue-collar with constant references to his Greek heritage and tough guy aspirations. Where it really emerges as problematic is in Appendix B  where he proffers a lightly redacted copy of his 2005 submission to the SEC. There’s the problem, writ large across 28 pages or so.

I wish it were possible to put everything you’ll find wrong there in a nut shell. But a coconut isn’t big enough for this mess. Pick a problem, you’ll find it. Poor overall organization. Generalities offered as evidence. Overuse of rhetorical questions. Beginning a paragraph with one point and ending with a different, at best distantly related, one. Vagueness married to contradiction. (Best example: “Without naming names….a manging director at Goldman Sachs tells me…”) And at least two pleas to receive a reward if the information qualifies.

Unfortunately it reads as though the author is a bit of a nut. There’s even a stipulation as to who should have access to this life-threatening information. It’s not the tone to get serious attention from a corporate superior let alone the government. This should have been a dry as toast rendering of the evidence in an accretive manner so that there was no choice but to investigate. Instead Markopolos delivered a lengthy invitation to dismiss.

One last note: I fear whatever pride existed among publishing professionals is fast evaporating. How a book about finance–with debt balances and primary responsibility holders aplenty–can for 300 pages or so mistake ‘principle’ for ‘principal’ is beyond baffling.

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