Read Online No One Would Listen: A True Financial Thriller by Harry Markopolos - Free Book Online
Authors: Harry Markopolos
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market-driven, yet his correlation coefficient was only 6 percent to the market and his performance line certainly wasn’t coming from the stock market. Volatility is a natural part of the market. It moves up and down—and does it every day. Any graphic representation of the market has to reflect that. Yet Madoff’s 45-degree rise represented a market without that volatility. It wasn’t possible.
Bernie Madoff was a fraud. And whatever he was actually doing, it was enough to put him in prison.
I knew that was true, but it was just so hard to believe. Several months later I showed another manager’s marketing explanation to Leon Gross, at that time the head of equity derivatives research at Citigroup. I don’t think I identified Manager B as Madoff to him; I just asked his opinion about the strategy. Leon is way up there on the smart chart, and 30 seconds after looking at the material he said, “No way. This is a loser. If this is what this guy is really doing, he can’t beat zero. The way this is designed it’s impossible to make money.” He shook his head in dismay. “I can’t believe people are actually investing in this shit. This guy should be in jail.”
That might have been the end of it for me. I might have filed a complaint with the Boston office of the Securities and Exchange Commission (SEC), and it would have made great pub conversation: “I’ll bet you didn’t know Bernie Madoff—you know, Madoff Securities—is running some kind of scam,” and it wouldn’t have gone any further. But this was the financial industry, and there was money to be made following Bernie—potentially hundreds of millions of dollars.
Frank Casey and Dave Fraley began pushing me hard to reverse engineer Madoff’s strategy so Rampart could market a product that would deliver similar returns. Frank didn’t believe what Madoff was doing was real; he knew that Madoff was using that split-strike jargon to cover for whatever he actually was doing, but he also didn’t believe that it was a Ponzi scheme. “Ponzi’s a strong word,” he said. “Okay, we know he’s a fraud, but maybe he’s doing something else and just claiming this to keep it simple.” What he did believe was that I could design a financial product that could compete with Madoff. “Just look at the return stream this guy is putting out,” he said. “This is what the market wants to buy. Can’t you develop something that we could run at Rampart that would compete against Madoff? Believe me, Harry, Thierry de la Villehuchet is looking for something that would net ten, twelve percent to the client. If we can offer him anything even close to that . . .” He didn’t need to finish that sentence.
Frank really pushed me to work on the new product. At times we both got a little testy. He was pretty blunt about it. His deal with Rampart guaranteed him a percentage of the business he brought in, and he had a client who could raise hundreds of millions of dollars if he provided the right product. “C’mon, Harry, I need a product to sell. Rampart needs the product. Let’s just build the frickin’ thing and get it out the door.”
But each time he asked me if I was making progress, I explained to him that it was impossible to compete with a man who simply made up his numbers. I couldn’t do it. Nobody could. And each time I said that, he would urge me to keep trying. He really wanted to believe Madoff was real, even if he wasn’t particularly legal. He suggested a lot of different possibilities, and I’m sure the excuses he offered for Madoff were precisely the same reasons the hedge funds gave for accepting his numbers: He’s one of the largest market makers, he’s got better execution, he’s been doing it for years, these are audited numbers, and, if there was something wrong, didn’t I think the SEC would have closed him down years earlier?
I thought this was a complete waste of my time and did my best to avoid
Bernie Madoff was a fraud. And whatever he was actually doing, it was enough to put him in prison.
I knew that was true, but it was just so hard to believe. Several months later I showed another manager’s marketing explanation to Leon Gross, at that time the head of equity derivatives research at Citigroup. I don’t think I identified Manager B as Madoff to him; I just asked his opinion about the strategy. Leon is way up there on the smart chart, and 30 seconds after looking at the material he said, “No way. This is a loser. If this is what this guy is really doing, he can’t beat zero. The way this is designed it’s impossible to make money.” He shook his head in dismay. “I can’t believe people are actually investing in this shit. This guy should be in jail.”
That might have been the end of it for me. I might have filed a complaint with the Boston office of the Securities and Exchange Commission (SEC), and it would have made great pub conversation: “I’ll bet you didn’t know Bernie Madoff—you know, Madoff Securities—is running some kind of scam,” and it wouldn’t have gone any further. But this was the financial industry, and there was money to be made following Bernie—potentially hundreds of millions of dollars.
Frank Casey and Dave Fraley began pushing me hard to reverse engineer Madoff’s strategy so Rampart could market a product that would deliver similar returns. Frank didn’t believe what Madoff was doing was real; he knew that Madoff was using that split-strike jargon to cover for whatever he actually was doing, but he also didn’t believe that it was a Ponzi scheme. “Ponzi’s a strong word,” he said. “Okay, we know he’s a fraud, but maybe he’s doing something else and just claiming this to keep it simple.” What he did believe was that I could design a financial product that could compete with Madoff. “Just look at the return stream this guy is putting out,” he said. “This is what the market wants to buy. Can’t you develop something that we could run at Rampart that would compete against Madoff? Believe me, Harry, Thierry de la Villehuchet is looking for something that would net ten, twelve percent to the client. If we can offer him anything even close to that . . .” He didn’t need to finish that sentence.
Frank really pushed me to work on the new product. At times we both got a little testy. He was pretty blunt about it. His deal with Rampart guaranteed him a percentage of the business he brought in, and he had a client who could raise hundreds of millions of dollars if he provided the right product. “C’mon, Harry, I need a product to sell. Rampart needs the product. Let’s just build the frickin’ thing and get it out the door.”
But each time he asked me if I was making progress, I explained to him that it was impossible to compete with a man who simply made up his numbers. I couldn’t do it. Nobody could. And each time I said that, he would urge me to keep trying. He really wanted to believe Madoff was real, even if he wasn’t particularly legal. He suggested a lot of different possibilities, and I’m sure the excuses he offered for Madoff were precisely the same reasons the hedge funds gave for accepting his numbers: He’s one of the largest market makers, he’s got better execution, he’s been doing it for years, these are audited numbers, and, if there was something wrong, didn’t I think the SEC would have closed him down years earlier?
I thought this was a complete waste of my time and did my best to avoid
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