Major City frauds uncovered by police

 

March 5, 2009

 

By Robert Verkaik and Mark Hughes

 

Detectives and SFO reveal inquiry into big 'Ponzi' scheme and several 'mini-Madoffs'

A spate of Bernard Madoff-style scams that threaten to bring misery to thousands of investors is being investigated by police and the Serious Fraud Office, The Independent has learnt. Bogus investment schemes have been uncovered by investigators focusing on crime resulting from the credit crunch.
 
One senior officer has called them "mini-Madoffs", a reference to the US fund manager Bernard Madoff, who is accused of profiting from a £30bn pyramid investment fraud – or Ponzi scheme – which paid investors returns from their own money, or cash paid by subsequent investors, rather than from the scheme's profits. The Serious Fraud Office (SFO) is still investigating Mr Madoff's activities in Britain.
 
In an interview with The Independent, Richard Alderman, the director of the SFO, said he expected other alleged cases of "fraud on investors" to be made public soon. One allegedly involves a "big Ponzi" fraud, similar to that used by Mr Madoff, he added, without revealing further details of the case.
 
The SFO is also offering advice on how to avoid falling victim to a Ponzi scam. Mr Alderman said: "Clearly, in view of our interest in Bernie Madoff and Sir Allen Stanford [the Texan financier accused of fraud], people are talking to us about red flags for hedge funds, because as the stories unravel it is very interesting to understand the structure of what happened and what could have been picked up by people through due diligence."
 
He warned: "We are finding that people are talking to us about that and we are learning from them. We are not sharing operational detail but sometimes it is right that we feed back what we learn when we can. There is a lot more we can do on that; what kind of things due diligence could pick up."
 
Most Ponzi schemes – named after Charles Ponzi, who became notorious for using the technique in America in the 1920s – claim to offer 20 per cent returns and collapse quickly, but Mr Madoff's returns were 10 per cent.
 
Because he offered his investors a modest but steady and consistent income from their money, he was able to keep up his pretence for nearly 50 years. However, his scheme relied on a healthy stock market, so that depositors would be unlikely to collectively remove their money. When the world's financial markets tumbled and people did try to draw out their funds en masse, his scheme collapsed.
 
Detective Superintendent Bob Wishard, of the City of London Police fraud squad, said: "The growing number of frauds in the City and the deepening recession has prompted speculation that Britain could soon see its first £1bn fraud. I'm not aware of anything as big as £1bn, but there are undoubtedly some huge investment frauds going on – mini-Madoffs – that, in the fullness of time, will come to our attention."
 
Mr Alderman said the "ripple effect" of credit-crunch fraud was bringing misery to thousands. His organisation is investigating a range of financial crimes and is shortly expected to announce developments in cases involving investments, mortgages and fraudulent trading.
 
He added: "Some of them are ones where we have been asked to look at something that has gone on, and we are conducting a preliminary investigation. With others we are digging deeper. Some of it we have identified it ourselves. At least one [case] comes from a whistleblower. We are talking about quite large-scale fraud as a result of the credit crunch."
 
He promised to take tough action in cases that justified prosecution, and said: "This is the year in which I am expecting delivery. This calendar year is the year I want a lot of cases in the public domain out in court. Some corporates, some individuals, some cases involving individuals and corporates. I am expecting to send out some very strong messages as a result of what we are getting out into court."
 
The SFO has conducted a review of credit-crunch fraud which has identified the scale of the problem facing regulators. One particular area of concern, Mr Alderman said, was large-scale mortgage fraud involving "professional agents" such as solicitors and surveyors. It was clear, he said, that the recession had placed huge pressures on failing businesses. "It can give rise to temptation for businesses that are in great difficulties. And what we have seen before is that there are temptations to make various assumptions in their accounts," he explained.
 
"The obvious one is the over-recognition of revenues in the accounts: booking in year one all of the revenues that you hope to obtain from a contract over a series of years – things like that; going way beyond any prudent accounting principles.
"We see that, and we see the temptation for people to keep trading when they are effectively insolvent. The result is that they are not able to succeed in doing that in a recession, and lots of people lose out."

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As capitalism stares into the abyss, was Marx right all along?

Stephen King:

We may avoid a 1930s Depression but the best we can hope for may be a 1990s Japan


Monday, 2 March 2009

"Modern bourgeois society ... a society that has conjured up such gigantic means of production and of exchange, is like the sorcerer who is no longer able to control the powers of the nether world whom he has called up by his spells."


Those of you with revolutionary zeal will immediately recognise these words. Penned by Karl Marx in 1848, they form part of the Communist Manifesto. Marx, like Adam Smith before him, had a historical view of society's development. Capitalism, with its bourgeoisie, had replaced feudalism, but capitalism, according to Marx, would be replaced by communism. Capitalism was inherently unstable, as Marx noted later in the same paragraph:

".....the commercial crises... by their periodical return, put the existence of the entire bourgeois society on its trial, each time more threateningly. In these crises, a great part not only of the existing products, but also of the previously created productive forces, are periodically destroyed. In these crises, there breaks out an epidemic that, in all earlier epochs, would have seemed an absurdity – the epidemic of over-production."

Whatever else one thinks of Marx, he certainly knew a thing or two about the business cycle. Were he alive now, he would surely claim his theories were being vindicated. We are, after all, witnessing the most remarkable collapse in economic activity around the world. Take Japan. In November, industrial production fell 8 per cent. That was bad enough. In December, production dropped another 9 per cent. That was even more remarkable. January's production figures, though, are simply eye-wateringly awful, showing a further 10 per cent decline. Production, then, is down almost 30 per cent in just three months, a pace of decline unprecedented in Japanese post-war economic history.

Or how about the US, where we discovered last week that national income contracted in the final quarter of last year at an annual rate of more than 6 per cent, the biggest drop since the early 1980s. Then there's Taiwan, where exports have been in freefall in recent months. Not to mention dear old Blighty, where the economy might end up shrinking by approaching 4 per cent this year.

The pace of decline in global economic output is extraordinary. On virtually any metric, we are seeing the worst global downturn in decades: worse than the aftermath of the first oil shock in the mid-1970s and worse than the early-1980s downswing, when the world economy had to cope with a doubling of the oil price, the tough love of monetarism and the onset of the Latin American debt crisis. Moreover, this time we cannot use the resurgence of inflation as an excuse for lost output: the credit crunch in all its many guises has seen to that. Instead, we have a world of collapsing output combined with falling prices: a world, then, of depression.

For many years, Marxist ideas appeared to be totally irrelevant. The collapse of the Berlin Wall in 1989 brought to an end the era of Marxist-Leninist Communism, while China's decision to join the modern world at the beginning of the 1980s drew a line under its earlier Maoist ideology. In western economies, Marxist ideas were at their most potent after the First Word War when the likes of Rosa Luxemburg could smell revol-ution in the air and as the Roaring Twenties gave way to the Great Depression of the 1930s. I'm not suggesting we're entering revolutionary times. However, it seems increasingly likely that the economic landscape in the years ahead will be fundamentally different from the landscape that has dominated the working lives of people like me who entered the workforce in the 1980s. We've lived through decades of plenty, where incomes have risen rapidly, where credit has been all too easily available and where recessions have been mostly modest affairs. Suddenly, we're facing a collapse in activity on a truly Marxist scale. It's difficult to imagine the world's love affair with free markets being sustained under this onslaught. The extreme nature of this downswing will change our lives for decades to come.

The first change relates to the allocation of capital. Increasingly, policymakers are accepting that market forces, left to their own devices, will lead to a race to the bottom. The dangers are becoming greater by the day. Interest rates are close to zero while prices and wages are in danger of declining. If deflation takes hold, real interest rates on cash will start to rise, creating perverse incentives in capital markets. Why bother to buy equities or corporate bonds if you are nicely rewarded for hanging on to an entirely risk-free piece of paper?

The efforts to stop this vicious circle are increasingly focused on bypassing the banking and financial system. As central banks widen the assets they are prepared to purchase to maintain the flow of credit to the economy at large, they are increasingly getting into the capital allocation game. They, and not the market, will at the margin decide whether companies and households are creditworthy. And as governments increase their spending plans to ward off a catastrophic loss of demand, they, rather than companies, will decide on how our savings should be allocated.

The second change relates to an increased national bias in the allocation of capital. As Nicolas Sarkozy, the French President, pushes to offer government funding to French car companies on condition they don't outsource French jobs abroad, as US Congress signs off a stimulus package with more than a hint of a "Buy American" policy, and as the UK Government pushes to encourage bailed-out banks to lend domestically as opposed to internationally, we appear to be turning our backs on the previous world of heightened cross-border trade and capital flows. While these flows have undoubtedly been volatile, they have nevertheless allowed emerging economies, in particular, to gain a foothold on the development ladder. Are we about to cast these countries asunder in our desperate attempt to fix our domestic problems?

The third change relates to interference in the price mechanism. When it comes to Sir Fred Goodwin's pension, this isn't so surprising, but the price mechanism extends far and wide. At the microeconomic level, we'll enter a world of subsidised loans with murky political undertones. At the macroeconomic level, countries may take the opportunity to manipulate their exchange rates in an attempt either to gain a competitive advantage or to "default" to foreign creditors.

Some of these changes may be absolutely necessary to prevent an outright collapse in global economic activity (although the rise in protect-ionist pressures is surely a retrograde step). They also suggest, though, that there will be no return to "business as usual" for market forces. The cost of avoiding depression is a heightened level of state intervention on a scale unimaginable for those who believe in the virtues of free markets. While such intervention may help prevent the worst ravages of economic collapse, it will ultimately do little to foster the entrepreneurial spirit and risk-taking behaviour which have, in the past, contributed so much to rising living standards. We may avoid a 1930s Depression but, increasingly, we may find the best we can hope for is a 1990s Japan. Not quite a Marxist revolution, then, but certainly a lasting sea-change in economic performance.

Management metaphors are out for the count

 

By Lucy Kellaway
Published: March 1 2009 20:09 | Last updated: March 1 2009 20:09

 
The gloves are off. The creators of business metaphors have been pulling their punches for more than a decade but have now come out swinging. There is a new metaphor in the management ring and, just in case you are too punch-drunk after so many idioms to have guessed what it is, here's the knockout blow: it's boxing.
 
The latest Harvard Business Review contains an 11-page article telling us that the best way to survive financial meltdown and global recession is to be like Muhammad Ali when he met George Foreman for their Rumble in the Jungle in Kinshasa, Zaire.
What the renowned boxer's performance teaches us about thriving in turbulent markets is that we must all be agile and we have to absorb blows. The point is helpfully summarised by various charts, diagrams and a two-by-two matrix with agility up one side and absorption along the other.
 
Curiously, the HBR doesn't mention any of the things about boxing that immediately come to my mind when I think of it. In boxing, you get beaten to a pulp – which must ring a bell with anyone who is now working on the economic front line. In boxing, you are quite likely to wind up with brain damage if you go on doing it for long enough – and, if things get much worse in the economy, this too may come to ring a bell.
 
Recently, I read that this bloody sport has become newly fashionable as an activity doled out by the authorities to young delinquents to distract them from drug-taking and knife crime. However, to discover that boxing is now the very latest fashion for management theorists is more surprising still.
 
The HBR article brings to an end 15 years of peace, love and political correctness by the purveyors of management metaphor. It is the first evidence I have seen from the management guff industry that "soft" is finally on its way out and "hard" is on its way in. Since I started following these things in the early 1990s, there have been three different sorts of metaphors wheeled out by gurus to help explain and prescribe business behaviour, all benign. The first were musical metaphors. There was the idea of a company as an orchestra, with the chief executive as the conductor. Each knowledge worker scraped away at her fiddle or blew his horn, and the maestro waved a thin stick to bring them together in perfect time and harmony.
 
This metaphor was popular for a while but, as the internet grew, gurus got groovier and decided that classical was out and jazz was in. The great leader must not tell his players how to play but let them jam, be creative and let it all hang out. Presently, even this seemed too square, and in 2002 a Swedish writer said that the CEO should be like a DJ, mixing records to match the mood on the dance floor.
 
Even more popular than music as a metaphor has been sport. Most of these have been based on the idea that business is a team effort (which we know it isn't, really). Football, rugby, rowing, cricket and baseball have all taken their turn as trendy management theories. For one crazy moment, even the downbeat Sven-Göran Eriksson was rebranded as a management guru.
 
The only team sports I have never seen a theory based on are synchronised swimming and lacrosse, but I dare say such theories exist somewhere. Sports without teams also get a look-in in the metaphor market, in particular golf, and a weird sled race with huskies that came into vogue a few years ago.
 
The third, and daftest, seam of management metaphor comes from science. The idea of a business as a stream of DNA always struck me as moronic. The point about a person's DNA is that it does not change. The point about companies and business conditions is that they do. It may be more plausible for gurus to talk the language of evolution and describe companies as complex adaptive systems – or it might be helpful if I could understand what they were driving at. A metaphor is meant to simplify, not to obfuscate.
 
Finally, there have been some outliers that fit none of the three categories: management as akin to being a top chef in a big kitchen, and management likened to animal behaviour. There have been ape theories, geese theories and even frog theories. The softest – and most famous – was the wretched mouse with the wretched cheese in the parable, Who Moved My Cheese?.
 
All of these metaphors have one thing in common: they are perfectly useless. I defy anyone to show how any of them has helped us understand how businesses behave or help us get better at running them.
 
Metaphors can be helpful in grasping something when the thing is terribly complicated. So, when Einstein was explaining relativity, he used a train and a clock to help us understand something that would otherwise have been beyond most of us.
 
By comparison, business – or the theory of business – is terribly simple. We know what we need to survive in troubled times, and it does not take 11 pages of boxing parallels to tell us. We need to cut costs. We need to take fewer risks. We need to conserve cash. We need to pull out of markets in which we are not successful. We need to fly economy – or not at all. There are two things that we don't need to do: float like a butterfly or sting like a bee.

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Slumdog: Dilemma of a new India

 

1 Mar 2009, 0151 hrs IST, Deepak Chopra

After its sweeping win at the Oscars last Sunday, Slumdog Millionaire seems like the movie everyone wants, and perhaps needs. It has all the ingredients of escapist fare from the Great Depression — a populist hero who overcomes all odds to get the girl and the money. There's an added element of self-congratulation for the West: by seeing this movie, you can see India without getting your hands dirty or offending your nose, and cheer it on. Cinderella didn't walk through tenements and sectarian violence to reach her prince. But in this fairy tale, a concession must be made to modern realities. Dev Patel is symbolic of India here and now, fulfilling its wildest economic aspirations while being conscious of the darkest aspects of social decay and despair. If we follow the metaphor to its logical conclusion, India will get the money and the girl by rising above its slums. Perhaps that's why Slumdog has created an uneasy reaction in Mumbai and the rest of India. Rising above isn't the same as solving. Many well-born educated Indians have looked westward for a long time, which is easier than looking inward. They know more about the streets of London and New York than the teeming lanes of the ghettos in their own city. This is true, of course, among rich elites everywhere, not just in South Asia. Watching Dev cross the social line is triumphant, but it reminds you that there is a line. (Obama crossed the racial line in triumph, also, but notice how much heat his Attorney General, Eric Holder, took when he suggested in less than polite terms that America needs to be more honest and courageous about the whole problem of race.) Like fairy tales, symbols can pacify deep anxieties. India dreams of being a millionaire, but it lives with the anxiety that it's really a slumdog. Or, that the slumdogs will one day rise up against the millionaires. You can read the tea leaves any way you like. Another uncertainty attends the film. Having been made on a shoestring budget, Slumdog managed to outgross any number of big-budget Hollywood films. Last week, it ranked fifth on the US box office while its nearest Oscar rival, The Curious Case of Benjamin Button, was no longer in the top ten. Brad Pitt, being a megastar, has pulled his film to $122 million, compared to Slumdog's $98 million, but is that really competitive? Ten movies on the scale of Slumdog can be made for the cost of one blockbuster that has yet to pay back its cost. The whole movie industry is watching closely, and the developing world is watching back even more closely. After two decades of action flicks with move-your-lips scripts that were primitive enough to appeal to immature male psyches, here is Asia — via the UK — sending back something sophisticated, poignant, and universal. It's like the ultimate retort to colonialism: the coolie and the wallah have more smarts than the sahib. Indians feel uneasy about that, too. Will the sahib turn his back and shut them out? Do South Asians have enough self-respect and stature in the world to at last forget that the sahib ever existed? We may know the answers in the near future. Bollywood didn't conceive Slumdog. It still purveys mindless entertainment, for the most part, interspersed with small independent films that challenge the West for thoughtfulness and freshness. It's not for lack of talent that India didn't produce Slumdog. But questions of vision and courage do arise. Past history and ingrained inhibitions make it hard for Indian artists in any field to be as frank and true to life as they should be. They have yet to seize freedom. If Slumdog is a viable symbol, the future it points to is just being born. An out-of-the-way picture can dare to be universal, which means that India may dare to be universal one day. The dispossessed people of Asia are suddenly aware that they have a place at the table where previously only the rich dined. Both developments are encouraging. Meanwhile, one can marvel at the bald fact that a Bollywood-style anthem, 'Jai Ho,' won the Oscar for Best Song, while Bruce Springsteen wasn't even nominated. The first Academy Awards of the recession turned out to be, as one headline proclaimed, the first outsourced Oscars of all time. The writer is a bestselling spiritual writer

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How Credit Unions Survived The Crash

 

 

By Ralph Nader

27 February, 2009
Countercurrents.org

 

While the reckless giant banks are shattering like an over-heated glacier day by day, the nation's credit unions are a relative island of calm largely apart from the vortex of casino capitalism.

 

Eighty five million Americans belong to credit unions which are not-for-profit cooperatives owned by their members who are depositors and borrowers. Your neighborhood or workplace credit union did not invest in these notorious speculative derivatives nor did they offer people "teaser rates" to sign on for a home mortgage they could not afford.

 

Ninety one percent of the 8,000 credit unions are reporting greater overall growth in mortgage lending than any other kinds of consumer loans they are extending. They are federally insured by the National Credit Union Administration (NCUA) for up to $250,000 per account, such as the FDIC does for depositors in commercial banks.

 

They are well-capitalized because of regulation and because they do not have an incentive to go for high-risk, highly leveraged speculation to increase stock values and the value of the bosses? stock options as do the commercial banks.

Credit Unions have no shareholders nor stock nor stock options; they are responsible to their owner-members who are their customers.

 

There are even some special low-income credit unions, though not nearly enough to stimulate economic activities in these communities and to provide "banking" services in areas where poor people can't afford or are not provided services by commercial banks.

 

According to Mike Schenk, an economist with the Credit Union National Association, there is another reason why credit unions avoided the mortgage debacle that is consuming the big banks.

 

Credit Unions, Schenk says, are "portfolio lenders. That means they hold in their portfolios most of the loans they originate instead of selling them to investors, so they care about the financial performance of those loans."

 

Mr. Schenk allowed that with the deepening recession, credit unions are not making as much surplus and "their asset quality has deteriorated a bit. But that's the beauty of the credit union model. Credit unions can live with those conditions without suffering dire consequences," he asserted.

 

His use of the word "model" is instructive. In recent decades, credit unions sometimes leaned toward commercial bank practices instead of strict cooperative principles. They developed a penchant for mergers into larger and larger credit unions. Some even toyed with converting out of the cooperative model into the shareholder model the way insurance and bank mutuals have done.

The cooperative model, whether in finance, food, housing or any other sector of the economy,does best when the owner-cooperators are active in the general operations and directions of their co-op. Passive owners allow managers to stray or contemplate straying from cooperative practices.

 

The one area that is now spelling some trouble for retail cooperatives comes from the so-called "corporate credit unions", a terrible nomenclature, which were established to provide liquidity for the retail credit unions. These large wholesale credit unions are not exactly infused with the cooperative philosophy. Some of them gravitate toward the corporate banking model. They invested in those risky mortgage securities with the money from the retail credit unions. These "toxic assets" have fallen $14 billion among the 28 corporate credit unions involved.

 

So the National Credit Union Administration is expanding its lending programs to these corporate credit unions to a maximum capacity of $41.5 billion. NCUA also wants to have retail credit unions qualified for the TARP rescue program just to provide a level playing field with the commercial banks.

 

Becoming more like investment banks the wholesale credit unions wanted to attract, with ever higher riskier yields, more of the retail credit union deposits. This set the stage for the one major blemish of imprudence on the credit union subeconomy.

 

There are very contemporary lessons to be learned from the successes of the credit union model such as being responsive to consumer loan needs and down to earth with their portfolios. Yet in all the massive media coverage of the Wall Street barons and their lethal financial escapades, crimes and frauds, little is being written about how the regulation, philosophy and behavior of the credit unions largely escaped this catastrophe.

 

There is, moreover, a lesson for retail credit unions. Beware and avoid the seepage or supremacy of the corporate financial model which, in its present degraded overly complex and abstract form, has become what one prosecutor called "lying, cheating and stealing" in fancy clothing.

 

Ralph Nader is a consumer advocate and three-time presidential candidate.

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The world's strangest laws

 

Did you know it's illegal in France to name a pig Napoleon? Or that in Ohio you're not allowed to get a fish drunk? Alex Wade celebrates the spirit of the silly season with a list of the world's most ridiculous laws

(Kham/Reuters)

 

25. It is illegal for a cab in the City of London to carry rabid dogs or corpses.
24. It is illegal to die in the Houses of Parliament.
23. It is an act of treason to place a postage stamp bearing the British monarch upside down.
22. In France, it is forbidden to call a pig Napoleon.
21. Under the UK's Tax Avoidance Schemes Regulations 2006, it is illegal not to tell the taxman anything you don't want him to know, though you don't have to tell him anything you don't mind him knowing.
20. In Alabama, it is illegal for a driver to be blindfolded while driving a vehicle.
19. In Ohio, it is against state law to get a fish drunk.
18. Royal Navy ships that enter the Port of London must provide a barrel of rum to the Constable of the Tower of London.
17. In the UK, a pregnant woman can legally relieve herself anywhere she wants – even, if she so requests, in a policeman's helmet.
16. In Lancashire, no person is permitted after being asked to stop by a constable on the seashore to incite a dog to bark.
15. In Miami, Florida, it is illegal to skateboard in a police station.
14. In Indonesia, the penalty for masturbation is decapitation.
13. In England, all men over the age of 14 must carry out two hours of longbow practice a day.
12. In London, Freemen are allowed to take a flock of sheep across London Bridge without being charged a toll; they are also allowed to drive geese down Cheapside.
11. In San Salvador, drunk drivers can be punished by death before a firing squad.
10. In the UK, a man who feels compelled to urinate in public can do so only if he aims for his rear wheel and keeps his right hand on his vehicle.
9. In Florida, unmarried women who parachute on Sundays can be jailed.
8. In Kentucky, it is illegal to carry a concealed weapon more than six-feet long.
7. In Chester, Welshmen are banned from entering the city before sunrise and from staying after sunset.
6. In the city of York, it is legal to murder a Scotsman within the ancient city walls, but only if he is carrying a bow and arrow.
5. In Boulder, Colorado, it is illegal to kill a bird within the city limits and also to "own" a pet – the town's citizens, legally speaking, are merely "pet minders".
4. In Vermont, women must obtain written permission from their husbands to wear false teeth.
3. In London, it is illegal to flag down a taxi if you have the plague.
2. In Bahrain, a male doctor may legally examine a woman's genitals but is forbidden from looking directly at them during the examination; he may only see their reflection in a mirror.
1. The head of any dead whale found on the British coast is legally the property of the King; the tail, on the other hand, belongs to the Queen - in case she needs the bones for her corset.

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Priyadarshan the Malayalam film maker on Slumdog Millionaire quoted in the Financial Times

Priyadarshan Nair, an India film-maker, complained strongly that the film makes a mockery of India. "It's nothing but a mediocre Bollywood film, which has used references from several Hindi films very smartly," he wrote in the newspaper India Today at the weekend.
"India is not Somalia. We are one of the foremost nuclear powers in the world, our satellites are roaming the universe. Our police commissioners' offices don't look like shacks and there are no blind children begging in the streets of ­Mumbai."

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