I'm Not So Wild About Harry

If you had to choose one word to describe the SEC's performance in the Madoff scandal, what would it be? Incompetence, no? That was your "take away" from Markopolos's 2/4/09 House Financial Services Committee testimony and his 60 Minutes interview, which is infinitely preferable to the alternative: Utter corruption. On Wall Street, it was fairly common knowledge that Madoff was not executing Split-Strike Conversions, aka collars, as advertised, leaving two possibilities:

1. Madoff was front running trades.
2. Madoff was running a Ponzi scheme.

Knowing that in all of human history no Ponzi scheme has ever succeeded without the assistance of a printing press (and the jury is still out on that one), would you have believed that a former NASDAQ chairman and respected regulatory consultant would commit financial suicide by playing Ponzi? No? I can't believe that the SEC did, either. Thus, we are only left with the first possibility: Upper level SEC management assumed that Madoff was front running large orders, when they closed their case in 2006. In fact, and this is pure speculation on my part, I'd lay odds that their investigation was performed to protect against the embarrassing possibility of Madoff getting caught front running. After all, they had secret agent Markopolos warning them for years and that might get ugly down the road had they done nothing. Unfortunately, for everyone involved, truth turned out stranger than fiction and Wall Street's complete capture of the SEC was about to become very public.

Enter Harry Markopolos, to save the day. His testimony to the House's Financial Services committee was nearly an infomercial for SEC incompetence. Who can forget, "I'm suggesting that if you flew the entire SEC staff to Boston, sat them in Fenway Park for an afternoon, that they would not be able to find first base." Or, when asked whether the SEC had been corrupted, Markopolos replied, "...I never thought the SEC was corrupt. In fact, I'm living proof here today that they are not, but FINRA is definitely in bed with industry." In the last statement, Markopolos was implying that if the SEC was corrupt, they would have leaked his identity to Madoff, who would dispatched his Russian Bogeyman on Markopolos. (I'd have given $20 to see his lawyer's EKG every time he talked about the Russian Mafia.) There are other holes in his testimony, but the bottom line is that, while he did discover Madoff's Ponzi scheme, Markopolos is being used to exonerate the SEC with the defense of ignorance. The alternative of having senior SEC officials refusing to seriously investigate Madoff because they thought he was running a sustainable front running scam would dictate indictments and real SEC reform, which is something that Wall Street and it's "employees" on the Financial Services Committee couldn't abide by.


  1. It's real easy to sneer at a real hero like Harry Markopolos from behind a keyboard. He was the only one who tried to stop that bastard Madoff and you mock him. What are these holes in his testimony that you're on about? Are you saying that you know more than all of the media and 60 minutes?

  2. I'm sorry, but much of what Markopolos said in his testimony was questionable, to say the least. However, if you want to smoke their dope, don't let me get in the way. And, yes, I do know more than the media has released.

  3. Seems like one more weird, convoluted example of why regulatory oversight is problematic. Due to agency problem et al, oversight is certain to break down over time.

  4. I agree that some level of "capture" is inevitable in regulatory oversight, due to the need for industry expertise. However, I'm hard pressed to think of a regulatory agency that isn't currently dominated by it's charge.

    My point is my usual point: We are still asleep at switch, as demonstrated by the fact that few have scrutinized Markopolos.