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Jim Chanos, an early detector of Enron's fraudulent practices, explains our dysfunctional banking system.

The articles like to one below really drive home the fact that the stock market is a crap shoot. Though with zero % interest its the only game to play. I concentrate on dividend stocks so that at least I know some money will be coming my way. And to reduce volatility tilt somewhat in consumer staple & utility stock etfs.

http://www.salon.com/2013/04/03/wall_street_power_player_wer...

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.

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).

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.

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.

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.

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.
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Why is their more incentive to cheat during Republican administrations?

intercst
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Why is their more incentive to cheat during Republican administrations?

intercst


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.

Mebbe so. But apparently it doesn't always work out for the CEO.;>)
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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.

That is exactly what happened with Hillary Clinton and 'Benghazi' and with Eric Holder and 'Fast and Furious'.

Both inept at their jobs, or complicit to 'willful blindness'.
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Because many, if not most, republicans are intrinsically cheaters.

Wessex
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Another incentivizing to cheat story.

http://www.theatlantic.com/national/archive/2013/04/did-high...

The details of the indictment are stunning -- teachers and school administrators allegedly engaged in a vast conspiracy, all for the sake of making Atlanta's students appear to be thriving instead of flailing.

Nearly three dozen Atlanta Public Schools employees -- ranging all the way up from classroom teachers to central office administrators to former Superintendent Beverly Hall -- face stiff fines and jail time over allegations that they changed students' answer sheets on high-stakes statewide exams. The indictment has 65 counts, including racketeering, false statements and writings, and influencing witnesses.

Some of the most damning charges are laid at the feet of 66-year-old Hall, a former national Superintendent of the Year, who is alleged to have fostered a work environment where dishonesty was rewarded.
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<<Why is their more incentive to cheat during Republican administrations?

intercst
>>



VBecause the Democrats are asleep at the switch and do NOTHING! Bill Clinton being a prime example. Obama, needless to say, has done nothing.

The S&L meltdown occurred when Bush I allowed hundreds of S&Ls to fail and their assets to be sold off. I think he deserves credit for dealing with that issue.

As I see it though, a good bubble creates it's own reality and protects itself from excessive scrutiny. Until things actually go bust, the rosy scenario prevails against cranks who are whistle blowing.

If the whistle blowers were actually listened to in a timely fashion and action was taken to correct a developing problem, it wouldn't BE a bubble.

(I'm speaking as someone who took a bath in the Washington Mutual stock meltdown after being a buyer of the stock for 25 years).



Seattle Pioneer
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<<The details of the indictment are stunning -- teachers and school administrators allegedly engaged in a vast conspiracy, all for the sake of making Atlanta's students appear to be thriving instead of flailing.

>>


Heh, heh! Students don't need to cheat on tests when they have teachers and administrators doing it for them!


The problem is that from time to time, the truth JUST WONT DO! It would damage the interests of the powers that be. If the powers that be have enough power, they can doctor up the facts and create a false reality.

Politics is a center for power, so it is a center for creating false realities too.

Business leader have power, and they can create false relaities with that power, but when the bank accounts go negative, reality may be disclosed unless bailouts are available to paper them over.

Liberals and conservatives take turns in being too trustful of government power, often in different political areas.

We would probably all be better off by being more sceptical of government promises and programs. But most of us like to drink the Kool Aid --- we just like different flavors.



Seattle Pioneer
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The problem that I see is that people manage *by* numbers rather than *with* numbers. That is, the numbers are used in the least useful, laziest way -- to figure out who to punish -- rather than to actually *understand* what's going on. Once people get defined on the basis of a number, they'll do whatever's necessary to make the right number appear.

At a call center where the number of calls and the average length per call are treated as "critical measures", employees toss their change into a box. When the numbers aren't looking good, someone takes the box down to a pay phone and makes dummy calls.

An executive staff person - someone with no real managerial or positional authority - is charged with improving the response time for customer complaints. He does it by telling IT to mark any complaint over six months old as "closed" and justifies it by saying "I think our sales people just forget to close old complaints." The complaint resolution time drops like a rock and he gets rewarded. To have done nothing would have cost him his job.

A decision comes down from corporate on some new made-up ratio. Division chiefs conspire among themselves to "lend" each other resources so that the target number for that ratio can be met even though nothing will change. To do otherwise would kill a career.

The list could go on and on...and, yes, I've personally witnessed all the above.
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The problem that I see is that people manage *by* numbers rather than *with* numbers. That is, the numbers are used in the least useful, laziest way -- to figure out who to punish -- rather than to actually *understand* what's going on. Once people get defined on the basis of a number, they'll do whatever's necessary to make the right number appear.

People tend to measure things that are easy to measure instead of what is important to measure. I see that in consulting all the time. I used to work at large and fairly prestigious consulting firm, one of the guys I worked with (I'll call him "Ted") was a borderline genius hydrogeologist. Partially because of Ted's abilities the company got a reputation for the place you called when you had a difficult hydro problem. However, Ted had the policy of only working 40 hours a week. When it was 4:30, he left the office. Ted's boss totally knew what he had, and begged the higher ups for bonuses and salary for Ted, but they really didn't go for it because they wanted guys who bill 55 hours a week. Eventually Ted decided he could make a whole lot more money doing the same thing and left. Ted's boss decided he didn't need the hassle and left too.
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sykesix, you're example reminds me of one of Dr. W. Edwards Deming's great sayings: Some of the most important numbers in a business are unknown and unknowable.

The company may be able to see how many customers flee to that departing employee, but it'll never now how many never came to them but went straight to him.
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