Book Review:
by Roger Tan, Vice President / Head
of Reserach , SIAS Reserach
No More Excuses to be
Cheated
On an early morning on 11 December 2008, “two FBI
agents knocked on his (Bernie Madoff’s) front door and asked
him if there was an innocent explanation. He shook his head,
saying, “There is no innocent explanation”. The two agents
immediately placed him under arrest. The largest Ponzi scheme
in history had finally collapsed.”
The news of Bernard Madoff’s arrest shocked the world.
Bernie was turned in to the authorities by his two sons after
he had confessed to them the day before that their company,
Bernard L. Madoff Investment Securities LLC, was actually a
Ponzi scheme. The Ponzi scheme had cheated investors off
an initially estimated US$50 billion.
However, a group of people was not surprised by the fact
that Bernie was running a Ponzi scheme; but by the fact that
his arrest was finally made because Benie had turned himself
in and was not detected and investigated by the
Securities Exchange Commission. This group of people included
Harry Markopolos and his “gang” of investigators.
Markopolos started investigating Madoff in 1999 after he
was asked to develop a hedge fund strategy that could
match Madoff’s investment returns. Markopolos tried to
backtest Madoff’s performance using the strategy that Madoff
claimed he was using, but he concluded that Madoff was either
front running or running a Ponzi scheme. Markopolos’s book,
‘No One Would Listen’, recaps his “adventure” in his attempt
to expose Madoff.
The book started off a little slow. The first few chapters
introduced Markopolos himself and the hedge fund he was
working with. It also recapped how Madoff’s investment
strategy was introduced to him. His initial conclusion after
looking at Madoff’s numbers was “he’s either got to be
front-running or it’s a Ponzi scheme. But whatever it is, it’s
total bullshit”. That was when Markopolos and his gang started
‘Madoff’ chasing.
Then, the book got more interesting as Markopolos
recapped the reactions of different people he had approached
to share his thoughts. He had approached people in the fund
management industry and the reactions were shocking.
Markopolos said, “…many people knew Madoff was a fraud…but
even those people who had questioned his strategy had accepted
his nonsensical explanations – as long as the returns kept
rolling in”. He also mentioned how some industry experts tried
to convince him that Bernie was a genius by absorbing or
subsidising losses to provide consistent profit to his
investors so that he could keep them happy.
But Markopolos’s most shocking discussion on the
financial professionals should be the one on the feeder funds.
Markopolos said: “They (feeder funds) knew as much as they
wanted to know…they knew if they kept their money with him
(Madoff) for six years, they basically would double their
original investment, so they were betting against the
clock.”
As I read on, I realised that Markopolos was not only
recapping his journey of exposing the trickery of Bernie
Madoff, but also recapping his accidental journey in exposing
the incompetence of an important regulator – the Securities
Exchange Commission (SEC). Markopolos had submitted his
findings that concluded that Madoff was running a Ponzi scheme
five times between 2000 and 2008 to the SEC, but the regulator
apparently did not conduct any comprehensive investigation on
the company to uncover the scam. According to Markopolos,
the SEC would have kept the Ponzi scheme size to between
US$3 billion and US$7 billion, instead of the US$50 billion
now, if they had taken action in the year 2000.
Markopolos reasoned (in his Epilogue) that one of the
main factors that contributed to SEC’s failure to uphold their
mission of protecting investors and detect fraud was that
there were too many lawyers in SEC. Markopolos argued that
“very few lawyers understand the complex financial instruments
of the 21st century. … A primary reason the SEC has reached
this point is that historically, the SEC commissioners have
been lawyers who may know where to find the best power lunches
in Washington D.C., but don’t have a clue as to how the
financial industry actually operates…”
You could also feel Markopolos’s cycle of excitement
and frustration as he uncovers Madoff’s scam, gets gleams of
hope from different agencies who were open to helping him
expose the scam, and then faces the dismal truth that they
were just entertaining him without interest in doing anything.
At one point, Markopolos was even fearful that Madoff would
send someone to “silence” him. At the end of the book, I could
not help but also feel Markopolos’s proud moment as he
testified in front of the congressional committee on how SEC
had not acted on his submissions.
The book not only contains Markopolos’s
whistleblowing journey, but also includes some interesting
discussions of various financial terms and concepts. For
example, Markopolos attempted to explain what Ponzi schemes
are and what funds of funds do. This added to the value of
reading this book.
Collecting finance and economics books is one of my
hobbies. I will not hesitate to buy a book that I deem as
“good reference”, but at times, I do add a few (and I stress,
only a few) “bad” books into my collection. Why do I do that?
The good books are there to help me understand concepts when I
need enlightenment; the bad books are there to remind me what
good books really are. Markopolos’s book definitely does not
fall into my “bad” books category.
This book is a good read. People should use this book to
remind themselves that “there are no more excuses to be
cheated”.
This book review is sponsored by John Wiley & Sons (Asia)
Pte Ltd. Order this book by June 30, 2010 and receive a
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