Fiduciary Duty to Cheat? Jim Chanos Reveals the Perverse New Mindset of Financial Fraudsters (by Lynn Parramore)

By Lynn Parramore, a senior editor at Alternet. Cross posted from Alternet

Editor's note: This article is the first in a new AlterNet series, "The Age of Fraud."

Hustlers. Cheaters. Crooks. American business has always had them, and sometimes they’ve been punished. But today, those who cheat and put the rest of us at risk are often getting off scot-free. The recent admission of Attorney General Eric Holder that systemically dangerous megabanks may escape prosecution because of their size has opened a new chapter in fraud history. If you know your company won’t be prosecuted, a perverse logic says that you should cheat and make as much money for shareholders as you can.

Jim Chanos is one of America’s best-known short-sellers, famed for his early detection of Enron’s fraudulent practices. In deciding which companies to short (short-sellers make their money when the price of a stock or security goes down), Chanos acts as a kind of financial detective, scrutinizing companies for signs of overvaluation and shady practices that fool outsiders into tlhinking that they are prospering when they may be on shaky financial footing. Chanos teaches a class at Yale on the history of financial fraud, instructing students in how to look for signs of cheating and criminal activity. I caught up with Chanos in his New York office to ask what’s driving the current era of rampant fraud, who is to blame, what can be done, and the ways in which fraud costs us financially and socially.

Lynn Parramore: You’re often characterized as a short-seller. How does fraud become a concern in that context?

Jim Chanos: One of things we like to say is that in virtually all cases of major financial market fraud over the past 20 years, the only people who really brought forth the fraud into the light were either internal whistleblowers, the press, and/or short-sellers. It was not the normal guardians of the marketplace – regulators, law enforcement, external auditors or people like that — that did it. It was people who had an incentive to come forward either for personal reasons or for profit to point out what was going on at the Enrons and the Sunbeams and Worldcoms. Short-sellers played an important role in the marketplace not only in terms of capping, sometimes, irrational exuberance in terms of prices, but also in ferreting out wrongdoing.

LP: Researchers have created all kinds of tools, like software to detect speech patterns associated with lying, to try to detect fraud. What are some of the best tools for catching financial fraudsters?

JC: There’s no single tool that works all the time, and some of them are kind of interesting, like the voice detection, or Bedford’s law, which looks at numbers and repetition patterns in accounting. But we have seen some models that we work with and I teach in my class– frameworks of fraud and fraud analysis – that have been helpful in looking down through the years where we’ve seen patterns continue. One is a wonderful checklist, the Seven Signs of Ethical Collapse in an organization. Some are clearly intuitive, such as a board full of one’s cronies or an obsession with making earnings forecasts. But some are not so obvious, for example, doing good to mask doing bad.

LP: Good deeds can be a sign of fraud?

JC: One of the more interesting observations in the world of fraud is that some of the most egregious frauds were some of the most philanthropic companies in their communities. In some ways, if you look at Bill Black’s theory of the corporation as both a weapon and shield (we teach a lot of Bill Black’s things in my class), you can begin to see that that would be one way in which the bad guys in corporate suites would basically use the corporation as a shield. They’d say, well, look at all the wonderful things we do in the community, how many people we employ. We give to hospitals, we give to the Little League team, and so on. Not all these things would be immediately obvious to the casual observer.

LP: You’re known for your early detection of Enron’s problems. How does a company like Enron stay in business for years? How is the fraud sustained over time?

JC: It’s one of the great questions, Lynn, and I think that in the case of Enron, there were a lot of people getting rich aiding and abetting what turned out to be to be a fraud. They may not have known it was go-to-jail fraud, as it turned out to be (and most fraud certainly does not end up in jail sentences for the perpetrators, as we know).

But if you look, for example, at the investment banks that were in on structuring the offshore vehicles that Andy Fastow used to offload bad investments from Enron the parent to these vehicles without telling Enron shareholders that he’d also given them a secret agreement that they would made good any losses by issuing Enron stock (that, by the way, was the crux of the fraud of the firm), when you see just how much in fees a lot of the banks and brokers made in these things, there’s an awfully strong incentive to look the other way and not ask the tough questions. That’s really one of the big flaws, I think, in our current market structure.

LP: What do we know about the timing of frauds? When are they most likely to happen?

JC: One of our models is the Kindleberger-Minsky model, named after Hyman Minsky and Charles Kindleberger. It’s a macro model, and basically it takes a look at various market cycles. What we find is that the greatest clustering of fraud in the financial markets occurs, as you might imagine, during and immediately after the biggest bull markets. As I like to tell my students, it’s basically a period in which people suspend their disbelief. Everybody’s getting rich and it becomes increasingly easy to sell more questionable schemes and investments to investors. Typically the major frauds are uncovered or unmasked after the markets decline, for example, Bernie Madoff or Enron, when investors need money from other losses (and often these things have a Ponzi-like nature and can’t finance themselves from a self-sustaining basis) or people simply begin to build back their sense of disbelief and begin to ask tough questions that they didn’t ask during the bull market. So we do see that the fraud cycle generally does track the broader financial market cycles we see with a little bit of a lag.

LP: One look at your Yale syllabus shows that fraud has been rife through business history. Yet for the last 20 years, many people have insisted with near-religious conviction that markets are efficient and therefore resistant to fraud. Where is this belief coming from, and why is it a problem?

JC: It rests upon an assumption that is deeply flawed, and that is that the people who are stewarding your capital in the marketplace — the boards of directors and the people that the boards hire – management — are acting not only in your best interest, but are playing by the rules all the time, so that, for example, the accounts that the company puts together for the accountants (and keep in mind, management prepares financial statement, not accountants, not the auditors) are accurate. The auditors simply review them, and that’s an important point I always stress to my class. If there are games being played, and if you read the boilerplate of any auditor’s opinion, it says “we rely on the statements of management” – and so if, again, the people in the corporate suite have ethical flaws, we have a system based on truth-telling that may not be exactly always accurate.

I point out to my class that in 1998 there was a survey — Business Week (which is owned by McGraw-Hill) and McGraw-Hill (which also owns Standard and Poor’s) had a conference for the S&P’s 500 chief financial officers. They asked these chief financial officers if they’ve ever been asked to falsify their financial statements by their superior. Now, the chief financial officer’s superior is the chief executive officer, or the chief operating officer—basically the boss. It was a stunning—of course anonymous – survey. 55 percent of the CFOs indicated they’d been asked, but did not do so. 12 percent admitted that they’d been asked and did so. And then 33 percent said they’d never been pressured to do that. In effect, only one third of the companies in the S&P’s 500 at that time did not have a CEO or COO try to pressure their financial officer to falsify financial results.

So this is agency risk writ large. Investors need to know that. They need to know that an awful lot of games are being played with the numbers and with disclosure and they’ve got to be on their guard. As Tony Soprano once said, as he exhorted his minions to redouble their efforts in the rackets, “We don’t got one of these Enron things going.”

LP: How much of the American economy do you think is built on fraudulent business models? How do we compare with other countries?

JC: Surveys have been very consistent –anonymous surveys of CFOs — and we’ve seen it in some other data we present in our class from various global entities. It appears that incidents of fraud in publicly traded corporations (globally) is somewhere in the order of 10-15 percent of the companies.

Now, that does not mean they’re all Enrons. An awful lot of fraud is, well, I didn’t reserve for bad debts and my earnings were overstated for a few quarters but then we reversed it later, and it’s probably not go-to-jail-type fraud. But it is misrepresenting numbers to the marketplace and to investors. And I think that you can still lose money if it gets revealed when you own the securities. So investors do have to have a healthy skepticism even when it comes to reasonably well-regulated markets like the U.S. and the U.K., because there are incentives, given the stock option-type compensation or the bonuses based on profitability. It gives management an awful lot of latitude to play games with accounting.

LP: Let’s talk about bubbles. Being mistaken or overly excited isn’t fraud. How do you distinguish investor euphoria from fraud? What’s the role of fraud in creating and sustaining bubbles?

JC: If we look at the recent global financial crisis, a lot of people say: why were there no prosecutions? One of the first sort of default defenses you heard over and over again is well, stupidity is not a crime, and making bad decisions is not a crime. It may certainly lead to grievous losses, but that’s the marketplace. And I agree with that 100 percent. The problem is that financial crimes, unlike crimes of passion and crimes of opportunity, come with their alibis already built in.  You build a veneer of legitimacy about what you’re doing. You get accountants to sign off on what you’ve done. You don’t look at any emails or get sent any emails –- at Enron Jeff Skilling never saw any emails (so how do you run a global trading powerhouse and never use email, right?).  We teach this legal concept called “willful blindness,” and that is, in some cases senior executives are cut out intentionally from controversial things because they don’t want to be able to say, well, I approved that or I saw that. Someone below them is compensated quite handsomely for taking the fall, if you will.

So we have to understand that the classic definition of fraud is intent to deceive. I am intentionally trying to tell you something that is not true, that I know is not true or I have reason to believe is a reckless disregard of the truth. That is still very difficult to prove legally. But sometimes the market renders its own judgment if the preponderance of evidence in the case of a Lehman Brothers or a Countrywide is such that the executives are not exactly being guardians of the truth.

It is difficult to prosecute these cases. We’ve had the stunning admission by the Justice Department in the past month that they put into their calculus as to whether or not to prosecute crimes in the financial arena as to the systemic effect of that. My head is still reeling from that admission. Most people would agree that that’s not the Justice Department’s role. And I think it’s caused a really reasonable, serious, continued undermining of trust in our markets.

While we may have benefitted from not revealing additional fraud during the dark days of ‘08 and ’09 by indictments and so forth, I still think you have the exogenous cost effect of a lack of trust by our public and by other investors. In effect, it raises the cost of capital. It depresses valuations. If people think that the game is rigged and they’re not in on it, they’re going to put their money somewhere else. And that’s almost impossible to quantify. But you know there’s an effect.

LP: If fraud is widespread, that means the government has failed as a regulator. What are the roots of that failure? Are the tricks too hard to understand? Is it is the prosecutors? Money in politics? What’s going on?

JC: Well, there are some obvious answers to this. Let me say that one of the things I teach in my class, which is technically a history class, is that this goes in waves. As Bill Black points out, the big financial crisis – the banking crisis – prior to the last one, in the early '90s, saw a rash of prosecutions, as did the 1930s after the Pecora Commission, where there was really a public drive to clean up the markets. But if you go back to the 1870s, and the Crédit Mobilier, which was the Enron of its day, scores of lawmakers and the standing vice president were caught with their hand in public till – being paid off by Union Pacific Railroad through their fraudulent Crédit Mobilier construction company. But there were just reprimands. No indictments. The public was outraged; similarly to today, but law enforcement and Congress at the time did not police themselves.

So we do see different public responses and legal responses to different waves of fraud. Having said all that, I think that certainly some observations would be that the concept of regulatory capture and the revolving door is a big one. I mean, how tough are you going to be on industry that you oversee if you’re going to go back into that industry every four or eight years. I think that really muddies the water in terms of getting people who really feel, like, say, a Stanley Sporkin did in the '70s at the SEC, that wrong is wrong and we’re going to go after it.

In some ways, as much as I consider myself a Democrat, I would say that the most prompt and vigorous response to fraud we’ve seen in the last 20 years has been the Bush administration’s crackdown on Enron, Tyco and Worldcom following the revelations of these massive frauds earlier in the millennium. Despite campaign contributions, John Ashcroft’s Justice Department went after these people and put the resources and set up the task forces and brought them to justice, which is what we’ve not seen in the last five years.

So you never know. A lot depends on the mood, and really, leadership at the top to say, this is wrong and we’re going to bring these people to justice.

LP: Journalists have played a key role in exposing fraud, but they have often been complicit, too. Are the media doing their job covering fraud?

JC: It’s funny because I remember when I spoke to Bethany McClean in early 2001 about Enron, I sort of scoffed at the idea that her magazine – Fortune, at the time – would do anything because Fortune kept putting Enron at the top of its most-admired-companies list. Sometimes it just takes the journalist to actually do the work and get the story and convince a good editor that, well, no matter what we said about it in the past, this is an important story that we need to tell the public. And there are still journalists, like Bethany, out there. Jesse Eisinger is another one who does just amazing work. Jon Weil at Bloomberg –I’m happy to give these people a shout-out because I think they played an important role, and they’re read avidly, so there is a market demand for this kind of journalism—to really call it like they see it.

But journalists are human beings and organizations are filled with human beings and when the bull market gets going, you know, no one wants to be the one who says the emperor has no clothes, unless you can actually point to a smoking gun and say, well, look at this.

LP: Right now, the news is filled of reports of fraud, from companies lying to regulators to money laundering and so on. Yet the GOP is trying to abolish Dodd-Frank, which addresses fraud by providing greater protection for whistleblowers, for example. Why would they be doing this?

JC: Well, I think the best comment was from a senior Democratic senator a number of years ago, who simply and bluntly said, “The banks own this place.” I always tell the story that right after the Bear Stearns collapse in March of ’08, the heads of all the big banks and brokers, they headed down to Washington immediately in April of ’08 to talk to senators and other lawmakers and regulators.

As we now know, what they didn’t ask for was forgiveness for their misdeeds or perhaps forbearance on capital until they could get their house in order or to work with the regulators on what was obviously a massive credit crunch coming. No, what they asked for was two things. They asked for the accounting rules to be liberalized on their hard-to-value assets and for short-sellers to be cracked down on. That was their focus, and, by the way, both happened. There were short-selling bans shortly thereafter and the accounting profession, at the urging of Washington, changed, liberalized, the rules on hard-to-value assets in March of ’09. They got what they wanted, and this tells you something.

It really is amazing to the extent that lawmakers, despite all the evidence that major legislative initiatives that banks have asked for in the last 50 years have generally been harmful to the public purse, they’ve generally gotten what they’ve asked for. You can’t be too cynical.

LP: Will Dodd-Frank really have an impact?

JC: Well, again, banks have gotten into all kinds of trouble throughout their history—with rigorous regulation and not-so-rigorous regulation. It’s the nature of the beast. But things like the Volcker Rule make common sense – that we should not put taxpayers at risk for trading activities, for example. But the banks have made a very strong case that most of what they’re doing can be seen as a hedge in one way or another, and some other part of their business, so therefore it’s not trading. I think all of those activities should be done at the holding company and not at the deposit-taking institutions. That’s a simple way to handle this.

I know banking is complex, but so are $700 billion bailouts. And I think there needs to be a sense by depositors and taxpayers who want a safe place to put their money that the deposit-taking institution is regulated tightly and insured properly, and that if banks want to do venture capital lending, private equity investments, hedge fund investments, or derivatives contracts, they can do so in an investment arm that is not as regulated or protected by insurance schemes. It’s seems to me to be common sense, but yet you have armies of lobbyists who will argue vociferously the opposite.

LP: What’s the role of the SEC in preventing and detecting fraud?

JC: The SEC has long held, for example, that short-selling plays an important role because of not only price discovery but also the fraud detection aspect, and they’ve always been pretty vocal about that. But the SEC is outgunned. The markets have grown much, much greater than their budget’s ability to police the markets. They also, you have to remember, have no criminal prosecution powers. That’s the Justice Department, and fraud, by definition is a crime. So you have the 10b-5 rules under the SEC, which are civil, but in fact, in much of this I lay much of the problems about fraud that we have at the feet of the Justice Department, not the SEC, because again, you need to prosecute, and that’s just not happening.

The SEC answers to Congress budget-wise, and this raises certain issues. I think generally when the SEC has gotten involved, they do a good job. But it’s tough, and they’re behind the curve. I think that’s more due to issues of budget and others than to lack of willingness to take on things. I think that they’re doing the best they can but they don’t have the resources.

LP: What are the economic and social impacts of fraud that worry you the most?

JC: The few things that jump out are obviously fraud at institutions that are backed by the taxpayer. Because there you’ve brought someone to the table that doesn’t know they’re at the table – in effect, the public or a small depositor. When the U.S. has to come to the rescue of these big institutions where clearly games were being played, we all lose. If I’m a hedge fund manager or investor, or if I’m a day trader, I understand the risks I’m taking. I’m a big boy, ok? And if I don’t do my work and someone pulls the wool over my eyes, well, shame on me.

But if my aunt in Okauchee Lake ends up having to foot the bill for Countrywide or Lehman Brothers or AIG, that’s not fair. And again, we get to a basic level of fairness. Is that eroded? Is trust in our market eroded because people think the game is rigged? Quite frankly, despite the recovery in the stock market, I think there is still an ongoing perception by the public that the game is rigged, and that my restaurant went out of business, and I didn’t get bailed out, but the guys on Wall Street did and they’re making bigger bonuses than ever. They got to start over with my money, but my restaurant didn’t. And that’s really a sense of fairness, I think, that continues to erode in this country. That’s number one.

Number two, I think that the costs for fraud tend to also disproportionately positively affect the wealthiest people in the country. So it also, in a weird way, increases the income inequality issue, and I think that’s something that’s beyond the purview of me in this interview, but it’s something I think that policy makers should keep in mind, because again, the people taking the biggest risks and taking the biggest paychecks and bonuses — if they had been hedge fund mangers, they would have been wiped out, and that’s that. End of game. But because they were doing it in too-big-to-fail institutions, they got to keep playing. In a weird way it is the antithesis of the free market. The free market would have taken these people out a long time ago. But, in fact, the subsidized market that we have, where the taxpayer stands behind all these bad decisions and the bad accounting, continues to exacerbate the income inequality issues.

LP: How does too-big-to-fail create fraud, and would breaking up the big banks be helpful in addressing it?

JC: Well, as we now know from Lanny Breuer and Eric Holder, too-big-to-fail is also too-big-to-jail. We now have admissions by the federal government that, in fact, this behavior was not extensively examined or investigated because of systemic issues.

It raises an interesting point, doesn’t it? Because if now, as the senior member of a bank, or the board of a bank, I know that there are no criminal penalities for breaking the rules, don’t I have a fiduciary responsibility to my shareholders to actually play fast and loose? Because if I get caught, that’s just the cost of doing business? I know it’s a frightening thought, but if carried to its logical extreme—if truly people believe that because of their size, they can’t be prosecuted, it actually brings forth a new issue of moral hazard extreme: illegal behavior.

That’s why equality under the law is an important concept – one that is being violated now.

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30 comments

  1. from Mexico

    The position Adam Smith took in Moral Sentiments is not easily reconcilable with the one he took in The Wealth of Nations. But with the devolution of classical economics into neoclassical economics, all ambiguities disappear, along with Das Smith Problem. Morality, according to neoclassical economic doctrine, must be hunted down and destroyed, root and branch.

    Nowhere is this more evident than in the formulations of the neoclassical guru, Nobel Laureate and Chicago School of Economics professor Gary Becker. As Robert H. Nelson explains in Economics as Religion:

    It says in the Ten Commandments in the Bible, Thou shalt not steal (Exodous 10:15). For Becker, however, understanding (and preventing) crime is explained not by such Christian homilies, but by hard economic motives. Indeed, stealing is simply another form of rational maximization of individual income and utility. Most people refrain from stealing because it would not be profitable for them, for some people it happens to be profitable and they become thieves. Economically a theft is a “redistribution” of resources, in much the same broad technically speaking, as a government welfare program.

    Of course, most people would naively object that stealing is morally wrong, but that the welfare form of redistribution of income is legitimate because it has been approved by democratic political process. However, the Chicago school also finds that official rationales in politics often cannot be taken at face value. Welfare programs really involve coercively taking money from some people to give to others. If collective “theft” by government can be analyzed without one’s feeling a need to interject extensive moral commentary, why not pure theft by ordinary criminals in the same economic category? As Becker argues, the “basic motivation” of criminals is the same as that of “other persons.” Criminals are distinguished not by their lack of moral character, but by the fact that “their benefits and costs differ,” perhaps in part a consequence of their having different physical and mental endowments for crime.

    Becker at one point comments that stealing per se is not inefficient. In a real sense, “frauds, thefts, etc., do not involve true social costs but are simply transfers, with the loss to victims being compensated by equal gains to criminals.” However, responding to their private incentives, people will steal up to the point where the objects gained (stolen) have a money value equal to the work effort in doing the stealing. It is only in this sense that it is possible to judge criminal actions as inefficient (“wrong” in the morality of economics) because acts of stealing produce no useful outputs, and yet can absorb considerable productive resources of society (the time and effort of the criminals themselves).

    In considering how society should deal with crime, Becker argues that the total social welfare function must also include “the social value of the gain to offenders” from crime.

    [….]

    Becker’s treatment of crime highlights the absence of any absolute social concepts such as “justice” or “morality” in the framework of thought that he applies to human behavior. Individuals may constrain their behavior of their own accord (based on some concept of “justice” in their mind) but there is no place where “society” meaningfully says, “this is not allowed because it is ‘wrong.’ “

    [….]

    To be sure, economic analysis in general has this characteristic – as discussed in Chapter 3, good and evil are transformed to become efficient and inefficient in Samuelson’s Economics as well. Most economists in the past, however, limited its application to the commercial sectors of society. They agreed that behavior in other areas of life might be driven by considerations that are difficult or impossible to incorporate into the standard economic framework of analysis. Implicitly most economists took for granted that there could exist a dichotomous morality… The great novelty of Becker’s analysis is that he in essence denies this dichotomy. The real influence – the meaningful existence – of any collective “values,” “religion,” “culture,” or “justice” that go beyond maximization of individual benefits and costs does not exist anywhere.

    [….]

    [T]he defense of a market system as a desirable institution that should be maintained by society requires a certain willingness to forgo “corruption” and other opportunistic gains that could well serve the self-interest of many individuals involved. Economists have never given a good explanation for their dichotomous framework of morality with respect to the role of self-interest in the world. It is a very large intellectual gap. Becker thus has performed an important intellectual service by bringing the whole issue to a much greater prominence. He does this simply by asking: What happens if the traditional individualism of the market is assumed to extend systematically into every area of life without exception? The very asking of the question, as is often the case in economics, is more important than the subsequent analysis — where Becker’s efforts are often flawed.

    1. ContrarianOntarian

      Greenspan argued that market players could be trusted to behave themselves because it was in their own self-interest, and he was colossally wrong to the point that just about everything else he has ever said has been forgotten. Crime and Justice are not individualistic concepts, but collectivist, and every market is collectivist. No rules, no market.
      Most who read Adam Smith rarely familiarize themselves with ‘Theory of Moral Sentiments’ and merely take the stuff they agree with in ‘…Wealth of Nations’ and ignore the numerous warnings, cautions and caveats because they are more comfortable with the individually-expedient ‘it’s not personal…it’s just business’ philosophy as practiced by organized crime.

      1. digi_owl

        Makes me wonder if the low on crime nations (that are not out and out police states) have a collectivist core in their culture. Japan for instance seems to have had a very collectivist culture, but one that is slowly turning individualistic as western values become more and more present. This in part based on their cultural creations, that seems stuffed to the hilt with the struggle between individual desires and the good of the masses. This in contrast to western media where the individual is glorified to a almost absurd degree.

      2. readerOfTeaLeaves

        Yes, and that’s why the work of anthropologists like David Graeber (“Debt, the First 5000 Years”), as well as social psychologists, is so important for current economic discussions, analysis, and policy.

        Morality is an issue of ‘mores’, acceptable norms that benefit the social context, thereby allowing individuals to flourish. One had assumed that the DoJ would have understood that simple fact. But apparently, Chanos has a much more clear understanding of this basic reality.

    2. allcoppedout

      I think this is as obvious as a wasp on the end of my nose Mexico. Jake is spot on. The problem is we’ve known this for centuries and been losing ground to the gamblers and thieves. One has to assume that our critique – something I find in places as diverse as university research methods symposiums, various blogs and crudely articulated ‘down the pub’ – cannot swat the wasp. The drivel I was expected to teach in various economics and management and organisational behaviour 101s and MBA modules was exposed as early as 1950 (before I was born) and by such stalwarts of the drivel as Peter Drucker as well as various critical theories.
      In many ways we are ‘bearing witness’.
      Steve Keen and others are right about a debt jubilee – I’d use the term leveling – but what can we do to make sure the same game doesn’t repeat itself?
      I sure (as an ex-cop) some decent cops could do a good job let loose on the big frauds and the political links – this in turn raises issues on policing police – a problem that is writ large in the question ‘what replaces the US military umbrella’. One senior UK cop went from London one week to denouncing freedom protests in Bahrain as criminals the next, demonstrating how easily bought off cops can be.
      How do our countries ‘compete’ (what would we replace competition with) if we actually get to the honest state? Would we just become the prey of countries not playing the honest game?

      The financial sector is essentially licensed piracy (it was always closely connected with Cortez, Drake and joint stock company thieving abroad). One might see the current fraud as come about because it’s overseas’ markets have become too perilous, its fleet has sailed home and is pointing its guns in the direction of our savings.

      We don’t even need the courage to face its guns. Yet we balk at pulling it down. Like many parasites it has infected us with the belief the sky will fall if we destroy it. We need some reality on live after the disease – especially as the parasite sends us dreams of doom on life without it.

      If we look at what Jim Chanos is saying on detective-shorters we can hardly be against such bringing Enron and the like down. In more complex biological metaphor we would seek inoculation against fraud to eradicate the disease, not constantly chase off with our shorting pistols to each outbreak like he guys who would turn up to board up windows and re-glaze them after burglaries. One subsequently admitted 60 such burglaries were his and detailed he made more from the glazing than thieving. I found a small notebook when I turned his drum over, listing £5 pay outs to police officers for the call outs. Cops were thus part of a monopoly trading ’empire’. £5 bought about 20 beers then – I burned the book.
      The very idea that markets can prevent fraud is a nonsense. The broken windows ruse had gone on for 10 years before my size nines blundered into it. How do we explain the fraud on wages being driven down to Chinese/Eastern European serf levels (similarities in pay between China, Romania, Bulgaria and Chechs are close – World Bank rhetoric was the ex-Soviets would catch up in 150 days!) – when clearly there could have been a leveling up? Do we know if Enron is an exception or run-of-the-mill but caught? How do weird logics like Obermensch being ‘worth’ huge amounts more just as everyone else gets less?
      We need much more complex models to understand economics and finance – yet also some very simple notions we can easily cope with. Pirates festering with disease are returning to out shores empty-handed. Cyprus has fallen and Spain and Italy may tempt – but all it needs is a wind ill to us to send them our way. I suspect if we trashed financial services entirely, banking utilities would rise the following morning – as quickly as the burglar-glazier was on my old beat.

    3. Jim

      The absence of a role for morality/traditions/values in Becker’s thought seems eerily similar to the unconcern that an overwhelming majority of the left/progressive community has had for morality/traditions/values issues over the past 200 or so years.

      Progressive/left thought has long argued for debunking or dismissing issues of morality and tradition (eg Marx—“the legacy of the dead generations weighs like a nightmare on the brains of the living” as well as 20th century Leninism, Stalinism and Maoism and certainly the sense of liberating oneself from the constraints of some traditions/values was also part of the 1960s.

      With the rise of MMT some bloggers and commetariat on NC are beginning to tiptoe around the problem—but it seems to be the case that morality and tradition cannot be produced on command or administered from the top down.

  2. Jim A

    Somebody smarter than me once said, “The only number from management that I believe is the one on the dividend checks.”

  3. jake chase

    What is missing from this otherwise excellent piece is the fact that virtually all contemporary corporate financial statements fall somewhere between the fictional and the fraudulent. Accounting is at the bottom of this, and the blame lies squarely on the SEC, which has shrugged off the complete cololapse of accounting standards.

    The role of auditors has changed from watchdog to enabler, and a big part of the problem is the drift into consulting (itself nothing but the justification of management wishlists, however dressed up and packaged in fancy binders and business school bs.)

    No doubt much of the dubious behavior is attributable to consolidation in the industry. Just during my working lifetime, Price Waterhouse, even as it has engorged one competitor after another, has morphed from a paradigm of probity to a courtesan enjoying featured roles in so many financial scams that its involvement can be seen as a coincidence only by those utterly confused about randomness.

  4. briansays

    the obama legacy-no ambiguity there is no difference between the parties despite the illusion of some on the left willing to give him a pass–the clarity of this is amplified by the hypocrisy of this administration in dealing with wall street—and the toothpaste ain’t gonna be put back in the tube by any future politician who has figured the short and easy path to election but more importantly re-election

    1. Wat Tyler

      I tend to agree on economic issues ,such as discussed in this post, but there still is a huge difference between the parties on social issues which makes voting Democratic an imperative – for me anyhow. Here in NC some idiot in the new GOP controlled legislature is proposing to establish an official state religion. The US constitution is to be invalidated on this point.

      Disgusted Jim in NC

      1. jake chase

        Social issues are a diversion, and always have been.

        Getting the State to sanction deviant behavior, and putting more Black faces in television commercials (where they seem invariably to assume positions of authority), will prove to be hollow victories in the United States of Mexico, which is what we will be by 2030 unless people wake up to economic issues.

  5. Jmd

    Jim Chanos does more to help the little investor than all the agencies of government combined…it is a travesty that Holder is being held-over for the second term.

    1. MaroonBulldog

      Attorney General Holder serves at the pleasure of President Obama. Holder would be gone if the president were not pleased.

  6. Hugh

    We live in a kleptocracy. We have witnessed in the last few years the largest financial frauds in human history. These were left uninvestigated and unprosecuted. More than this, the government, bought by those who committed and profited from these crimes, bailed them out, left them in place, reformed nothing, and indemnified them for their crimes in a series of “deals” that amounted to only tenths of a penny per dollar of damage done.

    Parramore and Chanos buy into Bill Black’s idea of a criminogenic environment. I have real issues with this. A criminogenic environment implies that while there is a lot of fraud in the financial system, indeed that the system is encouraging such frauds, the foundations of the system remain sound, and, despite all the evidence to the contrary, its problems are susceptible to reform.

    It is even more jarring to hear anyone talk about corrupt, joke legislation like Dodd-Frank with a straight face. But then do any of us expect a thoroughgong critique of the system from someone, like Chanos, who has profited so handsomely from it? Call this the Soros or Buffett effect. No matter what they say ultimately they are talking their book.

    1. allcoppedout

      Spot on Hugh. The lot needs to come down. The establishment will claim anyone saying this is a mad revolutionary. There is no reason to do anything on an unplanned basis of course. I doubt seizing the assets of the world’s rich and bringing in primitive banking would cause as much discomfort as Cyprus has already had.

    2. Ms G

      “No matter what they say ultimately they are talking their book.”

      Exactly.

      Ditto for the absurdity of anyone discussing the velvet glove in a new color that is Dodd Frank.

    3. jake chase

      I agree. Every reform in my lifetime has only engorged a new set of criminals and made life increasingly difficult for individuals. People caught in this corporatist web must either discover a niche or be plowed under. Most of the survivors owe their success to luck rather than design.

      The solutions trumpeted about seem increasingly fanciful and romantic, whatever their origin or perspective. One might as well be moving mountains using teaspoons.

    4. reslez

      A criminogenic environment implies that while there is a lot of fraud in the financial system, indeed that the system is encouraging such frauds, the foundations of the system remain sound, and, despite all the evidence to the contrary, its problems are susceptible to reform.

      Indeed, this is why Chanos can make statements like these with a straight face:

      “The problem is that financial crimes, unlike crimes of passion and crimes of opportunity, come with their alibis already built in…. That is still very difficult to prove legally…. It is difficult to prosecute these cases.”

      How about a thought experiment. Let’s pretend the scum elite were in charge of Congress and could write all their own laws and regulations. In this hypothetical scenario I imagine it would be quite difficult to prosecute the sorts of frauds the scum elite would be inclined to commit. And oddly enough that’s exactly how things work in our world. Too difficult to prosecute? Exactly as intended. Plus, who really wants to try too hard when you don’t want to do it in the first place?

      “I think that’s more due to issues of budget and others than to lack of willingness to take on things. I think that they’re doing the best they can but they don’t have the resources.”

      Yes, it’s quite convenient for banksters how the SEC doesn’t have the resources to prosecute. Plus, you know, we wouldn’t want to jeopardize their future career prospects.

      “[T]he costs for fraud tend to also disproportionately positively affect the wealthiest people in the country. So it also, in a weird way, increases the income inequality issue”

      Yes, very weird how having a lot of money to buy yourself impunity to prosecution and committing fraud gets you even more money.

      “In a weird way it is the antithesis of the free market.”

      There’s nothing weird about this. It’s as intended. Feature, not bug.

      I see no problems here. The system is working perfectly. They have the best government money can buy.

  7. LifelongLib

    “We’ve had the stunning admission by the Justice Department in the past month that they put into their calculus as to whether or not to prosecute crimes in the financial arena as to the systemic effect of that.”

    This sounds like a more refined way of stating my “nuts in a vise” theory — banks etc. are still on the verge of collapse, and any attempt to prosecute will cause a[nother] world-wide financial meltdown.

    1. Sierra7

      “Free Market Capitalism” is inherently self destructive……..
      If humanity in general cant come up with a better system to Improve the human condition then we will ultimately not only “consume” ourselves but this so far, beautiful planet.
      We don’t deserve it anyway.

  8. washunate

    Yep.

    When even the FBI was ignored on fraud warnings, it was pretty clear that fraud was a feature, not a bug.

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