Regular readers of this blog come from remarkably diverse backgrounds, but seem united by at least one shared experience: the act of having examined some aspect of our capital markets only to conclude that much of what the world has accepted as fundamental simply does not make sense.
Regulators refusing to regulate. Investigative reporters unwilling to investigate. Villains praised as heroes. Heroes marginalized as villains. Fact derided as fantasy. The valueless labeled “valuable”. Lies labeled “truth”. One plus one labeled “three”.
These are all symptoms of a financial system that is beyond broken…even beyond unhinged. It’s insane. And yet, in keeping with the black-is-white nature of Wall Street, those who say as much can expect to see their own sanity publicly questioned and, in the absence of external validation, possibly come to question it themselves.
If you can relate to this feeling, then take heart. Last month saw the publication of two books packed with the psychological healing capacity of a year’s worth of frustrated market reformer support group sessions: No one would Listen by first time author Harry Markopolos, and The Big Short by seasoned Wall Street chronicler Michael Lewis.
For all their differences of artistry and scope, in the end these books tell the stories of remarkably relatable individuals confronting the unpopular realization that large and seemingly trustworthy institutions were getting rich by playing the rest of us for fools and making mockeries of the markets in which they operated in the process.
In the case of No one would Listen, we follow the author himself through the process of uncovering the Bernard Madoff Ponzi scheme, followed by his decade-long effort to expose it. Along the way, we’re given fly-on-the-wall access to his many infamously fruitless attempts to help complacent journalists and bumbling SEC staffers (Markopolos refers to the agency as “captured” at least a half-dozen times) recognize that “the world’s largest hedge fund is a fraud.”
In The Big Short, Lewis tells the stories of a small handful of investors as each came to their own realization of the tremendous gulf separating Wall Street’s portrayal of subprime mortgage-backed securities and their reality. These a-ha moments are neatly encapsulated by the line, attributed to Charlie Ledley of Cornwall Capital, who despaired, “in the course of trying to figure it out, we realized that there’s a reason why it doesn’t quite make sense to us. It’s because it doesn’t quite make sense.”
In both books, the protagonists’ disconcerting conclusions are backed up not only by subjective observation, but also by the kind of objective math anybody with finance training could duplicate, but which most chose to ignore for fear of what the conclusions might portend. In each case, the result was a generally-accepted delusion and limitless lessons on the shortcomings of human nature and how these – when aggregated on the market level – are ripe for exploitation.
Lewis maintains as his primary target the investment banks that peddled the deeply-flawed subprime mortgage-backed CDOs all the while planning (as we’ve been reminded today) to make money on their inevitable failure, as well. Markopolos expends most of his ammunition on the SEC, while saving some fire for uninspired business reporters and the culture of greed-induced blindness that permeates the hedge fund industry.
In terms of style and mechanics, I much preferred The Big Short, as it is one of the most masterfully woven works of non-fiction I’ve ever experienced. Lewis paints compelling pictures of his players and their circumstances, making them feel quite familiar. It’s been a long time since I’ve felt so unhappy to reach a book’s final page.
Markopolos, on the other hand, is a numbers person by profession, not a writer. And while his is a superb first effort, it’s afflicted by a few awkwardly executed patches that left the book feeling about 30 pages too long; much the same way I suspect Markopolos’ frequently-acknowledged eccentricities likely result in conversations with him lasting just slightly longer than they should.
While The Big Short offers near perfection, if forced to pick one work over the other for readers of Deep Capture, I’d have to recommend No one would Listen, for two reasons.
First, as culpable as the banks are, their behavior is merely a product of the regulatory environment in which they’ve operated for the past 20 years. To understand why criminals abound, you must start by understanding why the cops are absent, and this is what Markopolos accomplishes.
Second, because readers of this blog seem drawn to stories marked by a clear delineation between right and wrong, I suspect No one would Listen will be the more satisfying read in the end. Indeed, throughout The Big Short, I was nagged by the feeling that while those who anticipated and profited from the bursting of the CDO bubble were likely smarter than those who profited from its inflation, they’re not necessarily better people. This was made especially clear to me through the story of Howie Hubler, a Morgan Stanley bond trader whose narrative – but for a single poorly-conceived trade (which ended up costing Hubler’s firm $9-billion) – would have followed an arc comparable to that of the heroically-portrayed Michael Burry or Steve Eisman. Harry Markopolos, on the other hand, is obviously a different kind of person and, of the many characters across both books, the one I’d want to have as a neighbor or meet over lunch. Where Lewis offers a limitlessly captivating story about economics, Markopolos offers a deeply endearing if slightly flawed story about character.
Fortunately, I don’t have to pick one book over the other. I can – and do – recommend both as great reads and invaluable reminders that it’s the system that’s insane, not us.