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How to get away with financial fraud

88 points by oska 8y ago

rossdavidh 8y ago
The last paragraph in that article packs quite a punch.
- deleted 8y ago
  [deleted]
HIPisTheAnswer 8y ago
Easy: Call it a central bank.
- sonnyblarney 8y ago
  No, call it an ICO.
qrbLPHiKpiux 8y ago
Call it Bitcoin.
Danieru 8y ago
Good article worth your time to read, but I am not sure there is much for comments to discuss. From the title I expected the article to be preachy, but rather I found it informative and nuanced.
slededit 8y ago
The claim you could have caught Enron had you knew where to look in their financial statements was never backed up. Given the length of the article it would have been nice if they had quoted concrete facts instead of vaguely alluding to evidence that may or may not exist. There were also lots of concrete examples they could have used such as Crazy Eddie using their best looking secretaries to distract the auditors. Instead the article gives a false sense of certainty to what is really a long opinion piece. I say this even though I agree with its thesis.
partycoder 8y ago
Highly complicated synonyms help. e.g: instead of "shit", call it "subprime"
lifeisstillgood 8y ago
>> criticism that is at once overheated, ill-informed and entirely justified The article is pretty good, and relatively sensible - and I think there are occasionally attempts by accounting bodies to do the sensible thing and only recognise revenue when it actually arrives - but usually that means that the current profits would get restated for everyone and ... that would look bad.
fauigerzigerk 8y ago
Lengthy as it is the article fails to mention how the Libor fraud actually worked and that it had two very distinct motivations. Understating the interest a bank had to pay during a short dramatic period in 2008 when there could have been disastrous bank runs was the less problematic part of it. In my opinion, breaking the letter of the law to avoid a run on a healthy bank is the right decision. But that's not all there was. The article fails to mention the second part, which was traders trying to make a profit by colluding with those at the same bank who were in charge of setting (or rather influencing) the Libor rate. The bankers knew that they would be forgiven for the first part, and that's why they tried to use it as an excuse for the second part. That's also where Bob Diamond's claim about the BoE comes from.
- osrec 8y ago
  Quite right. I was at the bank at the time, and couldn't quite believe what my colleagues had done. It was most disappointing and inexcusable. These guys should certainly be punished even more heavily, but in reality, the antiquated system that defines LIBOR must also change as it is wide open to manipulation.
- cm2187 8y ago
  I am not sure I follow your reasoning. The second part (collusion between swap traders and libor submitters) occured in the years preceding the financial crisis, 2005-2007, while the first part (the lowballing at the height of the financial crisis) happened in 2007-2008. So no there is no way they did the collusion thinking it would be forgiven because of the lowballing.
  - fauigerzigerk 8y ago
    I didn't mean to imply that at all. What I meant is that when the whole thing blew up in 2012, they clearly thought they could use the crisis and the understandable attempts by themselves and the BoE to avoid a bank run to deflect all criticism of their Libor rigging more generally. That's what I think the purpose of Bob Diamond's accusations against the BoE was. An attempt to confuse the two issues. The Guardian article doesn't make the distinction clear at all.
PaulAJ 8y ago
From the article: It is much more difficult to be a fraudster in a society in which people only do business with relatives, or where commerce is based on family networks going back centuries. It is much easier to carry out a securities fraud in a market where dishonesty is the rare exception rather than the everyday rule. I don't think thats the case. The skillsets are different, but fraud happens just as much in societies which depend on inter-personal trust. https://www.cbsnews.com/news/ohio-man-sentenced-in-17-million-amish-fraud-case/ https://www.cbsnews.com/news/ohio-man-sentenced-in-17-millio... http://amishamerica.com/amish-investors-lose-3-9m-in-alleged-investment-scam/ http://amishamerica.com/amish-investors-lose-3-9m-in-alleged...
- coldtea 8y ago
  It's not about happening, it's about happening "just as much". A couple of Amish examples don't prove that. Not to mention that the guy was Amish, but not necessarily part of the communities that invested, in the sense of the article.
chiph 8y ago
What I've seen is that most audits are incomplete, because the audit is time-boxed. The auditors only have a few weeks to examine the books, either because that's all the budget by the client will allow, or because the audit firm hits the profitable/not-profitable limit around the extra services they sold to the firm. So the firm has an incentive to draw out the process and gamble that the auditors won't find anything actionable before the clock runs out.
- jimnotgym 8y ago
  This is a very common misconception. Whilst auditors should always report fraud if they find it, an audit is not there to detect fraud. They call this the "expectations gap". An audit is trying to demonstrate that the accounts of a company show a 'true and fair view' of the companies performance. Things that interest auditors are things like, is the stock all there, will the company be able to sell the stock for what it bought it for, does the income booked to these accounts properly belong in this time-frame, are these assets still worth their book value. Obviously this turns up various kind of fraud, but wouldn't for instance detect a fraud like Libor. edit: > So the firm has an incentive to draw out the process and gamble that the auditors won't find anything actionable before the clock runs out. Auditors are trained to look out for this, but it is certainly possible to some degree. I would say it is getting harder to do, because much more of the audit methodology is about 'analytical review' (do the results seems possible) rather than 'substantive testing' (checking documents). If the audit partner is not happy with the access he has been given he can always 'qualify' the accounts in his statement. This is then public information, and a qualified audit would raise a lot of suspicion with counter-parties
rahimnathwani 8y ago
This article talks about the LIBOR fixing scandal at length, without once explaining or even hinting at the mechanism by which those doing the fixes would profit. AFAIK the individual LIBOR submissions are not circulated: on the average of the non-outliers. So submitting a lower number doesn't make your own bank look less risky than other banks. The problem/opportunity arose because many contracts use LIBOR as a benchmark rate. And these contracts are often tradeable. So you can make trades to bet on LIBOR. An article from the same source that does a better job: https://www.theguardian.com/business/2017/jan/18/libor-scandal-the-bankers-who-fixed-the-worlds-most-important-number https://www.theguardian.com/business/2017/jan/18/libor-scand... It doesn't seem like the design of LIBOR is the major problem. It's more that people are using it in ways that were not intended when it was designed. It's like writing code that relies on undefined behaviour: when it stops working, who do you blame?

88 points by oska 8y ago

rossdavidh 8y ago

The last paragraph in that article packs quite a punch.

deleted 8y ago
[deleted]

HIPisTheAnswer 8y ago

Easy: Call it a central bank.

sonnyblarney 8y ago
No, call it an ICO.

qrbLPHiKpiux 8y ago

Call it Bitcoin.

Danieru 8y ago

Good article worth your time to read, but I am not sure there is much for comments to discuss. From the title I expected the article to be preachy, but rather I found it informative and nuanced.

slededit 8y ago

The claim you could have caught Enron had you knew where to look in their financial statements was never backed up. Given the length of the article it would have been nice if they had quoted concrete facts instead of vaguely alluding to evidence that may or may not exist. There were also lots of concrete examples they could have used such as Crazy Eddie using their best looking secretaries to distract the auditors. Instead the article gives a false sense of certainty to what is really a long opinion piece. I say this even though I agree with its thesis.

partycoder 8y ago

Highly complicated synonyms help. e.g: instead of "shit", call it "subprime"

lifeisstillgood 8y ago

>> criticism that is at once overheated, ill-informed and entirely justified The article is pretty good, and relatively sensible - and I think there are occasionally attempts by accounting bodies to do the sensible thing and only recognise revenue when it actually arrives - but usually that means that the current profits would get restated for everyone and ... that would look bad.

fauigerzigerk 8y ago

Lengthy as it is the article fails to mention how the Libor fraud actually worked and that it had two very distinct motivations. Understating the interest a bank had to pay during a short dramatic period in 2008 when there could have been disastrous bank runs was the less problematic part of it. In my opinion, breaking the letter of the law to avoid a run on a healthy bank is the right decision. But that's not all there was. The article fails to mention the second part, which was traders trying to make a profit by colluding with those at the same bank who were in charge of setting (or rather influencing) the Libor rate. The bankers knew that they would be forgiven for the first part, and that's why they tried to use it as an excuse for the second part. That's also where Bob Diamond's claim about the BoE comes from.

osrec 8y ago
Quite right. I was at the bank at the time, and couldn't quite believe what my colleagues had done. It was most disappointing and inexcusable. These guys should certainly be punished even more heavily, but in reality, the antiquated system that defines LIBOR must also change as it is wide open to manipulation.
cm2187 8y ago
I am not sure I follow your reasoning. The second part (collusion between swap traders and libor submitters) occured in the years preceding the financial crisis, 2005-2007, while the first part (the lowballing at the height of the financial crisis) happened in 2007-2008. So no there is no way they did the collusion thinking it would be forgiven because of the lowballing.
- fauigerzigerk 8y ago
  I didn't mean to imply that at all. What I meant is that when the whole thing blew up in 2012, they clearly thought they could use the crisis and the understandable attempts by themselves and the BoE to avoid a bank run to deflect all criticism of their Libor rigging more generally. That's what I think the purpose of Bob Diamond's accusations against the BoE was. An attempt to confuse the two issues. The Guardian article doesn't make the distinction clear at all.

PaulAJ 8y ago

From the article: It is much more difficult to be a fraudster in a society in which people only do business with relatives, or where commerce is based on family networks going back centuries. It is much easier to carry out a securities fraud in a market where dishonesty is the rare exception rather than the everyday rule. I don't think thats the case. The skillsets are different, but fraud happens just as much in societies which depend on inter-personal trust. https://www.cbsnews.com/news/ohio-man-sentenced-in-17-million-amish-fraud-case/ https://www.cbsnews.com/news/ohio-man-sentenced-in-17-millio... http://amishamerica.com/amish-investors-lose-3-9m-in-alleged-investment-scam/ http://amishamerica.com/amish-investors-lose-3-9m-in-alleged...

coldtea 8y ago
It's not about happening, it's about happening "just as much". A couple of Amish examples don't prove that. Not to mention that the guy was Amish, but not necessarily part of the communities that invested, in the sense of the article.

chiph 8y ago

What I've seen is that most audits are incomplete, because the audit is time-boxed. The auditors only have a few weeks to examine the books, either because that's all the budget by the client will allow, or because the audit firm hits the profitable/not-profitable limit around the extra services they sold to the firm. So the firm has an incentive to draw out the process and gamble that the auditors won't find anything actionable before the clock runs out.

jimnotgym 8y ago
This is a very common misconception. Whilst auditors should always report fraud if they find it, an audit is not there to detect fraud. They call this the "expectations gap". An audit is trying to demonstrate that the accounts of a company show a 'true and fair view' of the companies performance. Things that interest auditors are things like, is the stock all there, will the company be able to sell the stock for what it bought it for, does the income booked to these accounts properly belong in this time-frame, are these assets still worth their book value. Obviously this turns up various kind of fraud, but wouldn't for instance detect a fraud like Libor. edit: > So the firm has an incentive to draw out the process and gamble that the auditors won't find anything actionable before the clock runs out. Auditors are trained to look out for this, but it is certainly possible to some degree. I would say it is getting harder to do, because much more of the audit methodology is about 'analytical review' (do the results seems possible) rather than 'substantive testing' (checking documents). If the audit partner is not happy with the access he has been given he can always 'qualify' the accounts in his statement. This is then public information, and a qualified audit would raise a lot of suspicion with counter-parties

rahimnathwani 8y ago

This article talks about the LIBOR fixing scandal at length, without once explaining or even hinting at the mechanism by which those doing the fixes would profit. AFAIK the individual LIBOR submissions are not circulated: on the average of the non-outliers. So submitting a lower number doesn't make your own bank look less risky than other banks. The problem/opportunity arose because many contracts use LIBOR as a benchmark rate. And these contracts are often tradeable. So you can make trades to bet on LIBOR. An article from the same source that does a better job: https://www.theguardian.com/business/2017/jan/18/libor-scandal-the-bankers-who-fixed-the-worlds-most-important-number https://www.theguardian.com/business/2017/jan/18/libor-scand... It doesn't seem like the design of LIBOR is the major problem. It's more that people are using it in ways that were not intended when it was designed. It's like writing code that relies on undefined behaviour: when it stops working, who do you blame?