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{{a| | {{a|disaster|}}Theme tune: born under a bad sign/crawling kingsnake - [[dangerboy]] | ||
The idea is not to look at the | 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? | ||
The idea is not to look at the progenitors of these crashes, so much as ''the rest of us''. Why did gatekeepers, investors, regulators miss it? Why did our control mechanisms fail? | |||
==Examples== | ==Examples== | ||
===Crashes === | ===Crashes === | ||
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*October 1987 | *October 1987 | ||
*Credit crunch of 2007 | *Credit crunch of 2007 | ||
==Theories== | ==Theories== | ||
===Disbelief-suspenders=== | ===Disbelief-suspenders=== | ||
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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 | ||
*'''[[The noble believer]]''': The credible person who is duped and who unwittingly enables the fraud, The prison of belief. | |||
*'''[[The big lie]]''': The lie so big it couldn't ''possibly'' be a lie. Could it? | |||
==Oh come on, Ref== | |||
*'''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]] | ||
*'''oversized management committee''': a top heavy management structure with multiple board members whose function is effectively to to diffuse away responsibility rather than accept it, thereby giving cover 2 to micro dictator behaviour. See: {{author|Peter Thiel}} — {{ | *'''oversized management committee''': a top heavy management structure with multiple board members whose function is effectively to to diffuse away responsibility rather than accept it, thereby giving cover 2 to micro dictator behaviour. See: {{author|Peter Thiel}} — {{br|Zero to One}} | ||
*'''Referees with personal skin in the game''': where referees have (wittingly or otherwise) committed personally to the enterprise, and are thus incentivised to find ''another'' explanation that doesn’t make them look bad | *'''Referees with personal skin in the game''': where referees have (wittingly or otherwise) committed personally to the enterprise, and are thus incentivised to find ''another'' explanation that doesn’t make them look bad | ||
:*Regulators on the Savings and Loan scandal | :*Regulators on the Savings and Loan scandal | ||
| Line 56: | Line 40: | ||
:*competing regulators are incentivised to keep businesses they regulate “onside”; | :*competing regulators are incentivised to keep businesses they regulate “onside”; | ||
:*business finance political campaigns and indirectly influence the leadership of regulators - S&L scandal | :*business finance political campaigns and indirectly influence the leadership of regulators - S&L scandal | ||
*'''Who is going to say no?''': where is the person inside the organisation who can stand up to the visionary? Who is Lear’s Fool? | |||
==In bed with the lawyers and accountants/my special friend== | |||
A very cosy relationship with a single law firm, accounting firm or management consultancy firm. Especially if there is a history of parachuting senior personnel of one organisation into the other — senior partner becomes general counsel, etc. Especially if the law firm is otherwise not a significant player. Points for style: cosy relations with single firms in all of the above (top marks, [[Enron]]!) | A very cosy relationship with a single law firm, accounting firm or management consultancy firm. Especially if there is a history of parachuting senior personnel of one organisation into the other — senior partner becomes general counsel, etc. Especially if the law firm is otherwise not a significant player. Points for style: cosy relations with single firms in all of the above (top marks, [[Enron]]!) | ||
*Enron and McKinsey; Vinson & Elkins; Arthur Andersen | *Enron and McKinsey; Vinson & Elkins; Arthur Andersen | ||
*Big eight accounting firms and S&L firms | *Big eight accounting firms and S&L firms | ||
*[[Greensill]] - The Greensill Capital’s Australian parent was audited by Nexia Sydney. Its London-based operating entity was audited by Saffery Champness, a UK partner of the Nexia Group. | |||
==[[This time it’s different]]== | |||
A [[paradigm]] shift as part of the [[narrative]]. We’ve banished risk. The internet has changed economics forever. | A [[paradigm]] shift as part of the [[narrative]]. We’ve banished risk. The internet has changed economics forever. | ||
*Enron: mark-to-market accounting | *Enron: mark-to-market accounting | ||
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*Debatable product quality/differentiators — low barriers to entry/inability to create monopoly conditions in which to seek rent | *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 | *Publicity courting, egotistical CEO: Adam Neumann, Jeff Skilling, Lex Greensill | ||
*Lavish lifestyle, private jets, fast cars: Greensill’s suits and fleet of private jets. | |||
*Spends a lot of time at conferences, Davos, wef: Greensill again! | |||
*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”. | *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”. | ||
==Money, money, money== | |||
*No, or little, like actual ''profit''. You know, ''yet''. | *No, or little, like actual ''profit''. You know, ''yet''. | ||
*Management compensation package out of line with ;''actual'' (not ''aspirational'') peers | *Management compensation package out of line with ;''actual'' (not ''aspirational'') peers | ||
| Line 81: | Line 69: | ||
*Just-in-time financing | *Just-in-time financing | ||
*High debt-to-equity ratio | *High debt-to-equity ratio | ||
*enthusiasm for sophisticated or state-of-the-art accounting. | *[[Duration mismatch]] — long-term assets funded by short-term liabilities — subprime mortgages; WeWork. | ||
*[[Low quality earnings]] — enthusiasm for sophisticated or state-of-the-art accounting. | |||
==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 | ||
**WireCard: BaFin not able to believe that this could be corporate fraud when "mendacious short-selling" by "locust" hedge funds - aided and abetted by, ahh, investigative FT journalists - fit the BaFin's regulatory world view and seemed a better story. | **WireCard: BaFin not able to believe that this could be corporate fraud when "mendacious short-selling" by "locust" hedge funds - aided and abetted by, ahh, investigative FT journalists - fit the BaFin's regulatory world view and seemed a better story. | ||
*'''Sleepy backwater''': It’s a boring and unglamorous part of the operational network. No one’s taking any risks there: Libor, Kerviel, Abodolo. | **Enron: mtm up front realisation of lifetime deal pnl | ||
*'''Sleepy backwater''': It’s a boring and unglamorous part of the operational network. No one’s taking any risks there: [[Barclays Programme Limit]], [[Excess margin]] return in [[Archegos]], [[Libor]], Kerviel, Abodolo. | |||
==Cassandras== | |||
*'''Weirdo whistleblowers''': The people who called it out were unglamorous, outsiders, easy to categorise as cranks. | *'''Weirdo whistleblowers''': The people who called it out were unglamorous, outsiders, easy to categorise as cranks. | ||
:*Harry Markopolos on Madoff | :*Harry Markopolos on Madoff | ||
:*Daniel Sheard | |||
:*Shorts on the Big Short | :*Shorts on the Big Short | ||
:*Twitter groups, bloggers | :*Twitter groups, bloggers | ||
*'''Short-sellers are the enemy''': narratising the short-sellers as venal and self-interested (as if any investors aren’t!) | *'''Short-sellers are the enemy''': narratising the short-sellers as venal and self-interested (as if any investors aren’t!) | ||
*'''SoftBank''': SoftBank is an investor! | *'''SoftBank''': SoftBank is an investor! Greensill, Wirecard, WeWork | ||
==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, WireCard | ||
*'''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. | ||
*'''Reality distortion field''': Charismatic leader can do no wrong, unusually able to divert attention from potential issues | *'''Reality distortion field''': Charismatic leader can do no wrong, unusually able to divert attention from potential issues | ||
*'''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) | ||
*'''It’s the law''': I can’t possibly tell you because of [[General Data Protection Regulation|GPDR]], Health & Safety, potential [[Unpublished price-sensitive information|market abuse]], [[Antitrust|anti-trust]] and so on. | |||
*'''Hostility''': combative/aggressive demeanour to criticism | *'''Hostility''': combative/aggressive demeanour to criticism | ||
*'''This is different how?''': To what extent is “fake it till you make it” bravura, and how much is it confidence in your ability to sort it out later, or big opportunities. Is there a difference? | *'''This is different how?''': To what extent is “fake it till you make it” bravura, and how much is it confidence in your ability to sort it out later, or big opportunities. Is there a difference? | ||
*'''[[Performative]], [[virtue signalling]] behaviour''': making it difficult to quibble/criticise without seeming politically incorrect. | |||
===All is not well=== | ===All is not well=== | ||
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:Internal competition/eat what you kill/personal ambition/territoriality | :Internal competition/eat what you kill/personal ambition/territoriality | ||
==Risk control defeat devices== | |||
:*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. | :*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) | :*'''Misaligned incentives''': financial reporting as a profit centre (Enron) | ||
===Correlation risks | ==Well fancy seeing you here== | ||
*[[McKinsey]] and [[McKinsey]] alumni | |||
*[[Ayn Rand]] fanboys | |||
==Correlation risks== | |||
*'''Interconnectedness of red-flags | *'''Interconnectedness of red-flags | ||
With all the checks and balances in financial regulation, how did: | With all the checks and balances in financial regulation, how did: | ||
==The disaster cafe== | |||
{{ | <small> | ||
{{Roll of honour}} | |||
</small> | |||