A sleuth’s guide to the coming wave of corporate fraud
economist.com
economist.com
We way overdid Covid stimulus, which helped inflate bubbles like you saw with crypto, pouring billions into the hands of criminal organizations like FTX.
We had cheap money flowing for too long with near-zero interest rates, propping up many zombie enterprises that shouldn’t have been propped up to begin with.
Salary growth is great, but we all have seen a proliferation of bullshit jobs with ridiculous salaries in the past two years.
All of these trends have started to correct, and it’ll be better for the long term. I just hope nothing systemically important breaks before we’re through the worst of it.
Expensive condos etc derive most of their value as a symptom of a much larger and extremely productive economic system which got disrupted. Suddenly people start reevaluating basic assumptions and markets adjust in ways more complex than a simple boom bust cycle.
I agree with you, and in particular I have a worry that corporate real estate is a bloodbath whose extent is not yet revealed. WFH has destroyed the need for knowledge workers to cluster in a downtown office and all CFOs must be wondering how they can get out of their leases as soon as they expire, not only to save some costs but also to keep workers who like WFH happy (played right between HR head, CEO, and CFO, it could be touted as a benefit to employees that also saves the company money)
SFO vacancy rates are about 15% right now (source: https://www.nar.realtor/blogs/economists-outlook/metro-offic...). NYC, 13%, double pre-COVID. See the link for the data source.
There will be many ways to read this data and if I knew which way the wind was blowing I'd obviously be out there making a killing on CBRE instead of typing this post, but if this trend stays, then cities will undergo huge shifts again. I don't predict the death of the city (cities have gone from being based on geographic confluence, to defensive importance, to transport hubs, to industrial centers, to mercantile centers, to confluences of knowledge workers, and they will adapt again) but it's goijng to be a bumpy ride.
[0]https://cre.moodysanalytics.com/insights/cre-trends/office-t...
I think this is an archaic, pre-21st century mindset. Advanced, industrial, technological societies should be able to guarantee comfort and stability for all people regardless of work. In the modern world, we should work because we love or enjoy it, because we want to contribute to society, and because it brings meaning to our lives and the lives of other people. We should not work, on the other hand, to be "rewarded" in a zero-sum game competing with others, to the detriment of the rest of the planet. We really need to change the way we think about this. The most productive workers aren’t people working for a reward, they are those who love their work and are happy with the comfort and stability they already have. It’s 2022 going on 2023. The idea that we should work based on scarcity rather than abundance is completely out of date and no longer supported by the evidence. This is the kind of have and have not mindset that needs to disappear. Nobody should have to work to obtain comfort and stability.
I think what you wrote is a goal for our society but we need minimum of many decades of technological advances to even start really thinking about implementing this. We are not there yet.
Advanced societies can and should guarantee food and shelter to all people regardless of work.
They can't guarantee comfort and stability at all.
> The most productive workers aren’t people working for a reward
The most productive workers are the ones working under crisis conditions. Not happiest. Most productive.
> Nobody should have to work to obtain comfort and stability.
Should not? Maybe. They do anyway, because that's just reality.
Choose not to work? Here's your bread, here's your cardboard box. Next!
If everyone could work together effectively, and no one would stab each other in the back, scam each other, lie to look better, or just screw up, etc. then hey, maybe.
But then we would already be in a better place?
If you figure that people will occasionally do ALL of those things if it benefits them (and sometimes when it doesn't), then what you're describing is the most incredibly rich target I can possibly imagine.
Cheers!
I’m not some consummate capitalist, but there is a tremendous amount of necessary yet unrewarding work that still has to be done by human hands, and I’ve never seen a believable pitch for how that happens in these “post-work” pitches.
We could end all that if we wanted to, it just wouldn't be as beneficial to the capital class. We have the tools to do the hard and dangerous work without destroying human lives, those of us who benefit the most from the status quo just lack the inclination.
There is a huge market opportunity to automate hard and dangerous work. If you build good tools, you'll make a fortune and do some good.
Most of these people, that I have met, aren't even productive at 'art' or their jobs, whatever they may be. It's always "if only"... then they would do all the things they claim
Modern societies are not yet at the stage of infinite resources. A change of mindset to this direction is very much part of "Hard times create strong men, strong men create good times, good times create weak men, and weak men create hard times" cycle.
It's very, very clear that we are at the tail end of good times, and this reversal will hurt a lot of people who assumed that work is not necessary.
This is literally what people have been saying in every generation since the beginning of time. They've made whole religions out of it.
This cycle doesn't exist. The idea that it exists serves political ideologies like fascism.
The Marxian version of the ideal also was predicated on technology, and also business cycles. It said, as technology brings increased productivity, and the replacement of labor with it, it would lead to these recessionary cycles caused by excess production. It's only a matter of time now before we realized these modes of production need to be replaced by something centralized, where the laws (the logic) of the free market lead to the destruction of the free market.
And then the 1960's Marxists: we would repurpose these machines to fulfill our needs that require labor, and we would now have the free time to frolic, fornicate and make art. A New Man would be created, one not an outgrowth of the competitive free market environment.
Sure.
We've had some time to let this play out and it's quite obviously heading in the opposite direction. We might have drones and magic devices where we can talk to each other face to face in real time, but we're all over-stressed, over-worked, over-monitored and as competitive as ever.
I don't see us laying in fields in the Sun and making art.
Although I might've seen something like that in a sponsored ad on Instagram.
This is an archaic mindset as old as the Industrial Revolution itself. The problem is that we’re still nowhere near the level of automation and productivity required for it to provide a quality of life we consider “good”.
Not only is productive enterprise positive sum, its positive-sum nature is responsible for all the comfort and stability we have.
>The most productive workers aren’t people working for a reward, they are those who love their work and are happy with the comfort and stability they already have.
I have taken to thinking of this line of argument as "the group project economy." We're all getting the same grade, and we know the nerd is going to do the work; he can't help himself. So just leave him to it and we'll be fine. I have to admit they're not wrong! It works! At least in the short term. But I find it pretty astounding that serious people think we should make this the basis of our whole economy.
https://www.justice.gov/opa/pr/us-attorney-announces-federal...
There is surely some GDP gain from not ploughing 250m of taxpayers money into lambo's.
When economics refers to east money and recessions and interest rates it’s how easy it is for businesses to find investment and loans for expansion.
how? capitalisms defining hallmark is a ten year cycle of boom/bust. the last solution in 2020 was a bailout and forgiveness for virtually all commercial covid debts. prior to that it was a massive bailout and payout checks to taxpayers along with a scorched earth foreclosure wave. at some point the argument comes across as an alcoholic that repeatedly crashes cars and promises to learn and grow from it.
real wages are stagnant, homes are still unaffordable, rent is skyrocketing, healthcare now routinely sells insulin for $200 and everything from energy to food is still rising. ive a tough time believing corporate fraud is a silver lining.
Anyway, the solutions are well understood. Any decent US history textbook contains them.
Unless you’re suggesting we replicate another world war to wipe out most of the competition, looking to some stupid domestic post war policies won’t do jack shit.
Free markets are a chaotic system, not a cyclical system. Every attempt at predicting markets based on cycles has failed.
You can make an anti-growth argument, possibly on carbon emissions, but a recession cannot ever be good for growth.
As long as you stop it before everyone is dead you'll be left an economy composed of only the most antibiotic resistant companies! I have no idea if that's good!
Sometimes new technology improves productivity in an industry, allowing the same amount of work to be done with less labor and resources. Sometimes consumer desires shift and industry has to adapt by reducing the size of their workforce or by cutting costs.
Recessions are what you get when the economy reorganizes itself into stronger, more sustainable patterns of specialization and trade. Preventing that adjustment from occurring prevents future growth from happening.
Crypto was already a problem way before covid came out of a bat cave - the problem is not the stimulus package, these saved a lot of lives, and they got to individual people, not corporations.
The actual problem was the expansive monetary policy that virtually all major central banks followed since the 2008ff crisis - well over a decade of injecting absurd amounts of money is what caused the absolute bull run on real estate, stock markets, venture capital backed crap (remember Yo?) and, finally, once there was no other avenue for all that money left, into crypto.
I don't think punishing FTX and zombie companies is a good trade-off for the overall effect on the standard of living of the average person. Wealthy and generally smart or connected people saw this coming in late 2021 when there started to be big dips in the market; no, not in the "a broken clock always strikes twice" sort of way, but in the "there's something fundamentally hosed here, let's cash out" sense.
Wealth inequality can only get worse from here - it's mostly just separated in terms of who still rents versus who owns and collects rent.
Put in another way, that support the assertion that recessionary cycles make the inequality worse. You're just pointing to the acute phase of the recession, when the evidence is in the years immediately after.
I think this can be explained because assets can be purchased more cheaply during these periods, leading to a greater share owned to be possible, and thus making the wealth slice of the pie by the 1% to be even more valued.
But even in an increasing wealth inequality environment, a proper recession should at least decapitalize the stupid among the wealthy and benefit better capital allocators, which is beneficial. Better to have productive Elon Musks getting rich in the aftermath of economic turmoil than SBF's and Adam Neumanns.
Of all weeks to pick him as an example...
If he's out of his prime and keeps it up, I imagine it'll negatively affect his wealth significantly (as it should).
Meanwhile, they get the opportunity to buy cheap assets from those who did not have liquidity, which worsens both asset consolidation and wealth inequality.
"We show that portfolio heterogeneity and asset price movements are the main determinants of wealth returns and inequality, whereas saving-rate heterogeneity and within-class return differences played a minor role. As the stock market continued to outperform the housing market, the return of the wealthy has risen faster than that of other households, reinforcing the wealth concentration at the top."
Oh, and the time limitation in the graph you reference only goes back to 1989. The recessions since the 80's have involved increasing federal bailouts and don't result in the kind of long term impact of organic corrections required to support the statement "wealth inequality only improves during recessions". With the fed stepping in and propping up failing corporations, that statement is only true for the narrow window of time at the start of the correction to where the stock price drops precipitously. Once the market responds to the bailout it is no longer a true statement because the most wealthy have taken advantage of the price decrease while individuals with smaller net worth eventually, but only, recover what they lost.
Taking a step back, I find your statement odd. Do you truly believe that or did you post that comment knowing it to be untrue in the hope to generate more discussion and push your user rank up in this system? Conspiratorial thinking on my part, but it only took me 15-20 minutes of reading to conclusively prove your statement untrue, and I'm not an economist. In light of that, it just seems...odd.
This has been the case for all of modern history. It's not something new.
It’s crazy to me that the house i grew up in and my parents could afford with only my dad working as enlisted in the military now is 650k vs 140k 20 years ago. This rate of growth doesn’t seem sustainable.
In the long run this isn't sustainable -- in the medium term we expect any exponential growth to plateau at a cubic, and in the long term quadratic, growth rate -- but while we're in what sure appears to be an exponential growth stage, that 8% number doesn't seem inherently unreasonable.
The middle class has seemingly vanished and I don’t think that is good for society
People in the middle. They haven't quite received that 50% raise the so now they're effectively much closer to the bag boy at the grocery store purchasing power. Yes, it's pretty awful for society and just getting started. It is demotivating and my thought is it's probably a contributing factor to why productivity is down.
Any investment portfolio that "only" made 8% YoY for 20 years would be incredible.
Isn't this almost exactly the return of SPY over that time period?
Some of this is simply caused by supply not keeping up for decades, but on top of that we have a lot of people who moved out of the cities/back in with their parents during the pandemic who now want somewhere to live.
Home prices are actually lower now than they were earlier in the year, but rent has inflated by quite a bit. That proves that the demand-side is causing the increases. If housing was simply an asset bubble, we would see purchase prices skyrocketing too. Increases in rent are outpacing increases in home values because of a lack of supply is causing potential tenants to compete with each other.
So, how would home values drop significantly? New supply takes years to build, so that won't do it anytime soon. High mortgage rates have only resulted in small decreases in prices. It's also becoming more expensive to build with new environmental requirements like solar panels on all new housing in California, for example.
The only way I can see significant price drops happening in the short term is something similar to what happened in 2008: a wave of foreclosures forcing sellers to sell low, at the same time as mass unemployment and massive stock market dips destroy the purchasing power of buyers. That would certainly lower prices, but the damage would certainly not be limited to the housing market.
or if there's a drop in demand?
To get an equivalent house you need to go further out to a less developed area with less people competing for the house, and there you will find cheaper houses.
I'm not saying it is sustainable or what the values should be etc, just that the past conditions != todays conditions despite it being the same latitude and longitude.
About the stimulus to the public; the policy should have been more nuanced and less about propping up failures. It should have been more solidly focused on humanitarian relief and incentivization of services that would be necessary during the pandemic (such as funding premiums, space, and PPE for critical jobs). The funded tests were a good step, but even better would have been blanket sending out a first test kit (of some size) free to every address registered to vote along with a letter that detailed the program and how to order more.
The PPP program (relief for businesses, not directly workers), as an example, should have been in conjunction with already existing banks and credit unions (who already have due diligence systems) and about vastly reducing the interest and underwriting a small percentage of the overall firm's total loaned out value to some degree.
Worker support should have been two prong, in the form of extended unemployment benefits during the pandemic and also the creation of new jobs fulfilling civic needs during the pandemic.
Rather than the forgiveable loan scheme, I would have implemented as a rebate to employer on say 5% of the payroll tax they remitted to the feds. That would precisely track actual payrolls without the application hurdles.
There's probably a better design, but a think tank of experts given a week or two of time to explore them and bake them into a proper response would obviously be far more effective than back of the napkin replies by armchair observers on an Internet forum. Though the wisdom cherry picked from a crowd still seems to do better than government / congress; so maybe they need to be more humble and/or make an agency/think tank for problem solving that becomes legislation.
Tech: QQQ is a pretty good index of tech stocks, which has dropped about 30% since 2022's high. Draw-downs from their 2022 peaks: AAPL: $513B. MSFT: $653B. AMZN: $711B. TSLA: $639B. GOOG: $663B. META: $598B. NVDA: $306B. The list goes on, and that doesn't even include the far higher investments lost in derivatives and indexes.
Crypto: since the peak this year, we've seen a total draw-down of around $1.24T USD.
For comparison: throughout 2020-2022, the M2 supply increased by around $6.3T. This peaked around Feb 2022.
Better for whom? That's the question. Maybe the imbalance in wealth distribution corrects, or maybe the wealth simply concentrates in still few hands. If I had the money, I'd bet on the latter.
Do you feel bad that Saudi Princes supported profligate brogramers via SoftBank?
Not sure what you’re referring to specifically, but the PPP was a good program. Most of the money went directly to non-owners/workers. And the amount which owners did receive helped keep those businesses afloat, again benefiting employees with a place of work.
I mean, there has to be some answer to the problem of an auditor that says "I don't like the way you treat this income stream" and the CEO says "we will never work with you again and I will make sure everyone I golf with never will again."
And thinking in more detail, substantial problems seem evident:
* You want auditors who check everyone, not just the most likely or most "profitable" targets.
* If the activity of a regulator depends on the fraud level, you will have people slacking off in times of little fraud, which will then give rise to times of much fraud.
* This would make regulation more adversarial - companies would have an incentive to withhold information from a regulator to the extent a regulator would have an incentive to "spin" things in a profitable direction for them. Despite a strong pro-business ideology prevailing in the US, US regulation is already often more adversarial than in Europe. A US regulator is more oriented to catching wrong doers than to guiding companies into behaving correctly. This is visibly failing in all sort of large and small ways. The proposal would make this worse.
Do you? Don't you in fact want the auditors to find the most fraud per hour worked?
The problem the US has now is that for example IRS audits go after the poor because the rich have too annoying lawyers. This is the absolute worst.
For the last fifty years, the prevailing ideology in the US has been a straightforward system of bureaucracy is horrible compared to some chaotic, production optimizing startup. But if you compare now and fifty years ago, today's "running the government like a business" has produce a sea of corrupt inefficiency. For that reason, I think it's perfectly not to fixate on dubious metrics like "most fraud (found) per hour worked". Regulators should be neither low paid nor super high paid. They should be honest, even idealistic, people working to keep society honest rather than "entrepreneurs" looking for some kind of "score".
The problem the US has now is that for example IRS audits go after the poor because the rich have too annoying lawyers. This is the absolute worst.
Of course, this is a product of the bizarrely complex tax code and the legality of a whole variety of shady maneuvers. I'm not optimistic about this going away but if it goes away, it would require the state simplifying the tax code and outlawing the whole fabric of hidden financial maneuvers. Until something like that happens, you're not going to win the arms race. And in this situation, "incentivizing" the agents just means they'll figure out a way to go after a certain middle type - rich enough to have some money but too poor to defend it.
Like I said, we've wound ourselves into a government of competitive proxy reaching pseudo-economies, we "Goodharted ourselves to death"[1]. But naturally people want to add one more spring to this clockwork nightmare.
100% agreed. Financial incentives destroy honest work. Sweden has proved this multiple times by having financial incentives through the entire health care system.
They'd then invent fraud in order to discover it.
Accounting has a lot of grey areas to it.
(like, promise something, sell it now, and deliver it days later, purchased in the meanwhile for less)
i often wonder if the practice arose because of physical lag in delivering paper-based shares of corporations many decades before everything was electronic.
IRS : https://www.irs.gov/compliance/whistleblower-office
> The IRS Whistleblower Office pays monetary awards to eligible individuals whose information is used by the IRS. The award percentage depends on several factors, but generally falls between 15 and 30 percent of the proceeds collected and attributable to the whistleblower's information.
From the annual report: https://www.irs.gov/pub/irs-pdf/p5241.pdf
> Since 2007, the Whistleblower Office has paid out more than 2,500 awards to whistleblowers totaling over $1.05 billion and has led to the successful collection of $6.39 billion from non-compliant taxpayers.
---
SEC : https://www.sec.gov/whistleblower
> The Commission is authorized by Congress to provide monetary awards to eligible individuals who come forward with high-quality original information that leads to a Commission enforcement action in which over $1,000,000 in sanctions is ordered. The range for awards is between 10% and 30% of the money collected.
---
CFTP (Commodity Futures Trading) : https://www.whistleblower.gov/overview/applyforanaward
False Claims Act Settlements : https://www.justice.gov/opa/pr/justice-department-s-false-cl...
NHTSA : https://www.nhtsa.gov/laws-regulations/whistleblower-program
... and more.
As part of the audit process the auditors assess the risks of fraud including management override of controls and build this into their audit plan. But external auditors are not required to find fraud, but may find it through their audit procedures.
Audit firms operate on trust and there are many many steps that are required to ensure a level of independence of the staff and the partners involved. The penalties associated with poor auditing are usually significant and when quality issues are identified partners are often penalised financially.
You can't pay auditors by the fraud discovered as that's in fact not what they're actually there for in the first place. However, they may identify instances of fraud as part of audit procedures as part of identifying material misstatements.
1) Tech valuations over the past ~5 years were based entirely on annual revenue multiples. 25x was the norm, while 50-100x wasn't hard to find.
2) Let's say your VC firm owns 5% of CompanySaaS, which you paid $1M for, and the company is valued at 25x ARR ($800k * 25).
3) Now you invest $100k in CompanyWhatever. As their VC and valued advisor, convince them they should spend $100k/yr utilizing CompanySaaS's products.
4) CompanySaaS is now worth $900k * 25 (probably higher multiple since revenue is growing so fast), or $22.5M, and you just turned $100k into $125k.
Rinse and repeat. It's a self-perpetuating bubble, and it's going to come crashing down hard. It's already happened but they've still got enough runway for another 6-24mos.
That isn't the case. Instead, these deals help bootstrap companies. Late phase investors insist on seeing per-customer revenue breakdowns specifically to avoid the issue you are describing.
It is likely that startups that are becoming revenue-dependent in 2022-2023 are in trouble though.
In the wise words of Mr. Buffett - "It's only when the tide goes out that you learn who has been swimming naked."
Well, the tide is going out. Time to grab some popcorn!
SaaS is entrenched and not going anywhere. The problem is what people think companies will pay for and how much. I will happily pay for a service to manage a deploy pipeline but one of the ones I talked to recently was going to charge $80 per POD in our line cluster. That would have easily made them a 6 figure SaaS for us which isn't going to fly, meanwhile we pay for somebody to host our monitoring dashboards because it's only $1k or so total a month.
However, even if you have no investors in common, this effect still happens. Everyone was growing and charging each other increasing amounts of money, which lets you raise on the assumption of continued growth. Once everyone stops spending more, freezes hiring, cuts costs, lays off, and sees all their customers do the same, all the metrics plateau or dip and you suddenly can't leverage the assumption of continued growth.
Do you have data to back that up?
I'm not naming my company of course but anecdotally we're in the b2b space, IPO'd etc, and I know that a huge number of our customers are similar, non-profitable start ups.
Reflecting on it, all of the b2b companies I've worked for in the last decade have had this same situation.
I honestly wouldn't be surprised if the long tail of AWS was mostly unprofitable, VC funded startups.
Just take a look at Snowflake for probably the most successful example (though they still don't make a profit). It seemed like over night ever "big data" tech company I knew started using them aggressively with little other reason than they were the next cool startup whose product you wanted to be using.
Unless you can figure out "What, EXACTLY, is the thing that I can charge them for -- meaning that they cannot get unless they pay me for it," you're done. And that space is pretty small. Not nonexistent, but small.
In that sense, the cascade effect is actually bidirectional; canceling Canva immediately hurts Canva, but it also hurts my customers; more acutely than, say, waiting a year to upgrade to the latest version.
Additionally, many people talk about bullshit jobs, and it seems obvious to me that subscription based billing has been a driving factor in this phenomena. If, revisiting the previous example, Office 2007 doesn't deliver enough value to Me The Customer to convince me to upgrade; I won't. Under subscription based billing, I'm given no choice; it follows that we enter a pattern where companies are far less incentivized to deliver innovation. When speaking on a domain where there's little competition, this effect is heightened, but the move to subscription-based billing subtly removes even another competitor from the domain: your past product.
The other thing I think about when it comes to software companies: how little inherent value they have. While not the only area where it matters: think about bankruptcy liquidation. Their value (at insane valuations, to be clear) was in the service they provide, but when the rubber hits the road the code really doesn't have much value (its kind of like that old story about the guy who stole coke's secret formula and tried selling to pepsi; even if you could obtain it legally, why would you want it?). Maybe the data does, for some companies. Most of these companies don't have servers; they may buy their employees laptops. Many are moving to full-remote; so no real estate (which may have been rented anyway). When revenue starts plateauing and the veil is lifted, the reckoning will be so much harder.
Point being, I think the pricing, expense, and operational model in typical SV-style corporations is subtly unsustainable.
Where does he send/receive fiat?
Another steaming stinking bucket of goo no one wants to look too hard at, for fear it will actually be shit instead of the maple syrup they keep being promised.
https://fortune.com/crypto/2022/11/08/sam-bankman-fried-face...
Among the big exchanges, Coinbase has always been more conservative and regulation/oversight-minded. They've suffered for it in market share during bull runs, but after this kind of shake-out they end up looking much safer and more reliable than Binance.
Or, Bitmex is further along in the process of rolling out proof of reserves and proof of liabilities than Binance is.
The economy must be separated from the government the same way religion was if we are to ever have true economic freedom and self-determination.
He says that several SV firms and VCs have been working on several of the shitcoins in which SBF was a cofounder and pumped and dumped or which SBF just pumped and dumped (already before FTX even existed) without being involved in their creation.
SBF had its hands into a lot of things, including Solana and Serum (SRM), which represented $2.2 bn in USD when FTX went down (but which since crashed by 75% or something).
SBF owns 9% of RobinHood.
I'm not saying it, Chamath Palihapitiya is. Here's a recent talk between him and Coinbase's CEO. Jump at 20 minutes when it starts on crypto:
I do personally think Chamath Palihapitiya is right and we connect the dot with the article from TFA, this does indeed go much further than just SBF.
Another one just for the gigs I recently read (facts needs to be checked): SBF's mom (lawyer and teacher at Stanford) ran a fundraising political campaign rooting for Biden. A few days after Biden announced he was running, SBF was apparently the biggest donor. Will they hand that money back to people who were scammed?
Speaking of parents who raised ethical kids... Elizabeth Holmes, who defrauded investors, had as a parental example a father working at... Enron apparently. Just a coincidence of course. Daddy wasn't aware of anything. And he can be very proud of the way he raised his daughter.
In french we say it's "un panier de crabes" (a pack of crabs).
Thanks to these guys' examples I know how to not raise my kid.
https://www.institutionalinvestor.com/article/b1qf5t2ymwfcl5...