Monday, January 13, 2014

The Wolf of Wall Street - A modern parable!

Leonardo di Caprio was interviewed by Andrew Marr on Sunday morning about his new film 'The Wolf of Wall Street'.

The story of an ambitious young fraudster who created and set up a major bucket-shop share selling operation, revelling in the advice given to him by one of his mentors in immoral philosophy - "...the name of the game is to move the money from your client's pocket into your pocket..."

Marr raises the issue of the moral message being sent by the film and wonders why it seems to contain no final dénouement for the young con man. He posits that such films normally seek to end on an ethical message that crime does not pay, whereas this film does not, so the audience is left in a moral vacuum. It is as if Marr is a subscriber to the theory that films about financial criminality must never end with the protagonists getting away with the proceeds of their crimes, as this sends a suspect moral message to the audience about the nature of crime, greed and dishonesty. The film must, it seems, become the vehicle for a moral parable, whereby good, truth and justice triumph at the end.

In this film,. it seems, the obverse is true, and in such a representation, di Caprio, very cleverly, identifies the major conundrum at the root of financial regulation in the 21st century in Western capital markets. In the programme, Marr asks him whether his portrayal of the fraudster is authentic because in the end he gets away with his crimes. Di Caprio's answer is prophetic; he says; "...Yes, I believe it is authentic because when you look back, most of the people doing this stuff got paid bonuses..."

I believe that this revisionist view of the financial sector is closer to the truth than many people are willing to admit.

I believe that it has always been thus and it sometimes irritates me a little when I seek to point out the discrepancies between what is accepted wisdom and what is the reality of the case, that I get told by so many main-stream practitioners that I am some kind of disruptive element who doesn't understand the realpolitick of the financial sector.

The traditional view of the financial sector is that those who work within its walls are decent and honest, and that if there are any rotten apples, they are very much a minority and they are quickly weeded out by the good guys!

This is a shibboleth which is maintained by every principle to which the financial sector adheres, but when it is deconstructed, it quickly becomes obvious that it is not true.

I spent many years examining and investigating the activities of (mostly) men who ran criminal organisations from within the City of London, and in every case, they were fully aware of what they were doing.

They operated in the margins between what was acceptable conduct and what was considered to be too risky to permit because it was too obviously criminal.

One man I investigated (an incredibly intelligent guy) ran a retail futures brokerage. His company was a by-word in the City for sharp practice, and he attracted a very wide bad press. 

His clients were always complaining that they had been ripped off by his slick cold-calling sales-team, and yet, when I investigated his actions, I discovered that he was punctilious about informing his clients, right from the start, his business methods and his tactics.

He told them when he would invest their capital, when he would close their positions, how much commission he would charge them, when he would reposition them into another contract, etc.

All was explained before the money changed hands, and all clients signed a full disclosure statement indicating that they understood the tactics, and the methods, and that they were willing to go ahead and allow his traders to do business on their behalf.

He was completely open about what he intended to do, and he did not deviate from his disclosed methods subsequently.

Some of his clients ( a few) made a great deal of money. Most of them lost everything. He became a multi-millionaire.

He was never charged with any criminal offences, because there was no evidence that what he was doing was criminal. Sharp practice, certainly, but fully pre-disclosed.

When I interviewed him, he was quite open about his techniques. He told me how he had started in the City working for a sugar broker as a trainee after leaving Oxford. One day, early in his career, one of the traders on his desk made a small killing ripping off another trader in another house.

He told me; "...I was aghast, I was convinced we would all get the sack when the boss found out. You see, I genuinely accepted all that crap about 'Utmost good faith' and 'My word is my bond' and all that other City bullshit, so I believed I would lose my job and the entire trading desk would be sacked..."

"...As it was, the boss came down and was roaring with laughter and clapping the trader on the back and sending out for Champagne..."

"...The following week, the trader in the other house ripped our desk trader off, in another deal. The boss came down again, roaring with laughter, and sent out for more champagne, except this time he made our desk trader pay for it..."

"...After that I realised that the only rule of the City was to make money, and not to get caught out, so having learned everything they could teach me, I left and started up my own brokerage. I realised that I could make money simply by playing the market mathematics, which were stacked in the favour of the trading house, and as long as I disclosed everything to the client first then I would be covered..."

He was right, of course, and he retired a fabulously wealthy man, but not before the rest of his business milieu grassed him up to the regulators and tried to get an SFO investigation into has activities.

As it was, I was able to turn over to the SFO all my investigations which demonstrated that he was not formally breaking the fraud statutes, and his regulatory agency was later forced to drop most actions against him.

His fellow futures brokers denounced him because while they were engaging in exactly the same dirty tactics as he was, they were not undertaking all his risk-disclosure practices, which meant they were far more criminally exposed, but as long as they all stuck together claiming that as they were all engaged in the same egregious behaviour, it couldn't be dishonest, they were confident that no-one would investigate them.

For me it was a fascinating exercise in double standards and criminogenic behaviour and it was where I began to realise the truth of the work undertaken by the criminologist David Matza. Matza wanted to build upon Edwin Sutherland's theory of Differential Association which states that an individual learns criminal behaviour through (a) techniques of committing crimes and (b) motives, drives, rationalizations, and attitudes which go against law-abiding actions. These techniques reduce the social controls over the delinquent . Neutralization is defined as a technique, which allows the person to rationalize or justify a criminal act.

I am now convinced that the vast bulk of business conducted in the City possesses a quasi-criminogenic capacity, and that by far the majority of the city practitioners are willing and capable of committing criminal offences in return for the vastly inflated values of salaries and bonuses they habitually receive, which is not only how they make the vast profits they do, but is also a marvellous mechanism for keeping them in line, for fear of losing this level of income they could not legitimately earn elsewhere.

This is the problem faced by the politicians, and regulators who oversee the conduct of the financial markets, they are simply unable, but also unwilling to perceive the people they regulate as behaving in a criminal manner. They just will not accept that such is the case, and thus they fail to meet the requisite standards of understanding how to legislate and regulate the Square Mile, and this is why they continually fail to provide the standards and the conditions under which crime will be less likely to be committed.

The harsh reality is that the present regime of politicians who sit on Parliamentary oversight committees are not willing to accept that the financial sector is an organised criminal enterprise, a mafia, which operates by its own rules and mores, and ignores the conventional rules of engagement; while its financial regulators are simply not qualified to understand the nature of the criminals with whom they are called upon to deal, thus rendering themselves incompetent to engage with the vast bulk of the problems associated with City wrong-doing. All the time these people go unpunished, there is no incentive for them to obey the laws.

The American used not to suffer from this failing.

When I was sent to Washington to study with the Securities and Exchange Commission back in 1985, I recall the then head of the Enforcement Division, John Fedders saying to me;

"...You British seem to believe that financial markets can be regulated by gentlemen, in their spare time, in between making deals. You assume that every man who handles another person's money is a gentleman, and you are shocked and horrified when you discover it is not so. Here in America we assume that every man who handles another person's money has the propensity to be a criminal, and we legislate for the likelihood. Until you understand the truth of that reality you will continue to suffer from the kind of scandals that make you a joke. When you are prepared to spend the money necessary to implement a regulatory system that really works, then we will talk to you, but until then, don't waste our time...!"

That was back in the day when the SEC really was a force to be reckoned with and had not had its teeth and claws drawn by successive Administrations under Regan, Clinton and Bush.
Leonard di Caprio's new film seeks to make the case for a recognition that crime does pay, has paid and is still paying. I would make it compulsory viewing for every financial regulator so that they can understand the truth of the market they seek to police. The only problem is that none of them would believe it, so we shall continue to suffer from more and more financial scandals, while the bankers will continue to be paid their bonuses.


AbogadoNZ said...

Great post Rowan. I was reminded that it was Woody Allen who when asked for the definition of stockbroker replied; "he's a man who invests your money until it's all gone."

Demetrius said...

On Tuesday I posted on meerkats and wolves. Your post invites me to think that in The City we have many wolves dressed as meerkats.