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Posts Tagged ‘fraud

“There’s class warfare, all right, but it’s my class, the rich class, that’s making war, and we’re winning”*…

In the past few decades, the Gini coefficient—a standard measure of income distribution across population segments—increased within most high-income economies. The United States remains the most unequal high-income economy in the world. The disparity reflects a surge in incomes for the richest population segments, along with sluggish or even falling incomes for the poorest, especially during bad economic times.

At the same time, the middle class is shrinking. The percent of Americans in the middle class has dropped since the 1970s, from 61 percent in 1971 to 51 percent in 2019. Some have moved up the income ladder, but an increasing number are also moving down. The middle class has also shrunk considerably in countries like Germany, Canada, and Sweden, but other advanced economies have generally experienced more modest declines.

From the introduction to the Petersen Institute for International Economics report “How to Fix Economic Inequality?

Founded by Pete Petersen (Lehman Brothers Chair, Nixon’s Secretary of Commerce, and co-founder, with Trump supporter Stephen Scharzman, of investment giant Blackstone), and overseen by trustees who include Larry Summers, Alan Greenspan, and George Schultz, PIIE is hardly a “progressive” think tank. But they are worried: quite apart from its obvious humanitarian toll, inequality at the scales that have emerged is highly unlikely to be sustainable (even at the human cost that we’ve so far been willing to pay). Put more bluntly, it is ever more likely to torpedo the domestic (and large hunks of the global) economy and indeed to threaten the stability of democratic society.

Other sources suggest that they have very good reason for concern:

• Even as the stock market hits new highs, 26 million Americans are suffering food insecurity (See also: “The boom in US GDP does not match what’s happening to Americans’ wallets.”

• The distribution of assets in the US (and other developed economies, but most egregiously in the U.S.) is even more skewed than income: see data in the PIIE report and “The Asset Economy.”

• And lest we think that this issue is confined to the U.S., social democracies throughout the developed world are feeling the same pressures (albeit mostly less dramatically).

FWIW, your correspondent doesn’t have terrifically strong confidence in the remedies mooted in the PIIE report. Even as the authors recognize that the issues are deeply structural, they confine themselves to recommending (what seem to your correspondent) relatively timid and incremental steps– which, even if taken (and most require legislative or regulatory action) are more likely to slow the polarization underway than to reverse it.

But they are worth contemplating, if only to provoke us to more fundamental measures (e.g., here). And in any case, it’s telling– and one can only hope, encouraging– that determined champions of the very neoliberal economics that have gotten us here recognize, at least, that unless we change course, we’re speeding into a dead end.

* Warren Buffett

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As we agree that fair’s fair, we might recall that it was on this date in 2001 that Enron, once #7 in the Fortune 500, declared bankruptcy. Six months earlier, it’s stock had traded as high as $90; it closed November 30th at 26 cents, wiping out billions in wealth (a appreciable part of it disappearing from employees’ pension plans). At the time, Enron had $63.4 billion in assets, earning it the honor of being the nation’s largest bankruptcy to that date. (It would be surpassed by the WorldCom bankruptcy a year later.)

Jeff Skilling, Enron’s CEO served 11 years in prison on several counts of fraud; Andy Fastow, Enron’s CFO, would served about 5 years. Chairman Ken Lay was also found guilty, but died before his sentencing. Enron’s accounting firm, Arthur Andersen (at the time a leader among the “Big 5”), which at least “missed” the egregious fraudulent practices in their audits of Enron, was effectively forced to dissolve after the scandal.

Published a year before the scandal broke

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“Results aside, the ability to have complete faith in another human being is one of the finest qualities a person can possess”*…

 

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Downtown San Francisco ablaze after the 1906 earthquake, from the slope of Nob Hill

 

Amadeo Peter Giannini was born in San Jose, California in 1870. The son of Italian immigrants had an outsized personality and unlimited faith in the American dream.

Giannini began by selling fruits and vegetables from a horse-drawn wagon. But he was made for bigger things. At age 34, he launched a small bank in the Italian neighborhood of North Beach, San Francisco. At the time, big banks lent only to large businesses, handled deposits of the wealthy, and frowned on aggressive advertising.

The novice financier knocked on doors and buttonholed people on the street. He persuaded “unbanked” immigrants that gold and silver coins were safer in vaults than under mattresses. Moreover, the money would earn interest at his “Bank of Italy.”

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On the morning of April 18, 1906, a massive earthquake hit San Francisco. The ensuing fires burned down the large banks. Their superheated metal vaults could not be opened for weeks—lest the cash and paper records catch fire when oxygen rushed in.

As flames threatened his one-room bank, Giannini spirited $80,000 in coins out of town. He hid the precious metal under crates of oranges and steered his wagons past gangs of thugs and looters in the streets.

As other banks struggled to recover, Giannini made headlines by setting up a makeshift bank on a North Beach wharf. He extended loans to beleaguered residents “on a handshake” and helped revive the city.

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The innovative bank welcomed small borrowers who might otherwise have to use high-cost loan sharks. Most banks at the time regarded people with modest incomes as credit risks not worth the paperwork. But experience had taught Giannini otherwise: that working class people were no less likely to pay their debts than the wealthy.

Seeking more customers, the former produce salesman returned to his old haunts—the fertile valleys of California. He “walked in rows beside farmers engaged in plowing” to explain how bank branches make credit cheaper and more reliable. Town by town, he built the first statewide branching system in the nation.

On November 1, 1930, the Bank of Italy in San Francisco changed its name to Bank of America. The bank today has the same national bank charter number as Giannini’s old bank— #13044.

When A.P. Giannini died in 1949, the former single-teller office in North Beach claimed more than 500 branches and $6 billion in assets. It was then the largest bank in the world…

How a humane response to a community tragedy launched what became the biggest bank in the world: “Bank of America: The Humble Beginnings of a Large Bank.”

* Haruki Murakami, The Wind-Up Bird Chronicle

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As we learn from our elders, we might recall that it was on this date in 2006 that the first news stories based on the Panama Papers were published.  A cache of 11.5 million leaked documents that detailed financial and attorney–client information for more than 214,488 offshore entities, all from Panamanian law firm and corporate service provider Mossack Fonseca, the Panama Papers chronicled tax evasion, money laundering and fraud involving 12 current or former world leaders; 128 other public officials and politicians; and hundreds of celebrities, businessmen, and other wealthy individuals from over 200 countries.

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An online chat between Süddeutsche Zeitung reporter Bastian Obermayer and anonymous source John Doe

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“When I consider Life, ’tis all a cheat”*…

 

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Sarah Howe’s early life is mostly a mystery. There are no surviving photographs or sketches of her, so it’s impossible to know what she looked like. She may, at one point, have been married, but by 1877 she was single and working as a fortune-teller in Boston. It was a time of boom and invention in the United States. The country was rebuilding after the Civil War, industrial development was starting to take off, and immigration and urbanization were both increasing steadily. Money was flowing freely (to white people anyway), and men and women alike were putting that money into the nation’s burgeoning banks. In 1876, Alexander Graham Bell invented the telephone, and in 1879 Thomas Edison created the lightbulb. In between those innovations, Sarah Howe opened the Ladies’ Deposit Company, a bank run by women, for women.

The company’s mission was simple: help white women gain access to the booming world of banking. The bank only accepted deposits from so-called “unprotected females,” women who did not have a husband or guardian handling their money. These women were largely overlooked by banks who saw them — and their smaller pots of money — as a waste of time. In return for their investment, Howe promised incredible results: an 8 percent interest rate…

All told, the Ladies Deposit would gather at least $250,000 from 800 women — although historians think far more women were involved. Some estimate that Howe collected more like $500,000, the equivalent of about $13 million today…

Then, in 1880, it all came crashing down. On September 25, 1880, the Boston Daily Advertiser began a series of stories that exposed Howe’s bank as a fraud. Her 8 percent returns were too good to be true. Howe was operating what we now know as a Ponzi scheme — 40 years before Ponzi would try his hand at it…

Rose Eveleth on the fascinating story of a 19th-century scammer, and what she can teach us about women, lying, and economic boom-and-bust cycles: “The No. 1 Ladies’ Defrauding Agency.”

* John Dryden, Aureng-Zebe

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As we remind ourselves that what’s too good to be true usually isn’t, we might recall that it was on this date in 1946 that FBI agents arrested Chicago gangster George “Bugs” Moran in Kentucky.

During the Prohibition era, Moran was one of the biggest organized crime figures in America, and has been credited with popularizing the drive-by shooting. He was a rival to Al Capone, who gunned down seven members of Moran’s gang in the 1929 Saint Valentine’s Day massacre.

Unlike Capone, Moran wasn’t a clever crime boss. By 1946 he had been reduced to common crimes like bank heists. He was basically penniless. The FBI found him renting an upstairs apartment from a law-abiding couple in Henderson, Ky.  [source]

220px-Bugs_Moran source

 

Written by LW

July 6, 2019 at 1:01 am

“A firm’s income statement may be likened to a bikini- what it reveals is interesting but what it conceals is vital”*…

 

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A recent (Roughly) Daily noted (by way of a quote from James Surowiecki) that “the challenge for capitalism is that the things that breed trust also breed the environment for fraud.”  A painful recent example was, the failure of credit ratings agencies honestly to assess the risk of derivatives being traded against home mortgages, which contributed mightily to the crash that occasioned The Great Recession.

But, as Richard Brooks argues, there’s a bigger and more pervasive problem still lurking:  accountancy used to be boring – and safe.  Today it’s neither.  Have the ‘big four’ firms become too cosy with the system they’re supposed to be keeping in check?  Are we in for Enron all over again, only this time on the financial system-wide basis?

The demise of sound accounting became a critical cause of the early 21st-century financial crisis. Auditing limited companies, made mandatory in Britain around a hundred years earlier, was intended as a check on the so-called “principal/agent problem” inherent in the corporate form of business. As Adam Smith once pointed out, “managers of other people’s money” could not be trusted to be as prudent with it as they were with their own. When late-20th-century bankers began gambling with eye-watering amounts of other people’s money, good accounting became more important than ever. But the bean counters now had more commercial priorities and – with limited liability of their own – less fear for the consequences of failure. “Negligence and profusion,” as Smith foretold, duly ensued.

After the fall of Lehman Brothers brought economies to their knees in 2008, it was apparent that Ernst & Young’s audits of that bank had been all but worthless. Similar failures on the other side of the Atlantic proved that balance sheets everywhere were full of dross signed off as gold. The chairman of HBOS, arguably Britain’s most dubious lender of the boom years, explained to a subsequent parliamentary enquiry: “I met alone with the auditors – the two main partners – at least once a year, and, in our meeting, they could air anything that they found difficult. Although we had interesting discussions – they were very helpful about the business – there were never any issues raised.”

This insouciance typified the state auditing had reached. Subsequent investigations showed that rank-and-file auditors at KPMG had indeed questioned how much the bank was setting aside for losses. But such unhelpful matters were not something for the senior partners to bother about when their firm was pocketing handsome consulting income – £45m on top of its £56m audit fees over about seven years – and the junior bean counters’ concerns were not followed up by their superiors.

Half a century earlier, economist JK Galbraith had ended his landmark history of the 1929 Great Crash by warning of the reluctance of “men of business” to speak up “if it means disturbance of orderly business and convenience in the present”. (In this, he thought, “at least equally with communism, lies the threat to capitalism”.) Galbraith could have been prophesying accountancy a few decades later, now led by men of business rather than watchdogs of business…

A chilling, but important report: “The financial scandal no one is talking about.”

* Burton G. Malkiel

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As we count beans, we might recall that it was on this date in 1873 that Samuel Clemens (the author known as Mark Twain) received a U.S. patent, his second, for a self-pasting scrapbook (No. 140,245).  His creation used a dried adhesive on its pages so that users need only moisten a page in order to attach pictures.

In 1871, Clemens had scored his first patent, for “an Improvement in Adjustable and Detachable Straps for Garments”–an adjustable strap that could be used to tighten shirts at the waist that was later used on women’s corsets, and is considered by many to be the precursor of the adjustable bra strap.  He earned his third patent in 1875 for a history trivia game,“Mark Twain’s Memory-Builder Game.”

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Written by LW

June 24, 2018 at 1:01 am

“The challenge for capitalism is that the things that breed trust also breed the environment for fraud”*…

 

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WannaCry, a computer virus that encrypts data and demands a ransom to unscramble it, hit thousands of computers in May, causing several hospitals in Britain to close their doors. Hardly a week now goes by without a large company admitting that its systems have been breached: Yahoo recently confessed that 1bn accounts had been compromised in an attack in 2013. Cyber-attacks are a scourge of modern life, but their history goes back further than you might expect.

The world’s first national data network was constructed in France during the 1790s. It was a mechanical telegraph system, consisting of chains of towers, each of which had a system of movable wooden arms on top. Different configurations of these arms corresponded to letters, numbers and other characters. Operators in each tower would adjust the arms to match the configuration of an adjacent tower, observed through a telescope, causing sequences of characters to ripple along the line. Messages could now be sent much faster than letters, whizzing from one end of France to the other in minutes. The network was reserved for government use but in 1834 two bankers, François and Joseph Blanc, devised a way to subvert it to their own ends…

Nearly two centuries ago, France was hit by the world’s first cyber-attack.  With a nod to Isaiah Berlin**, Tom Standage argues that it holds lessons for us today: “The crooked timber of humanity.”

* James Surowiecki

** Berlin’s title was a reference to a quote from Kant: “Out of the crooked timber of humanity, no straight thing was ever made.”

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As we learn from history, we might recall that it was on this date in 1858 that two ships, the Niagara and the Agamemnon headed out from Keyham Dockyard in England to begin work on what would become the first operational Transatlantic cable, as previous attempts at laying a Transatlantic cable had failed.  Designed for telegraph operation, the cable run was completed on August 5th; and the first test message was sent on August 12th.

The Niagara at work

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Written by LW

June 10, 2018 at 1:01 am

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