No One Would Listen: A True Financial Thriller by Harry Markopolos (rainbow fish read aloud .txt) 📗

Lawyers should focus on using regulations to establish a standard of behavior for the industry that is substantially higher than now exists. But it would be tough to do a worse job running the show than they’ve done, so we really should put professionals in charge. The lawyers should have a separate enforcement unit in which they can prosecute both civil and criminal cases of securities and capital markets fraud. Let lawyers prosecute, not investigate.

Second, smart is as smart does. The people who should fill the positions created when we clean up the SEC should have industry experience, not resemble a clown car filled with college degrees. These college greenhorns couldn’t find a steer in a stampede. This is actually a great place for reverse age discrimination. For the broker-dealer exam teams, the people who actually go into an office to conduct an investigation, we should be hiring experienced brokers with as many years of experience as can be found. These people know the tricks and the hiding places; they may even have used some of them themselves when they were on the other side of the investigation. So put veteran traders and veteran back-office personnel on these investigative teams to conduct trading floor exams. For the money management and hedge fund teams, hire experienced portfolio managers, analysts, and buy-side back-office personnel to conduct asset manager examinations. Hire experienced accounting professionals to examine required corporate filings.

Hire experienced leaders. Most people in the industry considered William Donaldson a capable chairman—and he came from the industry. He knew where the skeletons were buried, and he allowed his staff to dig them up.

There is a theme here: Hire people who know what they’re doing, not college kids who know what they want to do—which is get a better-paying job at the companies they’re investigating!

This is a true story: A woman I know with an undergraduate degree in economics and math, an MBA, and a CFA, with more than 10 years’ experience in the industry, wanted to leave her job as a senior analyst at a large mutual fund in order to have a second child. She wanted out of the 70-hour-a-week rat race, so she applied for a job at the SEC. If she were hired, she would almost immediately become one of the most experience people on their staff. But during her interview she was told that she was overqualified with too much industry experience, that she was overeducated, and that it was clear she wouldn’t be happy inspecting paperwork and would probably just quit anyway, so it made no sense to hire her.

Instead, the SEC hires unqualified, sometimes undereducated people without financial industry experience, apparently because those people won’t get bored doing the boring work. All they want these people to do is check pieces of paper to make sure that a company’s paperwork is in compliance with the outmoded securities laws that have to be followed. So is it any surprise, given the current quality of the SEC’s staff, that major felonies go undiscovered and unpunished while paperwork violators are cited and fined? This is the regulatory equivalent of death by a thousand paper cuts!

No Child Left Behind tests students to determine if they’re learning, yet we don’t test those people given power to regulate our financial industry. So maybe we should hire the fifth graders who passed the test? Because it’s clear that a significant portion of the SEC’s professional staff—my guess is at least half and maybe more—need to be let go because they are not qualified to hold their positions. Certainly based on their performance in the Madoff investigation, quite a few employees of the New York regional office staff should be fired—unless they’ve had the good sense to resign. Fortunately, given the layoffs that have swept Wall Street, there are many extremely qualified industry professionals with a clear understanding of the capital markets who are currently at liberty and would be delighted to start tomorrow morning. The quality of the SEC’s staff needs to be dramatically upgraded, and the people who are capable of doing that are incredibly available and ready to jump into that particular pool.

Before hiring an employee, the SEC should give applicants a simple entrance exam to test their knowledge of the capital markets. To me, it doesn’t seem unreasonable that someone joining the agency that regulates the financial industry should have some knowledge of the industry he or she is being hired to regulate. Many SEC staffers, particularly the staff attorneys, don’t know a put from a call, a convertible arbitrage strategy from a municipal bond, or an interest-only from a principle-only fixed income instrument. The Chartered Financial Analysts Level I exam covers the material that I would expect all of the SEC’s professional staff to have mastered before being hired. But that’s just me being Harry. I seriously doubt that 20 percent of the SEC’s current staff would be able to pass this important exam.

There are several other tests that could be used to determine the proficiency of potential or active employees. SEC employees should be tested regularly, and if they perform poorly on those tests they should be required to attend classes until they prove their ability to conduct professional inspections.

Third, examine the SEC’s examination process. I have survived an SEC inspection, although I didn’t get the official T-shirt. I was a portfolio manager, then the chief investment officer at a multibillion-dollar equity derivatives asset management firm. My firm, Rampart, was considered high-risk only because we managed derivatives; therefore, we received SEC inspection visits every three years, so I know from my own experience how flawed these examinations are. Incredibly, the SEC never sent in a single examiner with any knowledge of derivatives. These examiners had no idea what they were looking at. Rampart was always honest, but we easily could have pulled a Madoff and they never would have caught us. These examiners were very young and had little or no industry experience. These examiners would come in with