News

Caveat Emptor

January 23 2020

One of the saddest aspects of the One Coin scam perpetrated by the now missing Dr Ruja Ignatova is how unsophisticated (and, indeed, poor) savers in African countries were specifically targeted using the claim that this wonderful new cryptocurrency technology would bring easy finance (and all its many advantages) to the unbanked. OneCoin was presented as practically a social service and a revolution in finance which would transform the prospects of those whom traditional finance providers had ignored.

All too good to be true?

Of course. And what this meant in practice for those believing these claims can be heard here in the BBC’s radio documentary – The Missing Cryptoqueen. What it also meant for those involved in handling the money she made was rather more traditional – convictions for fraud and money-laundering.

Investors believed what they hoped was true and failed to ask some basic and obvious questions. If there was no blockchain how could this new currency really be a cryptocurrency? And what was the track record of the person behind it? If they had, they might have learnt that there was no blockchain and that Dr Ignatova had form, having received in 2016 a suspended sentence and fine from a German court for her role in relation to a German metallurgical factory taken over by her, asset stripped and then left to go bankrupt in 2009.

Past performance can sometimes be a guide to the future, it seems.

So what might an investor make of an opportunity to invest in a new venture which will:-

  • Package new and existing mortgages into securities to be sold to investors
  • The mortgages to be sold to people who have a low uptake of these products, preferring to use their savings to buy land and build property
  • In a country – Ghana – with high interest rates and a very recent banking crisis, which resulted in 7 Ghanaian banks collapsing
  • On the basis of a study, whose authors have not been revealed, which apparently states that there are plenty of people able to afford a $50,000 mortgage among the 9 million Ghanaians earning more than $11 a day (a munificent annual income of $4,015)
  • Promoted by a convicted fraudster (responsible for the UK’s biggest fraud). Yes, Kweku Adoboli is back (though this time it is the economy of Ghana he plans to grow and the balance sheets of (presumably) the remaining Ghanaian banks he wants to expand)
  • Who declines to say who his business partners are
  • But expects banks to be shareholders in the new venture (assuming actual and potential conflicts of interest can be properly managed)
  • And who is still being economical with the actualité of the reasons why he was convicted and imprisoned.

But it is good to see that he has developed a sense of humour – if this quote is genuine: “The day when I deliver my first profit to someone, that will be a good day.”

The injunction “Let the buyer beware” is as sound as ever.

 

Here We Go Again

February 28 2019

One of the financial sector’s characteristics is a short memory.  After about 5-7 years memories, particularly of tough times, begin to fade. New joiners bring their enthusiasm and keenness to do new deals, develop new structures, explore new possibilities. Blockchains, ever more complex algorithms, AI, new paradigms: all are being created and expanded. The future’s exciting. So the surfeit of scandals which came to light following the financial crisis a decade ago are beginning to sound like stories from a forgotten age, interesting but no longer really relevant to now, let alone the bright new future.

And then, from the other side of the world, comes this – a searing report (a Royal Commission, no less) into misbehaviour in Australian banks, to remind us, once again, that – in the words of an official with the US’s Financial Crimes Enforcement Network back in 2013 – “large amounts of money sometimes bring out the worst in people.”

(As an Australian might put it: “You don’t say!”)

The report followed a year-long public inquiry into the culture and practices within Australian banking and revealed shocking, widespread and systemic examples of the sort of misbehaviour with which we have become so familiar.

  • Rewards for misconduct: the focus of all the institutions, whether banks, mortgage brokers, insurance firms, intermediaries was on selling, as much as possible for as high a fee as possible, regardless whether this was in the customer’s best interests.  In some cases, non-existent services were provided to dead people for years.
  • It will come as no surprise that this arose from badly skewed incentives. Or greed, of both the individuals and the institutions, as the Report says, bluntly and refreshingly.  
  • Firms abused their superior knowledge to mislead and defraud customers.  Conflicts of interest were ignored.  Individuals did what they could not what they should.
  • When customers complained, staff were trained to lie to them, even when compensation was paid; deliberate actions were conveniently and misleadingly described as an “administrative error”.
  • Firms lied to and misled regulators, often for years on end.  Nor were these the actions of junior staff but of senior management who felt no compunction about noting down in internal correspondence how to keep information from regulators and prevent any proper scrutiny of their actions.
  • Regulators were weak and did not hold those who misbehaved to account, even when they became aware of them.

500 pages set out in blistering detail a sorry tale of greed, fraud, lies, poor leadership, contempt for customers and a systematically rotten culture.  The usual action is, of course, now being taken: resignations, new leadership, building a good culture, training, new legislation, enforcement, litigation and so forth. 

Two points in particular are worth noting:

  1. These scandals did not happen in investment banking but in retail institutions, those dealing every day with ordinary consumers, the very people who need trustworthy and reliable financial services, who had a right to trust their providers and who were so badly let down.
  2. The banking sector in Australia is one of the most profitable in the world: 2.9% of Australia’s GDP.  Compare this to the US share of 1.2% and 0.9% in the UK.  The pre-tax profits of Australia’s banks are 6thin the world even though it is only the world’s 13th largest economy and its population only 25 million.  Little wonder that they thought they could do no wrong.

When sectors / institutions start thinking of themselves as indispensable (“look at our profits, our tax revenues”), when finance forgets that it is a service industry, there to serve others not itself, when banking is seen as a product to be sold rather than as a long-term relationship to be nurtured, then hubris and the sorts of behaviours seen in Australia, as well as elsewhere, will happen.  

The Australian report is a salutary reminder that the old stories still have much to teach us.  

Photo by Jamie Davies on Unsplash

Ask Not For Whom The Bell Tolls

January 21 2019

The best single essay on financial misbehaviour was written not by a journalist, academic or former trader, but by a novelist and 25 years ago: The Deficit Millionaires by Julian Barnes, that most pointillist and French of English writers.  It is about Lloyds of London, the huge losses it suffered in the early 1990’s and how trusting Names slowly realised that their faith in a long-standing and well-established institution was utterly misplaced.  Lloyds had been around for ever.  It was part of the City’s furniture.  And it was insurance, after all.  How boring is that. How could anything possibly go wrong?

Well, with exquisite care and sympathy and the precision of a surgeon’s scalpel, Barnes shows us how.  And the story is a surprisingly familiar one.

  • A novel but complicated instrument designed to reduce risk but instead increasing it – the London Market Excess, or the spiral of reinsurance.  “Making a turn” – in the spiral – “was the easiest way to make money” one underwriter said.”
  • Greed – “If you are making a good living, if you have self-regulation, if you are outside exchange control, it’s human nature to get greedier and greedier and greedier”.
  • The market’s rapid expansion in a short period of time.  There was a near-ten-fold increase in the number of Names in 14 years, most of them trusting amateurs and all looking for insurance to underwrite.
  • A lack of due diligence, a suspension of critical faculties, a lack of scepticism coupled with an all too human willingness to believe in the promises of a no risk investment, all wrapped up in a flattering appeal to vanity.
  • A  deeply cynical – and possibly fraudulent – approach by the professionals to those who joined (“If God had not meant them to be sheared, he would not have made them sheep.”) 
  • Relaxation of the rules and lax monitoring of those that existed.
  • The undisclosed conflicts of interest – recruiters were paid a fee for each Name who joined.
  • A lack of transparency – it was Lloyds insiders rather than external members who got onto the best managed, low risk and least spivvy syndicates, justified by the then Chief Executive thus – “In any activity, the professionals will know more than the others.”
  • The breakdown of trust – what Barnes describes as the “tickle of fraud“, the realisation that the belief in “an honourable society, operating on trust, on shared values” was a chimera.  Or as one Name put it more bluntly, “You know, trust, honour, and then to find in such an august body a bunch of craven crooks”.
  • The realisation, far too late, that private warnings were given about some of the risks and unacceptable/criminal behaviour but these were ignored or not shared with those who ought to have been told.
  • The turning of blind eyes to unacceptable/negligent and/or criminal behaviour by a remarkable cast of shameless rogues during the 1980’s, even when the latter were the subject of legal action.
  • The failed institution’s repeated insistence that any problems were only the result of that well-worn old favourite: one or two rotten apples, despite one of those rotten apples being a Chairman of Lloyds.
  • The determined focus by new management only on its new procedures and processes and business plans for the future in the hope that a veil would be cast over the past, without any unseemly digging into it.
  • The eventual realisation by the institution that, as its deputy Chairman, put it, for the previous twenty years it had lacked “total integrity” and “strong government“.

Even the modern new building housing the salvaged and totemic Lutine Bell and built by a famous “name” architect is part of the story.

Barnes eloquently shows how an institution believed to be “the highest name of honesty“, seen as part of a certain sort of honourable Englishness, around for three hundred and five years, a stalwart of the City, selling its services around the world, as venerable as the Bank of England and thought to be as safe, came to be seen, harshly but accurately, as “a cesspit of dishonesty“.

If only this had been published more widely than in a US publication and, later, a book of essays.  If only we had paid more attention.  If only we had learnt the lessons that were there to be learnt.

Everything that went wrong in the run up to the near collapse of the Lloyds insurance market happened again two decades later and led to the financial crash 10 years ago, even with the benefit of external regulation and control.  Indeed, pretty much the same things happened in the lead in to most financial scandals going back hundreds of years.

And, human nature being what it is, it’s a pretty safe bet that a version of all or some of these will happen the next time, may indeed be happening now.  The same behaviours will once again come under the spotlight when the the next scandal becomes known, with its inevitable backing chorus.  

Why didn’t anyone see?  

Why did no-one ask the obvious questions?  

Why did no-one listen to the warnings?  

Why, oh why didn’t anyone act?

As Parliament’s Intelligence and Security Committee put it in a different context“it has been striking how some the issues which arose in [2005 and 2013] have also been seen as having been a factor in 2017.  We have previously made recommendations in these areas, yet they do not appear to have been acted on.”

Scepticism.  Curiosity.  Asking tough questions.  Learning lessons from previous events.  Their absence is a regular feature of many incidents of misconduct, many crises, both large and small.

But ultimately, in finance, as in other sectors, it is those old-fashioned concepts – trustworthiness, integrity, honourable dealing – which remain as essential in 2019, and years to come, as they have always been.

 

Photo by Boris Stefanik on Unsplash