Mass. investor saw inside Madoff scam

His repeated warnings that Wall Street money manager Bernard Madoff was running a giant Ponzi scheme have cast Harry Markopolos as an unheeded prophet.

But people who know or worked with Markopolos say it wasn't prescience that helped him foresee the collapse of Madoff's alleged $50 billion fraud. Instead, they say diligence and a strong moral sense drove his quixotic, nine-year quest to alert regulators about Madoff.

"He followed through on everything he ever did. He never let up," said his mother, Georgia Markopolos, in an interview Thursday. "Some kids just let it go if it's too hard, but he wouldn't do that."

"He feels very sorry for these people that got taken," she added. "It wouldn't have happened if they would have listened to him long ago."

Markopolos waged a remarkable battle to uncover fraud at Madoff's operation, sounding the alarm back in 1999 and continuing with his warnings all through this decade. The government never acted, Madoff continued his ways, and people lost billions.

Markopolos reached his conclusion with the help of mathematicians like Dan diBartolomeo, whose analysis of the Madoff's methods in 1999 helped fuel Markopolos' suspicions.

"People should have seen the writing on the wall," diBartolomeo said.

Markopolos did not respond to multiple e-mail or phone requests for an interview.

The 52-year-old resident of Whitman, about 20 miles south of Boston, grew up in Erie, Pa., the oldest of three siblings.

His mother said her son was a little nerdy as a child, as well as occasionally mischievous and unfailingly honest. She recalled an incident where he pelted his elementary school with eggs in the middle of winter, but no one saw him. Time passed with no confession from anyone, until Markopolos stepped forward, admitted he did it, and cleaned the school himself.

Markopolos became an adept hunter and fisherman as he grew up, like many from the rural area, but also showed early aptitude at academics, as well as a willingness to question authority.

"He used to challenge the teachers," his mother said with a laugh. "He'd tell them he had the right answers, but they had the wrong questions."

Markopolos graduated from Cathedral Prep in Erie in 1974, then in 1981 from Loyola College in Maryland, which his mother said he paid for on his own. After time in the Army and in the financial services field, he earned a graduate management degree from Boston College in 1997.

By 1999, he was working for Rampart Investment Management Co. and charged with doing competitive research on Bernard L. Madoff Investment Securities, which was using a similar investment strategy as his company, but far outperforming it. Part of Markopolos's research included a visit to diBartolomeo, whom he knew from his professional circle.

"I think he was curious about how his competitor was doing so much better than they were," diBartolomeo recalled.

Researching Madoff's numbers, using data the firm distributed to prospective investors, diBartolomeo concluded within hours that it was impossible for Madoff to get the returns he reported while using the strategy he said he used.

"As the market goes up and down, this strategy should have done a little better or a little worse, just like everybody else," he said. "Instead, it appeared to be indifferent as to whether the market went up or down. They made money all the time."

Markopolos complained to the SEC's Boston office in May 1999, saying it was impossible for the kind of profit Madoff was reporting to have been gained legally.

But Madoff continued to thrive, even as Markopolos continued to pursue the case.

In 2005, he submitted a report to the SEC saying it was "highly likely" that "Madoff Securities is the world's largest Ponzi scheme." In the report, he says he knew his research could ruin people's careers and asked the SEC be discreet about circulating the report and his name.

"I am worried about the personal safety of myself and my family," he wrote.

The report highlights 29 "red flags" about Madoff's business, among them the returns of a third-party hedge fund managed by Madoff's firm which had negative returns in just seven on the 174 months Markopolos analyzed.

"No major league baseball hitter bats .960, no NFL team has ever gone 96 wins and only 4 losses over a 100 game span, and you can bet everything you own that no money manager is up 96% of the months either," he said.

His warnings were heard too late, and he's become a symbol of a botched oversight of Madoff by the SEC. His mother says the father of three boys under 5 has been bombarded by media requests. Now, a man who tried to be heard for years is going to lay low for a bit, she said.

Fed cuts target for key rate to record low

The Federal Reserve has cut its target for a key interest rate to the lowest level on record and pledged to use "all available tools" to combat a severe financial crisis and prolonged recession.

The central bank on Tuesday said it had reduced the federal funds rate, the interest that banks charge each other, to a range of zero to 0.25 percent. That is down from the 1 percent target rate in effect since the last meeting in October. Many analysts had expected the Fed to make a smaller cut to 0.5 percent.

The Fed's aggressive move was greeted enthusiastically by Wall Street. The Dow Jones industrial average rose about 210 points in late-afternoon trading.

The Fed's action and statement made clear that economic conditions have worsened since its last meeting in October.

Federal Reserve Chairman Ben Bernanke and his colleagues said they will use unconventional methods to try to contain a financial crisis that is the worst since the 1930s and a recession that is already the longest in a quarter-century. For example, the Fed last month said it planned to purchase up to $600 billion in direct debt and mortgage-backed securities issued by big financial players including Fannie Mae and Freddie Mac in an effort to boost the availability of mortgage loans.

That move was one of a series the central bank has taken to increase its loans by hundreds of billions of dollars as a way to deal with the worst financial crisis to hit the country in more than 70 years.

The Fed on Tuesday also made clear that it intends to keep the funds rate at extremely low levels.

"The committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time," the central bank's panel that sets interest rates said in a statement.

Even before the announcement of a lower target, the funds rate has been trading well below the old target of 1 percent. For November, the funds rate had averaged 0.39 percent. Analysts said it was likely to fall further with the Fed setting the new target as low as zero.

The Fed's decision is expected to be quickly matched by a reduction in banks' prime lending rate, the benchmark rate for millions of business and consumer loans. Before the Fed announcement, the prime rate stood at 4 percent.

The Fed has never pushed its target for the federal funds rate as low as zero to 0.25 percent. The lowest target rate before had been 1 percent, a level seen only once before in the past half-century.

Given how low interest rates are, the central bank said it planned to use a variety of unconventional methods to flood the banking system with credit and drive interest rates lower.

"The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability," the Fed said.

The announcement on the deployment of unconventional methods had been expected given that Bernanke and other Fed officials have sought in recent comments to let financial markets know that the central bank will not be out of ammunition to battle the economic downturn even with the funds rate at such low levels.

In its statement Tuesday, the Fed said that since its last meeting in late October, "labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment and industrial production have declined. Financial markets remain quite strained and credit conditions tight."

The central bank acknowledged that it had room to battle the economic weakness because inflation pressures have "diminished appreciably" as the price of energy and other commodities has fallen sharply.

The Fed action came only hours after the government announced that consumer prices dropped by a record amount of 1.7 percent in November, reflecting a record decline in the price of gasoline and other energy products.

Fed eyes record low interest rates to battle deflation

All eyes will be on the feds to see if they lower interest rates today. But at this stage that we're in, will it really help? With all the turmoil going on in financial news right now, it's hard for me to say.

Many analysts are anticipating a half-point cut, which still would be an all-time low for the rate.

But the Fed's low rates have not yet filtered into many consumer and business loans, and the central bank is likely to expand its arsenal of extraordinary actions to break the global credit crunch and avert a crippling deflationary spiral, say analysts.

"The Fed basically lost control of the rate after the Lehman Brothers failure on September 15," said Jeremy Siegel, a University of Pennsylvania economist and adviser to Rittenhouse Asset Management.

"With the effective real market rate now at zero, what difference does a cut make?" said John Mauldin, president of Millennium Wave Advisors.

"I hope they do the right thing and go ahead and cut at least 75 basis points, if not more. That would stop the speculation and let them move on to quantitative easing and other allied policies."

Alleged Madoff fraud has worldwide exposure

The 70-year-old Madoff, well respected in the investment community after serving as chairman of the Nasdaq Stock Market, was arrested Thursday in what prosecutors say was a $50 billion scheme to defraud investors. Some investors claim they've been wiped out, while others are still likely to come forward.

The alleged victims who sunk cash into veteran Wall Street money manager Bernard Madoff's investment pool include real estate magnate Mortimer Zuckerman, the foundation of Nobel laureate Elie Wiesel, and a charity of movie director Steven Spielberg, according to The Wall Street Journal.

On Friday, representatives from major U.S. banks -- Bank of America Corp., Citigroup Inc., PNC Financial Services Group Inc. and Merrill Lynch & Co. -- declined to comment on whether they had exposure to Madoff's company. Both BlackRock Inc. and Goldman Sachs Group Inc. said they had no exposure.

Among those overseas confirming exposure on Monday, Banco Santander, the largest bank in the euro zone by market capitalization, said its clients have 2.33 billion euros ($3.07 billion) in exposure with Madoff, mostly through a fund called Optimal Strategic US Equity.

The Wall Street Journal, citing a person familiar with the matter, said Mortimer Zuckerman, the chairman of real estate firm Boston Properties and owner of the New York Daily News and U.S. News & World Report, had significant exposure through a fund that invested substantially all of its assets with Madoff.

Reports from Florida to Minnesota included profiles of ordinary investors who gave Madoff their money. Some had been friends with him for decades, others were able to invest because they were a friend of a friend. They told stories of losing everything from $40,000 to an entire nest egg worth well over $1 million.

Morgan Stanley, Wells Fargo & Co., Comerica Inc. and U.S. Bancorp did not return calls seeking comment.