Afterword

Some new developments in some of the stories in this book have emerged as the book was going to press, and these are discussed below. For private investors who are eager not to get cheated in the future, it pays to study how frauds were perpetrated in the past, but we should not forget that frauds are never going to disappear. There is no ‘closure’ in these matters; some of the guilty will go jail, and others will avoid it, but in the next financial boom it is a racing certainty that there will be new frauds, however hard the regulators try to prevent it. This is simply the way of the world; as private investors we need to remember that fraud is an ever-present possibility, and to do our best to watch out for it.

The LIBOR scandal trundles on. RBS, currently 81% owned by the British taxpayer, is said to be in negotiation with the UK and US governments over large fines, and who will pay them (various politicians have said that it should be the bankers, and not the British taxpayer). The scandal may have serious implications for the UK’s financial sector and London’s status as a leading global financial centre, if, as has been proposed, some of the regulation of LIBOR, or of any new reference rates that replace it, are moved to another country. So far, three major banks, Barclays, UBS, and RBS, have been implicated but more than 20 banks around the world are now the subject of investigations or court cases relating to the scandal and it seems probable that it will eventually be established that the LIBOR rate rigging was done by a cartel of major banks; in other words, that it was a systemic, institutional fraud that affected the whole world’s interest rates. Reforms will come, no doubt, but with so much of the world in a shaky economic condition it may not be politically possible to achieve the radical reforms that many people would like to see.

In early June 2013 it was announced that Jefferson County was close to an agreement with its creditors to reduce and refinance its billions of dollars’ worth of debt. JPMorgan Chase, in particular, is reported to have agreed to give up $842 million, some 70% of what it is owed for the sewer deals. As Robert Brooks, a professor of finance at the University of Alabama, remarked, ‘I think any reasonable person would not come to the conclusion they’re [JPMorgan Chase] just really nice people. When you inflict harm you have to make it right.’ What galls many Americans is that although a number of corrupt municipal officials went to prison for their role in this mess – the largest municipal bankruptcy in American history – no one from Wall Street has been incarcerated.

The UK’s FSA was abolished in April 2013. Like its US counterpart, the SEC, it failed to cover itself in glory during the ‘light touch’ regulatory regime of the 2000s, when many of the frauds covered in this book came to light. Not all of the criticism the FSA has received has been fair, but it is evident that it did not succeed in reining in the worst excesses of the financial sector. Sir James Crosby, CEO of HBOS until 2006, was also deputy chief of the FSA between 2006 and 2009, resigning from the latter position amid allegations by Paul Moore, head of regulatory risk at HBOS, that Crosby had fired him after Moore had warned that HBOS had been lending in a very risky way. In April 2003 the UK’s parliamentary commission on banking standards said Crosby should take the primary responsibility for the near collapse of HBOS, and in June, at Crosby’s request, he was formally stripped of his knighthood. HBOS’s problems seem to have been more to do with wishful thinking at the top than any deliberate wrongdoing, but the fact that Crosby also held a senior position at the FSA illustrates why it became politically impossible to allow the FSA to continue as the UK’s main financial regulator. The FSA will be replaced by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA), who will be given new powers to prevent financial scandals. As always, the fundamental problem remains: how do you regulate the City without killing off its power to create wealth?

Now that the noughties boom is over, hedge funds are coming under increasing scrutiny. Forbes magazine, in a March 2013 article, suggested that, in the US, the hedge fund industry ‘is overrun with unethical and illegal activity’. An anonymous survey of hedge fund managers conducted by the New York law firm Labaton Sucharow produced some interesting findings, including: 46% of respondents said that they thought that their competitors were likely to have engaged in unethical or illegal activities; 35% felt under pressure to act illegally or unethically; 30% said they had direct knowledge of wrongdoing at work; and 54% thought that the SEC was ineffective in catching and prosecuting wrongdoers. Anecdotal evidence seems to support these findings on both sides of the Atlantic. This is a section of the industry that is severely under-regulated, and it is about time that it gets cleaned up. Investors beware!

Many of the major fraudsters of the 2000s, such as Allen Stanford, are now yesterday’s news, but Bernie Madoff, the biggest of them all, is still attracting attention. It seems likely that Madoff had highly-placed associates, in both the US and Europe, who have not yet been brought to justice. In June 2013 the liquidators of Madoff Securities International Limited (MSIL), which was based in London, sued a number of Madoff’s relatives, Sonja Kohn, the founder of Bank Medici, and others, claiming that very large sums of money were funnelled illegally through MSIL by Madoff. A slew of books and films about the scandal – the witnesses range from a secretary to a daughter-in-law – continue to appear. Meanwhile, back in the US, Madoff himself continues to utter snippets of information suggesting that he has more to tell; for example, he has claimed that the major banks ‘knew’ what he was up to and has offered to testify before Congressional committees on the matter. Robert De Niro is due to star as Bernie in a major motion picture, which should be entertaining. Says De Niro, ‘It’s interesting how it’s about trust … I think that’s very interesting, that people, with all the smarts that they have about business and numbers and this … at the end of the day it’s about people interacting and how he conned people.’ Let’s hope that De Niro can provide some deeper insights into the mind of this great villain; if any actor can, he can.

The Cyprus banking crisis, which erupted in spring 2013, has raised a spectre that many had believed was long gone: the prospect of a ‘levy’ (in other words, expropriation) on deposits held in Cypriot banks. This does not bode well, since it could be a precedent for more levies on deposits held in other countries, especially in troubled areas of the EU but also in other parts of the world. Such levies, which many investors regard simply as a form of theft by a government, are deeply antithetical to free market principles and are very bad news for the investment world as a whole: if you can’t trust governments to run the game fairly, whom can you trust? Friends and colleagues from countries likely to be affected, such as Spain, tell me that they have already prepared for this eventuality. As the psalm says, ‘Put not your trust in princes, nor in the son of man, in whom there is no help.’ Investors are probably going to be in for a bumpy ride over the next few years.