Book Review: No One Would Listen: A True Financial Thriller, by Harry Markopolos
The story of the math & finance geek who uncovered Bernie Madoff.
John Wiley & Sons, 2009, 354 pages
No One Would Listen: A True Financial Thriller is exactly what the title promises. This is more than another book about the Bernie Madoff scandal, this is a fast-paced, blow-by-blow, true-crime story that you have to hear to believe. In a true David and Goliath tale, the underdog number cruncher uncovers the largest financial fraud in history, and has to fight everything and everyone in the system to bring it down. Harry Markopolos and his team of financial sleuths tell first-hand how they cracked Madoff’s $65 billion Ponzi scheme yet, amazingly, the Securities and Exchange Commission (SEC) refused to hear the truth for nearly 10 years. Told from the perspective of the ultimate whistleblower in modern corporate memory, No One Would Listen is bound to be the definitive narrative of this scandal.
Harry Markopolos is seething with anger. This is obvious almost immediately from the title (No One Would Listen), but within a few chapters he is fully giving vent to his rage and contempt. If his version of events is correct, he has good reason. His anger is particularly directed at the Securities and Exchange Commission, which he repeatedly calls inept, incompetent, ineffective, inefficient, unqualified, corrupt, and just about every other insult he can think of, sometimes even descending to schoolyard zingers. But he also indicts the entire financial industry, which basically knew what Bernie Madoff was doing long before his scheme collapsed and nearly brought down the economy with it.
The short version, for those who only vaguely remember Bernie Madoff as a big Wall Street con-man: for many years (from the 90s to 2008), Madoff, a "financial wealth manager," ran a huge Ponzi scheme in the form of a hedge fund. He promised a 1% rate of return every month. Every month. Without fail. As Markopolos points out, this is essentially impossible. No fund, no investor, no financial manager, can run a portfolio that never has a down month for ten straight years. Yet Madoff did it, and this incredible rate kept the money flowing in. He had the backing of large banks. It turned out later that entire funds were basically invested 100% in Madoff's fund. There was a huge amount of overseas investment from Europe, the extent of which we'll never know because much of it was money being invested by organized crime and rich tax evaders.
It was all a Ponzi scheme. Madoff was never investing anything. He was just taking money from new suckers and using it to pay returns to old suckers. It worked until the financial crisis of 2008, when suddenly his investors needed their money back and he couldn't pay them all.
Ponzi schemes are nothing new on Wall Street, of course, but the sheer scale of Madoff's scheme is what made it remarkable. There were hundreds of billions of dollars invested in him, and when he went down, it was mostly rich people who lost their shirts, but not a few individual investors who'd invested their retirement savings with him. Pension funds were also destroyed. As a member of New York's wealthy Jewish community, "Uncle Bernie" was trusted by everyone in that community and so he also shamelessly looted synagogues from New York to Florida.
Madoff, who is now serving life in prison without the possibility of parole, has in many respects done more damage to America, and the world, than Osama Bin Laden ever did.
How did he get away with it? A combination of trust, ineptitude, and greed.
Harry Markopolos was a small fish on Wall Street. He was a financial analyst for a Boston firm. He first became aware of Bernie Madoff when his bosses asked him to come up with a financial product that could compete with Madoff. All of their clients were looking at Madoff's returns and asking why they couldn't do the same thing.
(Incidentally, one of the things I find particularly telling about Wall Street is how all sorts of bizarre, complicated, and downright fraudulent investment schemes are called "products" - as Markopolos points out, anyone can create a "product" that you can get someone to invest in. People can invest money in your "product" that is based on trading according to the tides and astrological signs.)
Markopolos began looking at Madoff's fund, and the numbers didn't add up. The more he studied it, the more he became convinced that something fishy was going on.
It turns out that Markopolos wasn't the only one, though he was the only one who made a thorough, documented study of Madoff. Basically everyone knew that Madoff was running some sort of scheme, but they were okay with it as long as it kept paying them off. Most people did not think Madoff was running a Ponzi scheme - they thought he was doing something called "front running," which is a complicated form of short-term "insider trading" that is technically illegal but almost impossible to catch.
Markopolos went to the SEC, multiple times, and each time the SEC blew him off. When the SEC finally investigated Madoff after he confessed to his sons what he was doing, it was far too late.
Harry Markopolos, who spent years being the boy who cried wolf in the eyes of Wall Street and the government, finally got his vindication, and he describes the utter delight he felt as Congress raked the SEC over the coals in the wake of Madoff's downfall. He ends the book was a set of prescriptions for reforming the SEC. As far as I can tell, very few of these have been implemented. All the SEC officials in charge at the time have resigned and "moved on to other opportunities," of course, but no one was fired, or went to jail (except Madoff), and the SEC of course made a lot of noise about reform and reorganization, but I have little confidence that anything has really changed.
The problem here is that while Markopolos, in his book, walks us through the reasoning he used and the evidence he gathered to prove Madoff was running a Ponzi scheme, it's not immediately obvious and intuitive to anyone except a financial analyst who's good with math. Markopolos had to convince people by showing them graphs, charts, and spreadsheets. The evidence was there, but as long as Madoff could confront his accusers with a plausible-sounding alternate explanation, it's all just a bunch of numbers. SEC investigators evidently do not have the background to crunch those numbers. And Madoff appears to have been a stone-cold sociopath who was unfazed by any accusations and able to placate anyone who questioned him.
No One Would Listen really is a fascinating and dramatic book, much more interesting than you'd expect from a book by a math geek about a Wall Street hedge fund. Markopolos gets personal quite often, and his anger and frustration is palpable. Although he was never directly threatened, some of his friends were, and he spent years fearing that Madoff might literally send hit men after him, or that the SEC would raid his house to confiscate his evidence proving their ineptitude. So when he finally gets to unleash in front of Congress, he tells us his goal was to make sure that the SEC had a very, very bad day.
Understanding what happened in the Bernie Madoff scandal should be a wake-up call to everyone involved in the financial industry (and we all are, one way or the other). Markopolos is quite sure there are other Bernie Madoffs out there, and the government watchdogs that are supposed to be protecting us aren't. And as with several other books I've read about Wall Street, this one leaves you with the unsettling realization that the biggest fish in the market, the people who handle billions of dollars and can shake the economy (and wreck your pension fund), more often than not are not the wise investors we'd hope, motivated to take some responsibility out of self interest if for no other reason. No, they are greedy, short-sighted, and sometimes downright clueless.
Ponzi Supernova
Audible has a free series called Ponzi Supernova, in which a journalist manages to gain access to Madoff, inside prison, and obtain exclusive interviews with the man himself. It's available for free, and I recommend it to anyone who is interested in this topic - it covers very briefly all the things that Markopolos details in his book, but you also get to hear Madoff talking. What does a sociopathic con-man sound like when explaining how it's not his fault that millions of people lost their life savings?
My complete list of book reviews.
John Wiley & Sons, 2009, 354 pages
No One Would Listen: A True Financial Thriller is exactly what the title promises. This is more than another book about the Bernie Madoff scandal, this is a fast-paced, blow-by-blow, true-crime story that you have to hear to believe. In a true David and Goliath tale, the underdog number cruncher uncovers the largest financial fraud in history, and has to fight everything and everyone in the system to bring it down. Harry Markopolos and his team of financial sleuths tell first-hand how they cracked Madoff’s $65 billion Ponzi scheme yet, amazingly, the Securities and Exchange Commission (SEC) refused to hear the truth for nearly 10 years. Told from the perspective of the ultimate whistleblower in modern corporate memory, No One Would Listen is bound to be the definitive narrative of this scandal.
Harry Markopolos is seething with anger. This is obvious almost immediately from the title (No One Would Listen), but within a few chapters he is fully giving vent to his rage and contempt. If his version of events is correct, he has good reason. His anger is particularly directed at the Securities and Exchange Commission, which he repeatedly calls inept, incompetent, ineffective, inefficient, unqualified, corrupt, and just about every other insult he can think of, sometimes even descending to schoolyard zingers. But he also indicts the entire financial industry, which basically knew what Bernie Madoff was doing long before his scheme collapsed and nearly brought down the economy with it.
The short version, for those who only vaguely remember Bernie Madoff as a big Wall Street con-man: for many years (from the 90s to 2008), Madoff, a "financial wealth manager," ran a huge Ponzi scheme in the form of a hedge fund. He promised a 1% rate of return every month. Every month. Without fail. As Markopolos points out, this is essentially impossible. No fund, no investor, no financial manager, can run a portfolio that never has a down month for ten straight years. Yet Madoff did it, and this incredible rate kept the money flowing in. He had the backing of large banks. It turned out later that entire funds were basically invested 100% in Madoff's fund. There was a huge amount of overseas investment from Europe, the extent of which we'll never know because much of it was money being invested by organized crime and rich tax evaders.
It was all a Ponzi scheme. Madoff was never investing anything. He was just taking money from new suckers and using it to pay returns to old suckers. It worked until the financial crisis of 2008, when suddenly his investors needed their money back and he couldn't pay them all.
Ponzi schemes are nothing new on Wall Street, of course, but the sheer scale of Madoff's scheme is what made it remarkable. There were hundreds of billions of dollars invested in him, and when he went down, it was mostly rich people who lost their shirts, but not a few individual investors who'd invested their retirement savings with him. Pension funds were also destroyed. As a member of New York's wealthy Jewish community, "Uncle Bernie" was trusted by everyone in that community and so he also shamelessly looted synagogues from New York to Florida.
Madoff, who is now serving life in prison without the possibility of parole, has in many respects done more damage to America, and the world, than Osama Bin Laden ever did.
How did he get away with it? A combination of trust, ineptitude, and greed.
Harry Markopolos was a small fish on Wall Street. He was a financial analyst for a Boston firm. He first became aware of Bernie Madoff when his bosses asked him to come up with a financial product that could compete with Madoff. All of their clients were looking at Madoff's returns and asking why they couldn't do the same thing.
(Incidentally, one of the things I find particularly telling about Wall Street is how all sorts of bizarre, complicated, and downright fraudulent investment schemes are called "products" - as Markopolos points out, anyone can create a "product" that you can get someone to invest in. People can invest money in your "product" that is based on trading according to the tides and astrological signs.)
Markopolos began looking at Madoff's fund, and the numbers didn't add up. The more he studied it, the more he became convinced that something fishy was going on.
It turns out that Markopolos wasn't the only one, though he was the only one who made a thorough, documented study of Madoff. Basically everyone knew that Madoff was running some sort of scheme, but they were okay with it as long as it kept paying them off. Most people did not think Madoff was running a Ponzi scheme - they thought he was doing something called "front running," which is a complicated form of short-term "insider trading" that is technically illegal but almost impossible to catch.
Markopolos went to the SEC, multiple times, and each time the SEC blew him off. When the SEC finally investigated Madoff after he confessed to his sons what he was doing, it was far too late.
Harry Markopolos, who spent years being the boy who cried wolf in the eyes of Wall Street and the government, finally got his vindication, and he describes the utter delight he felt as Congress raked the SEC over the coals in the wake of Madoff's downfall. He ends the book was a set of prescriptions for reforming the SEC. As far as I can tell, very few of these have been implemented. All the SEC officials in charge at the time have resigned and "moved on to other opportunities," of course, but no one was fired, or went to jail (except Madoff), and the SEC of course made a lot of noise about reform and reorganization, but I have little confidence that anything has really changed.
The problem here is that while Markopolos, in his book, walks us through the reasoning he used and the evidence he gathered to prove Madoff was running a Ponzi scheme, it's not immediately obvious and intuitive to anyone except a financial analyst who's good with math. Markopolos had to convince people by showing them graphs, charts, and spreadsheets. The evidence was there, but as long as Madoff could confront his accusers with a plausible-sounding alternate explanation, it's all just a bunch of numbers. SEC investigators evidently do not have the background to crunch those numbers. And Madoff appears to have been a stone-cold sociopath who was unfazed by any accusations and able to placate anyone who questioned him.
No One Would Listen really is a fascinating and dramatic book, much more interesting than you'd expect from a book by a math geek about a Wall Street hedge fund. Markopolos gets personal quite often, and his anger and frustration is palpable. Although he was never directly threatened, some of his friends were, and he spent years fearing that Madoff might literally send hit men after him, or that the SEC would raid his house to confiscate his evidence proving their ineptitude. So when he finally gets to unleash in front of Congress, he tells us his goal was to make sure that the SEC had a very, very bad day.
Understanding what happened in the Bernie Madoff scandal should be a wake-up call to everyone involved in the financial industry (and we all are, one way or the other). Markopolos is quite sure there are other Bernie Madoffs out there, and the government watchdogs that are supposed to be protecting us aren't. And as with several other books I've read about Wall Street, this one leaves you with the unsettling realization that the biggest fish in the market, the people who handle billions of dollars and can shake the economy (and wreck your pension fund), more often than not are not the wise investors we'd hope, motivated to take some responsibility out of self interest if for no other reason. No, they are greedy, short-sighted, and sometimes downright clueless.
Ponzi Supernova
Audible has a free series called Ponzi Supernova, in which a journalist manages to gain access to Madoff, inside prison, and obtain exclusive interviews with the man himself. It's available for free, and I recommend it to anyone who is interested in this topic - it covers very briefly all the things that Markopolos details in his book, but you also get to hear Madoff talking. What does a sociopathic con-man sound like when explaining how it's not his fault that millions of people lost their life savings?
My complete list of book reviews.