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The dog in the night time: Difference between revisions
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Podcast idea - look at unusual anomalies in the markets and ask why they persist | Podcast idea - look at unusual anomalies in the markets and ask why they persist. What are the red-flags that an out and out fraud, pyramid, ponzi scheme is going on? are there some consistent themes? | ||
==Theories== | |||
== | ===Disbelief-suspenders=== | ||
*'''Over-reliance on “other adults”''': We imagine regulators/rating agencies are better resourced, more watchful, more powerful, more talented and less human than they are. Examples: | *'''Over-reliance on “other adults”''': We imagine regulators/rating agencies are better resourced, more watchful, more powerful, more talented and less human than they are. Examples: | ||
**SEC on Madoff. | **SEC on Madoff. | ||
**FDA on Theranos. | **FDA on Theranos. | ||
**Moody’s on the GFC | **Moody’s on the GFC | ||
**[[Auditor]]s for [[Enron]] - see also the agency problem. | **[[Auditor]]s for [[Enron]] - see also the agency problem. | ||
**[[BaFin]] on WireCard | **[[BaFin]] on WireCard | ||
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*'''Credibility''': Connection top political figures or well-regarded community pillars. If George Schultz is on the board the company must be legit, right? We imagine community pillars have done their due diligence on our behalf? | *'''Credibility''': Connection top political figures or well-regarded community pillars. If George Schultz is on the board the company must be legit, right? We imagine community pillars have done their due diligence on our behalf? | ||
*'''Cult of personality''': A single Svengali, genius, Nobel prize-winners, NASDAQ chairmen, | *'''Cult of personality''': A single Svengali, genius, Nobel prize-winners, NASDAQ chairmen, | ||
===[[This time it’s different]]=== | |||
A paradigm shift as part of the narrative. We’ve banished risk. The internet has changed economics forever. | |||
*Enron: mark-to-market accounting | |||
*Dotcom bust: traditional valuation models | |||
* | *LTCM: option tail risk | ||
* | *They're techno trousers. They’re ex NASA'''. | ||
*Debatable product quality/differentiators — low barriers to entry/inability to create monopoly conditions in which to seek rent | |||
===Hiding in plain sight=== | |||
*Publicity courting, egotistical CEO. Lavish lifestyle. | |||
*Inspiring public speakers - hokey aspirational hogwash mixed with [[virtue signalling]] as a BS detector bypass. “we don’t discriminate on age, sex, race and together we are unstoppable”. | |||
====Nothing to see here folks | ===Money, money, money=== | ||
*Management compensation package out of line with ;''actual'' (not ''aspirational'') peers | |||
*Compensation based on stock-price or top-line growth, incentivising short term behaviour | |||
*Suggestions of cashflow trouble: especially if masked as “just in time financing” — delays in paying usual outgoings. | |||
*Just-in-time financing | |||
*High debt-to-equity ratio | |||
===Nothing to see here folks=== | |||
*'''Narrative failures''': Control oversights brought about by overzealous application of the theory of the game. | *'''Narrative failures''': Control oversights brought about by overzealous application of the theory of the game. | ||
**LTCM: reliance on Black Scholes notwithstanding it's failure to manage tail events | **LTCM: reliance on Black Scholes notwithstanding it's failure to manage tail events | ||
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*'''Weird whistleblowers''': The people who called it out were unglamorous, outsiders, easy to catagorise as cranks. Harry Markopolos | *'''Weird whistleblowers''': The people who called it out were unglamorous, outsiders, easy to catagorise as cranks. Harry Markopolos | ||
===Porkie Indicators=== | |||
*'''No errors''': no screw ups, no bad launches: everything is fine. Real companies have setbacks. Especially if defended with hostility - e.g., you threaten to ruin EVERYTHING with your questions. | *'''No errors''': no screw ups, no bad launches: everything is fine. Real companies have setbacks. Especially if defended with hostility - e.g., you threaten to ruin EVERYTHING with your questions. | ||
*Also implausibly steady rate of return over a period of time. Sea Madoff, Enron, AIG, WireCard | |||
Also implausibly steady rate of return over a period of time. Sea Madoff, Enron, AIG | |||
*'''The dog ate my homework''': Promised answers to your questions are delayed, derailed, lost or excused. There's an excuse for everything. The excuses are implausible/out of proportion with the question. (what's the most plausible explanation: The dog really did eat your homework or ---? | *'''The dog ate my homework''': Promised answers to your questions are delayed, derailed, lost or excused. There's an excuse for everything. The excuses are implausible/out of proportion with the question. (what's the most plausible explanation: The dog really did eat your homework or ---? | ||
===Cloaking devices=== | |||
*'''Micromanagement''': Single person unusually able to influence/control the narrative. | *'''Micromanagement''': Single person unusually able to influence/control the narrative. | ||
*'''Secrecy''': Insistence on confidentiality not just of unannounced plans but of entire operation. Black box operations. Masking the size of the operation (Madoff) or suggesting it is so secretive that you cannot know it (Theranos) | *'''Secrecy''': Insistence on confidentiality not just of unannounced plans but of entire operation. Black box operations. Masking the size of the operation (Madoff) or suggesting it is so secretive that you cannot know it (Theranos) | ||
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====All is not well==== | ====All is not well==== | ||
*'''High turnover''': Especially when combined with confidentiality. Workplace bullying etc. | *'''High turnover''': Especially when combined with confidentiality. Especially risk/control personnel. Workplace bullying etc. | ||
*'''Who’s that guy?''': A position of unusual influence with a flaky backstory | *'''Who’s that guy?''': A position of unusual influence with a flaky backstory | ||
*'''A big problem is a small one that you | *'''A big problem is a small one that you didn’t fix when you could have''': Often big problems start out as small problems, where a well-intended patch didn't play out. How disciplined is your organisation with sweating the little stuff. and what of the trade off between “bureaucracy” and “discipline with sweating the small stuff”? | ||
*''' | *'''Internal checks defeaters''': cultural/organisational factors undermining internal control mechanisms | ||
: | :Internal competition/eat what you kill/personal ambition/territoriality | ||
:*Specialisation/siloisation/ | |||
:* | ===Risk controllers=== | ||
:*Juniorisation: Specialisation/siloisation/jujniorisation of key risk personnel: miss emergent risks between functions, not understand bigger picture; not understand risks at all. Emphasis of form over substance: [[Playbook]] as a substitute for comprehension. | |||
:*'''Misaligned incentives''': financial reporting as a profit centre (Enron) | |||
====Correlation risks==== | ====Correlation risks==== | ||
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With all the checks and balances in financial regulation, how did: | With all the checks and balances in financial regulation, how did: | ||
==Examples== | |||
===Crashes === | |||
What caused the crashes and how were these risks managed and viewed before the crash? | |||
*Dotcom bust | |||
*Russia crash of 1998 | |||
*October 1987 | |||
*Credit crunch of 2007 | |||
===Frauds=== | |||
*[[WireCard]] | *[[WireCard]] | ||
*[[Bernie Madoff]] get away with it? - Author Harry Markopoulous | *[[Bernie Madoff]] get away with it? - Author Harry Markopoulous | ||
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*WeWork | *WeWork | ||
*Uber | *Uber | ||
*Softbank | |||
* | |||