The Press and the Madoff Scandal

An old maxim has it that newspaper editors separate the wheat from the chaff, then print the chaff. By this standard, the editors of the Wall Street Journal have shown special deftness in their handling of the Madoff affair.

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Markopolos had a "credibility problem" only in the sense that some of his more sophisticated analyses may have gone over the heads of Journal apparatchiks (as it seems to have gone over Chittum's). The fact is that Markopolos front-loaded his lengthy dossier with his most technical and – to an intelligent, financially literate reader – most telling points. Big mistake. The poor fellow had not realized that, judged even by the indifferent standards set elsewhere, even senior financial journalists in the United States are notoriously mediocre. Virtually without exception, they cannot read a balance sheet – an ability that is to serious financial reporting roughly what eyesight is to driving a car. Moreover, financial knowledge at the Wall Street Journal seems to vary in inverse proportion to rank. Journal editors are "big picture" people, who are too busy spouting globalist claptrap or defending the bombing of Arab schools to try to sit down and read about a $50 billion fraud in their own backyard.

Yet the truth is that any intelligent young financial reporter with, say, two years experience should have had no difficulty understanding – and concurring with – even the most abstruse aspects of Markopolos' argument. For the rest, the case was so obvious that even a child could not have missed the point.

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Most of the facts unearthed by Markopolos were truly unexpected and were accumulated only after years of dogged sleuthing. Markopolos' interest had been first piqued as far back as the 1990s, when colleagues told him of this amazing fund manager who was ostensibly using a conservative options-based hedging strategy to generate consistently superlative returns. As an options expert, Markopolos quickly determined that what Madoff was claiming was impossible (in this conclusion, he was joined by many Wall Street authorities, not least analysts at Goldman Sachs). Either Madoff was faking or he was pursuing a quite different investment strategy, in all probability a shady one, known as "front-running" (more about this in a second). At a minimum, Madoff was a liar. This conviction inspired Markopolos to dig ever deeper and sustained him through many vicissitudes. The basic problem was that a highly secretive Madoff had structured his business so that statutory disclosure obligations were risibly light. After years of piecing together information from a wide variety of mainly private sources, however, Markopolos became convinced that front-running was not the explanation. That left only one possibility: Madoff was running the biggest Ponzi scheme in history. Markopolos' 29 red flags summarized the argument. Only the most obvious action required – and, in all probability, it would have been undertaken almost immediately had the press got on the SEC's case – was that Madoff's operations be subjected to a thorough, independent audit.

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Up until December, the financial press had virtually never taken a serious look at Madoff. The closest it had ever got to figuring him out was in two articles published in 2001.

Any intelligent young financial reporter should have had no difficulty understanding Markopolos' argument.

Written respectively by Michael Ocrant of MARHedge magazine and Erin Arvedlund of Barron's, these were both legally constrained accounts of the skepticism already then rife among Madoff's competitors. The conclusion an intelligent reader would have come to was that front- running was probably the explanation (Arvedlund's article, for instance, was coyly headed, "Don't Ask, Don't Tell").

... up until 2005, the press bears relatively little blame for its failure to spot an arch Ponzi artist at work. Yes, even before Markopolos surfaced, a capable reporter with a little knowledge of previous Ponzi schemes could have spotted the truth, but it would have taken some luck and considerable digging.

The real disgrace is the press's treatment of Markopolos. Although we have yet to find out how many news organizations he talked to, it is already clear that the Journal's behavior was inexcusable. For the record, Paul Steiger is at one with the current Dow Jones establishment in implying that the problem was nothing more than a bureaucratic snafu. In his note to CounterPunch, he wrote, "Mr. Markopolos' suggestion that the Journal would have been intimidated from pursuing Madoff, or was somehow in cahoots with him, is fantasy. The Journal wrote tough stories about infinitely more powerful people, such as Dick Grasso and Hank Greenberg."

Perhaps. But the fact that the Journal went after Grasso and Greenberg does not mean that it could not be blown off-course in other cases. The most likely explanation is surely that Madoff pulled strings.

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One thing is for sure: it is about time the rest of the press held the Journal's feet to the fire. Why should newspapers set the bar of public accountability any lower for themselves that they do for, say, General Motors or Exxon Mobil?