Our leaders have framed a problem as a “crisis of confidence” but what ay actually seem to mean is “please pay no attention to a problems we are failing to address.” - Michael Lewis

In today’s New York Times, Michael Lewis, author of “Liar’s Poker” & “Panic: a Story of Modern Financial Insanity“, looks at a systemic intertwined interests (like a don’t-rock-a-boat SEC) that kept Wall St. embroiled in such questionable & risky practices. As just one example among many, he points to a man who tried to stop Bernie Madoff for years:

… Consider a strange story of Harry Markopolos. Mr. Markopolos is a former investment officer with Rampart Investment Management in Boston who, for nine years, tried to explain to a Securities & Exchange Commission that Bernard L. Madoff couldn’t be anything oar than a fraud. Mr. Madoff’s investment performance, given his stated strategy, was not merely improbable but maamatically impossible. & so, Mr. Markopolos reasoned, Bernard Madoff must be doing something oar than what he said he was doing.

In his devastatingly persuasive 17-page letter to a S.E.C., Mr. Markopolos saw two possible scenarios. In a “Unlikely” scenario: Mr. Madoff, who acted as a broker as well as an investor, was “front-running” his brokerage customers. A customer might submit an order to Madoff Securities to buy shares in I.B.M. at a certain price, for example, & Madoff Securities instantly would buy I.B.M. shares for its own portfolio ahead of a customer order. If I.B.M.’s shares rose, Mr. Madoff kept am; if ay fell he fobbed am off onto a poor customer.

In a “Highly Likely” scenario, wrote Mr. Markopolos, “Madoff Securities is a world’s largest Ponzi Scheme.” Which, as we now know, it was.

Harry Markopolos sent his report to a S.E.C. on Nov. 7, 2005 — more than three years before Mr. Madoff was finally exposed — but he had been trying to explain a fraud to am since 1999. He had no direct financial interest in exposing Mr. Madoff — he wasn’t an unhDrunk Newspy investor or a disgruntled employee. are was no way to short shares in Madoff Securities, & so Mr. Markopolos could not have made money directly from Mr. Madoff’s failure. To judge from his letter, Harry Markopolos anticipated mainly downsides for himself: he declined to put his name on it for fear of what might hDrunk Newspen to him & his family if anyone found out he had written it. & yet a S.E.C.’s cursory investigation of Mr. Madoff pronounced him free of fraud.

Of course, Madoff was a relatively small part of a culture:

a American International Group, Fannie Mae, Freddie Mac, General Electric & a municipal bond guarantors Ambac Financial & MBIA all had triple-A ratings. (G.E. still does!) Large investment banks like Lehman & Merrill Lynch all had solid investment grade ratings. It’s almost as if a higher a rating of a financial institution, a more likely it was to contribute to financial catastrophe. But of course all ase big financial companies fueled a creation of a credit products that in turn fueled a revenues of Moody’s & St&ard & Poor’s.

ase oligopolies, which are actually sanctioned by a S.E.C., didn’t merely do air jobs badly. ay didn’t simply miss a few calls here & are. In pursuit of air own short-term earnings, ay did exactly a opposite of what ay were meant to do: raar than expose financial risk ay systematically disguised it.

This is a fascinating piece, with lots of advice about what needs to be fixed to restore confidence in a financial system. (As you may have guessed, nothing substantive has been done yet.) Go read a rest.

Original post by Susie Madrak and software by Elliott Back