Home » The Madoff whistleblower: it’s the math, stupid(s)

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The Madoff whistleblower: it’s the math, stupid(s) — 25 Comments

  1. Very interesting. But I think the paragraph that begins “In 2000, Madoff was the resident math whiz” should read “In 2000, Markopolos was the resident math whiz.”

  2. Actually, this reminds me of the cases where we see evidence of voter fraud, but the liberals blow it off because few people have been convicted. If a bank is robbed, we don’t wait till some particular person is convicted to say ” The bank was robbed”. The conviction of a person(s) requires ” beyond a reasonable doubt” – but proving the bank was robbed does not.

  3. It might have helped the SEC if they had had a real trader in there to look at how he did it. Someone versed in the actual functioning of a trade would smell a skunk and would have dug around to find the problem. How the SEC can’t understand the market it is supposed to regulate is beyond me, maybe there are too many political appointees and less actually interested auditors and investigators. Think using a hacker to guard programs against hackers. mpw

  4. The failure of the SEC staff is to some extent a failure of the various SEC divisions and the SEC’s NY regional office to communicate and share information. This failure is somewhat analogous to the failure of our pre-9/11 intelligence failure. That was due to the shameful and idiotic Gorelick wall barring such communication. The SEC’s failure is to due petty, bureaucratic rivalry. btw. It is the staff that runs the SEC, not the Commissioners. It is they, who for the most part, decide which matters come before it. As with other bureaucracies, they focus too much on “picking the fly-sh*t out of the pepper.”

  5. MPW280 is right. Who is the best building inspector? The answer is obvious. Someone who worked in the trades for 30 years. He knows the codes, but more importantly, understands completely the mentality of those who are meeting those codes.
    I’m a computer programmer. I submit that only someone who programs for a living has a full understanding of all that goes into it. Yes, others understand it . . . but there is understanding and then there is UNDERSTANDING.
    Seems this is what’s missing in our financial oversight. And, I would guess, the new financial instruments ran ahead of the regulators. Just as my building inspector might fail if he’s on old school contractor inspecting totally new technologies.

  6. OK, I’ll be the first to say it:
    What are the odds that she was an affirmative action appointment?

  7. It’s not the math! It’s worse than that. A simple review of the audited financials would have uncovered this mess – something a green junior auditor could have figured out. Markopolos did an excellent job of showing that the purported investment returns were highly doubtful. That should have provided enough information of probitive value for the SEC to conduct the investigation. Megan “Mr. Magoo” Cheung just wasn’t looking in the right places. I find it hard to believe that someone who went to law school wouldn’t know were to look. She could have had one of the many auditors available to the SEC do some simple tests. A really slow auditor might have taken a couple of weeks to discover the existence of fraud. I have dealt with government auditors from different agencies and I don’t really think that the people at the SEC are really that stupid. I think there was a deliberate coverup. This is not the same as 9/11. It’s a lot easier to find a fraud at an audit target than a terrorist cell.

  8. It’s very obvious to pros that IF Madoff was actually doing a “split strike” strategy, option exchanges don’t have enough size.He would have needed to do OTC options with firms like Goldman Sachs, Morgan Stanley, UBS,Deutsche Bank,JP Morgan,Citi and others.They would have had their credit depts crawling all over his operation and they would have required he use them for custodial holding or used a third party like BNY Mellon or JP Morgan or State St.He could have BS’d his way through it if he said he was only running $750 million, but even that would have stretch the limits of using the listed exchanges.

    His investors willingly suspended their disbelief.

  9. I’m a computer programmer. I submit that only someone who programs for a living has a full understanding of all that goes into it. Yes, others understand it . . . but there is understanding and then there is UNDERSTANDING.

    I’ve been programming for thirty years, and earning my living at it. I’m very good at it, and yet I can’t claim to rise to the highest understanding. What’s more, even the very best can occasionally be surprised. For a classic example, see the Wikipedia entry for Duff’s Device.

    I’m sure the same thing is true in the financial industry which is, after all, less mechanical than the execution of a program.

  10. Kurt: absolutely. I was in such a hurry today that I didn’t proof things as carefully as usual. I just corrected it—thanks!

  11. As one who knows a bit of mathematics, I would say that people are too easily hypnotized by “math” and too easily impressed by “math whizzes” — the problem here wasn’t difficulty in understanding the underlying mathematics, but rather in appreciating the truth of simple maxim:

    If it looks too good to be true, it is.

    Jamie Irons

  12. Have you ever worked in a gov’t job? I have. Incompetence is the rule,because that is the default position for most people. In industry one is forced to be competent, else you go out of business-unless you can get the gov’t to support you.

  13. “”Incompetence is the rule,because that is the default position for most people.””

    It seems like the default position of politically correct bureaucracies. My girlfriend works at a big city hospital and you just wouldn’t believe the incompetence and laziness that abounds. I can only imagine what it will be like with more govt influence on hospitals.

    Bureaucracies seem to be where we warehouse all the idiots in society in hopes of diluting their incompetence.

  14. I think it is time to repeat The Tale of the Little Bird Who Wouldn’t Fly South, a fable for bureaucrats:

    Once upon a time there was a little bird who decided he didn’t want to fly south for the winder. While all the other birds were flying south, he was enjoying all the food they were leaving behind and all the peace and quiet with all of them gone. And the trees were ablaze with color.

    But after a few weeks, he realized that he had made a bad mistake. The food was running out. The days were getting short. The trees were getting bare. And it was cold. So cold that he knew he couldn’t survive much longer. So he turned south and took off, hoping to catch up with all the other birds.

    But it was no good. The cold came in faster than he could fly. His wings became heavier and heavier, and food was no easier to find. It was a constant struggle to stay in the air and finally, the cold was too much. Try as he might, he couldn’t make his wings beat hard enough. He lost altitude, slowly at first, and then faster. He stiffened his wings for a glide and shut his eyes to await his fate.

    The landing wasn’t as bad as he expected. It was still cold, but the ground, although bare, had been worked over. He looked around and realized that he was in a barnyard, and to one side were the legs of a cow. Moments later, he heard something above him and realized which end of the cow he was under.

    The cow did what cows do, and the little bird was buried in a heavy, smelly mess. A heavy, smelly, warm mess that slowly began to thaw his muscles. Thanks to that cow, he was going to survive! He was so happy he began to sing.

    Unfortunately, the barnyard had a cat, and when the cat heard the little bird sing, he bounded right over and, heedless of the mess and smell, dug the little bird out of the nice warm pile and ate him, and that was the end of the little bird.

    And now to the morale. First, the one who dumps it on you isn’t necessarily your enemy. Second, the one who shovels it off of you isn’t necessarily your friend. And third, if you are nice and warm and comfortable under a pile of it, for God’s sake keep your mouth shut!

  15. My money is on a combination of incompetence, a payoff, ideology and innumeracy, with innumeracy probably coming out ahead of the pack.

  16. What if all of this is part of a deliberately designed “perfect storm” that is being used as an excuse to make government bigger. ie- The Sheeple will be told we need MORE regulations., Like the housing crisis that was in part brought on by government interference in the marketplace (Fannie and Freddie encouraging bad loans by buying them up from banks) . Much of the Sheeple seem to have no idea how Fannie and Freddie were already part of the government and don’t realize they helped bring this on. But the Sheeple swallow the lie ” We need more government” because that is what the MSM tells them.

  17. To me it is pretty good parallel to the Fannie and Freddie mess. Two years before it toppled there were people (including republican congresspeople and the Bush administration) who were raising red flags about the situation and the coming catastrophe. They were not only dismissed but the party running the committees actually commended idiots who were making millions and driving the market into a crater bigger than the one made by the meteor that signaled the end of the dinosaurs.

  18. Madoff tale and every other Ponzi scheme is an example of “greed” among everyone of us. We all know that if it is too good to be true, that it actually is. And yet time and time again, people fall for more of the same. Because this time it is different – it is us, we are smarter than the previous bunch.

    As for SEC, in its entire 70 year history, has it ever “uncovered” anything on its own. Only in our government do people get to keep a job in which they suck. And might even get paid more for it. We might as well abolish it – but then again, I am dreaming. Look who is governing now.

  19. And how do YOU, maneocon know that the SEC, in its entire 70 year history has never uncovered anything on its own?

    Who do you think uncovered the accounting fraud at Fannie Mae when Fannie Mae fraudulently misstated earnings by about $10.6 billion from 1998 through 2004.

    Why don’t you spend some time doing your homework before your make any more sweeping dismissals. You can start here: http://www.sec.gov/divisions/enforce/friactions.shtml an d begin reading the SEC’s Accounting and Auditing Enforcement Releases

    Or you can spend sometime learning about the SEC’s internet related litigation here: http://www.sec.gov/divisions/enforce/internetenforce/litreleases.shtml

    and
    http://www.sec.gov/divisions/enforce/internetenforce/internetlitrelold.shtml

    or bank fraud:
    http://www.sec.gov/divisions/enforce/primebank/pbaction.shtml

    *
    ***
    *

    BTW: Has anyone yet considered what impact 9/11 had on the SEC New York Regional Office? The New York Office was housed in World Trade Center 7 which burned and collapsed with a catastrophic lost of records, evidence, computer equipment etc.

  20. Nonetheless the loss remains. Perhaps you can tell us what sort of off-site hardcopy records retention practices are used by major law firms and the Big 4 accounting firm for analogous current and recent workingpapers and evidenitary materials. For that matter recall the pre 9/11 and post 9/11 state of the FBI’s information systems. The FBI agents were unable to make use most common e-mail capabilities. Keep in mind that if Congress doesn’t provide the necessary funds for IT and records retention it doesn’t happen. And many Congress critters prefer pork to spending money administrative infrastructure. Moreover, I seem to recall that the SEC was severely under staffed and underfunded by Congress in the 1990s and the early part of this decade.

  21. newton: It’s certainly possible. But consider that Madoff only had confessed to his sons (supposedly, anyway) on Dec. 10.

    The last two withdrawals she made were after that confession. It stands to reason that if he had confessed to the sons at that point, he had probably already confessed to her earlier. Her first withdrawal was on Nov. 25, only about two weeks earlier. My guess is that she may have been told just prior to that date.

    Of course, as I’ve said several times, it’s certainly possible she was in on the whole thing from the start. But the timing of these withdrawals doesn’t really answer that question, in my opinion.

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