Does history show that fraud is the sign of a healthy economy?

0:00What happens next in the story of money? Nuveen has spent over 125 years helping clients answer this question. By investing in the growth of businesses, real estate, infrastructure and natural capital, we continue to deepen our expertise across income and alternatives so investors can confidently write the next chapter of their own portfolio stories. Nuveen. Invest like the future is watching. Visit nuveen.com slash future to learn more. Investing involves risk. Principal loss is possible. We're going to dig into some of the wildest and most shocking examples of fraud in history. It is not clear what happened during that helicopter flight.

0:37The helicopter arrived without him in it. Sounds like a classic mafioso story. What happened to Sam Israel after he tried to fake his own death? He wanted to get back in touch with his family. And that's always the biggest mistake when you're dead. Wow. They went to a company called Richmond Fairfield. I haven't heard of that auditing firm, Dan. it's because it doesn't exist.

1:03Today on the story of money, how can you tell if an economy is actually working? Does that mean inflation being under control, healthy growth figures, low unemployment? Well, that's what they teach you in economics class or business school. But here's another measure that they certainly don't actually teach you. Yes, because today on the show, we're going to be talking all about fraud. Because the level and nature of fraud, a white collar crime, actually might be a weird contrarian sign of a healthy economy. I know that sounds weird, but listen on. Because we're going to dig into some of the wildest and most shocking examples of fraud in history.

1:43And ask, is fraud actually natural? Is it an inescapable piece of a property function economy? Well, here we have someone who thinks that is the case. and he's Dan Davis. He's the author of Lying for Money, a book all about financial crimes and how they've shaped today's economy. So, Dan, great to have you with us. Hello, thank you very much for inviting me. It's great to be here. Dan, before you became a writer and historian, you were at the coalface of finance. You were a finance industry analyst in the City of London. You worked at the Bank of England and you were doing this at a time when a huge fraud was being uncovered.

2:19Can you take us back to the genesis moment for lying for money? It was the early 2010s. And I can remember pretty vividly that I was sitting on a desk in the research department with some of my colleagues watching Bob Diamond, who was at the time the chief executive of Barclays, being questioned by a parliamentary committee and going down incredibly badly. Again, George, this was reprehensible behaviour. I know that. I know that. I know that. I have to answer on behalf of Barclays. Did nobody, what kind of firm were you running? You're now out of a job because of the attack on the integrity of the bank.

3:10It was just about as bad a performance as you could ever see from someone who'd previously being regarded as a pretty impressive CEO. There was nobody in your firm when that was happening openly with traders that came to you and said, Bob, you're going to have to watch this because we're going to be in deep trouble. This first came to light during the investigation. Yeah, okay, I hear that. The positive side is the organization said we have a problem. No, We have to fix it. Just a diamond. No, from your point of view, that does not wash. And it just turned a switch in my brain that I'd been looking at this thing that we'd called the LIBOR affair for the previous three or four years.

4:01I'd always assumed that it was a minor market anomaly or think there was a little bit of a regulatory fine and just basically something that was part of the cost of doing business in finance and actually I realized oh this has been a huge multi-trillion with a t dollar fraud that's been going on for decades and it's happened and I never even noticed it. So Dan, what exactly was LIBOL? LIBOL stands for the London Interbank Offered Rate. It's the rate at which banks in London would lend to and borrow from each other for short-term cash deposits, so about 30 days. And there was one of these interbank offered rate averages for every major currency.

4:57So this figure was, as I say, just put together from a series of phone calls, and it turned out that that figure was being rigged. So Dan, the experiences you say of watching Bob Diamond talk about this fraud and realising just how big it was, and I remember that testimony as well, it was car crash. But that led you down this path of looking at fraud and financial fraud through the ages, and through that research, you've come to a realisation that they all share a fairly similar framework right but what is that well i think the the interesting framework here is that there are two ways that you can deal with someone who knows something that you don't which is that you can check or you can trust and of those two checking is always more reliable but trusting is so much more efficient.

5:53And so that's really kind of the story of the development of the economy. We grow and we gain the ability to build bigger and more complicated economic institutions because we use this incredibly efficient social technology of trusting each other. But that means that there's always opportunities for fraud. And the more that you build and the more you use that there, the more opportunities there are, which is how you get countries where there's hardly any fraud. Countries like Lebanon, famously, has very little commercial fraud. Greece has ship owners who will do business on a handshake. And the reason for that is that they reduce the number of people that they're prepared to do business with.

6:43They will check everyone out unless they are in a very deep, very embedded social web with them. And you can compare that to somewhere like Canada or Australia or the USA, where you can just show up. And if you are polite and you've got a nice suit and you tell a decent story, people will start from a default position of trusting you. And that means that Canada does have quite a lot of financial fraud. But would you rather be the economy of Lebanon or would you rather be the economy in Canada? Touché. We are going to be talking about three different types of fraud today. You've named them the long firm, counterfeiting and control fraud.

7:29So Dan, why this taxonomy? Why try and classify frauds according to different categories or buckets? I put the different kinds of fraud into different categories because they seem to be exploiting different kinds of trust. So you have direct interpersonal kind of relationships of trust. You have certification by a trusted authority. You have institutions which are meant to be kind of webs of trust. And the different kind of frauds are all attacking different aspects of those social technologies of trust. And let's just start with the long firm, because it sounds a bit like a story of gangsters, organised crime, maybe a Scottish football derby.

8:19What exactly is a long firm fraud? The first of these three categories we're going to dig into today. And tell us what it's got to do with salads, because that's one of the most extraordinary quirks of the whole story is salad economics. So, I mean, a long firm is probably the simplest kind of interesting economic crime that you can get because it's simply theft with a time dimension. You promise value at some point in the future in order to get something valuable today, and then you have no intention of keeping your side of that promise. and the the thing you're alluding to there is what they call the great salad oil scandal um which is there's a pulitzer prize winning book of that name which describes how someone ended up stealing almost enough money to kind of knock over american express by exploiting the properties of salad-grade soybean oil.

9:26That's amazing. I mean, okay, tell us more about this. Where does this story start? Well, huge character, a guy called Tino De Angelis. He was originally a pork butcher. Handy with a knife, not somebody I'd like to mess with. He liked to give the impression, obviously as an Italian-American who was big and had a big kind of posse around him, He liked to give that impression of links to organized crime. In fact, he didn't have any, but he liked to give that impression because people thought he might have extra sources of cash flow to pay back all the money he kept borrowing. And after having had a good war, basically profiteering in federal food contracts for which he did get prosecuted, he came out of it as an expert in trading soybean oil.

10:19And he was, by the 1960s, he was one of the biggest soybean oil traders in the USA. He was a genuine innovator of the soybean oil industry. He was the first guy to use bulk carrier ships to transport huge tanker load quantities of vegetable oil but he had this affliction which often afflicts successful business people that they get a very strong opinion about prices and they decide to go into financial speculation and in the case of tino he particularly believed that the usa was going to end a trade embargo with russia there would be this huge source of demand for cheap American cooking oil and the price of soybean futures was going to go through the roof.

11:08And if you've developed that geopolitical opinion, always a really dangerous thing for a CEO to do, then obviously you want to own as much soybean oil as you can. But also you want to own as many soybean oil futures as you can get your hands into. And it seems that Tino had underestimated quite how expensive financial speculation is. So he needed lots of money suddenly and lots of credit, a bit like putting all your chips on red at the casino. So how did he actually get the money to fund those massive positions? In order to borrow money, particularly if you're someone who's got a reputation like Tino DeAngelis did, which was not a good reputation, you need to put up collateral.

11:55Luckily, he had a lot of valuable collateral in soybean oil. This is salad oil, so-called, not because it's particularly nice on a salad, but because you can eat it. It's not industrial vegetable oil. It's a standard, basically. Salad oil standard means it's high quality. As high quality as Americans will put on their salads. He kept these things in a massive tank farm in Bayonne, New Jersey, which is just across the Hudson River from New York. And in principle, he can borrow against those. As it happened, American Express at that time had a trade financing division that was looking to expand and make some really aggressive earnings at targets.

12:44And they were prepared to lend money collateralized against the solid oil even though they didn't own an oil tank warehouse to put their collateral in they were prepared to lend on the basis of having a legal title to the oil in tino de angelis's um tank farm in bayon new jersey and this is where the great bit of the fraud which really makes him go down in history goes because if you're borrowing money against collateral of solid oil, then someone's going to come out to check that the collateral is there. But oil floats on water, and so it is often quite difficult to tell the difference between a tank that is full of highly valuable top-grade vegetable oil and a tank that's got a few gallons of soybean oil floating on top of mostly seawater.

13:47So basically, he could present those tanks, borrow on the back of it very cleverly. American Express was desperate to lend because, as so often, it was trying to develop a new area of financial innovation. And you had a win-win situation, it seemed, where he needed money and American Express wanted to lend. Of course, the problem is that he was basically doing on this on the back of phony collateral. Absolutely. And so when did it start falling apart with anyone actually going to see there was water beneath the oil? No one did ever really until it was too late to do anything about it because he just kept on borrowing more money.

14:24He could sell the oil and then still borrow against it because he was mainly filling the tanks with salt water. it seems that a book of warehouse receipts on someone's desk at American Express fell into his position. So by that point, he was able to just write phony warehouse receipts and borrow against those. Wow. And by the end of it, if all of his warehouse receipts had been totaled up, he would have had to have had the entire soybean production of the United States of America for that year in his thing. This is so classic. It's often the really boring, dull kind of financial transactions, which no one notices because they seem so dull where this kind of thing happens.

15:10And nobody adds up. Nobody literally adds up the numbers and realise that they are divorced from reality. Absolutely. An incredibly common theme. When did people actually notice? What forced them to actually finally realise? Basically, geopolitical relations worsened. The USA decided it was not going to sign a deal to exempt wheat from the Russian trade embargo. Everyone presumed, well, if they're not doing wheat, they're never going to do soybeans. And the price of soybean futures fell. At that point, the brokers in Chicago, who were a little bit more clued up than the warehouse leasing bankers in New York, got together and realized that there'd only been one person buying soybean futures for the previous month.

15:57And they made an immediate cash margin call, which was just too much money for him to raise in a short period of time. At that point, Amex went out to repossess what they believed was this lake of soybean oil. At that point, the fraud was discovered. He went to prison. Two or three brokers on the Chicago Exchange went bust because he wouldn't cover his losses. It was the equivalent of, it was about 150 million US dollars in the 1960s, equivalent of not far off a billion today. Wow. And of course, that weekend was the weekend that JFK was assassinated, which kind of kept it off the front pages.

16:40But it was the biggest single scandal that the commodities futures markets had seen. And that was a record that stayed for a very long time. The brokers in Chicago, they wanted basically Tina DeAngelis to put up more collateral. That's this cash margin call that you mentioned. That essentially they say, oh, we kind of worry about your exposure here. you have to pony up more collateral, more cash, and American Crude's company just couldn't get the resources. Is that how it played out? Absolutely. You can see here that you've got a mechanism here whereby the brokers protect themselves against having to trust someone by demanding that they put up cash collateral.

17:22And that works as long as you don't let someone build up too big a position, and it works as long as things don't move too fast in the market. and then it immediately stops working. But the mechanics whereby people went bust over allowing Tino De Angelis to build up big soybean futures positions, they're exactly the same as what we saw three or four years ago when Credit Suisse allowed Bill Huang and Archegos to build up stock futures positions. You trust someone, but you don't necessarily work out how much you're trusting them and then suddenly the market changes and you realise that actually that trust has been misplaced.

18:07Or else you put your faith in collateral, which happens so often, and no one really probes into the collateral. And time again, whether it's collateral that was underpinning so much of, say, the mortgage-backed securities problems or anything else like that, turns out to be worthless. So that's fascinating. But I have to admit, I still don't quite understand why you call it the long firm. Why is that? It's a weird piece of folk etymology. The Anglo-Saxon galang, meaning fake, wrong, fraudulent, and the Italian firma for a signature, went into Cockney slang and thieves' cant sometime around the 18th century.

18:48and ever since then it's been used mainly in england uh for the crime of buying goods on credit and then uh not paying for them uh so it's just a generalized version of that really ah gotcha but let's move on to the the next formal fraud because this is a bit of a classic one uh counterfeiting and this is obviously an ancient formal financial crime and we've talked to david McWilliams, the historian in an earlier episode, as we talked about then, even Dante wrote about it. He condemned money counterfeiters to the eighth circle of hell, just one notch above the devil himself. So we're going to deal with one specific story that takes, frankly, that to a whole new level.

19:30And it begins in modern day, but in Borneo in 1993. So Dan, can you tell us about this bornian 1990s counterfeiting scam so it was in bono in indonesia and you know everyone knows that there is gold in indonesia and so you will often get mining companies buying out small patches and buying staking claims in order to raise money on the stock market from people who like a bit of and who like the idea of a gold mine. One group of people who love gambling on minor kind of small mining companies are Canadians. I've heard horror stories about some of the stock market shenanigans that happens in Canada.

20:21It's a weird thing given, you know, our view of Canadians is sort of nice, but the stock market is anything but. Yeah, I mean, Vancouver Stock Exchange actually got closed down. But before it did, it was given the nickname of the scam capital of the world. But there was not quite so many junior marketing frauds quite so big as a company called BrayX, which was run by a small-time Canadian mining stock promoter and the hero of this story, a guy called Miguel de Guzman, who was a Filipino geologist. Both of these people were down on their luck and really needed a big hit and a big score. So when the stock promoter found out that he'd kind of got a claim to the Busan kind of territory in Borneo, he sent de Guzman out to take geological samples.

21:21What came back was evidence of something which looked like it might be the single biggest gold deposit in the world. Wow. How did he go about and do that? Because he wasn't seen as a kind of expert in gold geology prospecting, was he? Well, he was a reasonable kind of jobbing geologist who was most well-known really for his willingness to take risk of catching malaria and to go and carry out geological operations in messy, unpleasant jobs that other people send down. However, as with all of these things, there is this it all seems so obvious now moment which is that um you have two types of gold nuggets and when i say nuggets here this is not something that someone's going to hold in the palm of their hand we're talking about tiny microscopic nuggets of the sort that show up in rock samples you have the kind of gold that is striated in quartz deposits and you have something called alluvial gold which is the gold that you take out of a river if you think of someone kind of panning for gold the gold that was in the samples from the busang mine was alluvial you could see on a microscope that it had been smoothed into round pellets you know by erosion in the water if someone had thought to ask how does alluvial gold get into a sample that's meant to have been taken from a quartz mine, the whole thing may never need it to have happened.

22:57What seems to have happened is that de Guzman bought a small amount of gold from local villagers who did pan for gold in the waters of the rivers nearby and had introduced it into a sample. And of course, this is the danger of extrapolating from samples. It's a very old technique that used to be called salting a mine what you used to do in the very old days of the gold rush in the usa was take a shotgun cartridge fill it up with gold dust fire it at a rock and then take a sample of that rock to the geologist to be assayed you know but with modern sophisticated assay techniques you can take a finger uh file to your wedding ring and you can in introduce enough gold dust into the rock to make someone think that you've got a commercially exploitable vein of ore there.

23:55And this went on for a while. It became the biggest story stock of the 1990s on the Toronto Stock Exchange. Like a 1990s meme stock, basically, for Canadians. Yeah, it was absolutely a meme stock. It went up thousands of percent. It was more than a 10-bagger. it attracted a lot of retail investment because it was a really romantic Canadian story that you had someone who was a down-on-his-luck promoter who'd finally found the biggest gold mine in the world. And of course, the idea of tangible gold is something that investors of all stripes can actually relate to because you know what gold is. So what caused it to actually go wrong?

24:39Because at its peak, I mean, Briex's penny stock went up to$12 billion, wasn't it? But what caused the whole bubble to pop? The trouble is that once things get big, people start getting interested in them. And particularly with respect to Breaks, the Indonesian government decided that they wanted their share of this. You can't just discover gold in Borneo and assume that you're never going to have any political trouble. As part of the political trouble that REACS got into, they decided to join forces and have a joint venture to exploit the mine with a major gold mining company, which is Freeport McMurron.

25:25and eventually after having been put off with excuses for an extremely long time freeport sent their own geologists to take samples and they found absolutely nothing ah so the game was a game was an up yeah they they sent back a telegram to toronto saying you know there's nothing here is not only is there not the world's biggest gold mine this has no commercially exploitable gold in it whatsoever. Then something quite shocking and tragic happened, which is that obviously one of the questions that you might ask immediately after having discovered a sample like that is, could we speak to the geologist who produced the sample with the gold in it with some urgency, please?

26:13And so Miguel de Guzman was put on a helicopter to go out to the busang mine and explain himself to the other geologists it is not clear what happened during that helicopter flight but his well the helicopter arrived without him in it and he was later found and had to be identified from dental records because wild pigs had found the body before the investigators did wow like so it sounds like a classic mafiosa story i mean or godfather maybe the guzman is still out there somewhere jillian well could be exactly the briex scandal yeah like you say that was quite a bad thing for not just you know the individual investors investors but canada as a whole it wiped out lots of people who put their money into it and really kind of shunned the spotlight on just how dodgy the Canadian junior markets could be.

27:15You know, that's so interesting. I mean, anyone who thinks that Canadians are just boring and too nice for their own goods. Well, yes, in some ways they are, but in other ways, actually, that really is the glue that keeps our society and their economy together, as you say. And credit, the Latin word credit meaning to trust, is at the heart of all finance in every sense. So coming up, we're going to talk about the fraud that triggered the panic which exposed Bernie Madoff's Ponzi scheme. It's a story I'm passionate about, or passionately interested about, because I went down and interviewed Madoff in his prison just after he'd been convicted.

27:50Plus, what does all this swindling really tell us about the times in which they're taking place? Could they even be a sign of a healthy economy, just like Dan argues? Well, that is all after the break.

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28:41So let's move on to our third and final fraud. And we're going to go back to the 1990s, the late 1990s, relatively modern history. And this particular fraud takes place on the trading floor. Yeah, Bayou Capital. It was a small hedge fund. It was never really much bigger than a particular trader called Sam Israel. Sam Israel was originally from New Orleans. He'd had a background in inside dealing and he'd written a computer program, which he claimed was able to forecast the stock market. And so on that basis, he launched a hedge fund with his colleague who happened to be called Dan Marino, which is a great name if you're going into the fraud business, because it means that anyone who ever does an internet search for you will only find anything about the former Florida Miami Dolphins quarterback of that name.

29:38And Sam and Dan were not quite the innovators, but they were early adopters of a really interesting new technology of fraud, which had been identified only 10 years earlier by the bank investigator Bill Black, which he called a control fraud. And the advantage of a control fraud is that up until around the 1980s, anytime you wanted to steal money by lying, you pretty much had to do something that was obviously and unambiguously illegal. So you had to present a counterfeit bill or you had to sign your name on a loan saying that there was a load of solid oil in a tank when there was only salt water in there.

30:29what people started to realize in the 1980s is that financial structures were big enough and complicated enough that you could take control of something like a company or a hedge fund or a kind of partnership in such a way that all of the transactions it paid to you were legal so the hedge fund will pay out management fees and performance fees. But if you control that entity and you control its accounting, you can pay yourself legal payments out of fictitious assets or on the basis of fictitious trading returns. And that makes it an extremely difficult fraud to detect because there's never any payment that is particularly questionable.

31:22And it makes it quite difficult to burst because the thing about companies and banks and hedge funds is that they are ongoing entities. No one ever expects them to wind up. They're not like bonds. They don't have a maturity date at which the cash has to be produced and showed up. So what did the Dan and Sam show do with Bayou Capital? What exactly were they getting up to? They had written a computer program that was capable of forecasting the direction of equity markets. Ah, yes, of course. Except it wasn't. It didn't work. And so what they tended to do was to record the trades that they wished they'd made rather than ones that they actually did.

32:09and so the fund kept on showing solid, low volatility, growth, absolutely the sort of profile of hedge fund returns that you'd want to keep your money in. And they had ways of making sure that no one looked too closely at it. One of the things that Bayou Capital always insisted on is that it would only take money from intermediaries. It would only take money from from funder funds and from asset allocators, they didn't want any high net worth individuals invested. Reason being that high net worth individuals, in Sam Israel's view, tended to have idle sons and daughters who had nothing better to do with their time than hang around reading investment returns and then going to their floor and asking awkward questions.

33:00So you didn't want anyone nosy around the whole investment scam. And funder funds were not nosy. Yeah. And so you wanted people who would only look at you in terms of the reports and the audited returns that you give to them. Now, you don't actually want an auditor to look at the returns if you're faking them, because it's quite easy to detect that they're fake. And so they went to a company called Richmond Fairfield. I haven't heard of that. I haven't heard of that auditing firm, Dan. Why is that? It's because it doesn't exist. It was invented by Dan Marino. They created a completely fictitious partnership.

33:43People checked that there were audited returns, but no one checked that the auditor existed. Because why would you check that an auditor exists? It's not on the kind of standard checklist of things to check up about a hedge fund. they would also send out the reports late on a friday evening so that they would be immediately swamped on everyone's desk by the weekend paperwork on monday morning and they would again not be looked at too quickly and once you've got a setup like that it grows you know because you're reporting 10 kind of returns in a month but that means that the whole fund is getting bigger and bigger.

34:26The clients all believe that they are doing extremely well. And then September the 11th happened. This catalyzed a huge argument between Dan and Sam because Dan was begging him with tears in his eyes. Let's just say we were invested in a load of airline stocks. We've lost all the money. Everyone will be mad at us, but we can just say it's gone to zero. Yeah. Fourth majeure kind of thing. Yeah. And everyone will hate us. We'll probably never run a hedge fund again, but we won't actually go to prison. And they didn't do that. So they actually ended up claiming that they came out flat to slightly up after the 9-11 attacks.

35:06And the fraud just kept on growing and growing. Unfortunately for the long-term survivability of this, Sam Israel was a pretty serious drug addict. And he was, on many cases, not able to come to work in the morning. He fell for a fraud himself at one point, didn't he? He did also invest in something called Prime Bank Guarantees, which is a conspiracy theory. This theory overlaps with a lot of really quite unpleasant conspiracy theories about hidden rulers of the world. Sam did believe that he'd got an introduction to that group and as a result ended up trying to wire something like 10 million US dollars as a finder's fee to the person who introduced him to the hidden rulers of the world unfortunately that transaction triggered an investigation by the bank that was meant to be sending it because it was such a weird payment and then everything fell apart some ended up trying to fake his own death not successfully and then of course you had the whole thing implode which began to get people asking questions about hedge funds in general well yeah because one of the things that people started looking at in the smoking wreckage of biocapital is why do they have this non-existent auditor and so everyone said well well, let's look at other firms who have auditors that we've never heard of.

36:41And one of those firms was indeed Bernie Madoff, which was, it was not a fictitious audit partnership, but it was a tiny little office that, as far as anyone could tell, had been completely come under the control of Bernie Madoff. So Bernie Madoff, of course, was the mastermind behind one of the largest frauds in history. The thing I find fascinating about the Madoff story is that when I went down to interview him in a prison, it was a high security prison, very dramatic moment because you have to go through these layers and layers of security like a movie, a Dan Brown movie or something like that in the middle of, in our case, North Carolina.

37:19And after all that drama, I finally got to see Madoff, sat with him for a couple of hours in his room. And the horrifying thing was he looked just like my dad. He looked professional, calm, collected, middle-aged, credible, reassuring. And in many ways, what he created was something that you've called a control fraud, isn't it? Because you essentially have the aura of professional businesses around it just making the whole thing happen. Yeah, and he was able to control the information environment of everyone who was dealing with them for a very, very long time. That's the way that you can exploit the general trust in society.

38:04Because at the end of the day, we see these things in ex post, in retrospect, once we know that there's something to look for. Once you know that there's something to look for, it's usually not difficult to work out what it was. You know, there's no kind of investigation into who was responsible for the collapse of Bernie Madoff. It was Bernie Madoff. And the trick is that while it's going, you conceal the evidence that a crime has ever been committed. The thing that really struck me as, you know, most shocking of all was that when I got to see Madoff in this prison room, he looked at me intensely the whole time.

38:40And I thought, I've got to maintain eye contact at all costs just to keep him talking. And I did not dare take my eyes away from him. I had to scribble shorthand without looking down at my pad the whole time, which was hard to decipher later. I remember looking at him and thinking, wow, if I'd encountered him before the fraud happened with all this professional paraphernalia, I would have trusted him too. There was nothing obvious beforehand to tell you that you couldn't trust him. And it's quite possible that he would even believe it himself. There's a criminologist called Donald Cressy, who was one of the first people to write about white collar crime.

39:17And he pointed out, firstly, that white collar crime is itself an interesting name, because how many other crimes are named after the kind of people who commit them? um it's a crime that's committed by non-deviant members of society it's committed by people who are like us which makes it unusual in criminology most criminals know that they are outside the boundaries of society and kind of act like they are basically deviant individuals the fraudster does not believe themselves to be a deviant individual and so they have to create what Cressy called a rationalization which is they create a story that they tell to themselves a very weird psychological phenomenon and about the only thing that you can really say about it with any confidence is that once that capacity is there something has fundamentally changed in a person.

40:17I remember asking him, you know, what he was doing with his time. And he said, well, firstly, he was teaching the other prisoners about finance. Don't laugh. And secondly, when I asked him what he was reading, he said he was reading romantic historical novels and said that was because that was the best way to relax and seemed to act as if nothing was odd whatsoever. And therein lies, as you say, the ability to not just con others, but con yourself too. So Dan, what happened to Sam Israel after he tried to fake his own death? He couldn't stay dead, basically. He wanted to get back in touch with his family and that's always the biggest mistake when you're dead.

40:57And he spent some time in prison. I believe he got out recently. As far as I know, he hasn't launched another fund yet. No, well, I think that might be a slightly tricky uphill task, but, you know, it's clearly an error for second chances on Wall Street these days. But Dan, I'm very much, I'm into your theory that, you know, we have to high trust societies, which is a valuable thing. There are economic benefits to having that, that essentially, you know, this is inevitable. There will always be people like Sam Israel and Bernie Madoff. Tell us where, I mean, so we've talked about these other frauds, but tell us, let's go back to where we started.

41:35Where did LIBOR fit into this schema as far as you're concerned? Was that... Yeah, it's sort of tech control fraud. and what kind of fraud was LIBOR in your taxonomy? Well, LIBOR is a very strange thing because it is an entire new entity. It's what I call a market crime, which is to say that there's a real question whether the LIBOR scandal was actually the crime of fraud, which it was mostly prosecuted at. Was it the crime of running a cartel, which it was sometimes prosecuted at? or was it just the normal business of the futures market which it should regulate itself and nothing to do with the criminal authorities at all the thing is that sometimes you get economic entities which are so big and important that their internal rules get given the status of criminal law so So the most interesting example of this is insider trading on a stock exchange.

42:39That was not a crime 50 years ago. There is no one of the Ten Commandments that says, thou shalt not trade securities while in possession of material non-public information. This was only made a crime in New Zealand as late as 1998. So going back to the 19th century, trading on the basis of inside information, was just what you did. You know, there would be no reason to trade stocks if you didn't have non-public information. The fact you have frauds shows that there's been so much trust that people haven't stopped to check what's actually happening. And trust is a good thing. But I'm curious, if you get these kind of frauds coming into public view, whether it's made of, whether it's any of the other frauds we talked about, doesn't that then erode people's trust in the system and begin to essentially take away the very essence of what you think is so good for a functioning capitalist economy?

43:34I think what erodes people's trust in the system is when this kind of dishonesty is seen to have no consequences. So you can run at a very high level of fraud if people have a baseline assumption that when it is found, it will be prosecuted. My favourite example is your own newspaper, of course, was founded without fear and without favour, which in the time was widely understood in London in the 19th century to mean, unlike all the other newspapers, the Financial Times does not take bribes from stock promoters. Exactly. By the way, we still don't. We're very proud of that. We are trying to be squeaky clean.

44:17So what I'm hearing from you then is that essentially, just coming to the final wrap of our discussion, the conclusion, I guess, is that fraud is endemic to a, in some ways, it has a good aspects. It shows that there's enough trust in society to enable fraud to happen. And we want to have trust in societies. But if you want to maintain trust in the face of fraud, at all costs, you have to make sure that there's actually a sense of consequences and retribution when things actually happen, which of course happened with Madoff. To some degree, it happened with LIBOR. It never really happened properly with the 2008 great financial crisis.

44:55But that's in some ways a key conclusion from here, isn't it? Yeah. I mean, I remember talking to a head of a major stock exchange who I'm not going to name. And his view was that the most of stock market manipulation inside trading, they wouldn't really catch. His job was when they did catch somebody to fall on them like a ton of bricks, to almost be deliberately draconian and over the top and really go for them, to send a signal to society that when you finally do catch somebody, there are consequences. And that was the important bit, really, that people were seen to be punished. Yeah, and it's kind of a ritual.

45:32And the one thing I was very struck by was after the Resolution Trust Corporation, the big banking scandal with savings and loans in America in the early 1990s, 2 ,000 American bankers went to jail. After the 2008 crisis, almost no one did. And that, of course, helps to explain why we have such poisonous politics today. Absolutely. I couldn't agree with that more. Well, listen, thank you so much, Dan, for coming on. It's been such a fascinating and in many ways counterintuitive discussion, but very important. And I said at the beginning, this stuff isn't on any classic Economics 101 class, but I think it should be.

46:07So thank you. And Dan, thanks so much for being with us here today. This has been fascinating and quite fun as well. Oh, thanks ever so much for both of you. It's been absolutely great. And that's it for this week's episode of The Story of Money. If you liked this episode, please make sure to subscribe and review the show. Comment underneath. We do read them all. I'm Robin Wigglesworth. And I'm Gillian Tett. We'll see you again next week.

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