The dog in the night time

Podcast idea - look at unusual anomalies in the markets and ask why they persist

Categories

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

Fraudsters

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:
  • SEC on Madoff.
  • FDA on Theranos.
  • Moody’s on the GFC
  • Auditors for Enron - see also the agency problem.
  • BaFin on WireCard
• 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

(b) are incentivised in conflict to your interests (by retrocession commission from end investment and upfront commission from client)

• Compliance with ad hoc control mechanisms: presence of ad hoc proxy measures with which the plan was formally compliant: credit ratings, certifications, audit reports Sharpe ratios, "official" measurements which substitute for and *represent* actual intractable data with a simplified measurement or derivative, often provided by a third party not itself in possession of the intractable data.
• The velvet rope: the hoi polloi not welcome here. Celebrities only. See also “I don't want your business oh go on then”
• Affinity fraud: He's one of us.
• 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?
• 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. See also "this time is different".
• Inspiring public speakers - hokey aspirational hogwash mixed with virtue signalling bs. - we work: we don't discriminate on age, sex, race and together we are unstoppable. The virtue signalling is a BS detector bypass.

Nothing to see here folks

• Narrative failures: Control oversights brought about by overzealous application of the theory of the game.
  • LTCM: reliance on Black Scholars 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: Libor, Kerviel, Abodolo.
• Weird whistleblowers: The people who called it out were unglamorous, outsiders, easy to catagorise as cranks

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.

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 ---?

Cloaking devices

• 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)
• 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?

All is not well

• High turnover: Especially when combined with confidentiality. Workplace bullying etc.
• Who’s that guy?: A position of unusual influence with a flaky backstory
• 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/juniorisation of risk control functions: 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 for controller group: financial reporting as a profit centre (Enron)

Correlation risks

• Interconnectedness of red-flags

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

Examples

• Bernie Madoff get away with it? - Author Harry Markopoulous
• Nick Leeson
• Theranos
• Enron
• Lance Armstrong
• Dot com bust
• CDOs
• Libor

Upcoming?

• Blippar
• WeWork
• Uber

Pervos

• Jimmy Savile

Does regulation work? - Netting - Diversity