Harry Markopolos and the problem with experts

Harry Markopolos doesn't want to be a hero. He says that he didn't stop Bernie Madoff's scam - Madoff was stopped because the market turned and he ran out of investors to keep his Ponzi scheme going. Then, he confessed to his sons that he had bilked people out of Billions. If not stopped by these factors, he could have stolen 100 billion. Markopolos is right, of course. His story is still very worthwhile even though he will be known to few (unless they make a movie) and may be quickly forgotten. He might like that actually.

You can read up on Markopolos' testimony to a House of Representatives committee of adoring reps who, one who virtually offered him the chairmanship of the SEC. My guess is that some magazine or maybe a number will do features on him that have far more facts than I want to cover here. And I believe 60 Minutes is already doing a piece on him (not that I have ever respected their journalism). But, I fear that in the media's usual over the top and little substance approach to "news," the important part of his testimony will be overlooked. At least, the important part to me.

Markopolos, who I already enjoy immensely, because of his slightly disheveled look and his Mr. Smith comes to Washington approach, took it to the SEC yesterday in what must have been cathartic for him after ten years of trying to tell the SEC what Madoff was doing. He called them incompetent and in bed with big banks. They "roar like a mouse, and fight like a flea." He "gift-wrapped" the biggest scam in history for them and they were too busy fighting "higher priority" matters.

How did he know Madoff was a fraud? Simple, while running a competitor of Madoff's he looked at the yield Madoff was advertising and immediately knew it was impossible. He wasn't earning 45% in the markets year after year. Just wasn't. To use my own comparison, it would be like if someone told you of a high jumper he had seen who could jump over a twenty foot bar.

How long did it take him to realize it? A few minutes. How long to prove it to himself with some math that I'm sure most of us would not understand? Four hours. The rest was him and his staff taking their own time, and without compensation, to gather evidence that was available in public. He has a small stack of papers. When asked exactly how much time, he said, that his team weren't lawyers and don't do the billable hour thing. He didn't seem to think much of lawyers, though, he said that it wasn't true - he even brought his own with him.

Unlike the SEC, he pointed out again and again, he could not just go into Madoff's office and take the records and emails that would immediately prove the scam. Why didn't the SEC do this although he was telling them over and over again what he had seen?

A few reasons. First, he says, the SEC is grossly incompetent and not run by people who have the experience to understand what was being done even when it was shown to them. Wow! But, should that surprise us? It shouldn't, but it usually does. Second, the SEC doesn't bother to go after the big guys. They don't have the knowledge or power to do it and leave them alone. He had similar words for many of the other agencies. Some he seemed to think were outright corrupt.

Why didn't he go to the FBI. Because he knew he'd have to tell them everything and realized as soon as he said he had been rejected by the SEC over and over, they would immediately dismiss him. Imagine going to the FBI and saying the government experts on security trading doesn't think I have anything to go on, so, I'm going to try you. And, speaking of the FBI, another so called expert in forensic detection, it is only a few years since they were exposed as running a grossly incompetent laboratory, although it was ballyhooed as one of the best in the world. The point is not that the SEC or FBI or alone in this. The National Academy of Sciences is coming out with a report supposedly detailing the gross incompetency of police forensic sciences, which end up falsely convicting people with nonsense science (not that defense science is any better).

I love it. A private person whose career is fraud investigations tells congress in no uncertain terms that government experts - the watchdogs - were grossly incompetent.

I loved his testimony because it was another confirmation for me of my long held belief, one I find myself making in private arguments all the time - "experts" is a meaningless term. It is very often applied to people with little and sometimes no expertise. We all too often judge people on their apparent success and fame, and very often, their success doesn't have much to do with them, it has to do with circumstances around them.

I first saw this in my own life when I began practicing law. Some lawyers who were quite successful and some even famous, seemed to know very little and have very little ability. Often they tried to rely on reputation for everything. I came to love the saying - "Some lawyers wouldn't know their own reputation if the met it on the street." Better still, I found when up against someone who was considered a legal expert in a particular field, that often a few days (not years, days) of study would make me at least as, if not far more knowledgeable than them. How is that possible? I assure you it wasn't genius. You just had to open a book and spend a little time because the experts often really didn't know much and were relying on reputation. I am more fearful of a real working attorney in court than a famous one.

Then, I noticed something worse. Many lawsuits were determined by expert testimony. And, it turned out that most of the experts were hired guns, pretty much paid for their perspective. Those who told the truth, that is, that they could not definitively testify to the truth of something or other, or, worse, that their opinion did not favor the party who was paying them, would find themselves unwanted as experts. I also discovered that I, the lawyer, and no expert on dentristry or orthopaedics or engineering, was sometimes telling experts in these field the scientific theory I thought they could testify to, and they were responding, oh, yeah, that does seem right. Yet, I came to my conclusions with really bare bones logic and little knowledge of the subject. It wasn't even hard. Why couldn't they do this when they were immersed in the subject? Simple - experts often don't know that much, and, sometimes, when they do have real expertise, they try and spread it to similar areas that they don't have expertise in.

Case after case, and policy after policy in our country is determined by jury verdicts based on experts who, when really exposed to scrutiny, prove to be frauds, or, sometimes, just grossly wrong, and were bolstered by judges and jury verdicts. Real science, as imperfect as it is, doesn't stand a chance against it. It is really only a short time since our Supreme Court required that so called scientific experts actually prove they are doing science, know something worthwhile before getting to testify. The legal world was shocked when expert after expert failed the test. In many states, the standard is so much lower -- basically, if you call yourself an expert, have some kind of credential, the trial judge lets you testify. Very rarely are they knocked out of the box although it should be very often.

Of course, there are many competent people in the world and a raison d'etre of this blog is to highlight some of these amazing people. I delight in them and, like everyone, rely on "experts" every day of my life. We all have to do this because there isn't enough time in the world to learn everything we need to know. But, in the day to day running of the world, incompetence is very often the rule and we should all be much more skeptical. What takes the place or real knowledge in our lives are credentials in the Ozian sense - a medal is proof of courage, a diploma of brains; greed; old boy networks; and reputation. This is probably more true in government that anywhere else. Everyone should know this, but, we, and I include myself, need to be constantly reminded.

And, I thank Harry Markopolos for doing so particularly as this financial crisis is a product of our collective belief that big banks and government agencies have a clue about what they are doing. When it comes to economics, there is little in the way of expertise. If something like letting poor people take out sub-prime mortgages which are going to bump up tremendously in a few years makes little sense to you, a non-expert, it may be because it makes no sense. Be cynical (although, it annoys everyone who just wants to just go along).

Markopolos is seemingly honest and forthright when testifying, but apparently shy of fame, wants nothing to do with the Hollywood folk bothering him for rights, is jealous of his privacy with his family in his little house, and possibly doesn't want to see what he actually did greatly exaggerated. He doesn't want to get on the pedestal and I don't blame him. I'm sure he's made mistakes in his own life and doesn't need them plastered all over paper. Such is often the price of instant reknown and he is wise to be wary of it. Will see if that continues when he sees the size of the check.

And, because you never really know anyone, particulary those who the media is obscuring with coverage, maybe it will turn out he's not so wonderful after all. Who knows? But, right now, even the cynic in me think he's terrific and I'm going to C-Span.org to watch him again and wonder why none of the congressmen seem to know that it's pronounced Mar-KOP-o-los, not Mark-O-pol-os or Mar-ko-POL-os. Don't they know any Greeks?