No One Would Listen: A True Financial Thriller
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No One Would Listen: A True Financial Thriller, by Harry Markopolos
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Greek tragedy
Cassandra was a beautiful Trojan princess who Apollo blessed with powers of clairvoyance but, when she rebuffed him, he cursed her by ensuring no-one would believe anything she said. Thus, her admonitions about the fall of Troy (it may have been she who warned "beware of Greeks bearing gifts") fell on deaf ears and, as Wikipedia beautifully puts it, her "combination of deep understanding and powerlessness exemplify the tragic condition of humankind".
I dare say Harry Markopolos, the Boston quant who repeatedly alerted authorities to Bernie Madoff's Ponzi scheme for almost a decade before it finally fire-balled, knows how Cassandra felt. This is his recounting of his whole grisly story.
At that level, this is a fascinating account of a genuinely Greek tragedy - irony intended - which contains exactly the elements of Cassandra's tale (except, perhaps, the unbearable beauty: the author's publicity photos capture an ungainly, if not altogether unlikely, figure doing his best to look resolute and loyal in front of the Stars and Stripes). Harry Markopolos was possessed not just of vague discomforts that, after the event, a know-it-all windbag might use to claim fore-knowledge: quite to the contrary, he identified, in gruesome and glaring detail, that Bernie Madoff was necessarily running a Ponzi scheme, precisely why, precisely how, helpfully suggested some precise and simple measures by which an investigating authority could cheaply verify his allegations (as simple as "ask to see his transaction confirmations"), and he sent this, in writing, to the Securities and Exchange Commission about five times over the course of a decade.
That is remarkable enough a story, and Mr. Markopolos deserves your money to tell his story for that service alone.
While we might shake our heads in wonder at how this could happen, we also might harbour some suspicions: Markopolos was from an unfashionable firm based in unfashionable Boston under the jurisdiction of the unfashionable Boston branch of the SEC; he seems an unfashionable chap prone to unfashionable conspiracy theory: none of this can have helped his credibility. But neither that nor the fact that the SEC is understaffed, underskilled and over-populated with financially illiterate lawyers (all certainly true) comes close to explaining why Markopolos' warnings were systematically ignored. If you read Markopolos' submission to the SEC from 2005, which is appended to the text, you will recognise that one didn't need to be an expert on split-strike conversion strategies to understand something must have been dreadfully wrong with Madoff's operation.
Yet while these shortcomings are not good answers, they are the best Markopolos can offer (and, in from position, can be expected to offer). For all the studied outrage he marshals (if ever there were a dictionary definition of "studied outrage" this is it) throughout this entertaining and readable book, Markopolos seems satisfied this is just a case of good, old-fashioned, thorough incompetence. The system itself is conceptually ok; it's just some significant parts of it (such as the SEC) happened not to be fit for purpose. Hire a few more financially literate analysts, and fire a few lawyers, and all will be well.
That doesn't sound like a plausible answer to me.
Anomalies, in the sense depicted in scientific literature, are fleeting imbalances; momentary disruptions in the established order of things which are gone so quickly so as to not be reliably measurable, and thus incapable of falsifying existing orthodoxy. Anomalies are the sort of things that are characterised by platitudes such as "stuff happens" or "the exception that proves the rule".
A fifteen-year, 50 billion dollar fraud involving one of the most respected men in the industry, publicly trailed by magazine articles and a privately prosecuted by the concerted, detailed, and relentless efforts of a small group of professionals is no such anomaly. It simply isn't credible to put this down to an unfortunate confluence of improbable human errors.
The collective failure to see Madoff for what he was feels like a symptom of something much wider and more fundamental. That feeling is augmented by other recent "anomalies": Nick Leeson; Long Term Capital Management; Enron; Amaranth; the Dot-Com bust; Jerome Kerviel; Lehman; AIG. By and large these anomalies went on, in full public view, for years.
Are these really anomalies? That, in the vernacular, is the elephant in the room.
In focussing on the minutiae of the Madoff investigation - and you can't really blame Markopolos for doing that; it's what he knows - "No-one Would Listen" doesn't ask, let alone answer, that important question: what is it structurally, systemically, even sociologically about our financial system that can allow these "anomalies" to happen for more than an instant? That they can recur suggests strongly that we have a paradigm in crisis; that something about our set of assumptions and parameters; something really fundamental about the way we we currently, collectively look at the financial world, is utterly misconceived.
The book that identifies this error, sure to be a ground shaker, is yet to be written. This one simply entertains. Markopolos is particularly scathing of the SEC. Its astoundingly poorly judged appearance before Congress, in which its general counsel attempted to plead executive immunity - from having to testify before a branch of the executive - must be seen to be believed (and can be, on YouTube).
Yet underlying the solid good sense and analysis lurks a grandstanding conspiracy theorist and this does undermine his credibility to some extent. Markopolos repeatedly mentions checking beneath his car for explosives, the risk he took from organised crime and terrorist cells who might have invested in Madoff (none has been reported, and while I guess you wouldn't expect it, it still doesn't make Markopolos' allegation justified).
That said, this book is worth your time and money to read, if nothing else as a salutary lesson.