Just about three months ago, I wrote a blog post which featured this quote, from Charles P. Kindleberger’s Manias, Panics and Crashes: “Swindles are a response to the appetite for wealth (or plain greed) stimulated by the boom.” Since then, the number of frauds, or swindles, that has been revealed has soared, a clear testament to both the breadth and degree of greed inspired by the current boom.
Most recently, we saw the collapse of Greensill Capital as the result of fraud. Like WireCard, Greensill was a relatively young finance company looking to disrupt its more mature competitors which took a few (illegal) short cuts in the process.
'Like Greensill, Katerra was backed by SoftBank’s Vision Fund, which encouraged collaboration between its portfolio companies. Greensill acted as a lender that could facilitate growth elsewhere in the SoftBank stable.' https://t.co/y5Y82sJuBg— Jesse Felder (@jessefelder) April 16, 2021
Then we saw the implosion of Bill Hwang’s family office, Archegos. While this may not look like your typical fraud, I would argue its failure was the result of market manipulation, enhanced by an obscene if not illegal amount of leverage, gone wrong. And isn’t market manipulation, “an act of deceiving or misrepresenting“?
'It was Hwang’s own orders that had helped make Viacom the year’s best performer in the S&P 500, forcing benchmark-tracking investors and ETFs to buy as well.' https://t.co/opPRvddgGR pic.twitter.com/6OLH5ozTrh— Jesse Felder (@jessefelder) April 8, 2021
What’s more, the Hwang playbook sounds a lot like what we have been seeing in the options markets for the past 18 months or so. It’s almost as if he, discovered his own, “perpetual motion machine,” for a time.
'For anyone who wondered about where the small day traders who made the 1990s so wild went, meet the 2020 version.' https://t.co/num0PjCF9n— Jesse Felder (@jessefelder) February 26, 2020
Speaking of manipulating prices, there is also the curious case of the mutual fund whose manager who simply decided to create his own fictional prices in order to enhance performance results.
'According to the SEC, Infinity’s chief investment officer, James Velissaris, had been "adjusting certain parameters" used by the pricing service. As a result, many of the fund’s holdings appear to have been overpriced.' https://t.co/V40nnAGXwU— Jesse Felder (@jessefelder) February 26, 2021
And then, of course, we have the wild world of SPACs which have been at the center of several outright frauds already. More broadly, however, it is looking more and more likely that SPACs could simply be an avenue for amoral characters to legally cheat investors.
'The SPAC structure could even have been designed to encourage "the bezzle," referencing a term coined by economist John Kenneth Galbraith to describe the period in which an embezzler has stolen money but the victim doesn’t yet realize it.' https://t.co/V2JtPiEBiW— Jesse Felder (@jessefelder) April 20, 2021
However, if their structure doesn’t constitute outright fraud, it’s looking more and more likely that their accounting methods, according to the SEC, did constitute a certain form of misrepresentation.
'The SEC blindsided the SPAC market this week with a warning that some companies may have to restate their financial results because of the way they accounted for warrants.' https://t.co/NcD9KY3tJb— Jesse Felder (@jessefelder) April 16, 2021
Similarly, another of the hottest segments of the investing universe also appears to have misrepresented itself to a great extent in order to attract capital.
'The SEC has found some investment firms that tout socially responsible investing were potentially misleading investors, part of the agency’s enhanced review of funds that claim to support environmentally friendly policies but don’t adhere to them.' https://t.co/qlDsjVM3MM— Jesse Felder (@jessefelder) April 11, 2021
Coming back to examples of outright fraud, the massive boom in commodities is already attracting fraudsters of its own.
'Before its journey from a port near Istanbul to China even began, about 6,000 tons of blister copper in more than 300 containers were switched with jagged paving stones, spray-painted to resemble the semi-refined metal.' https://t.co/rXB948IX3Q— Jesse Felder (@jessefelder) March 9, 2021
Hollywood is also getting into the act.
'They’d been lured into what federal investigators describe as one of the most audacious Ponzi schemes in Hollywood history. Horwitz collected $690 million from investors for movie deals authorities say were fictitious.' https://t.co/E9LPbZt9Oq— Jesse Felder (@jessefelder) April 27, 2021
Even central bankers can’t resist the urge to get in on “the bezzle.”
This story from my colleague Chloe (with myself on triangle) is just more and more astonishing the more one thinks about it, even in these fraud-filled times: Swiss prosecutors suspect the governor of Lebanon’s central bank has embezzled more than $300m. https://t.co/EMvXcmhxJR— Sam Gad Jones (@samgadjones) April 24, 2021
And then, of course, is “the bezzle” that came about entirely in response to the more politically acceptable, though perhaps no less reprehensible, actions of central bankers.
'"It’s a beautifully set up cryptographic system. It’s well made but there’s absolutely no reason it should be linked to anything economic," added Taleb. He said bitcoin has characteristics of what he calls a Ponzi scheme that’s right out in the open.' https://t.co/ijSAkWc2u7— Jesse Felder (@jessefelder) April 24, 2021
The cryptocurrency space has been the provenance of fraud for quite a while now.
'Prosecutors alleged that McAfee, Watson and other members of McAfee’s cryptocurrency team took in more than $13 million by victimizing investors who had bought into a fraudulent "pump and dump" scheme.' https://t.co/oYRwOu5Wb7— Jesse Felder (@jessefelder) March 6, 2021
That trend has only continued, and the related frauds have only grown in size, as cryptocurrencies have become ever more popular.
'A Turkish cryptocurrency trader is feared to have fled the country with $2 billion of his investors’ assets, garnered from fraudulent sales.' https://t.co/YJGn0SFXnk— Jesse Felder (@jessefelder) April 23, 2021
But, as Mr. Taleb seemed to imply, even beyond outright fraud, cryptocurrency best resembles a Ponzi scheme. It is telling that even a coin which promotes itself as a scam can succeed in this booming market for virtual currency.
TikToker makes ‘scamcoin’ as a joke and within an hour it’s worth ~$70mln lmao. pic.twitter.com/dmEAdNUG6Z— TikTok Investors (@TikTokInvestors) April 22, 2021
The only thing I find truly surprising about all of this is that, considering the firm’s involvement in manipulative valuation techniques; manipulative options trading; and SPACs, Softbank has essentially no exposure to the crypto space at all. I guess even they see it as ‘a bridge too far.’
"If I’m an investor, I want to know how they are coming up with these numbers. Otherwise, you can’t believe any of the valuations. The more they talk about accountants the less I would trust the numbers." pic.twitter.com/3NaWRpd3tV— Jesse Felder (@jessefelder) November 26, 2019
As noted at the outset, this explosion in fraud of late is merely indicative of just how successful the Fed has been in stoking “animal spirits.” JP Morgan said, “Nothing so undermines your financial judgement as the sight of your neighbour getting rich.” Clearly, financial judgement in a broad sense has been undermined like never before.
To come back to Kindleberger, “Crashes and panics often are precipitated by the revelation of some misfeasance, malfeasance, or malversation (the corruption of officials) that occurred during the mania… As the monetary system gets stretched, institutions lose liquidity and as unsuccessful swindles seem about to be revealed, the temptation to take the money and run becomes virtually irresistible.”
In this light, the acceleration in the revelation of fraud over the past few months suggests we could be nearing the tail end of the boom that inspired all of this greed in the first place. At the very least, it clearly suggests investors ought to be exercising a much greater amount of caution at present than they seem to be doing.