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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? | 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 progentortis of these crashes, so much as ''the rest of us''. Why did gatekeepers, investors, regulators miss it? Why did our control mechanisms fail? | |||
==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]] | |||
*[[Bernie Madoff]] get away with it? - Author Harry Markopoulous | |||
*Nick Leeson | |||
*Theranos | |||
*Enron | |||
*Lance Armstrong | |||
*Dot com bust | |||
*CDOs | |||
*Libor | |||
===Upcoming? === | |||
*Blippar | |||
*WeWork | |||
*Uber | |||
*Softbank | |||
*Tesla | |||
==Theories== | ==Theories== | ||
===Disbelief-suspenders=== | ===Disbelief-suspenders=== | ||
*'''[[Agency problem - Risk Article|Reliance on agents and intermediaries]]''': Reliance on trusted intermediaries as experts to place your funds so hold themselves out as experts and imply that they are taking responsibility for your interests but | *'''[[Agency problem - Risk Article|Reliance on agents and intermediaries]]''': Reliance on trusted intermediaries as experts to place your funds so hold themselves out as experts and imply that they are taking responsibility for your interests but | ||
:(a) expressly (but discreetly) disclaim that responsibility and | :(a) expressly (but discreetly) disclaim that responsibility and | ||
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*'''I don’t want your business''': ... Oh go on then, really, if you must, just as a favour to you, you understand. | *'''I don’t want your business''': ... Oh go on then, really, if you must, just as a favour to you, you understand. | ||
*'''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 | ||
===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: | |||
**SEC on Madoff. | |||
**FDA on Theranos. | |||
**Moody’s on the GFC | |||
**[[Auditor]]s for [[Enron]] - see also the agency problem. | |||
**[[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 | |||
:[[BaFin]] on [[Wirecard]] | |||
===[[This time it’s different]]=== | ===[[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 | ||
*Dotcom bust: traditional valuation models | *Dotcom bust: traditional valuation models | ||
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===Money, money, money=== | ===Money, money, money=== | ||
*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 | ||
*Compensation based on stock-price or top-line growth, incentivising short term behaviour | *Compensation based on stock-price or top-line growth, incentivising short term behaviour | ||
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*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. | |||
===Nothing to see here folks=== | ===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. | ||
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**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. | *'''Sleepy backwater''': It’s a boring and unglamorous part of the operational network. No one’s taking any risks there: Libor, Kerviel, Abodolo. | ||
*''' | |||
===Cassandras=== | |||
*'''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=== | ===Porkie Indicators=== | ||
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*'''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? | ||
===All is not well=== | |||
*'''High turnover''': Especially when combined with confidentiality. Especially risk/control personnel. 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 | ||
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:*'''Misaligned incentives''': financial reporting as a profit centre (Enron) | :*'''Misaligned incentives''': financial reporting as a profit centre (Enron) | ||
===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: | ||