The deeper explanation is that it only looks ridiculous to us because we have different blind spots today to the ones that people had at the start of the nineteenth century. And the troubling corollary of that is: there are always blind spots. (Location 127)
In terms of financial damage, LIBOR was massively worse than Poyais, although nobody directly died from it. But the thread that links the two of them is that the blind spots are built into the system, and only become glaringly apparent once the whole thing has collapsed and people are watching the sun set over a pestilent swamp where a capital city ought to be. The problem is that whenever you’re creating an economic institution like the LIBOR market or the colonial system of the nineteenth century, you have to make decisions about what checks and balances you need to put into the system. And every decision about what you’re going to check up on is also a decision about what you’re not going to check up on. And when you’ve decided what you’re not going to check up on, then those are the things you’re going to have to take on trust. (Location 190)
Like the human brain, the market economy is an information processing system. (Location 292)
Note: Mirowski
You can tell more about the structure of any industry by looking at patterns of payment terms than you can from any ‘five forces’ or ‘SWOT’ analysis. (Location 343)
He did his best to fight back and defend his reputation, even submitting to public examination by a celebrated psychic to show that his mind contained no hint of turpitude. (Location 1015)
So what we have here is a fraud investing in a fraud, which then took their money and invested it in a fraud. (Location 1273)
But this was a high-percentage strategy, simply because these ‘obvious’ checks are the sort of thing that you would only do if you already had a strong reason for suspicion. It would be utterly unfeasible to exercise that level of scrutiny on every single hedge fund; you would be employing a tower block full of accountants, the majority of whom would spend every working day finding out that accounts had been filed correctly and filing null returns. If you wanted to catch Sam Israel, you would have done better to keep an ear out for gossip about his drug and alcohol problems, which might have given you a short* list of people who should be subjected to extra scrutiny. (Location 1316)
The Portuguese Bank Note Affair remains one of the most tragic cases in which the weak link in a high-trust society (in this case, notaries) ended up pulling down the whole structure of trust itself. (Location 1424)
In 1955, Alves dos Reis got an obituary in The Economist saying that his scheme had been good for Portugal on Keynesian principles, which probably ranks as one of the stupidest things that newspaper has ever printed. (Location 1426)
As with several other patterns of behaviour that tend to generate frauds, the dynamic by which a difficult audit partner gets overruled or removed happens so often and reproduces itself so exactly that it’s got to reflect a fairly deep and ubiquitous incentive problem which will be very difficult to remove. (Location 1809)
Because it was the early 1980s and the Reagan Revolution was beginning to find its form, the solution to the S&Ls’ problems had to involve deregulation. The idea that the main problem of finance is excessive red tape and that all problems can be solved by leaving things to the market has been a constant since the Victorian Railway Mania. And so, successive rounds of deregulation took place. (Location 1998)
There have been a few official studies into the PPI mis-selling scandal, and they make grim reading. But what is needed is for someone to look into a bank which had a massive PPI problem, and find out if there were individual branches which did not mis-sell insurance. If there are any, we need to find out how they resisted the pressure and whether we can build their secret into the whole system. Competition is not going away, after all, and nor are sales targets. (Location 2254)
Management theory tends to cycle between trying to deliver efficiency, quality and customisation. If you mainly measure cost indicators, quality tends to suffer. If you mainly measure quality indicators, the cost tends to drift up. If you refuse to compromise and demand both low cost and high quality, you tend to find you have concentrated too much on your own production process and not enough on what the customers want. If you try to achieve all three goals at once, you tend to go mad. (Location 2357)
Quality control is all about the number of defects, or the accuracy of measurements, and the cost of reducing or avoiding them. While there’s no direct relationship or single numerical measure of ‘quality’, there’s a clear definition of what a poor-quality project is going to be: it has inaccurate information, unrealistic or completely unanalysed assumptions and important details unspecified or left to chance. (Location 2427)
The main frauds in the sagas involve things like arskot, because the right to an inheritance was one of the first abstract stores of value to emerge as legal systems became codified. (Location 2519)
In fact, it often wasn’t. Members of the House of Lords were sometimes willing to rent their names out to company promoters, to the extent that the slang term ‘guinea pig’ was coined for a company director who received a guinea for every board meeting he missed. (Location 2595)
Halfway through the century, the limited liability company form was introduced. The Victorians were under no illusions that the limited liability form was a boon to fraudsters, but they wanted it anyway, in order to keep deepening the pool of potential investors. (Location 2628)
Because they were exposed to significant risk in dealing with London merchants on ninety-day credit, German manufacturers would employ the services of ‘enquiry-agents’ who would, for a few shillings, respond with opinions on the business and standing of merchants, their profitability and stock levels and so on. A typical one might read something like: Re: Gustav Opitz, 22 St Mary-Axe, London EC G. O. is established since 1883 and is exporting goods of all kinds, especially cloth to the East Indies. According to the official shipping-list he exported last year considerable quantities and there is no doubt that his business is a prosperous one … It is not doubted that he is possessed of means and a short time ago it is said he came in for a considerable amount of money at the death of his father.* Besides he is representing in London one of the largest Manchester firms. It is thought that the mentioned amount of £500 could be credited to him. Other reports were shorter: G. O. is rotten. Hands off. (Location 2664)
The reason why companies inexorably tend to collaborate with their competitors can be explained in terms of elementary economics. One of the first things one learns to prove in price theory is that in a competitive market, the price of a single unit of output will tend to equal the marginal cost – the cost to an established producer of increasing output by one more unit.* But the marginal cost rarely equals the average cost of producing a unit of output, because there are fixed costs, overheads and the like. This is a rare example in which elementary economics works, by the way; companies in industries with high fixed costs and low marginal costs (like airlines, and media) go bust a lot because they can’t resist competing prices down to levels which don’t cover their overheads. (Location 2821)
This is ‘white-collar’ crime we’re talking about after all; one of its defining characteristics is that it’s carried out by people of the same social class as those responsible for making decisions about crime and punishment. We’re too easy on people who look and act like ourselves. (Location 3245)
note on pronouns. Most of the time this book will follow modern usage of generic ‘they’ and so on. However, it cannot be overlooked that commercial fraud is overwhelmingly a male affair; it occupies the intersection between the structural sexism of business management, and the structural sexism of crime. Sometimes it feels much more sensible to refer generically to both crooks and victims as ‘he’. (Location 4028)
As the chef and author Anthony Bourdain said, ‘if you ever have any question about the viability of your operation, ask your fish purveyor; he probably knows better than you. You may be willing to take it in the neck, but he isn’t’. (Location 4038)
Not necessarily that short, to be honest. The threshold of seriousness for a coke habit would have to be pretty high to cut down the list of potentially problematic hedge fund traders. (Location 4173)
At the time, many of the world’s most respected researchers believed that cox-2 inhibitors were potentially wonder drugs which could be used for all manner of inflammatory conditions. A lot of the problem with Vioxx seems to have been that people fell in love with this theory and stopped doing their job of looking at the evidence as it piled up. (Location 4208)
And in all honesty, the extreme unprofitability of audit compared to all the other consulting and advisory work done by the same firms is a lot of the problem here. (Location 4235)
