The dog in the night time: Difference between revisions

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?

*October 1987

*Credit crunch of 2007

==Theories==

===Disbelief-suspenders===

==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:  

**FDA on Theranos.

**Moody’s on the GFC

**[[BaFin]] on [[WireCard]]

*'''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

*'''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?

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

*Big eight accounting firms and S&L firms

==[[This time it’s different]]==

==Hiding in plain sight==

*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”.

**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.

*'''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.

*'''Weirdo whistleblowers''': The people who called it out were unglamorous, outsiders, easy to categorise as cranks.  

:*Harry Markopolos on Madoff

:*Shorts on the Big Short

:*Twitter groups, bloggers

*'''Short-sellers are the enemy''': narratising the short-sellers as venal and self-interested (as if any investors aren’t!)

==Porkie Indicators==

*'''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)

*'''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?

:*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==

*'''Interconnectedness of red-flags

With all the checks and balances in financial regulation, how did: