Latest / Economy & Finance / Why fraud might be good for the economy _ The Story of Money

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Why fraud might be good for the economy _ The Story of Money · Economy & Finance

• 0:00
  Speaker 1: We're going to dig into some of the wildest and
• 0:01
  Speaker 1: most shocking examples of fraud in history.
• 0:04
  Speaker 2: It is not clear what happened during that helicopter flight.
• 0:09
  Speaker 2: The helicopter arrived without him in it.
• 0:11
  Speaker 1: Sounds like a classic Mafiosa story.
• 0:13
  Speaker 3: What happened to Sam Israel after he tried to fake
• 0:16
  Speaker 3: his own death?
• 0:17
  Speaker 2: He wanted to get back in touch with his family,
• 0:19
  Speaker 2: and that's always the biggest mistake when you're dead. Wow.
• 0:22
  Speaker 2: They went to a company called Richmond Fairfield.
• 0:26
  Speaker 3: I haven't heard of that auditing firm, Dan.
• 0:28
  Speaker 2: It's because it doesn't exist.
• 0:35
  Speaker 3: Today on the story of money. How can you tell
• 0:38
  Speaker 3: if an economy is actually working? Does that mean inflation
• 0:42
  Speaker 3: being under control, healthy growth figures, low unemployment?
• 0:46
  Speaker 1: Well, that's what they teach you in economics class or
• 0:49
  Speaker 1: business school. But here's another measure that they certainly don't
• 0:54
  Speaker 1: actually teach you.
• 0:55
  Speaker 3: Yes, because today on the show, we're going to be
• 0:57
  Speaker 3: talking all about fraud. Because the level and nature of fraud,
• 1:02
  Speaker 3: white-collar crime, actually might be a weird contrarian sign of
• 1:07
  Speaker 3: a healthy economy.
• 1:07
  Speaker 1: I know that sounds weird, but listen on, because we're
• 1:10
  Speaker 1: going to dig into some of the wildest and most
• 1:13
  Speaker 1: shocking examples of fraud in history and ask, is fraud
• 1:16
  Speaker 1: actually natural? Is it an inescapable piece of a properly
• 1:20
  Speaker 1: functioning economy? Well, here we have someone who thinks that
• 1:23
  Speaker 1: is the case, and he's Dan Davis. He's the author
• 1:27
  Speaker 1: of Lying for Money, a book all about financial crimes
• 1:30
  Speaker 1: and how they've shaped today's economy. So, Dan, great to
• 1:33
  Speaker 1: have you with us. Hello.
• 1:35
  Speaker 2: Thank you very much for inviting me. It's great to
• 1:36
  Speaker 2: be here.
• 1:37
  Speaker 3: Dan, before you became a writer and historian, you were
• 1:40
  Speaker 3: at the coalface of finance. You were a finance industry
• 1:42
  Speaker 3: analyst in the city of London. You worked at the
• 1:45
  Speaker 3: Bank of England. And you were doing this at a
• 1:48
  Speaker 3: time when a huge fraud was being uncovered. Can you
• 1:51
  Speaker 3: take us back to the Genesis moment for lying for money?
• 1:55
  Speaker 2: It was the early 2010s. And I can remember pretty
• 2:00
  Speaker 2: vividly that I was sitting on a... desk in the
• 2:04
  Speaker 2: research department with some of my colleagues watching Bob Diamond,
• 2:09
  Speaker 2: who was at the time the chief executive of Barclays,
• 2:12
  Speaker 2: being questioned by a parliamentary committee and going down incredibly badly.
• 2:21
  Speaker 4: Again, George, this was reprehensible behavior. I know that. It
• 2:26
  Speaker 4: was 14, but I have to answer on behalf of Barclays.
• 2:30
  Speaker 4: What kind of firm were you running? You're now out.
• 2:34
  Speaker 2: Of a job because of the attack on the integrity
• 2:40
  Speaker 2: of the bank. It was just about as bad a
• 2:44
  Speaker 2: performance as you could ever see from someone who'd previously
• 2:47
  Speaker 2: been regarded as a pretty impressive CEO.
• 2:50
  Speaker 4: There was nobody in your firm.
• 2:52
  Speaker 3: when that was happening openly with traders, that came to
• 2:56
  Speaker 3: you and said, Bob, you're going to have to watch
• 2:58
  Speaker 3: this because we're going to be in deep trouble?
• 3:04
  Speaker 4: This first came to light during the investigation. Yeah, okay,
• 3:07
  Speaker 4: I hear that. The positive side is the organization said,
• 3:11
  Speaker 4: we have a problem.
• 3:12
  Speaker 5: No.
• 3:12
  Speaker 4: We have to fix it. That's a diamond. No, I
• 3:14
  Speaker 4: don't know. From your point of view, that doesn't wash.
• 3:18
  Speaker 2: And it just was. turned a switch in my brain
• 3:23
  Speaker 2: that I'd been looking at this thing that we'd called
• 3:28
  Speaker 2: the LIBOR affair for the previous three or four years.
• 3:33
  Speaker 2: I'd always assumed that it was a minor market anomaly
• 3:38
  Speaker 2: or a thing that was a little bit of a
• 3:40
  Speaker 2: regulatory fine and just basically something that was part of
• 3:45
  Speaker 2: the cost of doing business in finance. And actually I realized, oh,
• 3:51
  Speaker 2: This has been a huge multi-trillion, with a T, dollar
• 3:59
  Speaker 2: fraud that's been going on for decades, and it's happened,
• 4:03
  Speaker 2: and I never even noticed it.
• 4:04
  Speaker 1: So, Dan, what exactly was LIBOR?
• 4:07
  Speaker 2: LIBOR stands for the London Interbank Offered Rate. It's the
• 4:12
  Speaker 2: rate at which Banks in London would lend to and
• 4:17
  Speaker 2: borrow from each other for short-term cash deposits, so about
• 4:21
  Speaker 2: 30 days. And there was one of these interbank offered
• 4:25
  Speaker 2: rate averages. for every major currency. So this figure was,
• 4:30
  Speaker 2: as I say, just put together from a series of
• 4:32
  Speaker 2: phone calls, and it turned out that that figure was
• 4:35
  Speaker 2: being rigged.
• 4:35
  Speaker 3: So Dan, the experiences you say of watching Bob Diamond
• 4:39
  Speaker 3: talk about this fraud and realizing just how big it was,
• 4:42
  Speaker 3: and I remember that testimony as well, it was car crash.
• 4:47
  Speaker 3: But that led you down this path of looking at
• 4:49
  Speaker 3: fraud and financial fraud through the ages. And through that research,
• 4:53
  Speaker 3: you've Bricknet, you've come to a realization that they all
• 4:57
  Speaker 3: share a fairly similar framework, right?
• 5:00
  Speaker 2: What is that? Well, I think the interesting framework here
• 5:03
  Speaker 2: is that there are two ways that you can deal
• 5:08
  Speaker 2: with someone who knows something that you don't, which is
• 5:12
  Speaker 2: that you can check or you can trust. And of
• 5:16
  Speaker 2: those two, checking is always more reliable, but trusting is
• 5:23
  Speaker 2: so much more efficient. And so that's really kind of
• 5:27
  Speaker 2: the story of the development of the economy. We grow
• 5:31
  Speaker 2: and we gain the ability to build bigger and more
• 5:34
  Speaker 2: complicated economic institutions because we use this incredibly efficient social
• 5:40
  Speaker 2: technology of trusting each other. But that means that there's always...
• 5:47
  Speaker 2: opportunities for fraud. And the more that you build and
• 5:50
  Speaker 2: the more you use that, the more opportunities there are,
• 5:54
  Speaker 2: which is how you get countries where there's hardly any fraud.
• 5:59
  Speaker 2: Countries like Lebanon, famously, has very little commercial fraud. Greece
• 6:05
  Speaker 2: has ship owners who will do business on a handshake.
• 6:08
  Speaker 2: And the reason for that is that they reduce the
• 6:12
  Speaker 2: number of people that they're unless they are in a
• 6:19
  Speaker 2: very deep very embedded social web with them and you
• 6:23
  Speaker 2: can compare that to somewhere like canada or australia or
• 6:28
  Speaker 2: the usa where you can just show up and if
• 6:32
  Speaker 2: you are polite and you've got a nice suit and
• 6:35
  Speaker 2: you tell a decent story people will start from a
• 6:39
  Speaker 2: default their position of trusting you and that means that
• 6:43
  Speaker 2: canada does have quite a lot of financial fraud But
• 6:48
  Speaker 2: would you rather be the economy of Lebanon or would
• 6:50
  Speaker 2: you rather be the economy of Canada?
• 6:57
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• 7:31
  Speaker 3: We are going to be talking about three different types
• 7:33
  Speaker 3: of fraud today. You've named them the long-term, counterfeiting and
• 7:38
  Speaker 3: control fraud. So Dan, why this taxonomy? Why try and
• 7:41
  Speaker 3: classify frauds according to different categories or buckets?
• 7:45
  Speaker 2: I put the different kinds of fraud into different categories
• 7:49
  Speaker 2: because they seem to be exploiting different kinds of trust.
• 7:55
  Speaker 2: So you have direct interpersonal kind of relationships of trust,
• 8:00
  Speaker 2: You have certification by a trusted authority. You have institutions
• 8:06
  Speaker 2: which are meant to be kind of webs of trust.
• 8:12
  Speaker 2: And the different kind of frauds are all attacking different
• 8:16
  Speaker 2: aspects of those social technologies of trust.
• 8:19
  Speaker 3: And let's just start with the long firm because, I mean,
• 8:21
  Speaker 3: it sounds a bit like a story of gangsters, organized crime.
• 8:25
  Speaker 3: maybe a Scottish football derby. What exactly is a long-firm fraud?
• 8:33
  Speaker 3: The first of these three categories we're going to dig
• 8:35
  Speaker 3: into today.
• 8:36
  Speaker 1: And tell us what it's got to do with salads,
• 8:38
  Speaker 1: because that's one of the most extraordinary quirks of the
• 8:40
  Speaker 1: whole story, is salad economics.
• 8:42
  Speaker 2: So, I mean, a long-firm is probably the simplest kind
• 8:47
  Speaker 2: of interesting economic crime that you can get, because it's simply...
• 8:54
  Speaker 2: theft with a time dimension. You promise value at some
• 8:58
  Speaker 2: point in the future in order to get something valuable today,
• 9:03
  Speaker 2: and then you have no intention of keeping your side
• 9:05
  Speaker 2: of that promise. And the thing you're alluding to there
• 9:11
  Speaker 2: is what they call the Great Salad Oil Scandal, which
• 9:15
  Speaker 2: is the Pulitzer Prize winning book of that name, which
• 9:18
  Speaker 2: describes how someone ended up stealing almost enough money to
• 9:27
  Speaker 2: kind of knock over American Express by exploiting the properties
• 9:33
  Speaker 2: of salad grade soybean oil.
• 9:36
  Speaker 3: That's amazing. I mean, okay, tell us more about this.
• 9:39
  Speaker 3: Where does this story start?
• 9:41
  Speaker 2: Well, huge character, a guy called Tino De Angelis. He
• 9:45
  Speaker 2: was originally a pork butcher.
• 9:48
  Speaker 3: Handy with a knife, not somebody I'd like to mess with.
• 9:50
  Speaker 2: He liked to give the impression, obviously, as an Italian-American
• 9:55
  Speaker 2: who was big and had a big kind of posse
• 9:58
  Speaker 2: around him, he liked to... give that impression of links
• 10:01
  Speaker 2: to organized crime. In fact, he didn't have any, but
• 10:05
  Speaker 2: he liked to give that impression because people thought he
• 10:07
  Speaker 2: might have extra sources of cash flow to pay back
• 10:10
  Speaker 2: all the money he kept borrowing. And after having had
• 10:17
  Speaker 2: a good war, basically profiteering in federal food contracts for
• 10:22
  Speaker 2: which he did get prosecuted, he came out of it
• 10:26
  Speaker 2: as an expert in trading soybean oil. By the 1960s,
• 10:32
  Speaker 2: he was one of the biggest soybean oil traders in
• 10:34
  Speaker 2: the USA. He was a genuine innovator of the soybean
• 10:38
  Speaker 2: oil industry. He was the first guy to use bulk
• 10:41
  Speaker 2: carrier ships to transport huge tanker load quantities into vegetable
• 10:47
  Speaker 2: oil but he had this affliction which often afflicts successful
• 10:54
  Speaker 2: business people that they get a very strong opinion about
• 10:57
  Speaker 2: prices and they decide to go into financial speculation and
• 11:02
  Speaker 2: in the case of Tino he particularly believed that the
• 11:05
  Speaker 2: USA was going to end a trade embargo with Russia
• 11:10
  Speaker 2: there would be this huge source of demand for cheap
• 11:13
  Speaker 2: American cooking oil and And the price of soybean futures
• 11:16
  Speaker 2: was going to go through the roof. And if you've
• 11:19
  Speaker 2: developed that geopolitical opinion, always a really dangerous thing for
• 11:23
  Speaker 2: a CEO to do, then obviously you want to own
• 11:27
  Speaker 2: as much soybean oil as you can. But also you
• 11:30
  Speaker 2: want to own as many soybean oil futures as you
• 11:34
  Speaker 2: can get your hands into. And it seems that Tino
• 11:39
  Speaker 2: had underestimated quite how expensive financial speculation is.
• 11:44
  Speaker 1: So he needed lots of money suddenly and lots of credit,
• 11:47
  Speaker 1: a bit like putting all your chips on red at
• 11:50
  Speaker 1: the casino. So how did he actually get the money
• 11:52
  Speaker 1: to fund those massive positions?
• 11:54
  Speaker 2: In order to borrow money, particularly if you're someone who's
• 11:58
  Speaker 2: got a reputation like Tino De Angelis did, which was
• 12:01
  Speaker 2: not a good reputation, you need to put up collateral. Luckily,
• 12:06
  Speaker 2: he had a lot of valuable collateral in soybean oil.
• 12:12
  Speaker 2: This is salad oil, so-called, not because it's particularly nice
• 12:15
  Speaker 2: on a salad, but because you can eat it. It's
• 12:17
  Speaker 2: not industrial vegetable oil.
• 12:20
  Speaker 3: It's a standard, basically. Salad oil standard means it's high quality.
• 12:24
  Speaker 2: As high quality as Americans will put on their salads.
• 12:28
  Speaker 2: He kept these things in a massive tank farm in Bayonne,
• 12:32
  Speaker 2: New Jersey, which is just across the Hudson River from
• 12:34
  Speaker 2: New York. And in principle, he can borrow against those.
• 12:41
  Speaker 2: As it happened, American Express at that time had a
• 12:47
  Speaker 2: trade financing division that was looking to expand and make
• 12:51
  Speaker 2: some really aggressive earnings targets. And they were prepared to
• 12:56
  Speaker 2: lend money collateralized against the solid oil, even though they
• 13:01
  Speaker 2: didn't own an oil tank. warehouse to put their collateral in.
• 13:06
  Speaker 2: They were prepared to lend on the basis of having
• 13:09
  Speaker 2: a legal title to the oil in Tino De Angelis'
• 13:14
  Speaker 2: tank farm in Bayonne, New Jersey. And this is where
• 13:18
  Speaker 2: the great bit of the fraud which really makes him
• 13:22
  Speaker 2: go down in history goes. Because if you're borrowing money
• 13:27
  Speaker 2: against collateral of solid oil, then someone's going to come
• 13:30
  Speaker 2: out to check that the collateral is there. um but
• 13:36
  Speaker 2: oil floats on water and so it is often quite
• 13:42
  Speaker 2: difficult to tell the difference between a tank that is
• 13:45
  Speaker 2: full of highly valuable top grade vegetable oil and a
• 13:50
  Speaker 2: tank that's got a few gallons of soybean oil floating
• 13:54
  Speaker 2: on top of mostly seawater.
• 13:57
  Speaker 1: So basically he could present those tanks um Borrow on
• 14:02
  Speaker 1: the back of it very cleverly, American Express was desperate
• 14:04
  Speaker 1: to lend because as so often, it was trying to
• 14:07
  Speaker 1: develop a new area of financial innovation. And you had
• 14:11
  Speaker 1: a win-win situation, it seemed, where he needed money and
• 14:13
  Speaker 1: American Express wanted to lend. Of course, the problem is,
• 14:16
  Speaker 1: that he was basically doing on this on the back
• 14:20
  Speaker 1: of phony collateral. Absolutely. And so when did it start
• 14:22
  Speaker 1: falling apart? Was anyone actually going to see there was
• 14:24
  Speaker 1: water beneath the oil?
• 14:26
  Speaker 2: No one did ever, really, until it was too late
• 14:30
  Speaker 2: to do anything about it because he just kept on
• 14:33
  Speaker 2: borrowing more money. He could sell the oil and then
• 14:37
  Speaker 2: still borrow against it because he was mainly filling the
• 14:41
  Speaker 2: tanks with saltwater. It seems that a book of warehouse
• 14:46
  Speaker 2: receipts on someone's desk at American Express fell into his position.
• 14:52
  Speaker 2: So by that point, he was able to just write
• 14:54
  Speaker 2: phony warehouse receipts and borrow again to those. And by
• 14:59
  Speaker 2: the end of it, if all of his warehouse receipts
• 15:01
  Speaker 2: had been totaled up, he would have had to have
• 15:04
  Speaker 2: had the entire soybean production of the United States of
• 15:09
  Speaker 2: America for that year in his thing.
• 15:12
  Speaker 1: It's so classic. It's often the really boring, dull kind
• 15:15
  Speaker 1: of financial transactions, which no one notices because they seem
• 15:18
  Speaker 1: so dull where this kind of thing happens.
• 15:21
  Speaker 3: And nobody adds up. Nobody literally adds up the numbers
• 15:23
  Speaker 3: and realizes that they are divorced from reality.
• 15:26
  Speaker 2: Absolutely. An incredibly common thing.
• 15:29
  Speaker 1: When did people actually notice? What forced them to actually
• 15:31
  Speaker 1: finally realize?
• 15:32
  Speaker 2: Basically, geopolitical relations worsened. the USA decided it was not
• 15:39
  Speaker 2: going to sign a deal to exempt wheat from the
• 15:42
  Speaker 2: Russian trade embargo. Everyone presumed, well, if they're not doing wheat,
• 15:45
  Speaker 2: they're never going to do soybeans. And the price of
• 15:49
  Speaker 2: soybean futures fell. At that point, the brokers in Chicago,
• 15:55
  Speaker 2: who were a little bit more clued up than the
• 15:58
  Speaker 2: warehouse leasing bankers in New York, got together and realized
• 16:03
  Speaker 2: that there'd only been one person buying soybean futures for
• 16:05
  Speaker 2: the previous month. And they made an immediate cash margin call,
• 16:10
  Speaker 2: which was just too much money for him to raise
• 16:13
  Speaker 2: in a short period of time. At that point, Amex
• 16:16
  Speaker 2: went out to repossess what they believed was this lake
• 16:21
  Speaker 2: of soybean oil. At that point, the fraud was discovered.
• 16:26
  Speaker 2: He went to prison. Two or three brokers on the
• 16:28
  Speaker 2: Chicago exchange went bust because he wouldn't cover his losses.
• 16:32
  Speaker 2: It was the equivalent of, it was about 150 million
• 16:37
  Speaker 2: US dollars in the 1960s. equivalent of not far off
• 16:42
  Speaker 2: a billion today. And of course, that weekend was the
• 16:46
  Speaker 2: weekend that JFK was assassinated, which kind of kept it
• 16:49
  Speaker 2: off the front pages. But it was the biggest single
• 16:54
  Speaker 2: scandal that the commodities futures markets had seen, you know,
• 16:58
  Speaker 2: and that was a record that stayed for a very
• 17:00
  Speaker 2: long time.
• 17:00
  Speaker 3: The brokers in Chicago, they wanted basically Tino DeAngelis to
• 17:05
  Speaker 3: put up more collateral. And that's this cash margin call
• 17:08
  Speaker 3: that you mentioned. That essentially they say, oh, we kind
• 17:11
  Speaker 3: of worry about your exposure here. You have to pony
• 17:14
  Speaker 3: up more collateral, more cash. And American crude is company
• 17:17
  Speaker 3: just couldn't get the resources. Is that how it played out?
• 17:20
  Speaker 2: Absolutely. I mean, this is– you can see here that
• 17:23
  Speaker 2: you've got a mechanism here whereby the brokers protect themselves
• 17:27
  Speaker 2: against having to trust someone by demanding that they put
• 17:30
  Speaker 2: up cash collateral. And that works well. as long as
• 17:36
  Speaker 2: you don't let someone build up too big a position,
• 17:39
  Speaker 2: and it works as long as things don't move too
• 17:41
  Speaker 2: fast in the market, and then it immediately stops working.
• 17:45
  Speaker 2: But the mechanics whereby people went bust over allowing Tino
• 17:51
  Speaker 2: De Angelis to build up big soybean futures positions, they're
• 17:55
  Speaker 2: exactly the same as what we saw three or four
• 17:57
  Speaker 2: years ago when Credit Suisse allowed Bill Hwang and Archegos
• 18:02
  Speaker 2: to build up stock futures positions. you trust someone, but
• 18:06
  Speaker 2: you don't necessarily work out how much you're trusting them.
• 18:11
  Speaker 2: And then suddenly the market changes and you realise that
• 18:15
  Speaker 2: actually that trust has been misplaced.
• 18:17
  Speaker 1: Or else you put your faith in collateral, which happens
• 18:19
  Speaker 1: so often, and no one really probes into the collateral.
• 18:22
  Speaker 1: And time again, whether it's collateral that was underpinning so
• 18:26
  Speaker 1: much of, say, the mortgage-backed securities problems or anything like that,
• 18:30
  Speaker 1: turns out to be worthless.
• 18:31
  Speaker 3: So that's fascinating, but I have to admit, I still
• 18:34
  Speaker 3: don't quite understand why you call it the long firm.
• 18:37
  Speaker 3: Why is that?
• 18:38
  Speaker 2: It's a weird piece of folk etymology. The Anglo-Saxon galang,
• 18:45
  Speaker 2: meaning fake, wrong, fraudulent, and the Italian firma, for any signature,
• 18:53
  Speaker 2: went into Cockney slang and thieves' count sometime around the
• 18:57
  Speaker 2: 18th century. And ever since then, it's been used... mainly
• 19:01
  Speaker 2: in England, for the crime of buying goods on credit
• 19:06
  Speaker 2: and then not paying for them. So it's just a
• 19:09
  Speaker 2: generalized version of that, really.
• 19:10
  Speaker 3: Ah, gotcha. But let's move on to the next formal fraud,
• 19:14
  Speaker 3: because this is a bit of a classic one, counterfeiting.
• 19:18
  Speaker 3: And this is obviously an ancient formal financial crime. We've
• 19:21
  Speaker 3: talked to David McWilliams, the historian, in an earlier episode.
• 19:25
  Speaker 3: He As we talked about then, even Dante wrote about it.
• 19:28
  Speaker 3: He condemned money counterfeiters to the eighth circle hell, just
• 19:32
  Speaker 3: one notch above the devil himself. So we're going to
• 19:35
  Speaker 3: deal with one specific story that takes, frankly, that to
• 19:39
  Speaker 3: a whole new level. And it begins in modern day,
• 19:42
  Speaker 3: but in Borneo in 1993. Dan, can you tell us
• 19:47
  Speaker 3: about this Bornean 1990s counterfeiting scam?
• 19:53
  Speaker 2: It was in Borneo in Indonesia. Everyone knows that there
• 19:58
  Speaker 2: is gold in Indonesia. You will often get mining companies
• 20:05
  Speaker 2: buying out small patches and buying staking claims in order
• 20:10
  Speaker 2: to raise money on the stock market from people who
• 20:14
  Speaker 2: like a bit of a gamble and who like the
• 20:16
  Speaker 2: idea of a gold mine. One group of people who
• 20:18
  Speaker 2: love gambling on minor kind of small mining companies are Canadians.
• 20:26
  Speaker 3: I've heard horror stories about some of the stock market
• 20:30
  Speaker 3: shenanigans that happens in Canada. It's a weird thing given
• 20:33
  Speaker 3: you're Our view of Canadians is sort of nice, but
• 20:36
  Speaker 3: the stock market is anything but.
• 20:39
  Speaker 2: Yeah, I mean, Vancouver Stock Exchange actually got closed down.
• 20:43
  Speaker 2: But before it did, it was given the nickname of
• 20:45
  Speaker 2: the scam capital of the world. But there was not
• 20:49
  Speaker 2: quite so many junior marketing frauds quite so big as
• 20:52
  Speaker 2: a company called BrayX, which was run by a small-time
• 20:59
  Speaker 2: Canadian mining stock promoter. And the hero of this story,
• 21:03
  Speaker 2: a guy called Miguel de Guzman, who was a Filipino geologist.
• 21:09
  Speaker 2: Both of these people were down on their luck and
• 21:11
  Speaker 2: really needed a big hit and a big score. So
• 21:16
  Speaker 2: when the stock promoter found out that he'd kind of
• 21:21
  Speaker 2: got a claim to the Busan kind of territory in Borneo,
• 21:27
  Speaker 2: he sent de Guzman out to take geological samples and
• 21:31
  Speaker 2: What came back was evidence of something which looked like
• 21:36
  Speaker 2: it might be the single biggest gold deposit in the world.
• 21:40
  Speaker 3: Wow.
• 21:41
  Speaker 1: How did he go about and do that? Because, you know,
• 21:43
  Speaker 1: he wasn't seen as a kind of expert in gold.
• 21:46
  Speaker 1: geology prospecting was he.
• 21:47
  Speaker 2: Well he was you know he was a reasonable kind
• 21:51
  Speaker 2: of jobbing geologist who was most well known really for
• 21:55
  Speaker 2: his willingness to take a risk of catching malaria and
• 21:58
  Speaker 2: to go and carry out geological operations in messy unpleasant
• 22:03
  Speaker 2: jobs that other people send down however as with all
• 22:06
  Speaker 2: of these things there is this it all seems so
• 22:10
  Speaker 2: obvious now moment which is that um You have two
• 22:15
  Speaker 2: types of gold nuggets. And when I say nuggets here,
• 22:18
  Speaker 2: this is not something that someone's going to hold in
• 22:20
  Speaker 2: the palm of their hand. We're talking about tiny, microscopic
• 22:24
  Speaker 2: nuggets of the sort that show up in rock samples.
• 22:27
  Speaker 2: You have the kind of gold that is striated in
• 22:31
  Speaker 2: quartz deposits. And you have something called alluvial gold, which
• 22:35
  Speaker 2: is the gold that you take out of a river,
• 22:38
  Speaker 2: if you think of someone kind of panning for gold.
• 22:42
  Speaker 2: The gold that was in the samples from the Busan
• 22:46
  Speaker 2: mine was alluvial. You could see on a microscope that
• 22:50
  Speaker 2: it had been smoothed into round pellets by erosion in
• 22:54
  Speaker 2: the water. If someone had thought to ask, how does
• 22:59
  Speaker 2: alluvial gold get into a sample that's meant to have
• 23:02
  Speaker 2: been taken from a quartz mine, the whole thing may
• 23:05
  Speaker 2: never have needed to have happened. small amount of gold
• 23:13
  Speaker 2: from local villagers who did pan for gold in the
• 23:18
  Speaker 2: waters of the rivers nearby and had introduced it into
• 23:22
  Speaker 2: a sample and of course this is the danger of
• 23:26
  Speaker 2: extrapolating from samples it's a very old technique that used
• 23:30
  Speaker 2: to be called salting of mine what you used to
• 23:33
  Speaker 2: do in the very old days of the gold rush
• 23:35
  Speaker 2: in the usa was take a shotgun cartridge fill it
• 23:39
  Speaker 2: up with gold dust fire it at a rock, and
• 23:44
  Speaker 2: then take a sample of that rock to the geologist
• 23:47
  Speaker 2: to be assayed. But with modern sophisticated assay techniques, you
• 23:51
  Speaker 2: can take a file to your wedding ring and you
• 23:54
  Speaker 2: can introduce enough gold dust into the rock to make
• 24:01
  Speaker 2: someone think that you've got a commercially exploitable vein of
• 24:04
  Speaker 2: ore there. And this went on... For a while, it
• 24:08
  Speaker 2: became the biggest story stock of the 1990s on the
• 24:13
  Speaker 2: Toronto Stock Exchange.
• 24:15
  Speaker 3: Like a 1990s meme stock, basically, for Canadians.
• 24:18
  Speaker 2: Yeah, it was absolutely a meme stock. It went up
• 24:24
  Speaker 2: thousands of percents. It was more than a 10-bagger. It
• 24:28
  Speaker 2: attracted a lot of retail investment because it was a
• 24:32
  Speaker 2: really romantic Canadian story that that you had someone who
• 24:35
  Speaker 2: was a down-on-his-luck promoter who'd finally found the biggest gold
• 24:40
  Speaker 2: mine in the world.
• 24:41
  Speaker 1: And of course, the idea of tangible gold is something
• 24:43
  Speaker 1: that investors of all stripes can actually relate to because
• 24:46
  Speaker 1: you know what gold is. So what caused it to
• 24:48
  Speaker 1: actually go wrong? Because at its peak, I mean, Brie
• 24:52
  Speaker 1: X's penny stock went up to $ 12 billion, wasn't it?
• 24:54
  Speaker 1: But what caused the whole bubble to pop?
• 24:56
  Speaker 2: The trouble is that once things get big, people start
• 24:59
  Speaker 2: getting interested in it. And particularly with respect to Briex,
• 25:04
  Speaker 2: the Indonesian government decided that they wanted their share of this.
• 25:09
  Speaker 2: You can't just discover gold in Borneo and assume that
• 25:13
  Speaker 2: you're never going to have any political trouble. As part
• 25:17
  Speaker 2: of the political trouble that Briex got into... they decided
• 25:22
  Speaker 2: to join forces and have a joint venture to exploit
• 25:26
  Speaker 2: the mine with a major gold mining company, which is
• 25:31
  Speaker 2: Freeport MacMoran. And eventually, after having been put off with
• 25:38
  Speaker 2: excuses for an extremely long time, Freeport sent their own
• 25:42
  Speaker 2: geologists to take samples and they found absolutely nothing.
• 25:46
  Speaker 1: Ah, so the game was an up.
• 25:49
  Speaker 2: Yeah, they sent back a telegram to Toronto saying, you know,
• 25:52
  Speaker 2: there's nothing here. It's not only is there not the
• 25:57
  Speaker 2: world's biggest gold mine, this has no commercially exploitable gold
• 26:01
  Speaker 2: in it whatsoever. Then something quite shocking and tragic happened,
• 26:08
  Speaker 2: which is that obviously one of the questions that you
• 26:12
  Speaker 2: might ask immediately after having discovered a sample like that is,
• 26:16
  Speaker 2: Could we speak to the geologist who produced the sample
• 26:19
  Speaker 2: with the gold in it with some urgency, please? And
• 26:23
  Speaker 2: so Miguel de Guzman was put on a helicopter to
• 26:27
  Speaker 2: go out to the Busan mine and explain himself to
• 26:30
  Speaker 2: the other geologists. It is not clear what happened during
• 26:36
  Speaker 2: that helicopter flight, but the helicopter arrived without him in it.
• 26:44
  Speaker 2: and he was later found and had to be identified
• 26:49
  Speaker 2: from dental records because wild pigs had found the body
• 26:53
  Speaker 2: before the investigators did.
• 26:56
  Speaker 6: Wow.
• 26:56
  Speaker 3: Yikes.
• 26:57
  Speaker 1: So it sounds like a classic Mafiosa story, I mean,
• 26:59
  Speaker 1: or Godfather.
• 27:00
  Speaker 3: Maybe the ghost man is still out there somewhere, Gillian.
• 27:03
  Speaker 1: Well, could be, exactly.
• 27:04
  Speaker 3: The Brieck scandal, yeah, like you say, that was quite
• 27:07
  Speaker 3: a bad thing for not just the individual investors, but
• 27:12
  Speaker 3: Canada as a whole. It wiped out lots of people
• 27:14
  Speaker 3: who put their money into it and really shunned the
• 27:20
  Speaker 3: spotlight on just how dodgy the Canadian junior markets could be.
• 27:25
  Speaker 1: You know, that's so interesting. I mean, anyone who thinks
• 27:27
  Speaker 1: that Canadians are just boring and too nice for their
• 27:29
  Speaker 1: own goods, well, yes, in some ways they are, but
• 27:32
  Speaker 1: in other ways, actually, that really is the glue that
• 27:34
  Speaker 1: keeps our society and their economy together, as you say.
• 27:37
  Speaker 1: And credit, the Latin word credit meaning to trust, is
• 27:41
  Speaker 1: at the heart of all violence in every sense. So
• 27:44
  Speaker 1: coming up, we're going to talk about the fraud that
• 27:46
  Speaker 1: triggered the panic which exposed Bernie Madoff's Ponzi scheme. It's
• 27:50
  Speaker 1: a story I'm passionate about, or passionately interested about, because
• 27:55
  Speaker 1: I went down and interviewed Madoff in his prison just
• 27:59
  Speaker 1: after he'd been convicted.
• 28:00
  Speaker 3: Plus, what does all this swindling really tell us about
• 28:03
  Speaker 3: the times in which they're taking place? Could they even
• 28:07
  Speaker 3: be a sign of a healthy economy, just like Dan argues? Well,
• 28:11
  Speaker 3: that is all after the break.
• 28:18
  Speaker 6: Alternatives play a key role in investor portfolios. Traditional stocks
• 28:22
  Speaker 6: and bonds are becoming increasingly correlated. In the most recent downturn,
• 28:26
  Speaker 6: equities and fixed income were both significantly negative. Alternatives can
• 28:31
  Speaker 6: add diversification to your portfolios and lower correlations between the
• 28:35
  Speaker 6: asset classes. Both of those can help your portfolio grow
• 28:38
  Speaker 6: behave in a more resilient manner during the economic ups
• 28:41
  Speaker 6: and downs.
• 28:53
  Speaker 1: So let's move on to our third and final fraud.
• 28:56
  Speaker 1: And we're going to go back to the 1990s, the
• 28:58
  Speaker 1: late 1990s, relatively modern history. And this particular fraud takes
• 29:03
  Speaker 1: place on the trading floor.
• 29:05
  Speaker 2: Yeah, Bayou Capital. It was a small hedge fund. It
• 29:09
  Speaker 2: was never really much bigger than a particular trader called
• 29:15
  Speaker 2: Sam Israel. Sam Israel was originally from New Orleans. He'd
• 29:18
  Speaker 2: had a background in inside dealing and he'd written a
• 29:24
  Speaker 2: computer program, which he claimed was able to forecast the
• 29:28
  Speaker 2: stock market. And so on that basis, he launched a
• 29:31
  Speaker 2: hedge fund with his colleague who happened to be called
• 29:34
  Speaker 2: Dan Marino, which is a great name if you're going
• 29:39
  Speaker 2: into the fraud business. because it means that anyone who
• 29:41
  Speaker 2: ever does an internet search for you will only find
• 29:44
  Speaker 2: anything about the former Florida Miami Dolphins quarterback of that name.
• 29:49
  Speaker 2: And Sam and Dan were... not quite the innovators, but
• 29:55
  Speaker 2: they were early adopters of a really interesting new technology
• 30:01
  Speaker 2: of fraud, which had been identified only 10 years earlier
• 30:05
  Speaker 2: by the bank investigator Bill Black, which he called a
• 30:09
  Speaker 2: control fraud. And the advantage of a control fraud is
• 30:14
  Speaker 2: that up until around the 1980s, anytime you wanted to
• 30:19
  Speaker 2: steal money by lying, you pretty much had to do
• 30:23
  Speaker 2: something that was obviously and unambiguously illegal. So you had
• 30:29
  Speaker 2: to present a counterfeit bill, or you had to sign
• 30:35
  Speaker 2: your name on a loan saying that there was a
• 30:37
  Speaker 2: load of solid oil in a tank when there was
• 30:39
  Speaker 2: only salt water in there. What people started to realize
• 30:43
  Speaker 2: in the 1980s is that financial structures were big enough
• 30:47
  Speaker 2: and complicated enough to that you could take control of
• 30:52
  Speaker 2: something like a company or a hedge fund or a
• 30:56
  Speaker 2: kind of partnership in such a way that all of
• 30:59
  Speaker 2: the transactions it paid to you were legal. So the
• 31:05
  Speaker 2: hedge fund will pay out management fees and performance fees.
• 31:09
  Speaker 2: But if you control that entity and you control its accounting,
• 31:14
  Speaker 2: you can pay yourself legal payments out of fictitious assets
• 31:19
  Speaker 2: or on the basis of fictitious trading returns. And that
• 31:24
  Speaker 2: makes it an extremely difficult fraud to detect because there's
• 31:29
  Speaker 2: never any payment that is particularly questionable. And it makes
• 31:34
  Speaker 2: it quite difficult to burst because The thing about companies
• 31:41
  Speaker 2: and banks and hedge funds is that they are ongoing entities.
• 31:46
  Speaker 2: No one ever expects them to wind up. They're not
• 31:49
  Speaker 2: like bonds. They don't have a maturity date at which
• 31:52
  Speaker 2: the cash has to be produced and showed up.
• 31:55
  Speaker 3: So what did the Dan and Sam show do with
• 31:57
  Speaker 3: Bayou Capital? What exactly were they getting up to?
• 31:59
  Speaker 2: They had written a computer program that was capable of
• 32:03
  Speaker 2: forecasting the direction of equity markets.
• 32:05
  Speaker 3: Ah, yes, of course.
• 32:07
  Speaker 2: Except it wasn't.
• 32:08
  Speaker 3: It didn't work.
• 32:10
  Speaker 2: And so what they tended to do was to record
• 32:15
  Speaker 2: the trades that they wished they'd made rather than ones
• 32:19
  Speaker 2: that they actually did. And so the fund kept on
• 32:24
  Speaker 2: showing solid, low volatility growth, absolutely the sort of profile
• 32:31
  Speaker 2: of hedge fund returns that you'd want to keep your
• 32:33
  Speaker 2: money in. And they had ways of making sure that
• 32:36
  Speaker 2: no one looked too closely at it. One of the
• 32:39
  Speaker 2: things that Bayou Capital always insisted on is that it
• 32:43
  Speaker 2: would only take money from intermediaries. It would only take
• 32:47
  Speaker 2: money from funder funds and from asset allocators. They didn't
• 32:51
  Speaker 2: want any high net worth individuals invested. Reason being that
• 32:56
  Speaker 2: high net worth individuals in Sam Israel's view tended to
• 33:00
  Speaker 2: have idle sons and daughters who had nothing better to
• 33:04
  Speaker 2: do with their time than hang around reading investment returns
• 33:08
  Speaker 2: and then going to their floor and asking awkward questions.
• 33:10
  Speaker 1: So you didn't want anyone nosy around the whole investment scam.
• 33:13
  Speaker 3: And funder funds were not nosy.
• 33:15
  Speaker 2: Yeah. And so you wanted people who would only look
• 33:19
  Speaker 2: at you in terms of the reports and the audited
• 33:24
  Speaker 2: returns that you give to them. Now, you don't actually
• 33:29
  Speaker 2: want an auditor to look at the returns if you're
• 33:32
  Speaker 2: faking them because it's quite easy to detect that they're fake.
• 33:36
  Speaker 2: And so they went to a company called Richmond Fairfield.
• 33:40
  Speaker 3: I haven't heard of that. I haven't heard of that
• 33:42
  Speaker 3: auditing firm, Dan. Why is that?
• 33:45
  Speaker 2: It's because it doesn't exist. It was invented by Dan Marino.
• 33:50
  Speaker 2: They created a completely fictitious partnership called People checked that
• 33:55
  Speaker 2: there were audited returns, but no one checked that the
• 33:58
  Speaker 2: auditor existed, because why would you check that an auditor exists?
• 34:02
  Speaker 2: It's not on the kind of standard checklist of things
• 34:06
  Speaker 2: to check up about a hedge fund. They would also
• 34:10
  Speaker 2: send out the reports late on a Friday evening so
• 34:14
  Speaker 2: that they would be immediately swamped on everyone's desk by
• 34:18
  Speaker 2: the weekend paperwork on Monday morning, and they would again
• 34:21
  Speaker 2: not be looked at too quickly. And once you've got
• 34:25
  Speaker 2: a setup like that, it grows. Because you're reporting 10%
• 34:30
  Speaker 2: kind of returns in a month, but that means that
• 34:34
  Speaker 2: the whole fund is getting bigger and bigger. The clients
• 34:38
  Speaker 2: all believe that they are doing extremely well. And then
• 34:42
  Speaker 2: September the 11th happened. This catalyzed a huge argument between
• 34:48
  Speaker 2: Dan and Sam because Dan was begging him with tears
• 34:51
  Speaker 2: in his eyes Let's just say we were invested in
• 34:54
  Speaker 2: a load of airline stocks. We've lost all the money.
• 34:57
  Speaker 2: Everyone will be mad at us, but we can just
• 34:59
  Speaker 2: say it's gone to zero.
• 35:00
  Speaker 1: Yeah, force majeure kind of thing.
• 35:02
  Speaker 6: Yeah.
• 35:02
  Speaker 2: And, you know, everyone will hate us. We'll probably never
• 35:05
  Speaker 2: run a hedge fund again, but we won't actually go
• 35:07
  Speaker 2: to prison. And they didn't do that. So they actually
• 35:10
  Speaker 2: ended up claiming that they came out flat to slightly
• 35:14
  Speaker 2: up after the 9-11 attacks. And the fraud just kept
• 35:20
  Speaker 2: on growing and growing. Unfortunately, for the long-term survivability of this,
• 35:26
  Speaker 2: Sam Israel was a pretty serious drug addict. And he was,
• 35:31
  Speaker 2: on many cases, not able to come to work in
• 35:34
  Speaker 2: the morning.
• 35:34
  Speaker 3: He fell for a fraud himself at one point, didn't he?
• 35:37
  Speaker 2: He did also invest in something called prime bank guarantees.
• 35:43
  Speaker 2: which is a conspiracy theory. This theory overlaps with a
• 35:47
  Speaker 2: lot of really quite unpleasant conspiracy theories about hidden rulers
• 35:52
  Speaker 2: of the world. Sam did believe that he'd got an
• 35:56
  Speaker 2: introduction to that group and as a result ended up
• 35:59
  Speaker 2: trying to wire something like 10 million US dollars as
• 36:04
  Speaker 2: a finder's fee to the person who introduced him to
• 36:07
  Speaker 2: the hidden rulers of the world. Unfortunately, that transaction triggered
• 36:12
  Speaker 2: an investigation by the bank that was meant to be
• 36:15
  Speaker 2: sending it because it was such a weird payment. And
• 36:18
  Speaker 2: then everything fell apart. Sam ended up trying to fake
• 36:24
  Speaker 2: his own death, not successfully.
• 36:27
  Speaker 1: And then, of course, you had the whole thing implode,
• 36:28
  Speaker 1: which began to get people asking questions about hedge funds
• 36:31
  Speaker 1: in general.
• 36:32
  Speaker 2: Well, yeah, because one of the things that people started
• 36:35
  Speaker 2: looking at in the smoking wreckage of Bayer Capital is...
• 36:40
  Speaker 2: Why do they have this non-existent auditor? And so everyone said, well,
• 36:47
  Speaker 2: let's look at other firms how have auditors that we've
• 36:50
  Speaker 2: never heard of. And one of those firms was indeed
• 36:54
  Speaker 2: Bernie Madoff, which was, it was not a fictitious audit partnership.
• 36:59
  Speaker 2: But it was a tiny little office that, as far
• 37:02
  Speaker 2: as anyone could tell, had been completely come under the
• 37:05
  Speaker 2: control of Bernie Madoff.
• 37:07
  Speaker 1: So Bernie Madoff, of course, was the mastermind behind one
• 37:11
  Speaker 1: of the largest frauds in history. The thing I find
• 37:15
  Speaker 1: fascinating about the Madoff story is that when I went
• 37:17
  Speaker 1: down to interview him in a prison, it was a
• 37:19
  Speaker 1: high security prison, a very dramatic moment because you have
• 37:23
  Speaker 1: to go through these layers and layers of security like
• 37:26
  Speaker 1: a movie, a Dan Brown movie or something like that
• 37:28
  Speaker 1: in the middle of, in our case, North Carolina. And
• 37:31
  Speaker 1: after all that drama, I finally got to see Madoff,
• 37:33
  Speaker 1: sat with him for a couple of hours in his room.
• 37:36
  Speaker 1: And the horrifying thing was he looked just like my dad.
• 37:40
  Speaker 1: He looked professional, calm, collected, middle-aged, credible, reassuring. And in
• 37:47
  Speaker 1: many ways, what he created was something that you've called
• 37:50
  Speaker 1: a control fraud, isn't it? Because you essentially have the
• 37:54
  Speaker 1: aura of professional businesses around it, just making the whole
• 37:58
  Speaker 1: thing happen.
• 37:59
  Speaker 2: Yeah, and he was able to control the information environment
• 38:03
  Speaker 2: of everyone who was dealing with them for a very,
• 38:06
  Speaker 2: very long time. That's the way that you can exploit
• 38:12
  Speaker 2: the general trust in society. Because at the end of
• 38:15
  Speaker 2: the day, we see these things in ex post, in retrospect,
• 38:20
  Speaker 2: once we know that there's something to look for. Once
• 38:23
  Speaker 2: you know that there's something to look for, it's usually
• 38:25
  Speaker 2: not difficult to work out what it was. There's no
• 38:29
  Speaker 2: kind of investigation into who was responsible for the collapse
• 38:32
  Speaker 2: of Bernie Madoff. It was Bernie Madoff. The trick is
• 38:36
  Speaker 2: that while it's going, you conceal the evidence that a
• 38:40
  Speaker 2: crime has ever been committed.
• 38:41
  Speaker 1: The thing that really struck me as most shocking of
• 38:44
  Speaker 1: all was that when I got to see Madoff in
• 38:46
  Speaker 1: this prison room, he looked at me intensely the whole time.
• 38:51
  Speaker 1: And I thought, I've got to maintain eye contact at
• 38:53
  Speaker 1: all costs just to keep him talking. And I did
• 38:57
  Speaker 1: not dare take my eyes away from him. I had
• 38:58
  Speaker 1: to scribble shorthand without looking down at my pad the
• 39:02
  Speaker 1: whole time, which was hard to decipher later. I remember
• 39:04
  Speaker 1: looking at him and thinking, wow, if I'd encountered him
• 39:07
  Speaker 1: before the fraud happened with all this professional paraphernalia, I
• 39:11
  Speaker 1: would have trusted him too. There was nothing obvious beforehand
• 39:15
  Speaker 1: to tell you that you couldn't trust him.
• 39:17
  Speaker 2: And it's quite possible that he would even believed it himself.
• 39:22
  Speaker 2: There's a criminologist called Donald Cressy, who was one of
• 39:25
  Speaker 2: the first people to write about white-collar crime. He pointed
• 39:28
  Speaker 2: out firstly that white-collar crime is itself an interesting name
• 39:33
  Speaker 2: because how many other crimes are named after the kind
• 39:36
  Speaker 2: of people who commit them? It's a crime that's committed
• 39:40
  Speaker 2: by non-deviant members of society. It's committed by people who
• 39:45
  Speaker 2: are like us, which makes it unusual in criminology. most
• 39:50
  Speaker 2: criminals know that they are outside the boundaries of society
• 39:56
  Speaker 2: and kind of act like they are basically deviant individuals.
• 40:01
  Speaker 2: The fraudster does not believe themselves to be a deviant individual.
• 40:05
  Speaker 2: And so they have to create what Sir Cressy called
• 40:10
  Speaker 2: a rationalization, which is they create a story that they
• 40:14
  Speaker 2: tell to themselves a very weird psychological phenomenon. And about
• 40:20
  Speaker 2: the only thing that you can really say about it
• 40:22
  Speaker 2: with any confidence is that once that capacity is there,
• 40:26
  Speaker 2: something has fundamentally changed in a person.
• 40:28
  Speaker 1: I remember asking him what he was doing with his time.
• 40:30
  Speaker 1: And he said, well, firstly, he was teaching the other
• 40:32
  Speaker 1: prisoners about finance. Don't laugh. And secondly, when I asked
• 40:36
  Speaker 1: him what he was reading, he said he was reading
• 40:39
  Speaker 1: romantic historical novels and said that was because that was
• 40:44
  Speaker 1: the best way to relax. And seemed to act as
• 40:47
  Speaker 1: if nothing was odd whatsoever. And therein lies, as you say,
• 40:50
  Speaker 1: the ability to not just con others, but con yourself too.
• 40:55
  Speaker 3: So Dan, what happened to Sam Israel after he tried
• 40:57
  Speaker 3: to fake his own death?
• 40:59
  Speaker 2: He couldn't stay dead, basically. He wanted to get back
• 41:02
  Speaker 2: in touch with his family. And that's always the biggest
• 41:05
  Speaker 2: mistake when you're dead. and he spent some time in prison.
• 41:11
  Speaker 2: I believe he got out recently. As far as I know,
• 41:14
  Speaker 2: he hasn't launched another fund yet.
• 41:16
  Speaker 3: No. Well, I think that might be a slightly tricky
• 41:18
  Speaker 3: uphill task, but it's clearly an error for second chances
• 41:23
  Speaker 3: on Wall Street these days. But Dan, I'm into your
• 41:26
  Speaker 3: theory that we have to high-trust societies, which is a
• 41:29
  Speaker 3: valuable thing, There are economic benefits to having that, that essentially,
• 41:35
  Speaker 3: you know, this is inevitable. There will always be people
• 41:37
  Speaker 3: like Sam Israel and Bernie Madoff.
• 41:40
  Speaker 1: Tell us where, I mean, so we've talked about these
• 41:41
  Speaker 1: other frauds, but tell us, let's go back to where
• 41:44
  Speaker 1: we started. Where did LIBOR fit into this schema as
• 41:48
  Speaker 1: far as you're concerned?
• 41:49
  Speaker 3: Yeah, it's sort of a tech control fraud. And what
• 41:52
  Speaker 3: kind of fraud was LIBOR in your taxonomy?
• 41:55
  Speaker 2: Well, LIBOR is a very strange thing because it is
• 41:58
  Speaker 2: an entire new entity. It's what I call a market crime,
• 42:03
  Speaker 2: which is to say that there's a real question whether
• 42:07
  Speaker 2: the LIBOR scandal was actually the crime of fraud, which
• 42:13
  Speaker 2: it was mostly prosecuted at. Was it the crime of
• 42:17
  Speaker 2: running a cartel, which it was sometimes prosecuted at? Or
• 42:22
  Speaker 2: was it just the normal business of the futures market,
• 42:27
  Speaker 2: which it should regulate itself and nothing to do with
• 42:30
  Speaker 2: the criminal authorities at all? The thing is that sometimes
• 42:33
  Speaker 2: you get economic entities which are so big and important
• 42:39
  Speaker 2: that their internal rules get given the status of criminal law.
• 42:44
  Speaker 2: So the most interesting example of this is insider trading
• 42:48
  Speaker 2: on a stock exchange. That was not a crime 50
• 42:52
  Speaker 2: years ago. There is no one of the 10 commandments
• 42:56
  Speaker 2: that says thou shalt not trade securities while in possession
• 42:58
  Speaker 2: of material non-public information. This was only made a crime
• 43:05
  Speaker 2: in New Zealand as late as 1998.
• 43:09
  Speaker 3: Wow.
• 43:10
  Speaker 2: Going back to the 19th century, trading on the basis
• 43:13
  Speaker 2: of inside information was just what you did. There would
• 43:16
  Speaker 2: be no reason to trade stocks if you didn't have
• 43:19
  Speaker 2: non-public information.
• 43:21
  Speaker 1: The fact you have fraud shows that there's been so
• 43:23
  Speaker 1: much trust that people haven't stopped to check what's actually happening.
• 43:26
  Speaker 1: And trust is a good thing. But I'm curious, if
• 43:29
  Speaker 1: you get these kind of frauds coming into public view,
• 43:31
  Speaker 1: whether it's Madoff, whether it's any of the other frauds
• 43:34
  Speaker 1: we talked about, doesn't that then erode people's trust in
• 43:37
  Speaker 1: the system and begin to essentially take away the very
• 43:41
  Speaker 1: essence of what you think is so good for a
• 43:43
  Speaker 1: functioning capitalist economy?
• 43:45
  Speaker 2: I think what erodes people's trust in the system is
• 43:49
  Speaker 2: when this kind of dishonesty is seen to have no consequences.
• 43:54
  Speaker 2: So you can run at a very high level of
• 43:58
  Speaker 2: fraud if people have a baseline assumption that when it
• 44:02
  Speaker 2: is found, it will be prosecuted. My favorite example is
• 44:07
  Speaker 2: your own newspaper, of course, was founded without fear or
• 44:12
  Speaker 2: without favor, which in the time was controversial. widely understood
• 44:16
  Speaker 2: in London in the 19th century to mean, unlike all
• 44:19
  Speaker 2: the other newspapers, the Financial Times does not take bribes
• 44:22
  Speaker 2: from stock promoters.
• 44:23
  Speaker 1: Exactly. By the way, we still don't. We're very proud
• 44:25
  Speaker 1: of that. We are trying to be squeaky clean. So
• 44:28
  Speaker 1: what I'm hearing from you then is that essentially, just
• 44:31
  Speaker 1: coming to the final wrap of our discussion, the conclusion,
• 44:35
  Speaker 1: I guess, is that fraud is endemic. to a in
• 44:38
  Speaker 1: some ways it has a good aspects it shows that
• 44:40
  Speaker 1: there's enough trust in society to enable fraud to happen
• 44:43
  Speaker 1: and we want to have trusting societies but if you
• 44:46
  Speaker 1: want to maintain trust in the face of fraud at
• 44:49
  Speaker 1: all costs you have to make sure that there's actually
• 44:52
  Speaker 1: a sense of consequences and retribution when things actually happen
• 44:57
  Speaker 1: which of course happened with Madoff to some degree it
• 45:00
  Speaker 1: happened with LIBOR it never really happened properly with the
• 45:04
  Speaker 1: 2008 great financial crisis But that's in some ways a
• 45:07
  Speaker 1: key conclusion from here, isn't it?
• 45:09
  Speaker 6: Yeah.
• 45:10
  Speaker 3: I mean, I remember talking to a head of a
• 45:12
  Speaker 3: major stock exchange who I'm not going to name. And
• 45:15
  Speaker 3: his view was that the most of stock market manipulation,
• 45:20
  Speaker 3: inside trading, they wouldn't really catch. His job was when
• 45:24
  Speaker 3: they did catch somebody to fall on them like a
• 45:26
  Speaker 3: ton of bricks, to almost be deliberately draconian and over
• 45:30
  Speaker 3: the top and really go for them. to send a
• 45:32
  Speaker 3: signal to society that when you finally do catch somebody,
• 45:35
  Speaker 3: there are consequences. And that was the important bit, really,
• 45:38
  Speaker 3: that people were seen to be punished.
• 45:40
  Speaker 2: Yeah, and it's kind of a ritual.
• 45:43
  Speaker 1: And the one thing I was very struck by was
• 45:45
  Speaker 1: after the Resolution Trust Corporation, the big banking scandal with
• 45:47
  Speaker 1: savings and loans in America in the early 1990s, 2,000
• 45:51
  Speaker 1: American bankers went to jail. After the 2008 crisis, almost
• 45:56
  Speaker 1: no one did. And that, of course, helps to explain
• 45:58
  Speaker 1: why we have such poisonous politics today.
• 46:01
  Speaker 3: Absolutely.
• 46:01
  Speaker 2: I couldn't agree with that more.
• 46:03
  Speaker 1: Well, listen, thank you so much, Dan, for coming on.
• 46:05
  Speaker 1: It's been such a fascinating and in many ways counterintuitive discussion,
• 46:10
  Speaker 1: but very important. And I said at the beginning, this
• 46:13
  Speaker 1: stuff isn't on any classic Economics 101 class, but I
• 46:17
  Speaker 1: think it should be. So thank you.
• 46:19
  Speaker 3: And Dan, thanks so much for being with us here today.
• 46:22
  Speaker 3: This has been fascinating and quite fun as well.
• 46:25
  Speaker 2: Oh, thanks ever so much, both of you. It's been
• 46:27
  Speaker 2: absolutely great.
• 46:28
  Speaker 1: And that's it for this week's episode of The Story
• 46:31
  Speaker 1: of Money.
• 46:31
  Speaker 3: If you like this episode, please make sure to subscribe
• 46:34
  Speaker 3: and review the show. Comment underneath. We do read them all.
• 46:37
  Speaker 3: I'm Robin Wigglesworth.
• 46:38
  Speaker 1: And I'm Gillian Tett.
• 46:39
  Speaker 3: We'll see you again next week.