News

Same old, Same Old

March 30 2021

Perhaps there was a clue in the name: Archegos. Arch. Egos. As a description of many in finance it can scarcely be bettered. A novelist might even think it a tad too unbelievable, unless you were seeking to write satire.

But why bother when reality serves it up on a plate.

The founder of Archegos Capital Management, Bill Hwang described himself in 2008 as “like a little child looking for where can I invest to please our God.” Not long after – in November 2009 – Goldman Sachs’s Lloyd Blankfein described  bankers as “doing God’s work“. Oh dear. The full extent of what bankers had been doing had yet to reveal itself, whether to God or anyone else. Still, PR advisors would do well to note that such statements do not impress. Rather they tend to bring to mind the Ralph Waldo Emerson quote:

The louder he talked of his honour, the faster we counted our spoons.”

Back to Mr Hwang. At the time of his humblebrag he was running Tiger Asia Management, which ended up being one of the largest investors in the expanding and profitable Asian market.

What God thought of Mr Hwang’s activities is unknown. What the SEC thought is, however. For in 2012 following a lengthy investigation, also involving the HK regulator, he pleaded guilty to insider trading and manipulation relating to trading in various Chinese stocks in late 2008 / early 2009. Surely not when he was trying to please God? Yes, apparently so.

A humongous fine inevitably followed. And almost as inevitably, the following year in 2013 Tiger Asia Management was wound up and Archegos rose, Phoenix-like in its place.

Now it is in trouble as a result of risky and very large investments having soured. Also in trouble are a number of banks which funded it, provided it with services and helped it trade. Questions no doubt are being asked – and, if not, they should be – about banks’ exposure to the firm, was this within risk limits, why so much leverage and so on. Other questions might also be asked: what due diligence was done? Was a fund run by a convicted insider dealer really a suitable client? How was it monitored? And so on.

Still, since bragging seems to be the fashion, might I modestly refer you to this article and my comments on what is often found when something goes wrong: “…so often, in virtually every case, there were bloody great red flags, or there was a clue that was missed.

The name might have permitted a wry smile. Mr Hwang’s track record should not have done. Does no-one ever read this stuff?

 

Photo by Orkun Azap on Unsplash

Lives Well Lived

September 30 2020

Earlier this year, Richard “Tigger” Hoare died, sadly one of this year’s many Covid fatalities. His Times obituary can be found here. A highly capable banker of the old school, coming from a long-standing banking family who still own the family bank established in 1672, he was proud to state: “I have never minded challenging things, if there is something that needs to be challenged.”  And he meant it too, as the last paragraph of his obituary makes clear –

“When the regulators interviewed the partners 20 years ago, they asked me what I thought was the greatest threat to the bank, and rather foolishly I said, ‘I think you are.’ They were very cross!

Well, even regulators, maybe especially them, need to be challenged now and again.

Sir Harry Evans, journalist and editor of the Sunday Times at a time when investigative journalism rather than clickbait articles was valued, who died last week, was another who understood very well the need to challenge those in authority. During his time as editor he won famous victories over those who tried to stop the publication of diaries by Cabinet Ministers (Richard Crossman) explaining what really goes on in government and those seeking to cover up what was known about the thalidomide drug which caused such misery to so many families.

There is a lovely line in his obituary – “Evans combined technical proficiency with moral passion to an unusual degree.

A combination of technical proficiency, challenge and moral passion: if only we had more people in positions of power and authority of whom this could be said.

 

 

Photo by author.

On juries and experts

June 29 2020

The right to a jury trial has been described, most recently this May, as “a fundamental right. It goes back centuries in our history, and it will never be removed at all.” (For the U.K. government’s latest proposals attacking this right and why they are not a good idea see here.)

Despite this, juries have not always been loved, especially by some in the legal establishment, including some judges, those who think that the law is far too important and complicated an issue for ordinary persons, who are simply not clever enough to understand. It uses the complexity beloved by lawyers to justify keeping the whole process within this charmed, closed circle, a legal elite. It is an argument often heard in relation to fraud trials, conveniently forgetting that sniffing out dishonesty does not need a degree, that it is often some of the apparently cleverest people – formally anyway – who fall for some of the biggest conmen around.

If you need convincing, look no further than the story of Wirecard, summarised by the Financial Times here.  It is a cautionary tale, one we have seen before, time and again. Remember Enron?Or Polly Peck? Or Theranos? It makes it all the more baffling why clever people fall for it over and over again.

The essential elements are usually the same:-

  • A new, often disruptive, entrant into the market or the repackaging of a boring staid company.
  • A charismatic CEO with ambitious expansion plans, an attractive story to tell and a talent for PR.
  • A novel way of providing a basic service, presented as a simplification, and which could be categorised into the “too good to be true” category. No-one is able to explain why, if it is so simple, others have not done this.
  • The use of some wonderful new technology. Everyone wants to be associated with this, even if the number of people keen on it is vastly greater than those who really understand it.
  • The use of complicated corporate structures and inter-company transactions, often in a variety of offshore jurisdictions, making scrutiny of the individual transactions and the company’s overall position much more difficult.
  • When critical or difficult questions are raised, responding aggressively with action from lawyers and PR specialists. Protection of reputation is apparently more important than responding to the substance of any criticism.
  • Rapid high growth, sustained year after year.
  • Becoming the latest “darling” of the stock market, investors and governments.

In all these cases, any number of highly expert advisors: analysts, accountants, auditors, bankers, lawyers and others seemed oblivious to what was going on. Did they choose to turn a blind eye? Or were their critical faculties simply dazzled by the fees to be earned?

What is perhaps different – and troubling – about the Wirecard story is the way regulators, in this case, the BaFin, seem to have abandoned its critical faculties, its willingness to probe behind the facade (surely an essential task for any regulator) and the need to listen to those voices who raised questions (from as far back as 2008) about the company.

Worse: not only did the BaFin not listen to those voices (investors, hedge funds, whistleblowers and journalists), it tried to take action against them, to shut them down, to prosecute them. The regulator abandoned its role as a disinterested supervisor and acted as if its interests were no different than that of the company.

How could so many apparently clever people be taken in? For the oldest reason of all: they believed what they wanted to be true, what they hoped was true. They formed an opinion then ignored any facts that did not fit. They ignored troubling messages or concerns because they came from the “wrong” sort of people: hedge funds and short sellers (boo! hiss!), foreign journalists doing down a national champion (double boo!) and so on. Shooting the messenger is so much easier than listening to an uncomfortable message.

Clever people are not immune from making these basic mistakes. Being clever does not necessarily make you clear-sighted. It does not necessarily make you courageous. Nor does it automatically make you curious.

There is an inestimable value in having an ordinary person’s view, in having people prepared to ask obvious, even stupid questions, in benefiting from the collective experiences, perspectives and opinions of a random group of 12 strangers, the wisdom of a small crowd, unencumbered by the sort of “groupthink” which can afflict those working closely together with the same types of people with largely similar perspectives.

Remember this when the lack of expertise of jurors is cited as a reason why they should not be involved in fraud trials. If expert and experienced people are so easily taken in, perhaps that expertise is not that valuable at assessing dishonesty and bluster and spin. If experts fail to ask obvious questions or fail to follow up on concerns raised, what value – really – does their expertise have?

 

Photo by Jon Tyson on Unsplash