Tuesday, October 05, 2010

The SEC Whiffs

It's easy to get the impression that the pro golfers of the PGA are a bloodless group, comfortable playing under lots of pressure for lots of money week after week, almost indistinguishable from one another under their sponsor hats. But you would have had a different impression yesterday as the bi-annual matches of the Ryder Cup (the US vs. Europe) were finished and the US lost the Cup by the margin of a single match. Millionaire players clustered around one of their own to block the picture of Hunter Mahan crying while trying to explain what went wrong on the 17th hole. Several sought to take the blame from Mahan, pointing out how other team members, including themselves, simply came up short when they were needed most. There was no blood in evidence, but plenty, I'm guessing, of internal bleeding.

I contend that our news media often does its job poorly. For instance, how many people are familiar with the latest in the lives of Lindsay Lohan or Paris Hilton but have no idea who Harry Markopolos is, or what he ever did to deserve any public attention?
Before echoing "Who?", let me back up a bit. Do you recall the financial meltdown suffered by some our best known institutions almost precisely two years ago? Does the name Bernie Madoff ("made off") sound familiar?
The Madoff story broke at about the same time as the meltdown. Mr. Madoff pled guilty, even though he was not even suspected at the time, of operating the largest Ponzi Scheme in history, losing something like $50 billion of investments in the monster fraud. A Ponzi Scheme, just to remind, uses funds from new investors to pay off old ones giving the false impression of superior investment performance. The name comes from a notorious Wall Street con man from the 1920's.
Markopolos never worked for, or even met Madoff. He worked in the middle management of a Boston-based investment firm as a self-described quant - someone concerned almost exclusively with the mathematical aspects of investing.As early as the late 1990's he became familiar with the Madoff organization and the returns he claimed to produce. The more Markopolos found out about the organization, the more doubtful he was of its legitimacy.
The trouble was, as Markopolo's recent book on the scandal is titled, No One Would Listen. Not other financial pros, some of whom Markopolos thinks must have been suspicious, not the financial press, who should have been anxious to break such a huge story, not investors from either the US or Europe, and especially not our own SEC, the agency specifically charged with protecting investors from fraud.
In fact, since Markopolos writes strictly from his own viewpoint in this book, it is the Bush 43 era SEC which comes in for the harshest rebukes. He was careful to document the almost 10-year effort he and a handful of colleagues spent trying to get the agency to act or at least, to investigate. Instead, he kept bumping into bureaucrats who served rather than oversaw the financial industry. It was typical for SEC employees to take employment applications from what were supposed to be auditing visits at Wall Street firms. The agency even installed a "hot line" for Street firms to call in and complain if they felt they were being pressured or bothered by investigations done in the name of the people of the United States!
Madoff turned himself in when he couldn't meet the redemption demands from his customers any longer, which is the way all Ponzi schemes finally end. The agency belatedly tried to take credit for catching him, but the truth finally came out when Markopolos testified before a Congressional committee. Madoff was sent to prison, sentenced for something over 100 years, and others will follow. The main silver lining to this dark cloud story is that a new administration with a new attitude seems to be reforming the SEC into something worthy of the expense taxpayers undertake for its existence. For myself, I believe that not only is Greed not good, but that it is such a common human temptation that Wall Street and all private business needs to be carefully overseen for the public's good.


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