Economics for
a Full World
By Paul Craig Roberts
roberts continued on page 2

***********************************************************
The Complaisant Watchdog
How the Wall Street Journal Buried the Madoff
Scandal for at Least Four Years
By Eamonn Fingleton The first two parts in this series
deal with economics within the
existing paradigm. This third and
final part deals with the economics that
is omitted from the paradigm. The omitted
economics is so important that the
omission indicates the need for a new
paradigm.
The basic problem is that economics
does not measure all the costs, and the
omitted costs might be the most important
costs. Since economics does not
measure all the costs, economists cannot
know whether growth is economic or uneconomic.
The economist Herman Daly,
for example, asks if the ecological and
social costs of growth have grown larger
than the value of the increase in production.
The costs that are left out of the computation
of Gross Domestic Product are
the depletion of natural capital, such as
oil and mineral resources and fisheries,
and the pollution of air, water and land
resources.
Economists do a poor job of adjusting
economic theory to developments
brought by the passage of time. Just as
capital theory originated prior to the income
tax and free-trade theory originated
at a period in history when capital was
internationally immobile and tradable
goods were based on climate and knowledge
differences, economists’ neglect of
the ecosystem as a finite, entropic, nongrowing
and materially closed system
dates from an earlier “empty world.”
In an empty world, man-made capital
is scarce and nature’s capital is plentiful.
In an empty world, the fish catch is
limited by the number of fishing boats,
not by the remaining fish population,
and petroleum energy is limited by drilling
capability, not by geological deposits.
Empty-world economics focuses on
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.
They used the occasion of whistleblower
Harry Markopolos’ testimony
in Washington recently to address
seemingly every minuscule detail
of the scam. They even published an
irrelevant, if lovingly crafted, floor
plan of the Madoff firm’s office in the
Midtown Manhattan Lipstick building.
Yet, in all their apparent desire to
“flood the zone” (maybe they’re angling
for a Pulitzer!), one detail was missing.
Not a word of explanation was offered
about the curious role played by the
Journal’s own Washington-based investigative
reporter John R. Wilke.
As Markopolos’ written testimony
has made clear, Wilke long ago knew
the score. As far back as 2005, he had
been entrusted with Markopolos’ now
famous dossier raising no less than 29
red flags about Madoff. It is hardly an
exaggeration to say that, on the strength
of an afternoon’s research, a good reporter
could have worked up any one
of Markopolos’ points into a cracker
of a front-page story. Taken as a whole,
the dossier represented the biggest “career
development opportunity” any
journalist has been handed since Deep
Throat delivered the goods on Richard
Nixon to Woodward and Bernstein a
generation ago.
There are differing accounts of
what happened next. According to
Markopolos, Wilke was hot to trot but
needed the blessing of higher-ups. And,
unfortunately, the Journal’s “news” operation
is apparently run much like an
Amtrak marshaling yard. As months
turned into years, Markopolos’ 29 red
flags festered like so many rotten tomatoes
in some desk jockey’s in-tray. Other
sources, however, place the blame firmly
on Wilke’s shoulders. Apparently, he
started to dig but lost heart because there
was so little publicly available information
on Madoff’s modus operandi.
It is all very puzzling. The question,
of course, is why would Markopolos lie
about something like this? And then
there is the simple fact that his testimony
on other, more weighty matters has already
been resoundingly vindicated.
What is not in dispute is that, to the
Journal’s eternal shame, the story eventually
came out only after an avalanche
of redemptions left Bernie with nowhere
to hide and he turned himself in. In the
interim, by remaining silent, the Journal
played a devastatingly ignominious role
in one of the biggest and most brazen
scams in history.
If the Journal’s shame is particularly
acute, virtually no one in wider American
financial journalism profession emerges
from this fiasco with much credit.
One dog that snoozed in its kennel
was the New York Times. The Madoff
scam was, of course, a local story for the
Times, not least because Times editors
undoubtedly knew many of Madoff’s victims
socially. It is surprising, to say the
least, that no Times person ever seems
to have sensed there was something
fishy going on in the Lipstick building.
The Upper East Side was buzzing with
rumors about his apparently sensational
investment returns. Many a New York
socialite either had money invested with
him – and boasted of it in a loud stage
whisper – or at least wanted to do so.
fingleton 
**************************************************************
Modern economic theory is based on
“empty-world” economics. But, in fact,
today the world is full. In a “full world,”
the fish catch is limited by the remaining
population of fish, not by the number of
fishing boats, which are man-made capital
in excess supply. Oil energy is limited
by geological deposits, not by the drilling
and pumping capacity of man-made
capital. In national income accounting,
the use of man-made capital is depreciated,
but the use of nature’s capital has
no cost. Therefore, the using up of natural
capital always results in economic
growth.
For example, the dead zones in the
Gulf of Mexico from fertilizer runoff
from chemical fertilizer farming are not
counted as a cost against the increase in
agricultural output from chemical farming.
The brown clouds that reduce light
over large areas of Asia are not included
as costs in the production of energy from
coal. Economists continue to assume that
the only limits to growth are labor, manmade
capital, and consumer demand. In
fact, the critical limit is ecological.
Nature’s resources cannot be replicated
or regenerated like man-made
capital. These real limits to growth are
both neglected and denied by economic
theory.
Modern economics is based on a
“production function,” associated with
Robert Solow and Joseph Stiglitz, two
Nobel prizewinners. A production function
explains the relationship between
inputs and outputs. The Solow-Stiglitz
production function assumes that manmade
capital is a substitute for nature’s
capital. Therefore, as long as man-made
capital can be reproduced, there are no
limits to growth. As the economist James
Tobin (another Nobel prizewinner) and
William Nordhaus put it in 1972, the
implicit assumption is that “reproducible
[man-made] capital is a near perfect
substitute for land and other exhaustible
resources.”
Nicholas Georgescu-Roegen, one of
the world’s most distinguished mathematical
economists (now deceased)
destroyed the Solow-Stiglitz production
function, dismissing it as a “conjuring
trick,” but economists have nonetheless
kept this production function close to
their chests, because it is a mathematical
way of saying that ecological limits
on economic growth do not exist.
Nature has no role in the game. (See
Herman Daly, Ecological Economics and
Sustainable Development, U.K.: Edward
Elgar Publishing, 2007).
Modern economics has turned economic
growth into an ideology,
just as free trade has become an ideology.
The Solow-Stiglitz production function
is a false explanation of how inputs
produce outputs. In contrast with the
Solow-Stiglitz absurdity, Georgescu-
Roegen made it clear that production is
the transformation of resources into useful
products and into waste products.
Labor and man-made capital are agents
of transformation, while natural resources
are what are transformed into useful
products and waste products. Man-made
capital and natural capital are complements,
not substitutes. The Solow-Stiglitz
production function, the basis of modern
economics, is fantasy.
The real question is whether the
world’s remaining natural resources and
the “sinks” for waste products are sufficient
to sustain the continuation of
economic growth as traditionally understood,
and its expansion to underdeveloped
countries.
Environmentalists and ecological
economists are aware that today the limits
to growth include the natural environment.
Even politicians are aware, as they
have imposed laws and regulations designed
to limit pollution.
Over the course of American history,
economic growth has made income inequality
acceptable, because economic
growth, as President Kennedy put it, is
“a tide that lifts all boats.” What becomes
of a society based on the rise in real incomes
when ecology imposes itlimits?
Can statistics forever disguise that
the costs outweigh the benefits?
Can a society based on children doing
better economically than their parents
survive when policy mistakes together
with ecological limits disrupt this traditional
outcome?
There are social costs associated with
the failure of economics to account for
the full costs of production and with the
integration of all countries into a “global
economy.” For many countries, being integrated
into the global economy means
that the society loses control over itself.
Entire occupations and ways of life
are wiped away as specific countries are
forced to forego diversification and to
specialize in the products that globalism
dictates, regardless of the needs and
wants of the domestic population.
Economic globalism is far in advance
of global government. As Herman
Daly writes, globalism is the “space into
which transnational corporations move
to escape regulation by national governments.”
Economic globalism in the
absence of global government permits
transnational corporations to escape accountability.
This means that today corporations
are escaping accountability for costs that
they impose on the rest of the world. If
these “externalized” costs were included
in their cost of production, would there
be any basis for CEOs to be paid 300,
400, or 500 times the pay of a production
employee?
If ecology imposes limits on growth,
ladders of upward mobility cease to
function. How would society distribute
income in order to ensure social
peace? This new distribution would certainly
require the end of the current large
differences, but would people be locked
into place, requiring luck and extraordinary
ability to rise?
*************************************************************
february 1-15, 2009
Yet it was only on the day of Madoff’s
arrest that the Times condescended to inform
its readers that mnay of his more
alert peers had sensed he was a fake all
along. For years, he had been pegged
as an outright Ponzi artist by Goldman
Sachs and Credit Suisse, for instance, and
he was blacklisted also at Deutsche Bank,
Merrill Lynch, and UBS. Indeed, as far
back as 1991, CounterPunch contributor
Pam Martens, in her capacity as a Wall
Street broker had told him she was on to
his game and had so advised a client. For
thousands of aggrieved Times readers,
who lost their life savings in Bernie’s fi-
nancial Bates Motel, the question is why
they were the last to know.
To be sure, primary blame for dropping
the Madoff ball lies with the
Securities and Exchange Commission
(SEC). But the fact that the SEC is
a basket case is not news. Infected
by the “greed is good” virus that has ravaged
political discourse for nearly three
decades, American financial regulation
has now become so corrupt and incompetent
that it would embarrass a Third
World kleptocracy. What is news – at
least to those who lack independent
sources of information – is that top
American editors and reporters now
seem no more willing to tackle wealthy
and well-connected crooks than their
avowedly venal and cowed peers in,
say, Jakarta or Harare.
Which journalists and publications
have been most remiss? It is not just the
Journal that would prefer you don’t ask.
Virtually the entire American media establishment
has gone catatonic. Searches
of Nexis, a news clippings database that
includes many publications in the English
language, indicate as much. As of mid-
February, anyone who searched for,
for instance, “Markopolos and Madoff
and Wilke” found only eight results, of
which only one came from the mainstream
press (a brief note by Howard
Kurtz of the Washington Post). The entire
subject seems to be a no-go area even
at the New York Times, which has yet
to mention Wilke’s name. Is this a case
of people in glass houses not throwing
stones? It sure looks like it. What is certain
is that in one hitherto unpublicized
email message included in his written
testimony, Markopolos stated that vari-
*****************************************************
It is possible that some new plague,
natural or man-made, will resurrect an
empty world, a world empty as well of
natural capital. Just as plague destroyed
the Mongol Empire, plague could destroy
science and technology, making it dif-
ficult for humanity to recover economically
from depleted and hard-to-reach
natural resources.
In the founding days of the discipline
of economics, Adam Smith and Alfred
Marshall endeavored to explain reality
in order that policy might improve the
human condition. Whether they succeeded
or failed, they were sincere.
Today, economists play games with
assumptions and equations. Smith and
Marshall were interested in truth and its
discovery. Economists today are interested
in money, and they provide apologies
for “globalism” that bring grants to
their departments from transnational
corporations. Today a person who speaks
economic truth has no future in the economics
department of a university dependent
on outside money.
If economics is to serve humankind,
the limits imposed by ecological
resources must be acknowledged. At
a minimum, this requires junking the
Solow-Stiglitz production function
and substituting that of Georgescu-
Roegen. Externalities are not very important
in an “empty world,” but in a “full
world” ignored externalities can offset
the value of increased output. When
the last species is gone, how is it replenished?
How are exhausted oil and mineral
deposits refilled? How are destroyed
rain forests replanted? How are polluted
air, water, and oceans reclaimed?
Unless one believes in science fiction,
the answer to these questions is only
through the passage of time, in some cases
millions of years. To treat resources created
by nature over millions of years as
devoid of costs other than the costs of extraction
is absurd. If economics is to be of
any use to humanity, it must cease being
absurd.
CP
Paul Craig Roberts has a B.S. from
Georgia Tech, and a Ph.D. in economics
from the University of Virginia. As
assistant secretary of the Treasury in the
Reagan administration, his policy innovations
cured the stagflation that destroyed
Jimmy Carter’s presidency. He can be
reached at PaulCraigRoberts@yahoo.com.
************************************************************
ous Times people, most notably assistant
financial editor Gretchen Morgenson,
were “pretty much in the know.” It is
not clear whether he had been in direct
touch with any of them, but this
would seem to be a reasonable inference.
For the record, Morgenson, who in 2002
won a Pulitzer prize for her “trenchant
and incisive” coverage of Wall Street, has
told CounterPunch she can’t recall ever
hearing from Markopolos. She added: “If
you could be more specific about when
it was that he supposedly contacted me
I would be grateful.” As it happens, the
date is not indicated in the correspondence
and Markopolos is incommunicado.
As for the Journal, the closest it has
come to acknowledging its own role
has been in two sentences summarizing
Markopolos’ complaints about its inaction.
In covering Markopolos’ oral testimony
in early February, it wrote: “Mr.
Markopolos said that in December 2005,
he contacted a reporter at The Wall
Street Journal, resulting in a number of
phone calls and emails. Mr. Markopolos
said he thinks that senior editors prevented
the reporter from the newspaper’s
Washington Bureau from flying to
fingleton continued from page 1
3
february 1-15, 2009
Boston to meet and discuss the Madoff
issue.”
Fair enough – but the Journal
didn’t leave it there. It went on: ”A
spokesman for Dow Jones & Co., publisher
of The Wall Street Journal, said Mr.
Markopolos was ‘ill-informed and incorrect’
but declined to comment further on
Mr. Markopolos’ statements.”
Dow Jones’ comment is a functional
lie – an outrageous and deliberate distortion.
Anyone who studies the full context
can see that the “ill-informed and incorrect”
epithets can only relate to the one
implausible inference in Markopolos’
testimony, his idea (unmentioned in the
Journal report) that Journal staff may
have feared for their personal safety.
Markopolos feared for his own safety,
but, as a lone whistleblower struggling to
get the attention of the SEC, he had more
to worry about than a major national institution.
The main thrust of Markopolos’
allegation – that the Journal wantonly ignored
the biggest investment scandal in
modern times – is in no way addressed in
the Dow Jones comment.
The former executive editor of the
Journal, Paul Steiger, who ran the paper
in the relevant years, has disavowed
personal responsibility for the fiasco. In
an email message to CounterPunch, he
wrote: “No mention of Markopolos’s initiative,
or indeed no mention of Madoff,
came up the line to me, nor would it be
expected to. Only if the Washington bureau
had decided to pursue a story would
that happen.” He added that John Wilke
was “an outstanding journalist” who at
the time was producing “a string of deep,
exclusive reports about such things as
the misuse of earmarks.” If Steiger’s comments
are meant to exonerate Wilke,
by the same token they appear to spotlight
Gerald Seib and Nikhil Deogun,
who served respectively as the chief and
deputy chief of the Washington Bureau
in the years concerned. Asked to comment,
Deogun referred CounterPunch
to the Journal’s spokesman who, in turn,
is not prepared to speak for attribution.
Meanwhile, Seib flatly denies responsibility.
Responding to CounterPunch, he
wrote: “Your question appears to simply
accept the premise that a Markopolos
initiative was ‘sidetracked,’ and then asks
me to comment on that. So let me try
to be as clear as possible here: It is completely,
absolutely, 100% incorrect to say
that some reporting initiative was sidetracked.
The notion is flatly wrong.”
It may be worth noting that
both men have prospered mightily
since Rupert Murdoch took control
of the Journal in 2007. Seib has rocketed
to assistant managing editor and
is a fixture on Murdoch’s Fox Business
News channel. As for Deogun, he was
promoted to the plum assignment of foreign
editor while still not yet 40. Given
that the testimony of both Steiger and
Markopolos seems fairly solid, it would
appear that either Seib or Deogun or perhaps
both are in the soup, with negative
implications for Murdoch’s efforts to rebuild
morale at 200 Liberty Street. A fair
inference is that Wilke may have had his
calendar loaded down with busy-work
chasing political minnows in Washington
when, with leadership and the help of a
numerate colleague, he could have reeled
in a financial whale in New York.
How could any capable editor
fail to see the possibilities
in the Markopolos dossier? Ryan
Chittum, a blogger at the Columbia
Journalism Review’s website, has opined
that the fault lay with – get this –
Markopolos! Markopolos was not credible
enough, apparently – this despite the
fact that he was an acknowledged expert
in options trading, the field where Madoff
was ostensibly performing such alchemy.
Let’s first note that Chittum may have
an axe to grind. He is not only a former
Wall Street Journal reporter, but his
work has been published at ProPublica,
a website that just happens to be run by
Paul Steiger.
Was Markopolos really such a hopeless
witness? Not in the eyes of Mike
Garrity, head of the SEC’s outpost in
Boston, where Markopolos lives. Garrity
was clearly impressed by Markopolos and
did his best to help. Unfortunately, he
could not do anything directly because
jurisdiction lay with the SEC’s New York
branch. In a telling departure from the
usual pattern of bureaucratic indifference
in such circumstances, however,
he repeatedly encouraged Markopolos
to keep banging on New York’s door.
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 diffi culty 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.
For a start, what inference is to be
drawn from the fact that, as we have already
noted, Madoff was blacklisted by
some of Wall Street’s top securities houses
– and this despite a long record of producing
ostensibly some of the highest returns
of any fund manager in the world?
Then there is the fact that even
as Madoff ’s investment business ballooned,
he stuck with a three-person
hole-in-the-wall auditing outfit run by
his elderly brother-in-law (Red Flag
17). Anyone who manages $1 million of
other people’s money, let alone $50 billion,
finds it a useful earnest of good faith
to have his books audited by an independent
and preferably well-known firm. As
Markopolos pointed out, Madoff’s eccentric
choice of auditor became an explicit
issue when European bankers, acting on
behalf of an Arab client, requested an independent
audit. Madoff showed them
the door, thereby passing up the opportunity
to rake in a large chunk of cash.
The journalistic significance of Red
Flag 17 is that, like many of the other
lower ranked flags in the Markopolos
dossier, it was easy to check out. In fact,
unless Madoff chose to stonewall, it
could have been instantly confirmed with
a single phone call. Although in itself
it did not prove very much, it strongly
suggested that further inquiries would
4
february 1-15, 2009
be well worth the effort.
In his aversion to normal reality
checking, Madoff ran true to the classic
Ponzi type. Classic, too, was his excuse.
His investment methods, he explained,
were proprietary, and if he
let independent auditors in, he risked losing
his secrets to competitors. This was,
of course, balderdash. Imagine how such
an excuse might play in any other field.
Suppose a golfer claimed his swing was
a secret, so no one except a 78-year-old
relative should be permitted to witness
his play and check his score. The point
is absurd, and in real life we know that
Tiger Woods and Phil Mickelson have no
problem with lesser mortals dissecting
their play. The full absurdity of Madoff’s
excuse is obvious when you realize
that no genuinely successful investor has
ever had much fear of auditors. An auditor
comes in after the fact – weeks, if
not months, after the balance sheet date
– to confirm that assets claimed to have
been held at said date were actually there.
They cannot outBuffett Buffett simply by
knowing what stocks Buffett held three
weeks ago. Still less can they hope to
reverse-engineer the financial logic behind
Buffett’s stock-picking. Indeed, even
though Buffett has gone to some lengths
to explain his techniques, remarkably
few of his disciples have had much luck
emulating him. Madoff ’s talk of a secret
investment method was one of the
oldest and most transparent tricks in
the fraudster’s repertoire – a minimally
disguised version of the imaginative
scam, perpetrated during the South Sea
Bubble in eighteenth-century London, in
which a stock promoter announced the
launch of ”a company for carrying on an
undertaking of great advantage, but nobody
to know what it is.”
Of course, defenders of the press’s
virtue point out that Madoff was widely
trusted by society figures. Certainly, he
had no trouble relieving the great and
the good of their wallets. Not least of
his victims were such familiar names
as CNN talker extraordinaire Larry
King and Dangerous Liaisons star John
Malkovich. But in common with most
of Madoff’s other celebrity victims, neither
King nor Malkovich is a economic
sage. As any Wall Streeter can tell on
sight, they fit in a different category, and
there’s one born every minute. (It is only
fair to point out that celebrities seem particularly
vulnerable to Ponzi schemes. Sir
Any intelligent young
financial reporter
should have had no
difficulty understanding
Markopolos’ argument.
Isaac Newton was among countless bigwigs
taken to the cleaners in the South
Sea Bubble. Ever afterward, he had the
vapors any time the subject came up.)
Of more forensic interest is the fact
that some financial notables got their
coattails caught in Bernie’s wringer.
One example was Henry Kaufman,
a former top Salomon Brothers executive
whose pessimistic commentaries
on America’s economic prospects in
the Carter years earned him the soubriquet
Dr. Doom. Then there is the ubiquitous
Mort Zuckerman, publisher of the
New York Daily News, a man who made
his pile in Boston real estate and is thus
presumably sensitive to scam artists. If
Madoff’s Ponzi act was good enough to
fool Zuckerman, surely the press has
a secure alibi? Actually, no.
The point is that Markopolos’ dossier
was not available to Zuckerman. Had it
been, his money would surely have been
out of the Lipstick building in a New
York minute.
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 optionsbased
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.
Although Madoff ’s investors knew
nothing of the 29-flag dossier, the more
sophisticated of them surely never swallowed
his presentation of himself as a fi-
nancial magician. As the author Michael
Lewis has pointed out, it is a fair bet
that they always assumed he was frontrunning.
In other words they realized
he was a crook but just not in a way that
threatened their wallets. To understand
this line of reasoning, one must first realize
that Madoff was not only a fund
manager but a broker/dealer, and a big
one at that. Front-running refers to the
practice by brokers of exploiting privileged
knowledge about future buying
and selling by large financial institutions
to make private profits. A typical
instance might start when a broker receives
a big order from an institutional
investor to buy shares in, say, IBM. This is
more or less guaranteed to send the price
shooting up, and if the broker can nip in
seconds ahead with an order for his personal
account, he or she is guaranteed an
almost certain, risk-free, and instantaneous
profit. Front-running is pandemic
on Wall Street and, as Madoff’s more
sophisticated investors realized, almost
no one was better placed to profit from
it than Madoff. Basically, they assumed
he was turbocharging his fund management
performance, thanks to his brokerage
knowledge. Of course, in theory he
might have been prosecuted but, given
what a shambles American financial regulation
had become, the risk was slight.
In any case, as Michael Lewis has argued,
his investors may have reasoned that the
worst that could happen was that “a good
thing would come to an end.”
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 ar-
5
february 1-15, 2009
 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”).
Although Markopolos had yet to surface
as a potential press source, he was
already way ahead. As he realized, frontrunning
only really works where the
front-runner is small in relation to the
institutional orders he exploits (otherwise,
he can’t get out of his own way).
This is where Markopolos’ sleuthing
paid off. He knew that although Madoff
tried to pass himself off as a small player
who was merely investing on behalf of
a few friends and relatives (an alibi that
tended to reassure the sophisticates who
believed he was front-running), by 2001
the amount of new money he was pulling
in was already torrential.
As Markopolos went on to document,
Madoff had structured his business to
make it difficult for all but the most determined
investigator to fathom its true
scale. In particular, he relied on a slew of
so-called feeder funds to bring in most
of the new money. Investors in many
of these funds never knew where their
money ended up.
The conclusion from all this is that
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. As a big donor to politicians and
charities, he undoubtedly had plenty of
surrogates with access to relevant journalists.
Then, there is the fact that cronyism
is rife both on Wall Street and in
Washington. On top of all this there was
the problem that the most damning aspects
of Markopolos analysis would have
gone over many heads at an editorial
conference.
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?
CP
Eamonn Fingleton, a former editor
for Forbes magazine and the Financial
Times, is the author of In the Jaws of the
Dragon: America’s Fate in the Coming
Era of Chinese Hegemony (New York: St.
Martin’s Press, 2008). He can be reached
at efingleton@gmail.com, or via his website,
www.unsustainable.org.
6
february 1-15, 2009