Wednesday, July 07, 2010

BOOKS: No One Would Listen by Harry Markopolos

The Stock Market. A place where people get rich. Sometimes, even the investors.

It's been apparent to me virtually forever that the stock market is a mug's game. It's also almost single-handedly responsible for the current recession. All because a lack of regulation and an almost complete absence of a sense of ethics has created an environment that looks like the old Wild West, but without very many sheriffs. It's the kind of environment that created Bernie Madoff.

Long before Madoff became short-hand for greedy soul-less weasel, Harry Markopolos was trying to tell anybody and everybody he knew that Madoff was no more than a Wizard of Odds, hiding behind the curtain and faking it all. All. He was skating past the thin line separating sharp practice from outright criminal activity. And he could prove it. When he started in 2000, Madoff was bilking people to the tune of something less than 5 BILLION dollars in his Ponzi scheme. By the time the bell wrung for Bernie (surprisingly, by his own hand) some eight years later, the number was past 53 BILLION and the final tally will never be known because well-heeled people are too embarrassed to go public or too likely to be arrested for their own crimes. Indeed, the prevailing opinion is that Madoff wanted to get some concrete wall protection against his seamier kind of customers, who might vent over lost money in different ways to you or I. Fat lot of good it's done him, he's already been 'roughed' up in the joint. Couldn't happen to a better guy.

At any rate, Markopolos in No One Would Listen proved his case to the SEC time and again, only to have that organization prove remarkably inept. I think the final tally was eight in all. He names names of the stupid, who's careers still continue in some cases. Institutionalized idiocy. It's what made America great(ly diminished). The putative industry watchdog had prosecuted ONE, count 'em ONE case in the area Madoff was taking advantage of in history. That's because this bunch of over-their-head lawyers were in charge of a branch of economics that fewer than a hundred people understand, much less than that are expert at and are designed to make money via paper pushing.

Derivatives. Take a little of this investment, a little of that one and a bit of the one over there. Some of those investments are good, some bad, some ... well we don't know about them. And, there's rarely three components of a derivative. Try hundreds, if not thousands of mini and micro-shares. Spreading the risk and locking in the profit. Unfortunately, the whole business seemed built of the good parts of a bunch of below-prime house mortgages. Ooops. The Quants (the quantitative analyst of derivative products) got a small little teeny weeny little problem in their formulas. What would happen if the house market did NOT continue growing like the Tulip craze millenia ago? Or even the tech bubble of ten years ago?


That's what happened to Madoff. He had a good thing going. He didn't even go out and solicit the money from new investors to give the old ones (who remained happy with him to the bitter end). No, he had people COMING TO HIM to get his impossibly consistent and high returns on money. All he did was make each of these dupes feel special. They were told to keep everything on the QT. He was selective and couldn't just take everybody's money. Which he did, of course. And of course, everybody blabbed just enough to keep the line-up of suckers going non-stop. Everybody loves being special and making a profit. And NOBODY was willing to look behind the curtain.

Except Markopolos and his team of non-believers. Markopolos possibly writes in a more thriller-ish veneer to his life during the eight years of hunting down somebody to believe him about Madoff. He fears for his life, outlined in great detail in the book. Was he actually in fear for his life, or embellishing the details after the fact? I tend towards the former. Regardless, it makes for compelling reading.

Look, I know pitching a book about economics is a hard sell. If you want, skip over some of the more mundane descriptions of the jargon. I did. But the rest of the book is really quite interesting and worth the time reading over it.

If nothing else, it might stop you from paying off some stock market wag's summer house while you watch your money wane.

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