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*'''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: | *'''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. | ||
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:*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 | ||
==In bed with the lawyers and accountants== | |||
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 | ||
==[[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. | ||
*Lavish lifestyle, private jets, fast cars. | *Lavish lifestyle, private jets, fast cars. | ||
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*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 | ||
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*[[Low quality earnings]] — enthusiasm for sophisticated or state-of-the-art accounting. | *[[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 | ||
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*'''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. | *'''Weirdo whistleblowers''': The people who called it out were unglamorous, outsiders, easy to categorise as cranks. | ||
:*Harry Markopolos on Madoff | :*Harry Markopolos on Madoff | ||
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*'''SoftBank''': SoftBank is an investor! | *'''SoftBank''': SoftBank is an investor! | ||
==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 | ||
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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== | |||
*'''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: | ||
{{devil}} | {{devil}} | ||