Friday, 20 March 2009

Trying to make sense of Fred ‘The Shred’ Goodwin

In a funny kind of way, if Fred ‘The Shred’ hadn’t existed, it might have become necessary to invent him. How else would it be possible to truly encapsulate the contemporary phenomenon of a man, charged with some of the most serious responsibilities any corporate human being can carry, the prudent management of a leading retail bank, who has been so unwilling or unable to demonstrate any feelings of personal shame, regret or remorse for his actions, all the while so egregiously enriching himself, beyond the dreams of avarice, while trashing the very empire which provided his financial underpinning?

There was a time when a man in this position might just have gone to his study with a bottle of whisky and his revolver.

But not ‘The Shredder’ and his ilk! No, he and his mates just got together in their glossy boardroom and worked out how much more money they could unjustifiably squeeze out of the already mortally wounded bank, just so that Fred would walk away, with his mouth firmly shut!

It’s not just old flaky Fred of course, he just happens to be a particularly loathsome example of the breed, because there are countless other corporate hogs who have plundered the trough with their snouts, all the while refusing to explain the losses their institutions have made.

How does one explain what appears to have become a truly modern leitmotif for greed, and dysfunction, the practice of paying off senior executives with sums of money which frankly dwarf one’s sense of any kind of realistic value, when all they have done is preside over a campaign of commercial incompetence, and piss-poor performance which beggars the imagination. What is it that makes rewarding failure such a regular occurrence in our modern society? Why do these losers feel able to pick up the dosh with quite the degree of insouciance they display, and then demand that their wounded companies also pay their tax bills into the bargain.

The answer lies somewhere in the thorny thickets of what criminologists call ‘The Anomie of Affluence’, a state of being where one’s normal senses of what is right and wrong, what is normal and what is bizarre, what is acceptable human conduct and what is off the wallpaper behavior, become distorted and confused, because the society in which these people operate and the values and norms by which they determine their ability to function have been allowed to become contorted by too much money!

The British attitude towards financial services, banking, investment and all the other grubby detritus of financial alchemy which go into the make-up the financial community, has always been distorted, twisted, and maimed, and what had, in so many cases, become an accepted way of commercial conduct among the denizens of Throgmorton Street, would, in any other walk of life have been called a serious crime.

The financial sector has always demanded a different set of rules by which to play the game, and by and large, for many hundreds of years, the British Establishment (which was originally very careful not to have anything whatsoever to do with the grubby denizens of Cornhill, or Change Alley) was content to let the Square Mile get on with it. The City has muddled through a series of scandals and vices, the South Sea Bubble, the era of the Railway Share Frauds, (read your Trollope or Dickens), and later the ‘Unacceptable Face of Capitalism’, the Guinness Case, The Blue Arrow scandal, etc. All of these and more have followed in a long line of old fashioned scams, fiddles and rip-offs.

The real problem however, came about when we started to muck about with the real distinction between what was a crime, and what was a more or less accepted market practice, and this occurred after the introduction of the Financial Services Act 1986, together with the adoption of the new regulatory environment which followed.

Let us take an example of the Occupational Pension scandals which rocked London in the late 1980’s and early 1990’s.

Back in the early 1960’s I recall hearing a financier on the radio talking about the problems with insurance policies, and pension arrangements. He talked about the way in which the actuaries who calculated the terms and premiums of insurance policies and pensions had made some serious mis-calculations in the 1940’s and 1950’s and had not appreciated that as a direct result of the emergence of a National Health Service, people in the UK would start to live longer, and that longevity would have a direct impact upon the value of insurance and pension funds.

He stated that by the 1980’s, if more money was not injected into the insurance industry, then serious shortfalls would begin to become apparent in the insurance and pensions sector, with possible disastrous effects.

Surprise, surprise, in the wake of the Thatcher reforms and the opening up of the era of ‘popular capitalism’, noises began to be heard from the insurance industry about the need for more capital and investment, and how this might be achieved through an act of de-regulation of the pensions industry, so that people now in occupational pensions could be given the benefit of being allowed to purchase a private pension from which-ever pension provider they liked.

This reform was needed because the insurance companies had become aware of the vast number of people in the UK who would be in receipt of an occupational pension when they retired, most, if not all of which were being contributed to by deductions from the employee’s salary in the form of ‘superannuation payments’. The insurance companies realized that there was a significant build-up of public-sector raw ‘cash’ to be acquired if the holders of occupational pensions could be persuaded to apply for their funds to be released to them so that they could be re-invested with the insurance companies.

Financial sector companies like raw cash better than they like anything else, and this vast pool of money began to play on their minds, and they bent all their efforts to getting their hands on it. They lobbied Government assiduously, and eventually, Norman Fowler was persuaded to propose the necessary degree of legislation needed to enable the privatization of pensions to take place.

And the wolves descended upon the sheep in a feeding frenzy that has seen no equal in modern times.

Hundreds of thousands of gullible, innocent, financially unsophisticated occupational pension holders, nurses, railwaymen, boilermakers, even policemen were inveigled to cash out of their copper-bottomed and protected pension plans and throw in their lot with the private sector, who frankly, just raped them blind.

So huge and so egregious was this period of downright theft, fraud and deception that a public scandal quickly followed, as the reality began to dawn on the new pension holders, how little of their money would find its way into their plans, and how much commission they had paid, and how much of their money had been eaten up in costs and payments to others, and how little they would have to live on in retirement, became apparent.

The problem was that there were so many high-profiled financial institutional names involved, and so many companies caught up in this series of scandals, that the scale of the crime became too big for the Government to handle. The SFO turned their back on the problem and walked away. Nevertheless, something had to happen because this was a problem that wasn’t going away and some form of closure had to be achieved.

Then, some genius came up with a new definition, a new description of conduct hitherto unknown to English criminal jurisprudence, and the scandal became defined as ‘mis-selling’. Overnight the problem went away, it was not a criminal issue any more, it was just a simple case of mis-selling, perhaps the most classic example ever of the ‘anomie of affluence’!

As soon as the definitional terms of engagement had been thrown into the trash-can, everything that followed became easier. Black was white, good was bad, right was wrong, and everything was up for grabs! The most obvious example was the way the financial sector looked upon financial wrong-doing and criminality.

The investigation and prosecution of serious fraud is widely perceived to have found its way into the 'too difficult' tray on the desks of too many Regulatory policy makers, despite the proposal to enlarge the remit of the Serious Fraud Office. A number of competing agendas have influenced this state of affairs, many of them very closely identified with the self-interest of the promoters. The end result of what has been a blatantly politically motivated involvement in the white collar regulatory procedure has been to complicate the fraud trial process immeasurably, resulting so often, in overloaded indictments, poor decisions and confusion in the minds of counsel, judges, defendants and public alike, particularly the latter.

The primary reason has been the total refusal of the City and the financial establishment, aided and abetted for too long by influential Whitehall Mandarins and their Regulator cousins, to underwrite a pro-active, dynamic fraud investigation mechanism; publicly preferring the promotion of a hugely expensive bureaucratic mechanism of self-regulation, but one in which positive acts of criminality can be re-defined in non-criminogenic terms such as mis-selling.

This 'regulatory resistance' factor is a vital element in understanding how a specific regime of financial regulation, one which positively promotes the adoption of an alternative, socially divisive system of crime-resolution, within a theoretically socially-equal system of criminal justice, could have evolved; one in which “ordinary" members of society who commit acts of dishonesty “outside” the financial sector, such as social-security fraud, are dealt with through the courts, criminalised and almost invariably imprisoned; while the representatives of the white collar sector are becoming increasingly insulated from the stigmatising effects of criminalisation, because they are being allowed to become immune from the normal sanctioning effects of the criminal law.

The financial sector deliberately encourages this conflict in attitudes, firstly by promoting the deflection of recognition of City criminality by an intensive exercise in special pleading in support of 'the reputation of the City.' Following the 'Guinness' and 'Blue Arrow' trials, this 'appeal to higher loyalties' had manifested itself in a policy which promotes the misconception that the esoteric affairs of the financial sector are so complex that they are incomprehensible to ordinary juries and that therefore they need special considerations to apply to their regulation. In such a way, behaviour which would be criminal to any ordinary person, if committed outside the City environment, is being allowed to be called something else and increasingly dealt with in a different, quasi-civil, regulatory manner. Dishonesty is universal, as both the law and the public recognises, the use of the 'complexity' argument being adopted to avoid the criminal process.

Secondly, there has been strong Government sector support for such a policy, which naturally recommends itself to the Treasury, because it means that normally cost-intensive areas of criminal wrongdoing can now be given all the appearance of being dealt with in a private manner, instead of through the public criminal court process, and without becoming a burden on the public purse, while reducing the public perception abroad that the City is full of a lot of greedy crooks!

Thirdly, through the identification of the regulatory-resistance factor, we obtain empirical recognition of the positive degree of unwillingness among many financial practitioners to adopt pro-active compliance procedures which would lead to the likelihood of criminalising their industry colleagues. This demonstrates that the regulatory bodies, whose effectiveness depends to a large extent on co-operation with their members to develop good compliance practices, can not expect to be capable of providing the same degree of deterrence required to inhibit widescale wrongdoing in the financial market, which many are presently claiming they possess.

Together, these key features have contributed to the creation of a state of regulatory anomie or normlessness - what Christopher Stanley of Kent University has called 'ethical indeterminancy' - in which blatantly dishonest financial conduct, whether in the form of the unauthorised sale of financial products, insider dealing, market manipulation, the abuse of discretionary client account management; the churning of insurance or pension products; the continued promotion of unsuitable products in order to generate greater commission, as in the institutionalised level of fraudulent pension transfers; or the wilful refusal to comply with regulatory demands to control the egregious practices of salesforces, can be defined as mere 'misconduct' or 'mis-selling', and where even the most blatant examples can be dealt with by fines and orders for costs, and only very occasionally, expulsion from the market.

Once you engineer such an ‘Alice in Wonderland’ world within the financial sector, is it any wonder that the ‘Fred the Shred’ syndrome becomes a sine qua non for an accepted standard of commercial behavior, without shame, regret or contrition.

Monday, 9 March 2009

The FSA: Rottweiler or Poodle?

Some years ago, I was a senior official in FIMBRA, the Financial Intermediaries and Managers Regulatory Association, the unlamented early Self Regulating Organisation which was eventually subsumed into the Financial Services Authority, when the alphabet soup of competing original SRO’s was eventually ended.

My early concern, as head of investigations and member vetting, and the concern I took away with me when I left, was that FIMBRA and its corresponding agencies did not see themselves as performing a policing function when it came to dealing with their member firms. They were far more concerned to ensure that their member firms were protected from the impact of the financial services levy, which was how the lead regulator was funded, by ensuring that a minimal number of member firms were expelled from membership, and encouraging more and more firms to join, thus diluting the costs of membership to the others.

I lost count of the number of times I heard the Director of the compliance division say ‘our job is to keep our members in compliance’, as an excuse for not taking a member in serious breach of the rules to the disciplinary committee and face the likelihood of the errant member being expelled!

Frankly, the early days of the post Big-Bang era, as far as City regulation was concerned, were a farce, and it eventually got so bad that FIMBRA’s name became re-interpreted as ‘F**k It, My Broker’s Run Away! as more and more members disappeared with their client’s monies.

Imagine my bemusement therefore to read in The Sunday Times an article entitled ‘…Exposed: the banks’ cosy ties to the watch dog…’

It appears that as a result of a whistleblower’s information to the Commons Treasury Committee, the FSA required the very firms it regulated to report on their relationship with the FSA inspector sent to oversee their activities, and how these observations were then used to help influence the level of bonus and the career prospects of the individual concerned.

Quite why the FSA feels the need to pay bonuses I have never managed to work out, but this appears to have become part of their anomic culture.

As a result of the whistleblower’s claims it appears that FSA staff were anxious not to antagonize the banks they oversaw because of the potential impact on their pay; Regulators were warned ‘not to frighten the horses’ during visits to firms because it might impact upon their willingness to provide cooperation; The FSA believed its role was to ‘serve’ the industry which ultimately funded it; and that staff turnover and a limited level of resources resulted in limited expertise among staff to really question the big banks too closely.

This is precisely the same level of spasticity in regulatory intervention that so marked out the ineffective days of FIMBRA, with regulatory staff ill-equipped to take on the member firms for lack of industry expertise, coupled with an almost child-like belief that member firms would want to co-operate with their regulatory visits.

This ridiculous point of view stems from the fact that most banks and financial institutions will go out of their way to avoid bringing themselves to notice as far as the FSA is concerned. They have taken a very careful ‘risk-based approach’ towards the nature of their relationship with their regulator and they have established that as long as the regulator is able to find and see what it wants to find and see during a visit, then not too many awkward questions will be asked.

This is why FSA officials get such a respectful hearing from member firms when ever they give key-note speeches at industry conferences or workshops. The FSA officials trot out the same tired and hackneyed policy statements that have been approved and reviewed by so many different people inside the agency that they are now entirely devoid of any humour, light, interest or value, while the audience sits in silent receipt of these words. There are never any questions, the FSA official is never, repeat never challenged as to the policy statement, and they then return to the office, content that they have maintained the high-level of FSA delivery.

The audience at the same time, quietly lets out a collective sigh of boredom, grateful to have got that part of the programme out of the way without antagonizing the FSA. The regulator on the other hand returns believing that yet another incomprehensible policy statement has been delivered which everyone present appeared to understand, adopt and no doubt, would soon implement.

Financial regulation is about asking awkward questions of the biggest institutions and having the courage to say ‘Well, I’m sorry Mr Fat Cat Banker, but your explanation for these figures does not make any sense to me and I am going to go on asking awkward questions until I do see some sense in them…’

When I was at the Fraud Squad, I used to love it when some irate spiv would accuse me in the interview room of not having the skills or the training to understand his business model. My answer was invariably the same. ‘…Until such time as you can explain these figures to me in a way which makes sense, you will continue to sit in that chair…’ and I will continue to ask these questions. It is a matter for you..!’

It is quite scandalous that things should have got to a state where the lead Regulator is inviting its constituency to report on the conduct of its supervisory staff. Human nature dictates that if a person thinks that their income, or their bonus is going to be impacted by an adverse report, they will pull their punches.

This latest revelation is really the final nail in the coffin for the FSA and frankly, it really is about time that it was wound up and allowed to go the same way as its predecessors, SIB et al.. We should give banking supervision back to the Bank of England, who at least used to understand these issues, and we should let a re-invigorated Metropolitan Police Fraud Squad deal with the rest.

Thursday, 26 February 2009

‘The first thing we do, let’s kill all the lawyers!’ (W Shakespeare)

One of the reasons (one among so many) why the City and the financial services sector has managed to get itself in such a complete moral and ethical mess is due to the contemporary fashion, whether for directors, regulators or civil servants, to call in the lawyers before making even the simplest decision. As a result, the shysters have, in a relatively short time, grown from a fairly ordinary, rather grubby, hum-drum profession, much disliked historically in many quarters, (ever found an attractive lawyer in any of Dickens’ books), into the multi-multi-million pound business they have become, with a finger in every pie, an eye on every deal, and a caveat for every suggestion.

There was a time, when I was at the Fraud Squad, where the prosecution of fraud was a fairly simple operation. The cops had a huge patch in which to hunt (we weren’t too welcome in the City of London, because that was looked after by our City police colleagues.) God knows what they got up to inside the Square Mile because we were never invited to participate, but they always seemed to be able to wear very nice suits! Nevertheless, by and large, they seemed to have a fairly pragmatic working relationship with the City fathers, and whatever transgressions got committed, the City seemed to be able to sort them out for themselves.

We had an office called the Director of Public Prosecutions, a fairly decent bunch of chaps and girls by and large, who looked after our cases. They were used to us and our funny ways, and we knew exactly what sort of evidence they wanted to take cases to court, and we went out to find it. Generally speaking, we treated our clients (nice word for villains), with a degree of consideration, no kicking in of doors in the early hours, but a polite request through their solicitors to ‘come in and have a chat’!

The solicitors, for the most part, tended to be older partners of small firms based in North London or in Soho, most of whom had known their clients for years, had followed them through a wide number of their earlier criminal developments, had briefed ‘well-refreshed’ counsel to appear at their pleas and sentencing hearings, and were genuinely amazed, in so many cases, that their clients were still actively engaged in a life of crime.

We had a nice local Court down at the ‘Bailey’, where the Judges and the Court staff knew us all by name, and where, by and large, most of our old clients would plead guilty to something or other, and dutifully troop off to spend a few months R&R at Ford Open Prison, while their brief, his solicitor and the detectives went across to the Magpie and Stump for a few beers and the pub’s excellent steak and kidney pudding.

The point I’m trying to make is that the system we had all worked so hard to devise, all worked perfectly well.

Fraud wasn’t seen as fashionable, it wasn’t seen as racy and daring, it wasn’t seen as dangerous and it wasn’t seen as something about which anyone really cared very much, one way or another.

Within the space of a few months, Margaret Thatcher ended all that.

The era of the ‘Big Bang’ ushered in an atmosphere of cultural change which remodeled the face of the City of London and its practices for ever. With the breaking up of the monopoly of the Stock Exchange and the admission of foreign shareholders and practitioners, banks and their business models changed completely.

Mrs Thatcher was an interesting dichotomy. She fervently believed that a large swathe of public services could easily be taken out of public sector monopolization, and large elements of their function hived off into private ownership. She believed this would foster competition and lead to greater efficiency and less cost. She included policing among these functions, and saw no bar to large sectors of policing services being privatized, and paid for by the constituent bodies who would use their services.

She saw this could work particularly within the City and the financial sector, and so was born the era of the SROs, the Self-Regulating Organisations, which sprung up like mushrooms after a rain shower.

I was the Fraud and Investigations Director of one such agency, FIMBRA, by far the most egregious of all the agencies, and the one whose constituent members contained the largest bunch of spivs and wideboys. Its initials stood for the Financial Intermediaries and Managers Regulatory Association, but after my time, due to the regularity with which some of its members helped themselves to their client’s investment funds, and then disappeared, it became better referred to as ‘F××k It, My Broker’s Run Away.

At first, the SROs were like an alphabet soup of initials, and they created their own codes of conduct and their own rule-books, but because they were now privately-owned and run by and for the interest of their constituents, they didn’t like the idea of being ‘policed’. They insisted on being regulated, so there was no room for detectives any more, and the lawyers proliferated. They were lawyer-ridden, and no-one could make any decision without involving the learned friends because of the likelihood of civil action flowing from any decision which might have an adverse impact upon any individual practitioner, particularly those whose dishonest activities meant that they stood to lose a lot of money.

The point is that the whole era became run by the lawyers, and out of this whole lawyer-driven culture grew a public-sector response to fraud and financial crime which taught that without lawyers running every element of the process, nothing could be properly achieved.

So, in a very short time the investigation and prosecution of fraud was taken over by government lawyers through their new playgroup called the Serious Fraud Office. Their legal colleagues in the financial sector, who hitherto wouldn’t touch fraud cases with two barge poles for fear of being tainted by their association with the criminal fraternity, now all suddenly piled in to develop ‘financial crime practices’ as more and more it was believed that their traditional commercial clients would come under the spotlight. These lawyers rubbed their hands with glee at the thought of the cornucopia of fees which would cascade from their clients’ pockets if they were charged with city frauds, and set out their shingles offering fraud defence practices.

The lawyers lost no time adopting all their usual time-wasting and process-delaying tactics; indictments grew longer and longer; documentary evidence became measured not by lever-arch files, but by the room-full; cases dragged on and on, jurors were subjected to cruel and unusual punishments by being required to submit themselves to months of dubious legal tactics, and all the while, the bills and the fees grew bigger and bigger, and the lawyers got fatter and fatter. It got so incestuous that conferences with cocktail parties were held where lawyers from the SFO and the regulators rubbed shoulders with their colleagues from the City law firms, and everyone had a wonderful time getting richer and richer, because by now the public purse was being invoked, and even the fattest cats were being granted legal aid.

Within a couple of years, the entire fraud case sector had ground to a halt in terms of investigations being completed, cases coming to trial, trials being expedited, hearings being shortened, convictions being obtained. With a few exceptions, none of this occurred, and the whole ghastly mess eventually began to subside into a morass of petty squabbles, and the shrinking of the reputation of the SFO, as more and more cases were either dropped, abandoned or the defendants were finally acquitted.

Unsuitable cases were pursued, Chief Officers of police would lay-off even the most meaningless fraud cases on the SFO because it would otherwise mean eating into the decreasing policing budgets; morale at the SFO plummeted, and fraud statistics grew exponentially, and all the while, the financial practitioners plundered the treasury.

So, now, when we have finally woken up to the dreadful realization that the last 10 years of city and financial regulation has been nothing but a bad dream, that the fat cat bankers with their swollen pension funds have stolen every last asset worth nicking and there is a desperate need to rebuild a regime which will begin to take the fight back to the looters, what do we get offered?

Headlines that read ‘Top lawyers back call for single regulator to tackle city fraud’.

‘…There are suggestions by former senior lawyers that the role of the SFO should be merged with the FSA...’

Oh God, yet another amalgamation of civil servants, even more ‘jobs for the people-like-us’, an increase in the ‘safe-pair-of-hands’ mentality which will do nothing to make any difference to the conviction rate.

How can I tell? It’s very simple, even dear old Monty Raphael from Peters and Peters, the doyen of the fraud defence magic circle, is reported to be calling for even more changes in the prosecution policy regime.

Monty and his close mates have made a very good living from defending fraudsters from within the extant regime and now he is demanding an end to ‘…Balkanisation’ and the development of a coherent anti-fraud prosecution strategy that is intelligently resourced, intelligently focused and proves a real deterrent to fraudsters…’

When the fox starts demanding that the farmer increase the quality of the fences to prevent his hens escaping, it is a sign that even the fox is getting fed up with eating chicken!

What a future conservative government needs to do is to focus on re-energising the one single agency which will have the will to go after criminal fraudsters, the criminally reckless fat cats and the pension looters and that is through a properly funded, trained, motivated and resourced detective force, and not one that comes from within the Square Mile, because they are too close to the City fathers.

We need a dynamic department based at New Scotland Yard, staffed with cynical career detectives who can most closely resemble Oliver Cromwell’s ‘…russet-coated captain, with fire in his belly, that knows what he fights for and loves what he knows…’

Such men and women are needed now more than ever, because it is detective skills, cunning and courage that we need, not lawyer’s slippery words and dubious judgment calls. We need someone to take the fight to the enemy, hard detectives who will not be frightened to make some difficult decisions, secure in the knowledge that if they act in good faith, the Commissioner will support them.

We need, what my old friend Detective Chief Inspector Cliff Knuckey used to call, ‘…the heady aroma of splintered wood first thing in the morning…’ and we need a constituency of dishonest bankers, financial advisers and money jugglers to lie awake in the early hours wondering if the sounds outside the house are a precursor to the Fraud Squad making an unannounced visit!

The last thing we need, right now, is any more bloody lawyers, and we have to take Shakespeare’s words metaphorically to heart! Let the lawyers stay on their side of the court where they belong and let’s get back to dealing with criminals in the way which works best. If George Osborne can achieve this, then he will have put the pieces of the equation back where they rightly belong, where the cops catch the bad guys, and the shysters defend them, and we can all get back down to the Old Bailey again.

Maybe the Magpie and Stump might be prevailed on to put steak and kidney pudding back on the menu!

Wednesday, 25 February 2009

This greedy bastard must not be allowed to profit from his ineptitude

The news tonight that ‘Fred the Shred’ Goodwin, the disgraced former CEO of Royal Bank of Scotland, is already receiving a £650,000 per year pension, which will continue for the rest of his life, is the final kick in the balls for the British tax payers who are now having to bale out this ridiculous man’s greed, arrogance and managerial incompetence.

If the remaining private sector directors of Royal Bank of Scotland do not give immediate undertakings that they will commence emergency proceedings against him for breach of his fiduciary responsibilities towards the bank and its shareholders; take proceedings to freeze this pension fund in the interim period, and then take the most aggressive legal action against Goodwin to claw back this immense pension fund, they should be sacked by Alastair Darling tomorrow, and a criminal investigation task-force formed by the SFO to begin investigations against Goodwin for alleged criminal recklessness in his management of RBS.

This appalling man must not be permitted to profit from his breathless ineptitude.

Friday, 20 February 2009

How short City memories prove to be!

Financial sector apologist starts wingeing at David Cameron.

Late last year, David Cameron went on the record and questioned why the people who had contributed to so fatally undermining the financial credibility of the City, should not face prosecution for criminal offences.

It was a very brave statement for the leader of the Tory party to make, but it demonstrated how sincere the new leaders of the Conservative party are in determining that when they are in charge, this situation will change.

It has long been a tradition within the financial sector that no sooner does a public official make a statement which runs counter to the continued interests of the financial sector’s adherence to the status-quo, then some member of the financial establishment can be dredged up to pour cold water on the censure, and to make an appeal to higher loyalties for every interested person to adopt a single policy line opposing the proposals.

Thus it is with David Cameron’s observations on City wrongdoing and his very strident attacks on City bonuses.

As reported in yesterday’s Evening Standard, Mr Cameron has been apparently challenged by someone called Hugh Osmond, described as the ‘Pizza Express entrepreneur’, who claims to be dismayed by the Conservative leader’s behaviour during the economic crisis.

Apparently, the Pizza slinger’s ire has been aroused by David Cameron’s response because he doesn’t think it ‘…shows a real attempt to understand either the genesis of the crisis or how to fix it…’

So, for Mr Osmond’s benefit I will tell him the answer that apparently only he doesn’t know. The crisis was caused by greed, mate, pure and simple greed!

It seems a little strange that this explanation has to be made to a man who as recently as 2008 was so mean he only paid his staff the minimum wage, and then charged them an 8% surcharge for reimbursing them for any tip paid to them on a credit card! He will tell us he was obliged to do this by law, but it didn’t stop a strike at his Wimbledon branch, part of a wider campaign to demand that all restaurants distribute service charges and restaurant tips fairly after a member of staff was sacked for speaking out against the 8% levy.

Mr Osmond clearly believes he has a right to dictate policy to David Cameron, because last year he gave £84,000 to the Tory Party. That’s roughly the sum of money equivalent to the 8% surcharge paid by 350 customers per restaurant, throughout the entire year, or 1 customer a day, give or take, so it may well be thought that some of that contribution is coming straight out of the sweat of his employees, to say nothing of their pockets!

Mr Osmond has highlighted David Cameron’s attack on the greed culture as an example of ‘…populism taking precedence over proper understanding…’ Clearly not a popular move with Mr Osmond, but he has a weird way of determining what the proper understanding is, by likening it to another area of financial payments equally highlighted for their strident greed, their lack of any logic and their complete absence of value.

He states; ‘…Banker’s bonuses are like Premiership footballer’s wages…’

As if this staggering insight was not enough he continues;

‘…You can have a view that they incentivize the wrong sort of behavior…’

Yeah, well right so far pal,

‘…but they’re not at the root of the issue…’

Well help me understand this better Mr Osmond, just what is at the root of the issue? We pay footballers far too much for doing very little, and we pay bankers the same, what is it about that equation you find difficult to understand!

The real point is that Mr Osmond is entirely irrelevant as far as this discussion is concerned. His remarks, and other’s comments must be put in context. Today’s FT reports;

‘…The devastating critique by Mr Osmond, who donated £84,000 to the party last year, represents the first public backlash by Tory supporters against Mr Cameron’s handling of the downturn.

But it reflects much wider unease in business about the substance and tenor of Tory attempts to wrest political advantage from the crisis. Another prominent Tory supporter said the party leader was getting sucked into a “ridiculous” Westminster game of “banker ¬bashing”.

The Tories’ many allies in the City say they understand the political rationale for the party’s attempt to outflank Gordon Brown on bonuses. But there is alarm about the potential consequences. One Tory City figure warned that Mr Cameron could be creating problems for an incoming Conservative government, not least by offering tacit support for potential over-regulation…’

This is all bollocks and should (and will be) ignored by David Cameron and George Osborne.

There is no question that the new policies are ‘banker bashing’ or trying to outflank Gordon Brown on bonuses. Brown has already painted himself into a corner as a serial ditherer on how to handle the bonus issue.

The complaint of over-regulation is the perennial whinge of the City fat cat and should be treated with the contempt it deserves. It will get louder and louder for a while, but it must be ignored resolutely. Eventually it will die out as these dinosaurs who don’t realize that a whole new regime of financial regulation will be needed in the future under a new Tory Government, will, if ignored, become extinct as a result of their failure to adapt to changing circumstances.

That goes for Pizza slingers as well!

Thursday, 19 February 2009

The Psychology of the Fraudster

If you find yourself wondering how so many people could invest with Bernie Madoff or how others could so successfully gull apparently sensible individuals into believing their stories, read on.

Towards an Understanding of the Manipulative Personality

“If you owe the bank £1,000, they can make your life a misery. If you owe the bank £10 million, then you own the bank.”

I was first taught this lesson in immoral philosophy, when I began my posting to the Fraud Squad at New Scotland Yard. My mentor, an elderly ‘mittel european’ refugee and ‘businessman’, who had spent his mature years, either selling insurance and other forms of investment opportunities, or borrowing money from a series of banks and individuals, cross-firing it through a wide variety of accounts, and then, mysteriously, forgetting to pay it back, tried, gently, to teach me the gospel of eternal greed.

He was, he would assert vigorously, not a crook!

Far from it! He was merely the conduit through which a large number of very greedy individuals (in which group he included bank officials), realised a false hope of enrichment. The fact that they would, and could, never achieve their ambitions, was immaterial. He was the provider of the avenue of golden opportunity, through which this constant parade of ‘schmucks’ could try and reach their own personal nirvana, a land of limitless opportunity, restricted only by the limitations on their own credulous expectancy!

He was a professional con-man, and over a period of months, he taught me that virtually all victims of fraudsters have only themselves to blame. At first, I was shocked. Did he not perhaps retain a certain degree of sympathy for the old, the infirm and the weak-minded?

The latter, the truly feeble-minded and those whom he considered to be incapable of formulating a true understanding of the offer being made to them, he exempted! They were not true ‘marks’ in any event, because their mental state meant that they could not be said to be able to enter into the proposed arrangement with the requisite degree of volition, which, he preached, was a very necessary state, if the ‘big con’ was to be successful.

This lack of the requisite mental state immediately predicated against their being considered as true ‘sucker’ material because he could not accurately predict their behaviour, and therefore this made them very dangerous from his point of view. I came, slowly, to realise that he was not exempting them from any sense of concern for their condition or for sympathy for their weakness, but because they posed an unacceptable threat to him, and it was the existence of the threat, whose implications he was powerless to control or influence, that made him eschew this particular group.

This was a man who always played the percentages, and he had worked out long ago that when dealing with the real nutters, and the feeble-minded, the odds were stacked against him!

As my career in the Fraud Squad, and later, as a financial regulator and legal practitioner developed, I came to realise the truth of the old man’s message. He was not unique. He was a member of a class of men and women with a particular mind-set, a group of individuals whose view on life had become distorted, in some cases mildly, and in some, to an exaggerated degree. They are all, without exception, victims themselves in some form or another, (he had spent years in a concentration camp) and conducting their affairs in a deceitful way provided them with a means of striking back at the perceived injustices of which they consider they have been made victim!

Such people all conduct their affairs according to the creed which my first teacher explained to me. He divided them into three groups. In some cases, like him, they do it merely to make a great deal of money. These are the practitioners at the very apogee of their craft. They recognise their motivations, and they use them ruthlessly to acquire huge wealth. They have no interest in any other form of reward, and like as much as possible, to remain as anonymous as possible.

In many cases however, other individuals use their twisted talents first to acquire power, which they then use to acquire financial rewards. These are the most dangerous, because they are really in denial as to their own true state of mind, and are using their talents as much to deceive themselves as their victims. Nevertheless, they will use the same disciplined tactics as their more directly entrepreneurial colleagues.

Finally, there is a small, but nevertheless identifiable group who suffer from a clinically-identifiable illness. In polite company it is referred to as ‘Munchausen Syndrome’, but in more common parlance, the condition is known as being a pathological liar! Such people are sad individuals who are simply incapable of determining the difference between truth and lies, and cannot see that their deceits and distortions render them wholly unbelievable. They also fail to understand that others, with whom they have to conduct normal relationships, quickly learn to distrust them, and guard themselves against the impact that such dangerous individuals can impose.

All these groups operate on the recognition of a carefully orchestrated combination of conditions. As my old con-man taught me, the potential victim has to demonstrate three important features in order to be successfully gulled, and they have to be identified in the correct order.

The critical triumvirate are greed, ignorance and fear, and they have to be present at the right time in the process of the relationship, for the successful con to work.

Once they have been identified, it did not matter in which environment the con was being played, it would be achieved successfully. Thus it is that the true con-artist can operate with impunity in any market or climate where a financial motivation is an important criteria of the perceived success or achievement of the victim.

Greed, he opined, was the crucial emotion. Greed enabled the victim to overcome his natural state of caution, and encouraged him to exercise the important ‘willing suspension of disbelief’. This was vital, because it was the crucial predicator which rendered the victim capable of moving from the status of potential victim to that of qualified ‘mark’. The reason such a move was necessary was because once the greed emotion had been aroused, it was important for the ‘mark’ to want to move to the next stage, and that desire had to be a voluntary one.

This was where the second component came into play. Ignorance on the part of the ‘mark’ had to be maintained and encouraged. It was during this stage that the critical degree of greed-enhancement had to be supported, because it was during this period that the ‘mark’s’ psychological dependence on the need to continue to believe the fraudster, was enhanced and cemented. If he was offering an investment scheme, he would always insist that the potential victim invest far more than he could afford. If it was in his work environment, he would always commit to deliver a far higher degree of profitable sales than any other salesman.

‘The schmucks’ he would tell me, ‘are always on the look-out for something for nothing. If you only offer a punter an investment he can just afford, you aren’t playing to his greed motive, and he might consider backing out. Always get him to commit far more than you know he can afford. He will beg, borrow or steal the cash to get into the game. Once he’s hooked, you’ve got his money anyway, so what do you care? The more he’s committed, the less likely he is to want to expose you’.

‘If he’s a sales manager, then your commitment to achieve a huge sales target plays to his greed factor just the same. He needs to make his targets to get his bonus, and he wants his bosses to think he’s a go-getter. So regard him like the ‘schlemiel’ he is and treat him like a mushroom. If he asks how you’re going to achieve it, just think of him like a punter, stay schtum, and give them any load of old patter, but never give them any facts’, that way you can never be held accountable. When, later, you haven’t reached the targets you promised, he will be so frightened that his own bonuses won’t be paid that he will make any excuse he can for your shortfall. He will go into bat for you, he will even fiddle the figures to make it look like his team achieved their huge targets.’

Ignorance of the true facts therefore was a critical component, and it was at this stage that the greatest danger to the con-artist was present, because if the level of ignorance could not be maintained, then the greed factor might be undermined, and this could lead to an unravelling of the entire scheme, with potential problems for the scammer.

So, the necessary degree of ignorance was maintained by a number of tactics. The choice of victim was an important criterion. ‘Always con your friends, family or work-colleagues first’, the old man used to insist. ‘They are much more likely to believe you and far less inclined to shop you, when it goes wrong’. The ignorance factor could always be enhanced by making the victim believe that even if the opportunity sounded too good to be true, it could not possibly be unachievable because the con man was considered to be such a close friend or a trusted work colleague. ‘A good con-man, he once told me, ‘doesn’t have to go looking for his victim. In most cases, with the right story, they will come to him!’ The more socially elevated a group they are, if your story means they can achieve something which is important to their egos, they will lap it up like kittens and milk.

Ignorance could also be enhanced by providing a minimalist amount of information about the investment scheme, the business plan, or the market opportunity. On the other hand, it could be achieved by the provision of a huge volume of detailed reportage, designed to create an overload of facts. On balance, this method was usually preferred, because it gave the impression of crucial knowledge and technical expertise, a state designed to alleviate potential disbelief.

As my old mentor explained, most potential victims were too scared to demonstrate their own state of pitiful ignorance, for fear of appearing to be less qualified than they might want to be considered. Quite often, a neat variation on the con-man’s methodology is to appear to defer to the potential victim, implying that the ‘mark’ is a person of considerable experience in the area within which the scam is to operate. ‘...Let the mark do the work for you. Let him think he understands the proposal, then his ego will lead him on...’ This is done, particularly within the workplace environment, where a senior manager is being bamboozled, in order to encourage him, as the potential ‘mark’, to believe that the proposal is one in which he is expected to display competence and core knowledge. This is where the fear factor, the third, and perhaps most vital component, comes into play.

‘Fear’ my immorality tutor explained, ‘is the most powerful influence in completing the big con. When you see the fear in their eyes, then you know you’re home and dry. You can laugh all the way to the bank, because they are never going to admit what has happened’.

At first, I did not believe him. ‘Surely’, I queried, ‘once a victim knows what has happened, he will want redress, he will seek revenge and retribution’.

‘Very, very rarely’, came the experienced reply. ‘Look at it like this. Virtually all victims of the big con are stupid, gullible, and at heart, fundamentally dishonest themselves. That is why a scheme that has all the hallmarks of overt dishonesty or even mild criminality is far more likely to succeed, than plain vanilla offerings. When they find out they’ve been conned, what man or woman in their right mind is going to later admit publicly that they were willing to part with their money in a scam which they were told was probably dishonest, and certainly immoral’?

‘What business manager is going to admit to over-promoting a man who has successfully shot him a line about his ability to deliver profitable returns? If he makes this admission, his own bosses will start to doubt his management judgements, and query his decision to promote the man in the first place, and if the bosses’ own financial rewards are threatened by his failure, then they will line up to support him as well. The best situation for the scammer is if he has the slightest chance of taking those above him down with him if he falls, because then he will be wholly protected. All concerned will close ranks to protect the con-man, sooner than expose him and then put themselves in the firing line for their own incompetence. In reality, they will almost certainly promote him, in the hope that he will become someone else’s problem’!

Fear was crucially important, he explained, because its existence was the vitally necessary degree of protection that meant that the scam merchant could guarantee he would not be exposed. Most victims ultimately came to realise that the scheme they had adopted was utterly risible, totally ridiculous and utterly laughable and that they had been conned, but then were incapable of doing anything about it. Indeed, the quicker they came to the unmistakable conclusion that they had been fooled, the better, because then the con-man could move on to the next ‘mark’, knowing he was safe from investigation.

The true expert, he said, was the con man who having successfully gulled a victim the first time, could go back and gull him again. While not an every-day occurrence, he had achieved it many times himself, using a variation on the greed and fear link, by playing on the victim’s willingness to accept that the second time around, things might get better, and that the business opportunity might just pay off. Like the inveterate gambler, the victim becomes the cause of his own downfall, and continues to try to beat the odds, sooner than admit he has been completely fooled.

This method, in his opinion, worked best in the working environment, when management could be more easily encouraged to believe that apparent failures to deliver on commitments could be explained by external circumstances such as a change in management in a client company, a purchasing policy shift, or the removal of a key business facilitator.

Most importantly of all in the work environment, if the con artist had the ability to promote others in his own immediate team to more senior positions, or to arrange for their internal reward, then this state of affairs could be allowed to continue almost indefinitely. Someone with real ability who would not fall in with the ethic of the group and who pointed out that internal policies were wrong or damaging, had to be got rid of as quickly as possible and ridiculed or smeared to make them seem foolish or worse, disaffected. Perception of others’ ability is always more important than real proof of competence. ‘People who can’, generally do, and are usually always overlooked or marginalised. People who talk about doing, generally get more attention. As long as the con-man can keep persuading others that he and his team are hugely effective, regardless of the truth, then more and more non-connected individuals would, when observing the almost inexorable rise of his direct reports, assume that they must be doing something special, if only to justify the realisation of their promotion or recognition...

Eventually, I had to give up on him. No-one wanted to give evidence against him, in fact, there were very rarely any complainants, despite the large number of people I suspected he had scammed. He died a very rich man.

When I heard he was ill and in hospital, I went to see him. I have to admit that I had become very fond of the old rogue, as his refreshing openness about himself and his incorrigible ways was almost addictive. Sitting by his bed, I asked him;

‘Is there anyone you couldn’t con’?

He smiled, and patting my arm he said;

‘Of course there is, you can’t con an honest man!’

But then he smiled even wider and said;

‘Mind you, there aren’t too many of them around!’

Sunday, 15 February 2009

The FSA admits – We regulate banks by ticking boxes

Well, alright, maybe that wasn’t exactly what FSA Boss, Adair Turner said on the Andrew Marr Show this morning, but he might just as well have done.

What he did say was that in their regulatory methodology that perhaps they had been ‘…too focused on process and procedures, and not on the totality of the systemic risk…’

In that one telling phrase, Turner finally admitted what some of us have been telling the FSA and the financial regulatory community for so long!

I was watching Chancellor of the Exchequer, Alistair Darling on the news this week, and no matter how often he was asked if he would be nationalizing HBOS, he squirmed and wriggled his way out of giving a straight answer by saying that banks did better in the private sector as long as they were well regulated. It wasn’t the answer to the question he was being asked, but it was clearly the mantra his political advisers had given him, and he stuck to it.

I suppose I wouldn’t mind so much if I had half an ounce of confidence that the two-tone Caledonian had half an ounce of knowledge of what this shibboleth, ‘regulated’, meant, but the problem is, I don’t!

When it comes to regulating the financial sector, Darling and his boss, Gordon Brown, seem to have bought the ‘good chaps’ syndrome in an even more wholesale way than Tony Blair used to adopt. They turn, without fail to the City institutions, the big consultancies, the business lobbyists, the ‘great and the good’, all of whom have a vested interest in being nice to the financial sector, and in doing so, they reflect, again and again, their wholesale lack of real understanding of what is needed to regulate the City (which I am using as a general catch-all phrase for the financial sector).

Let us start from the first premise which is known to anyone who has seen the financial sector from the inside, or from underneath. The City is a jungle, in which the law of the jungle prevails, and the strong survive and the weak go to the wall. It is a place where the only rules are ‘don’t get caught’ and if you do get caught, ‘you’re on your own’. Nobody goes to work in the City for the sake of altruism, you go there to make a shed load of money, and as much of it as you can before you retire with your grotesque pension, your summer house in Tuscany, your non-executive seats on various plush boards secured, and possibly a knighthood or even, under this mob, a peerage.

There used to be a time when certain Chancellors used to say that international businessmen came to London to do business because it was known as a clean and well-regulated place in which to do business.

What utter bollocks!

These men come to London because they know that it is flabbily regulated, that not too many searching questions are asked and that it has been traditionally easy for a wealthy foreigner to set up business in London, secure in the knowledge that he will be offered great tax incentives as a non-dom to stay here, and that is why foreigners poured into London, because it was a tax-haven for them, it had nothing to do with London’s well-regulated markets.
People can’t make money in markets that are too well regulated, so you roll the dice, you play for high stakes, you keep your winnings and you try to fob your potential losses off into other people’s investment plans and pension policies. Like the man from Citibank said, ‘when the music plays, you have to get up and dance!’

Oh, and when it comes to the regulator, you first of all make sure that when their staff show any sign at all of becoming remotely good at what they do, and they have begun to ask questions which might mean that they might just have an inkling of what you are up to, you make sure that you hire them with more money than they will ever earn in the agency, and you put them to run your own internal compliance organization. Once you have them signed up, they have a choice, follow the party line and enjoy life, or rock the boat, and find themselves in deep water!

The problem, for too long, has been that the FSA has repeatedly failed to regulate the financial sector. Oh, they have given a good impression of going through the motions, they have had review procedures, think-tanks, consultative documents, and discussion forums. They have produced reams of paper containing millions of words of policy, all the time making sure that each document contains the words ‘this is not FSA advice’. They have ticked the boxes, focusing as Adair Turner has admitted on ‘…process and procedures and not on the totality of systemic risk…’

I have some advice for Lord Turner, presumptious though he may think it.

Ticking boxes of processes and procedures doesn’t cut it, mate! You also need some grey hairs, a good memory for what happened before, some real personal moral courage to step in and say ‘enough is enough and this has got to stop’, and the skill and knowledge to be able to know when the great white sharks are not just rolling in the surf, but are in the middle of a feeding frenzy. You can usually tell by the presence of the blood in the water, never theirs, always someone else’s.

So, start hiring some people who really know about financial wrong-doing and give them some space in which to manoeuvre. If you don’t know any, give me a call and I can recommend some.