Crime doesn’t pay…
January 8, 2009
For many of us, the stock market debacle of 1929 conjures images of devastated investors leaping from upper-story windows; but as John Kenneth Galbriath pointed out (in The Great Crash: 1929), it led to a sharper increase in frauds than in suicides. And while the epic scales of the Madoff scheme and the doctored books at Satyam have pushed other scandals to the inside pages of the business section (or, given the slimmed down state of the press, to the nether reaches of the web)*, malfeasance is on the rise again today.
As the Financial Times reports, corporate fraud is spiking:
Fraud is closely correlated with the business cycle… As the downturn deepens and companies struggle for credit, the more managers will come under pressure to cook the books. At the same time, the traditional recessionary cull of middle managers, eyes and ears of any business, exposes companies to the crooked hand-in-till small-timers responsible for 80 per cent of all fraud.
Portfolio points out that, for all the drama, convictions in cases like these can be tough. Still, the fall-out is real enough… and has, from this latest explosion, only just begin. The cost seems sure to continue to rack up in all of those commercial settings where some measure of trust is crucial… it starts with the investment arena, as we’ve seen; but it seems all too likely to spread to insurance (where false claims are already on the rise–e.g., car owners dumping their vehicles to collect insurance payments), and to the wider business arena– everything from purchasing and contracting fraud to “organic” products that aren’t.
As the FT observes:
The sense of déjà-vu is overwhelming. The exposure of fraud at Enron, Parmalat, Tyco and WorldCom in the wake of the dotcom crash ushered in a new era of legislation and regulation intended to result in a permanent and irrevocable improvement in investor confidence in corporate information. But as the tide of cheap credit goes out, it will soon be clear whether it worked.
… though even if it did, it ameliorated only the sorts of issues that Sarbannes-Oxley and kin were designed to stop. It seems certain that much more in the way of fraud losses will be added to the tally when the costs of the last several years are computed. (For an interim count from Nobel Laureate Joesph Stiglitz and Harvard professor Linda Bilmes– $10.35 Trillion– see the extraordinary Harper’s piece “The $10 Trillion Hangover”).
The incoming Obama Administration seems serious about rethinking financial regulation; while that’s only part of the battle (there are, of course, also the fronts covered by the FTC, the FDA, et al.), it’s surely an encouraging sign. The singular failure of oversight over the last several years abetted the fraudsters, enabling them to dig as deeply and last as long as they did.
But the new Administration– and we all– are up against one of the less pleasant aspects of too many humans’ nature. As Henry Blodgett (an analyst exiled from the securities world for his role in the dot-com bubble) observed in a posting entitled “I Knew Bernie Madoff Was Cheating–That’s Why I Invested With Him”:
We’re hearing that the smart money KNEW Bernie had to be cheating, because the returns he was generating were impossibly good. Many Wall Streeters suspected the wrong rigged game, though: They thought it was insider trading, not a Ponzi scheme. And here’s the best part: That’s why they invested with him.
That’s “trust,” after a fashion… just not the kind of trust on which we can can rely for an end to this kind of fraud. So Godspeed to Mary Shapiro, the incoming Head of the SEC, Gary Gensler, Obama’s pick for the CFTC, and all of the other folks who’ll be trying to find ways to reign in the abuses without choking off the economy. They’ll need all the help that they can get– and we need them to get it.
*Consider the case of Marc Drier, the New York lawyer caught pushing fraudulent bonds to pension funds– part of an alleged $380 million fraud… and barely worthy of a mention… only $380 million.
