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Lying for Money: How Legendary Frauds Reveal the Workings of Our World
Financial crime seems horribly complicated but there are only so many ways you can con someone out of what's theirs. In fact, there are four. A veteran regulatory economist and market analyst, Dan Davies has years of experience picking the bones out of some of the most famous frauds of the modern age. Now he reveals the big picture that emerges from their labyrinths of deceit.Along the way you'll find out how to fake a gold mine with a wedding ring, a file and a shotgun. You'll see how close Charles Ponzi, the king of pyramid schemes, came to acquiring his own private navy. You'll learn how fraud has shaped the entire development of the modern world economy. And you'll discover whether you have what it takes to be a white-collar criminal mastermind, if that's what you want. (Which you don't. You really, really don't.)
321 pages, Kindle Edition
First published January 1, 2018
251 people are currently reading
3155 people want to read
About the author
Dan Davies
39 books43 followersDaniel Davies is a British journalist, editor and writer.
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June 13, 2025A terrific read about frauds of all kinds, although in fact there aren't that money [EDIT: *many*, Jesus what a typo]. Really what mostly comes across here, in fact, are what small, shitty people fraudsters are. No heists, no Robin Hoods, no daring raids, nothing to glamourise: just, literally, people lying for money.
It's well explained though a lot of the technical stuff still went over my head (admittedly my head stays extremely low when it comes to finance), and extremely well written: lively, personal, some excellent footnotes. An excellent read, with a few crucial takeaways:
--the difference between convicted fraud and financial genius is frequently luck. If that big gamble with company money to cover up your losses works, then no crime ever happened
--apparent runaway success needs to be scrutinised *hard*
--financial institutions are like beehives: once the bad actor gets in the door, they can romp around unchallenged for a long time. Nobody should be marking their own homework.
--some situations are criminogenic, ie they encourage people to crime, and these situations may well not have been intended to produce that result, so think harder
--the very first time a publishing company misses a royalty payment is the time you assume malfeasance and act accordingly. (The book doesn't say anything about publishing, but it does have a lot of stories about how massive frauds start with someone moving money around to temporarily cover a loss.)
Very readable, very much worth reading.
It's well explained though a lot of the technical stuff still went over my head (admittedly my head stays extremely low when it comes to finance), and extremely well written: lively, personal, some excellent footnotes. An excellent read, with a few crucial takeaways:
--the difference between convicted fraud and financial genius is frequently luck. If that big gamble with company money to cover up your losses works, then no crime ever happened
--apparent runaway success needs to be scrutinised *hard*
--financial institutions are like beehives: once the bad actor gets in the door, they can romp around unchallenged for a long time. Nobody should be marking their own homework.
--some situations are criminogenic, ie they encourage people to crime, and these situations may well not have been intended to produce that result, so think harder
--the very first time a publishing company misses a royalty payment is the time you assume malfeasance and act accordingly. (The book doesn't say anything about publishing, but it does have a lot of stories about how massive frauds start with someone moving money around to temporarily cover a loss.)
Very readable, very much worth reading.
November 25, 2021
I bought this book to defraud my friends and have some great tips thanks Dan
August 19, 2018
This book manages to be less than the sum of its parts, mainly because being excellent on Twitter doesn’t always (usually?) convert into being a good book-length writer. The examples of historic frauds are excellent, and just the right balance of technical and interesting. But the book lacks an overall thesis, other than interesting things about frauds. I enjoyed it, but it’s difficult to know who to recommend it to other than people who enjoy reading detailed summaries of the key components of financial crimes.
January 10, 2021
Vier Sterne, weil es ein sehr gutes Sachbuch ist. Der fünfte Stern ist dafür, dass der Autor gleichzeitig Insiderkenntnisse hat und unterhaltsam schreiben kann, das fällt ja selten zusammen. Ich habe sehr viel Text markiert und auch die Fußnoten machen überdurchschnittlich viel Spaß. Aber vor allem ist der fünfte Stern dafür (und das geht nicht ohne die Insiderkenntnisse), dass nicht nur lustige Betrugsgeschichten nacherzählt werden, sondern auch ein paar ernsthafte Konzepte dahinter herausgearbeitet. Ach so, und dann auch noch dafür, dass das Buch nicht nur Beispiele aus den USA oder nur aus Großbritannien enthält, sondern zusätzlich viele europäische und ein paar aus den Isländersagas.
April 25, 2020
There is a scene in the Rodney Dangerfield movie, Back To School, where a business professor is leading the class through an exercise of developing a budget for opening a new business. Dangerfield is aghast at the professor’s naiveté and, when prompted, explains the reality of doing business in the U.S.
Although it’s played for laughs, the subtext is actually very deep; we create ideal models of how the world works and use those models not just to understand the world, but also to interact with it. The models have to be based on ideal types because the complexity of the world would quickly overwhelm our ability to make sense of our perceived reality. But it is also critical that we understand where we have simplified and linearized our model so that we are not led astray by mistaking the map for the territory. Daniel Davies’ book, Lying For Money, though on the surface appears to be about financial fraud, is actually an exploration of the single most fundamental model that humans use to interact with the world: the model of the behavior of other humans. The trust networks that we form with people are the bedrock on which cooperative and interdependent relationships are founded, and this trust is entirely based on the way that we know and understand (through mental models) the people we interact with. Even before language, the ability to accurately model the behavior of another human, and perform counterfactual reasoning on that behavior in a variety of situations, is the fundamental innovation that set humans on the path to dominating the earth. These are very deep waters indeed, yet without any hint of academic pedantry or dense, sociological theory, Davies manages to illuminate the importance and fragility of human trust networks to an amazing degree. That he does it with such an enjoyable narrative structure along with wit and humour is a remarkable achievement.
Davies is a regulatory economist who is also a connoisseur of financial fraud. In Lying For Money, he takes us on a tour of the various types of financial fraud, introduces us to some of the more flamboyant characters who have committed fraud, and guides us through an analysis of how these frauds work. The underlying theme of this tour is that trust between strangers, particularly through anonymous market transactions, is the basis of the modern industrial economy. When the systems and institutions that allow those transactions are set up, certain checks and balances are built in to provide confidence to the users who need to know that their trust will not be betrayed. The nut of the problem, though, is that to check everything means that nobody is actually trusted, and the effort that goes into all that checking cancels any benefit that would accrue from trust. So a decision must be made about which checks and balances will be implemented, thereby implying which checks and balances will not be implemented. The knowledge of the latter, of the weaknesses in the system of checks and balances, is what fraudsters actually play on; greed, fear, and moral weakness figure prominently in the stories that are told when fraud is uncovered but they are only bystanders to the actual crime. It is actually much easier to commit fraud in a high trust society, because when trust can usually be depended upon, there is little need for excessive checks and balances. Unfortunately, a high trust society is not only attractive to people but it is also a highly productive society due to the substantial benefits that come from putting energy into productive pursuits rather than checks and balances. Davies calls this the “Canadian Paradox”, after the surprising ease and regularity with which frauds are perpetrated on regional Canadian stock exchanges.
Davies lays out the basic mechanisms through which business is done in a capitalist economy as an introduction to his taxonomy of fraud. As in the opening quote from the movie, Back to School, the realities of business are not as tidy as the ideal. For example, the amount of credit extended between business to business exceeds the credit extended by banks by a factor of ten or more. This credit is meant to be short term, allowing a re-seller to make money before reimbursing his supplier, but the payment terms are negotiated based on whatever checks the supplier does on the credit-worthiness of the re-seller. Everyone has to do business to make money, so it is better to extend credit and keep business moving than refuse and go bust. It is the time delay between the extension of credit and repayment that provides an opportunity to commit fraud. Likewise, the various institutional forms of collateral, bankruptcy, credit control, insurance, and other financial devices have aspects where checks and balances are inconvenient or difficult to perform and these weaknesses are the points at which fraud can occur.
Where Davies really shines in his analysis of various famous and obscure cases of fraud is with the insight that the successful fraud is not a mere theft where the thief spends their remaining days in hiding. Rather, it is the fraud where the defrauded party never even knows that they were targeted. The essence of a successful fraud is for the fraudsters to continue living among polite society, freely able to spend their ill-gotten gains. This is harder to do than you might think, because the rate at which money is taken can lead to all kinds of unintended consequences and, fraudsters too, have to rely on networks of trust. The many ways in which historical fraudsters have tried to manage their fraud, and especially the ways in which they have failed, provide enormously entertaining reading.
Just as the blueprints for a lock are the best way to learn how to pick that lock, so too is the knowledge of how to manage a company the best way to know how to defraud a company. If you know the key indicators of whether the business is doing well or not, what qualities go into good performance indicators, how growth and compound interest will affect the business and how to tell if your indicators have been tampered with, then you have the blueprints for that business. Management is essentially an information processing job and the quality of management is highly dependent on the quality of the measurements that provide that information. Davies shows how economic institutions have arisen due to a process of mutual escalation, an “arms race”, between commerce and fraud. He goes beyond the “fraud triangle” of risk management systems (Need, Opportunity, & Rationalization) to arrive at his golden rule for detecting fraud: Anything that is growing unusually quickly needs to be checked out in a way that goes beyond whatever checks and balances are currently in place. This is purposely more of an heuristic than a rule because in an arms race, you don’t find out about your opponent’s latest innovation until it is too late. In commercial fraud you don’t even know who your opponent is until it’s too late, so you have to check your own business for signs that your checks and balances have been penetrated.
At the end of the day, the high trust environment in which fraud is easy to perpetrate is a nice place to live. Humans have to trust each other to work together, and we take pleasure in trusting and being trusted. The price of that high trust environment is that some level of fraud is inevitable. Rather than destroy the benefits of the high trust society in pursuit of the eradication of fraud, it is far better to accept a level of fraud that we can live with and continue to adapt as new and more ingenious frauds are discovered. This is the overt message that Davies leaves us with, but along the way he has delivered valuable and unexpected insights into the trust networks that are the foundation of our society. The book is a pleasure to read for its surface meaning and more so for the subtext. A wonderful story that leaves the reader so much richer for having read it.
“First of all you're going to have to grease the local politicians for the sudden zoning problems that always come up. Then there's the kickbacks to the carpenters, and if you plan on using any cement in this building I'm sure the teamsters would like to have a little chat with you, and that'll cost you. Oh and don't forget a little something for the building inspectors. Then there's long term costs such as waste disposal. I don't know if you're familiar with who runs that business but I assure you it's not the boyscouts.”
Although it’s played for laughs, the subtext is actually very deep; we create ideal models of how the world works and use those models not just to understand the world, but also to interact with it. The models have to be based on ideal types because the complexity of the world would quickly overwhelm our ability to make sense of our perceived reality. But it is also critical that we understand where we have simplified and linearized our model so that we are not led astray by mistaking the map for the territory. Daniel Davies’ book, Lying For Money, though on the surface appears to be about financial fraud, is actually an exploration of the single most fundamental model that humans use to interact with the world: the model of the behavior of other humans. The trust networks that we form with people are the bedrock on which cooperative and interdependent relationships are founded, and this trust is entirely based on the way that we know and understand (through mental models) the people we interact with. Even before language, the ability to accurately model the behavior of another human, and perform counterfactual reasoning on that behavior in a variety of situations, is the fundamental innovation that set humans on the path to dominating the earth. These are very deep waters indeed, yet without any hint of academic pedantry or dense, sociological theory, Davies manages to illuminate the importance and fragility of human trust networks to an amazing degree. That he does it with such an enjoyable narrative structure along with wit and humour is a remarkable achievement.
Davies is a regulatory economist who is also a connoisseur of financial fraud. In Lying For Money, he takes us on a tour of the various types of financial fraud, introduces us to some of the more flamboyant characters who have committed fraud, and guides us through an analysis of how these frauds work. The underlying theme of this tour is that trust between strangers, particularly through anonymous market transactions, is the basis of the modern industrial economy. When the systems and institutions that allow those transactions are set up, certain checks and balances are built in to provide confidence to the users who need to know that their trust will not be betrayed. The nut of the problem, though, is that to check everything means that nobody is actually trusted, and the effort that goes into all that checking cancels any benefit that would accrue from trust. So a decision must be made about which checks and balances will be implemented, thereby implying which checks and balances will not be implemented. The knowledge of the latter, of the weaknesses in the system of checks and balances, is what fraudsters actually play on; greed, fear, and moral weakness figure prominently in the stories that are told when fraud is uncovered but they are only bystanders to the actual crime. It is actually much easier to commit fraud in a high trust society, because when trust can usually be depended upon, there is little need for excessive checks and balances. Unfortunately, a high trust society is not only attractive to people but it is also a highly productive society due to the substantial benefits that come from putting energy into productive pursuits rather than checks and balances. Davies calls this the “Canadian Paradox”, after the surprising ease and regularity with which frauds are perpetrated on regional Canadian stock exchanges.
Davies lays out the basic mechanisms through which business is done in a capitalist economy as an introduction to his taxonomy of fraud. As in the opening quote from the movie, Back to School, the realities of business are not as tidy as the ideal. For example, the amount of credit extended between business to business exceeds the credit extended by banks by a factor of ten or more. This credit is meant to be short term, allowing a re-seller to make money before reimbursing his supplier, but the payment terms are negotiated based on whatever checks the supplier does on the credit-worthiness of the re-seller. Everyone has to do business to make money, so it is better to extend credit and keep business moving than refuse and go bust. It is the time delay between the extension of credit and repayment that provides an opportunity to commit fraud. Likewise, the various institutional forms of collateral, bankruptcy, credit control, insurance, and other financial devices have aspects where checks and balances are inconvenient or difficult to perform and these weaknesses are the points at which fraud can occur.
Where Davies really shines in his analysis of various famous and obscure cases of fraud is with the insight that the successful fraud is not a mere theft where the thief spends their remaining days in hiding. Rather, it is the fraud where the defrauded party never even knows that they were targeted. The essence of a successful fraud is for the fraudsters to continue living among polite society, freely able to spend their ill-gotten gains. This is harder to do than you might think, because the rate at which money is taken can lead to all kinds of unintended consequences and, fraudsters too, have to rely on networks of trust. The many ways in which historical fraudsters have tried to manage their fraud, and especially the ways in which they have failed, provide enormously entertaining reading.
Just as the blueprints for a lock are the best way to learn how to pick that lock, so too is the knowledge of how to manage a company the best way to know how to defraud a company. If you know the key indicators of whether the business is doing well or not, what qualities go into good performance indicators, how growth and compound interest will affect the business and how to tell if your indicators have been tampered with, then you have the blueprints for that business. Management is essentially an information processing job and the quality of management is highly dependent on the quality of the measurements that provide that information. Davies shows how economic institutions have arisen due to a process of mutual escalation, an “arms race”, between commerce and fraud. He goes beyond the “fraud triangle” of risk management systems (Need, Opportunity, & Rationalization) to arrive at his golden rule for detecting fraud: Anything that is growing unusually quickly needs to be checked out in a way that goes beyond whatever checks and balances are currently in place. This is purposely more of an heuristic than a rule because in an arms race, you don’t find out about your opponent’s latest innovation until it is too late. In commercial fraud you don’t even know who your opponent is until it’s too late, so you have to check your own business for signs that your checks and balances have been penetrated.
At the end of the day, the high trust environment in which fraud is easy to perpetrate is a nice place to live. Humans have to trust each other to work together, and we take pleasure in trusting and being trusted. The price of that high trust environment is that some level of fraud is inevitable. Rather than destroy the benefits of the high trust society in pursuit of the eradication of fraud, it is far better to accept a level of fraud that we can live with and continue to adapt as new and more ingenious frauds are discovered. This is the overt message that Davies leaves us with, but along the way he has delivered valuable and unexpected insights into the trust networks that are the foundation of our society. The book is a pleasure to read for its surface meaning and more so for the subtext. A wonderful story that leaves the reader so much richer for having read it.
Read
March 16, 2025Really interesting book setting out various frauds and scams perpetrated on the financial and banking industries, and the features of financial systems that make them possible. Much more readable than this makes it sound, too - the accounts of the various scams and frauds are fascinating and often hilarious, and I particularly enjoyed the story of the Great Salad Oil Swindle (which really was called that at the time!)
June 19, 2022
I didn't like the title, but the book itself was a great read. This book did not glorify fraud or deception, but it did a good job of showing why fraud can be lucrative (or not) for the individuals involved, at least in the short run. Patterns emerged. It seems like a good idea observe these patterns and to try to think like a fraudster when designing new administrative systems to spot weaknesses and design around them. It was interesting to read how systems designed for "good" humanitarian purposes could be rippled with weaknesses that make them prone for perversion and misuse. A great example is the ARM loan model.
This book covers old frauds from the 1800s into today, illustrates why they were successful in each case, and the similarities across time that made them successful. The big takeaway for me was that the big frauds described here were not based on a magnetizing personality in most cases, but rather were based on exploiting weaknesses in a system - or else creating a system with a weakness. Some of these were very clever. Others were less clever, but succeeded in their simplicity and reliance on common human behaviors.
I started paying increasing attention around chapter 5, introducing gaps in medical and intellectual property systems that enable deception, and modern examples predominated for the latter half of the book. Another big takeaway for me was that catching fraud often requires seeing the forest -- not being distracted by the trees. Fraud is hard to detect when looking at individual sales (e.g. see commercial real estate example), but only becomes visible when you boil down the portfolio into big patterns. In litigation, the prosecutor's job is to focus the jury on big patterns, while defense will try to distract the jury by narrowing their focus on particular examples. Defense tries to show that "bad luck" can explain each of the matters that lost money. Prosecution will try to show that it's pretty unlikely that so many cases kept hitting "bad luck."
Overall, this is a fun and quick read. It kept my attention throughout and seemed well-balanced when introducing economic theories (e.g. Chicago vs. Yale schools of thought): both sides presented, with explanations on why both have plausible elements.
This book covers old frauds from the 1800s into today, illustrates why they were successful in each case, and the similarities across time that made them successful. The big takeaway for me was that the big frauds described here were not based on a magnetizing personality in most cases, but rather were based on exploiting weaknesses in a system - or else creating a system with a weakness. Some of these were very clever. Others were less clever, but succeeded in their simplicity and reliance on common human behaviors.
I started paying increasing attention around chapter 5, introducing gaps in medical and intellectual property systems that enable deception, and modern examples predominated for the latter half of the book. Another big takeaway for me was that catching fraud often requires seeing the forest -- not being distracted by the trees. Fraud is hard to detect when looking at individual sales (e.g. see commercial real estate example), but only becomes visible when you boil down the portfolio into big patterns. In litigation, the prosecutor's job is to focus the jury on big patterns, while defense will try to distract the jury by narrowing their focus on particular examples. Defense tries to show that "bad luck" can explain each of the matters that lost money. Prosecution will try to show that it's pretty unlikely that so many cases kept hitting "bad luck."
Overall, this is a fun and quick read. It kept my attention throughout and seemed well-balanced when introducing economic theories (e.g. Chicago vs. Yale schools of thought): both sides presented, with explanations on why both have plausible elements.
June 3, 2023
Различните световни измами не са ми особено интересни, даже да "разкриват" световната икономика на хора, които не са запознати с нея. Първата глава на Lying for Money всъщност обаче представя една концепция, поради която си струва да се прочете (поне тази глава де). Концепция, която за мен беше нова, а това малко книги правят.
Става дума за обществата с високо ниво на доверие и тия с ниско ниво на доверие между членовете и как те работят по отношение на измамите.
В една друга книга имаше момент, в който войник в Афганистан разказва на местен преводач, как докато е на мисия, понеже не е женен, е оставил на съседа си ключа да му наглежда къщата. Афганистанският преводач е изумен: "Ама той няма ли да ти окраде всичко?!?"
Обществата с високо доверие са отдавна законови и правосъдието в тях отдавна работи, поради което много от взаимоотношенията между хора и фирми се основават на доверие - пращат се пари предварително, не се вземат мерки за охрана и т.н. Това подобрява обществените отношения, добре е за икономиката.
При обществата с ниско вътрешно доверие всеки се страхува от всеки, всеки слага решетки на първия етаж на прозорците... Съответно фирмите и държавата преглеждат внимателно всички документи, стоки и транзакции за възможни измами. Това е скъпо и бавно и пречи и на хората и на бизнеса: един порочен кръг от който излизането е много трудно.
Да, но ако искаш да си измамник, много по-лесно ще ти е в първия вид общества, дето хора и институции са доверчиви. Както знаят българските емигранти във Великобритания, които по мои наблюдения фалшифицират половината документи които пращат на тамошните институции за каквото и да е. Никой не проверява, щото очакват хората да са що годе честни.
Новаторското виждане на Дан Дейвис към всичко това е, че понеже мерките по сигурността са оскъпяват и забавят, едно общество с високо доверие може да си позволи да ги пренебрегва до известна степен.
Въпреки, че това означава известно количество измамници ще бъдат неразкрити, все пак обществената и икономическа цена на тия измами ще е много по-ниска, отколкото цялото общество да стане недоверчиво, да се засили масово сигурността, проверките и подозренията.
Става дума за обществата с високо ниво на доверие и тия с ниско ниво на доверие между членовете и как те работят по отношение на измамите.
В една друга книга имаше момент, в който войник в Афганистан разказва на местен преводач, как докато е на мисия, понеже не е женен, е оставил на съседа си ключа да му наглежда къщата. Афганистанският преводач е изумен: "Ама той няма ли да ти окраде всичко?!?"
Обществата с високо доверие са отдавна законови и правосъдието в тях отдавна работи, поради което много от взаимоотношенията между хора и фирми се основават на доверие - пращат се пари предварително, не се вземат мерки за охрана и т.н. Това подобрява обществените отношения, добре е за икономиката.
При обществата с ниско вътрешно доверие всеки се страхува от всеки, всеки слага решетки на първия етаж на прозорците... Съответно фирмите и държавата преглеждат внимателно всички документи, стоки и транзакции за възможни измами. Това е скъпо и бавно и пречи и на хората и на бизнеса: един порочен кръг от който излизането е много трудно.
Да, но ако искаш да си измамник, много по-лесно ще ти е в първия вид общества, дето хора и институции са доверчиви. Както знаят българските емигранти във Великобритания, които по мои наблюдения фалшифицират половината документи които пращат на тамошните институции за каквото и да е. Никой не проверява, щото очакват хората да са що годе честни.
Новаторското виждане на Дан Дейвис към всичко това е, че понеже мерките по сигурността са оскъпяват и забавят, едно общество с високо доверие може да си позволи да ги пренебрегва до известна степен.
Въпреки, че това означава известно количество измамници ще бъдат неразкрити, все пак обществената и икономическа цена на тия измами ще е много по-ниска, отколкото цялото общество да стане недоверчиво, да се засили масово сигурността, проверките и подозренията.
April 11, 2019
Very interesting read on the various creative ways in which one could be scammed. Includes real examples of past scams such as the Great Salad Oil Swindle. A valuable resource for business owners, managers and investors alike, who are looking to avoid the pitfalls of investing in the wrong business or simply being defrauded by employees. There's a saying that goes something like, if it looks too good to be true, it probably is. This book goes a step further by advocating the more appropriate "Trust, but verify."
For the general reader, it's an interesting look into human inventiveness, though applied in furtherance of dishonest motives.
For the general reader, it's an interesting look into human inventiveness, though applied in furtherance of dishonest motives.
September 12, 2021
An intellectual investment banker takes an enjoyable detour through the long history of commercial and financial fraud, simultaneously musing on markets, the foundational issues of trust, Icelandic sagas, ancient Greek orators and various strands in the history of economic thought. Not everyone’s cup of tea, but excellent for sitting in a cozy armchair with a cup of tea while mumbling ‘quite’ and ‘myes old boy’.
June 16, 2023
Lying for Money is a book about some of the biggest frauds and their mechanisms. The book starts by presenting the structure of four types of financial frauds, then chapter by chapter offers examples for each type. The writing style is humorous and witty and that makes it quite an interesting read. The last three chapters are bit of a drag but the earlier chapters make it a 4 star.
March 30, 2025
Fun book about fraud, the optimal amount of which is non-zero. Interesting stories ranging from S&L scandal, Barings Bank, Bre-X, and PPI. Although my favourite was probably the Bradley Birkenfield one.
June 7, 2025
Mit viel Beispiel gespickte Sammlung von Betrugstypen und -methoden. Gut auf aktuelle Fälle anwendbar.
November 13, 2022
Interesting topic but I didn't love the writing style and found it difficult to follow at times.
April 30, 2025
The title is superlative, but Davies takes a good crack at justifying it. A useful exercise recommended to the reader: if you want to understand how to manage a system, consider how you could defraud it.
February 24, 2020
An extremely good book that delves into the various structures of corporate fraud, how they originate and the measures taken and not taken to prevent such frauds from happening. Davies also details the stories of historical frauds, some of which like Enron or the GFC are infamous others are far more obscure. Highly recommended for anyone who works in areas that confront these issues. Just basic things like asking yourself "If I was going to steal from my employer, how would I do it?" will give you tons of insight into areas in your company where more controls and robust processes are needed
May 22, 2021
This book may have the most interesting and insightful microeconomic theory per page of any book I've read, and is also substantially more entertaining than your typical text on information economics. Dan Davies, in his careers as regulator, securities analyst, and econ blogger, has collected a huge pile of stories of true white collar crime, along with a perceptive understanding of how to dive into the web of lies spun by fraudsters big and small and extract the basic economics of the scam, and explain it in clear language, retaining the more entertaining anecdotes for color. In the process of explaining the modus operandi of crooks ranging from small time drug dealers (most interesting for how they use escrow and when it does or doesn't work) to presidents of the United States (including a detailed account, albeit with extensive legal disclaimers, of the contractual arrangements of the Trump organization), he also elucidates more general principles of how the financial system and its institutions work.
The basic premise is that to understand why financial contracts and the legal and professional structure around them take the form they do, you have to understand that some people can and will, if given the chance, simply lie for money. The simplest class of scam, which he starts the book off with and on which the more complicated forms build, is to make a promise you don't intend to keep; a drug dealer can make money "honestly" by selling you some heroin, but they could keep their costs even lower in this transaction and make greater profits by taking your money and then not giving you the heroin. Avoiding this kind of outcome is key to well-functioning markets, but requires some special arrangements, which can be costly, including trust or verification. Trust can be established through relationships and conventions, but can also be abused, as by magnifying the magnitude and volume of transactions, it also magnifies the potential gains to eventual reneging on promises, hence the elaborate schemes that are used by confidence men to establish a reputation before cleaning out their marks, and more complicated forms of fraud which build on the reputation of others. Verification can reduce some forms of dishonesty, but can be very costly, requiring accountants and auditors and analysts, and the prohibitive cost of verifying every transaction means that there have to be some limits which let some dishonesty through. Further, the presence of verifiers raises the gain to the process of slipping by or faking the verification, the crime of counterfeiting, and the book is full of practical advice on how to cook books, find a corrupt or incompetent auditor or regulator, and hide your fraud through layers of opaque and confusing intermediaries. Expanding or hiding an initial fraud often involves subsequent fraud, as you can fulfill the initial promise by making even more fraudulent promises, taking on debts to expand, in a process sometimes called a Ponzi scheme; the chapter on these covers the story of Charles Ponzi and modern successors but notes that the feature of an exponentially growing scam is much older, and occurs also in crimes of embezzlement, securities fraud, and rogue trading.
At the boundary, the distinction between fraud and the normal operation of financial markets becomes quite fuzzy, as "intention to keep a promise" is hard to judge based on objective facts. The difference between an investment in a speculative biotech investment promising world-changing innovations like Theranos, which seems to have been entirely fabricated, and in a legitimate but speculative start up like Moderna, which actually did deliver lifesaving MRNA vaccines, is obvious ex post now that products have been delivered, but if you're not an expert, may have been less so ex ante, and in between you have many biotech startups that may have had good ideas that just didn't pan out, or bad ideas the progenitors thought might be good, and views on value of an idea which may just be ordinary scientific disagreement. Likewise, modern financial arrangements may involve enough layers of interaction and control that separating crime from ordinary and even honest financial interactions becomes difficult; behaviors like insider trading, while abusing the trust of market participants, may not even involve dishonest statements or have clearly identifiable victims. Davies notes in the chapters in the book covering this kind of behavior that it eventually shades into value judgments on what constitutes legitimate financial activity, though I nevertheless found discussions like the description of how the system of option ARMs sold to subprime borrowers and repackaged into mortgage-backed securities during the housing bubble era was, though not technically criminal, at the very least quite shady, useful for contextualizing the role of honesty and dishonesty in financial markets. The book goes on a bit long, with some of the later chapters getting a bit repetitive, as many frauds have similar structure but Davies presumably had too many entertaining anecdotes about 19th century railroad barons to cut from the structure, but this is both understandable and forgivable, and overall I learned quite a lot.
While the book is heavy on real world economics, it's fairly light on formal theory and citations thereto, aside from a chapter citing Hayek as bringing to the fore the study of the economics of imperfect information. Partly this reflects the imperatives in a popular book to keep it light, but largely it appears to come from a commitment to focus on the facts as the author has seen them in his career encountering different frauds, which may or may not match with established theories. Exploring the extent to which our models can match the patterns described here, and formalizing the parts that don't, could make for many interesting research projects for finance-oriented microeconomic theorists. Probably the closest model class to describing the view he expounds in this book is the literature on costly state verification, extending from Gale and Hellwig 1985 on through several works exploring its broader economic implications by one Ben Bernanke. An emphasis in this literature, as well as the broader literature on mechanism design, which is less emphasized in this book, is how the possibility of lying creates incentives for arrangements which counteract it by allowing those who may be tempted to outright lie some smaller gains ("information rents") by license to some ambiguity. Fundamentally, debt, a promise to repay a fixed amount, allows the lender to not bother checking in on the project so long as it is successful enough to pay back above a fixed quantity: in return, the borrower gets to keep these upside gains. Verification is then exercised only during bankruptcy. Davies' story is similar, but it seems as if he views the mechanism design approach as both a bit too harsh and a bit too naive. Rather than viewing all potential counterparties as potentially dishonest, much of economic life runs on basic trust, avoiding some of the more complicated contractual forms dreamed up in the theory literature to reward some and punish others for varying degrees of shading, instead expecting honesty most of the time. But, in the case of someone looking to commit fraud, it also seems that these sophisticated mechanisms are a bit too simple, as the presumption, for example, that verification actually verifies, or that parties won't exploit some situation beyond the scope of the contract, can make the incentives and checks ineffective.
Davies repeatedly states that the opportunity to benefit from this trust to expand mutually beneficial commerce and the cost of implementing checks against fraud means that while effort should be spent, the "optimal level of fraud is not zero." There is a tension here with a basic principle of mechanism design, the revelation principle, that even if you expect people to be able to lie, through mechanisms conditioning results on information provided, you should always be able to design a contract where there is no fraud per se, though there may be omission or ambiguity, at no loss. Exactly which features of real situations break this principle is something that merits investigation. Is it the presence of honesty? Incompleteness of contractual arrangements, or the fact that behavior can't always be structured in the form of a contract at all? Behavioral limitations, of the fraudsters or the defrauded? Davies is not averse to the latter, with much of the discussion of Ponzi and pyramid schemes and related frauds suggesting that quite a lot of people have a poor understanding of exponential growth, a challenge that befalls both the victims (who maybe don't stop to think how their money might be growing so quickly) and the perpetrators (who may unwittingly find themselves having to create larger and larger unsustainable fabrications to cover for their earlier lies). Many of the perpetrators in the book are described in terms of narratively compelling character flaws, and the victims likewise. Probably some of these matter, though exactly how, in the context of the basic incentives to cheat people out of their money, seems like a complicated story that could be pursued much more deeply.
The basic premise is that to understand why financial contracts and the legal and professional structure around them take the form they do, you have to understand that some people can and will, if given the chance, simply lie for money. The simplest class of scam, which he starts the book off with and on which the more complicated forms build, is to make a promise you don't intend to keep; a drug dealer can make money "honestly" by selling you some heroin, but they could keep their costs even lower in this transaction and make greater profits by taking your money and then not giving you the heroin. Avoiding this kind of outcome is key to well-functioning markets, but requires some special arrangements, which can be costly, including trust or verification. Trust can be established through relationships and conventions, but can also be abused, as by magnifying the magnitude and volume of transactions, it also magnifies the potential gains to eventual reneging on promises, hence the elaborate schemes that are used by confidence men to establish a reputation before cleaning out their marks, and more complicated forms of fraud which build on the reputation of others. Verification can reduce some forms of dishonesty, but can be very costly, requiring accountants and auditors and analysts, and the prohibitive cost of verifying every transaction means that there have to be some limits which let some dishonesty through. Further, the presence of verifiers raises the gain to the process of slipping by or faking the verification, the crime of counterfeiting, and the book is full of practical advice on how to cook books, find a corrupt or incompetent auditor or regulator, and hide your fraud through layers of opaque and confusing intermediaries. Expanding or hiding an initial fraud often involves subsequent fraud, as you can fulfill the initial promise by making even more fraudulent promises, taking on debts to expand, in a process sometimes called a Ponzi scheme; the chapter on these covers the story of Charles Ponzi and modern successors but notes that the feature of an exponentially growing scam is much older, and occurs also in crimes of embezzlement, securities fraud, and rogue trading.
At the boundary, the distinction between fraud and the normal operation of financial markets becomes quite fuzzy, as "intention to keep a promise" is hard to judge based on objective facts. The difference between an investment in a speculative biotech investment promising world-changing innovations like Theranos, which seems to have been entirely fabricated, and in a legitimate but speculative start up like Moderna, which actually did deliver lifesaving MRNA vaccines, is obvious ex post now that products have been delivered, but if you're not an expert, may have been less so ex ante, and in between you have many biotech startups that may have had good ideas that just didn't pan out, or bad ideas the progenitors thought might be good, and views on value of an idea which may just be ordinary scientific disagreement. Likewise, modern financial arrangements may involve enough layers of interaction and control that separating crime from ordinary and even honest financial interactions becomes difficult; behaviors like insider trading, while abusing the trust of market participants, may not even involve dishonest statements or have clearly identifiable victims. Davies notes in the chapters in the book covering this kind of behavior that it eventually shades into value judgments on what constitutes legitimate financial activity, though I nevertheless found discussions like the description of how the system of option ARMs sold to subprime borrowers and repackaged into mortgage-backed securities during the housing bubble era was, though not technically criminal, at the very least quite shady, useful for contextualizing the role of honesty and dishonesty in financial markets. The book goes on a bit long, with some of the later chapters getting a bit repetitive, as many frauds have similar structure but Davies presumably had too many entertaining anecdotes about 19th century railroad barons to cut from the structure, but this is both understandable and forgivable, and overall I learned quite a lot.
While the book is heavy on real world economics, it's fairly light on formal theory and citations thereto, aside from a chapter citing Hayek as bringing to the fore the study of the economics of imperfect information. Partly this reflects the imperatives in a popular book to keep it light, but largely it appears to come from a commitment to focus on the facts as the author has seen them in his career encountering different frauds, which may or may not match with established theories. Exploring the extent to which our models can match the patterns described here, and formalizing the parts that don't, could make for many interesting research projects for finance-oriented microeconomic theorists. Probably the closest model class to describing the view he expounds in this book is the literature on costly state verification, extending from Gale and Hellwig 1985 on through several works exploring its broader economic implications by one Ben Bernanke. An emphasis in this literature, as well as the broader literature on mechanism design, which is less emphasized in this book, is how the possibility of lying creates incentives for arrangements which counteract it by allowing those who may be tempted to outright lie some smaller gains ("information rents") by license to some ambiguity. Fundamentally, debt, a promise to repay a fixed amount, allows the lender to not bother checking in on the project so long as it is successful enough to pay back above a fixed quantity: in return, the borrower gets to keep these upside gains. Verification is then exercised only during bankruptcy. Davies' story is similar, but it seems as if he views the mechanism design approach as both a bit too harsh and a bit too naive. Rather than viewing all potential counterparties as potentially dishonest, much of economic life runs on basic trust, avoiding some of the more complicated contractual forms dreamed up in the theory literature to reward some and punish others for varying degrees of shading, instead expecting honesty most of the time. But, in the case of someone looking to commit fraud, it also seems that these sophisticated mechanisms are a bit too simple, as the presumption, for example, that verification actually verifies, or that parties won't exploit some situation beyond the scope of the contract, can make the incentives and checks ineffective.
Davies repeatedly states that the opportunity to benefit from this trust to expand mutually beneficial commerce and the cost of implementing checks against fraud means that while effort should be spent, the "optimal level of fraud is not zero." There is a tension here with a basic principle of mechanism design, the revelation principle, that even if you expect people to be able to lie, through mechanisms conditioning results on information provided, you should always be able to design a contract where there is no fraud per se, though there may be omission or ambiguity, at no loss. Exactly which features of real situations break this principle is something that merits investigation. Is it the presence of honesty? Incompleteness of contractual arrangements, or the fact that behavior can't always be structured in the form of a contract at all? Behavioral limitations, of the fraudsters or the defrauded? Davies is not averse to the latter, with much of the discussion of Ponzi and pyramid schemes and related frauds suggesting that quite a lot of people have a poor understanding of exponential growth, a challenge that befalls both the victims (who maybe don't stop to think how their money might be growing so quickly) and the perpetrators (who may unwittingly find themselves having to create larger and larger unsustainable fabrications to cover for their earlier lies). Many of the perpetrators in the book are described in terms of narratively compelling character flaws, and the victims likewise. Probably some of these matter, though exactly how, in the context of the basic incentives to cheat people out of their money, seems like a complicated story that could be pursued much more deeply.
July 27, 2019
Well written, funny, informative.
> If you want to be like Canada, you more or less have to accept that you’re going to be the kind of place where people assume that a guy in a suit is probably honest.
> This state of affairs is actually quite uncommon in the criminal justice system. Most trials only have a couple of liars in the witness box, and the question is a simple one of whether the accused did it or not. In a fraud trial, rather than denying responsibility for the actions involved, the defendant is often insisting that no crime was committed at all, that there is an innocent interpretation for everything.
> At the time of writing, if you want to convert a ludicrously false story about the internet into enough money to buy a yacht, private venture capital is probably the way to do it. But public markets have some advantages too.
> He liked the finer things in life – private jets, luxury hotels and politicians – and spent lots of money buying all of them.
> If you want to be like Canada, you more or less have to accept that you’re going to be the kind of place where people assume that a guy in a suit is probably honest.
> This state of affairs is actually quite uncommon in the criminal justice system. Most trials only have a couple of liars in the witness box, and the question is a simple one of whether the accused did it or not. In a fraud trial, rather than denying responsibility for the actions involved, the defendant is often insisting that no crime was committed at all, that there is an innocent interpretation for everything.
> At the time of writing, if you want to convert a ludicrously false story about the internet into enough money to buy a yacht, private venture capital is probably the way to do it. But public markets have some advantages too.
> He liked the finer things in life – private jets, luxury hotels and politicians – and spent lots of money buying all of them.
July 20, 2023
This is one of those books I’d heard mentioned in a dozen different places before I finally decided to read it. I think it was the review in Thing of Things that finally pushed me over the edge and convinced me to read it myself? I’m very happy I did, even if I had a severe case of deja vu reading a few particular passages (and even if it does suffer from a few of the usual pop nonfiction issues at times).
The title gets across the substance of the book clearly enough; this is, to paraphrase the author, a work of counter-economics. That is, an attempt to illuminate the workings of an advanced capitalist economy by showcasing the sorts of crimes that take advantage of its complexity and parsitize it. It’s nowhere near as dry or academic as all that, of course (the author makes his disdain for academic economics clear on a few separate occasions); most of the meat of the book is case studies and anecdotes or particularly famous or illuminating frauds, which are all mostly great reading.
The books, if not central thesis, then definitely on of the main things it keeps coming back to, is that the optimal level of fraud in an economy is higher than zero. Fraud is fundamentally an abuse of trust, after all, and if no one’s trust is getting abused, then that probably means that an unjustifiable amount of resources are being spent checking up on every possible thing, and a great deal of productive business isn’t getting done because people are too paranoid to work with each other.
The term Davies uses is the Canadian Paradox. Which is the fact (anecdote, popular wisdom) that Canada, with its mostly trustworthy institutions and rule of law and developed financial system, has vastly more fraud than, say, Greek shipping (I don’t know why specifically Greek and specifically shipping. Specifically Canada because in the ‘90s the Vancouver Stock Exchange was apparently the most full of scams and fakes in the world). The reason for this being that Canadian investors more or less assume that anyone with a stock listing is probably on the level, because they’re usually right; Greek shipowners, by contrast, absolutely expect to get screwed over if they leave themselves vulnerable, and so do business exclusively with people who they have strong relationships and embedded social ties with. The overwhelmingly intended takeaway being that the Canadian equilibrium is the one to aspire to.
The book’s organized around Davies’ own taxonomy of fraud – he divides the broader category into four distinct (if overlapping) types based on the trust they abuse and so (in a broad sense) are crimes against. Those types being: 1) the Long Firm (neither of the words mean what you think they do here), which is just lying and defrauding someone, buying on credit, reselling and skipping town before the first bill comes due 2) Counterfeiting, of currency yes, but also legal documentation, audited account books, hell even mining samples 3) Control Frauds, when employees or trustees take advantage of their control over assets to juice the books and manipulate returns in ways that maximize ‘legitimate’ profits for themselves (distinct from embezzlement, which is just taking advantage of control over assets to, well, take them) and 4) Market Crimes, which intuitively might not seem like crimes at all, at least in a moral sense, but are regulated or criminalized or made taboo because people engaging in them damages the wider structure society or the market or capitalism or whatever relies upon.
The types of fraud, you’ll notice, get steadily more abstract and conceptual as you go on – the only thing that distinguishes most control fraud from managerial incompetence and over-optimism is a paper trail showing they knew what they were doing. The only thing that distinguishes a market crime form just, being good at business, is the opinion of whatever jurisdiction your in’s regulatory authorities. One gets the sense that these sorts of tricky conceptual crimes interest Davies more than more straightforward sorts of fraud, and his discussions of them certainly get more philosophical than the mostly technical descriptions of long firms and counterfeiting.
Of course, you don’t really read a book like this for the theorizing – I mean, I didn’t, anyway – but for the interesting and absurd case studies of historical frauds. Of which the book delivers in spades; everything from the ‘salad oil king’ of New Jersey with with vats of water with a layer of oil floating on top, to Ponzi and his original scheme, to the counterfeiter who destabilized the Portuguese economy sufficiently to pave the way for a reactionary military coup, to the first actually comprehensible explanation of the whole Savings&Loans crisis in ‘80s America that I’ve ever read to, of course, 2008.
One trait of historical frauds that gets more salient the more of them you read is that, because many of them involve taking advantage of some since-patched loophole in law or regulation, in retrospect it seems positively absurd that they could ever have worked. The book cautions against this point of view – given how bewilderingly complex the modern economy is, there are doubtless more absurd loopholes and abuses of what people will take on trust now than there have ever been.
The 2008 financial crisis was a generation-defining event for the people who got fucked over by it, but it clearly did a number on the paradigms of guys like Davies too. It gets a chapter to itself as an ‘innocent’ control fraud. That is, an institutional setup and incentive set that inevitably massive amounts of crime even though the people at the top actually profiting from it all are, technically speaking, innocent (and most of the low-level employees doing the crimes are mostly just trying to meet aggressive sales targets and keep their jobs. Which, hardly justifies a lot of the conduct, but they were hardly profiting from the enterprise like the managers and executives.) The term Davies uses is ‘crimogenic’ – as in, an environment that incentivizes and will almost inevitably lead to the commission of crimes.
A note on the author – Davies was a regulator and then a market analyst in the UK for much of the early 21st century, and whatever the specifics is clearly someone with an insider’s view of financial markets and investment banking. Not really an apologist – or I mean, he is, to the extent that he clearly considers them useful institutions that do more good than harm for the world at large, and considers the present regulatory setup governing the markets if not just, then at least pragmatically useful. But about the culture and foibles of the financial services industry itself he’s pretty cynical. In any event, as the book goes on he starts peppering in personal anecdotes about how he was personally involved with some event on the periphery of the frauds he’s discussing or saw them happen live, which I mostly found charming but I can see how it would grate.
In any event, it’s a very chatty, casually written book, by a centre-left pro-regulation but incredibly finance-brained guy. So, you know, caveat lector if you’re going to find that totally insufferable. For myself I found it a fun, casual read, and a more educational one that I really expected.
The title gets across the substance of the book clearly enough; this is, to paraphrase the author, a work of counter-economics. That is, an attempt to illuminate the workings of an advanced capitalist economy by showcasing the sorts of crimes that take advantage of its complexity and parsitize it. It’s nowhere near as dry or academic as all that, of course (the author makes his disdain for academic economics clear on a few separate occasions); most of the meat of the book is case studies and anecdotes or particularly famous or illuminating frauds, which are all mostly great reading.
The books, if not central thesis, then definitely on of the main things it keeps coming back to, is that the optimal level of fraud in an economy is higher than zero. Fraud is fundamentally an abuse of trust, after all, and if no one’s trust is getting abused, then that probably means that an unjustifiable amount of resources are being spent checking up on every possible thing, and a great deal of productive business isn’t getting done because people are too paranoid to work with each other.
The term Davies uses is the Canadian Paradox. Which is the fact (anecdote, popular wisdom) that Canada, with its mostly trustworthy institutions and rule of law and developed financial system, has vastly more fraud than, say, Greek shipping (I don’t know why specifically Greek and specifically shipping. Specifically Canada because in the ‘90s the Vancouver Stock Exchange was apparently the most full of scams and fakes in the world). The reason for this being that Canadian investors more or less assume that anyone with a stock listing is probably on the level, because they’re usually right; Greek shipowners, by contrast, absolutely expect to get screwed over if they leave themselves vulnerable, and so do business exclusively with people who they have strong relationships and embedded social ties with. The overwhelmingly intended takeaway being that the Canadian equilibrium is the one to aspire to.
The book’s organized around Davies’ own taxonomy of fraud – he divides the broader category into four distinct (if overlapping) types based on the trust they abuse and so (in a broad sense) are crimes against. Those types being: 1) the Long Firm (neither of the words mean what you think they do here), which is just lying and defrauding someone, buying on credit, reselling and skipping town before the first bill comes due 2) Counterfeiting, of currency yes, but also legal documentation, audited account books, hell even mining samples 3) Control Frauds, when employees or trustees take advantage of their control over assets to juice the books and manipulate returns in ways that maximize ‘legitimate’ profits for themselves (distinct from embezzlement, which is just taking advantage of control over assets to, well, take them) and 4) Market Crimes, which intuitively might not seem like crimes at all, at least in a moral sense, but are regulated or criminalized or made taboo because people engaging in them damages the wider structure society or the market or capitalism or whatever relies upon.
The types of fraud, you’ll notice, get steadily more abstract and conceptual as you go on – the only thing that distinguishes most control fraud from managerial incompetence and over-optimism is a paper trail showing they knew what they were doing. The only thing that distinguishes a market crime form just, being good at business, is the opinion of whatever jurisdiction your in’s regulatory authorities. One gets the sense that these sorts of tricky conceptual crimes interest Davies more than more straightforward sorts of fraud, and his discussions of them certainly get more philosophical than the mostly technical descriptions of long firms and counterfeiting.
Of course, you don’t really read a book like this for the theorizing – I mean, I didn’t, anyway – but for the interesting and absurd case studies of historical frauds. Of which the book delivers in spades; everything from the ‘salad oil king’ of New Jersey with with vats of water with a layer of oil floating on top, to Ponzi and his original scheme, to the counterfeiter who destabilized the Portuguese economy sufficiently to pave the way for a reactionary military coup, to the first actually comprehensible explanation of the whole Savings&Loans crisis in ‘80s America that I’ve ever read to, of course, 2008.
One trait of historical frauds that gets more salient the more of them you read is that, because many of them involve taking advantage of some since-patched loophole in law or regulation, in retrospect it seems positively absurd that they could ever have worked. The book cautions against this point of view – given how bewilderingly complex the modern economy is, there are doubtless more absurd loopholes and abuses of what people will take on trust now than there have ever been.
The 2008 financial crisis was a generation-defining event for the people who got fucked over by it, but it clearly did a number on the paradigms of guys like Davies too. It gets a chapter to itself as an ‘innocent’ control fraud. That is, an institutional setup and incentive set that inevitably massive amounts of crime even though the people at the top actually profiting from it all are, technically speaking, innocent (and most of the low-level employees doing the crimes are mostly just trying to meet aggressive sales targets and keep their jobs. Which, hardly justifies a lot of the conduct, but they were hardly profiting from the enterprise like the managers and executives.) The term Davies uses is ‘crimogenic’ – as in, an environment that incentivizes and will almost inevitably lead to the commission of crimes.
A note on the author – Davies was a regulator and then a market analyst in the UK for much of the early 21st century, and whatever the specifics is clearly someone with an insider’s view of financial markets and investment banking. Not really an apologist – or I mean, he is, to the extent that he clearly considers them useful institutions that do more good than harm for the world at large, and considers the present regulatory setup governing the markets if not just, then at least pragmatically useful. But about the culture and foibles of the financial services industry itself he’s pretty cynical. In any event, as the book goes on he starts peppering in personal anecdotes about how he was personally involved with some event on the periphery of the frauds he’s discussing or saw them happen live, which I mostly found charming but I can see how it would grate.
In any event, it’s a very chatty, casually written book, by a centre-left pro-regulation but incredibly finance-brained guy. So, you know, caveat lector if you’re going to find that totally insufferable. For myself I found it a fun, casual read, and a more educational one that I really expected.
March 21, 2021
A truly exceptional book -- analyzing things by their defects is a generally good approach, and showing how the financial system works, what it optimizes for, and what is ultimately important is well illustrated through frauds. These frauds also have the advantage of being very interesting in their own right, as some things are repeated, but the exceptional ones have pretty unique aspects.
The book describes a few major categories of fraud -- long firm (aka the "bustout" from Boston), counterfeiting (which goes beyond just "producing fakes" but a variety of subversions of chain of provenance), control fraud (where someone takes a firm over and then uses it to do a variety of things beyond simple embezzlement -- a great example of principal-agent), and crimes against the market itself.
Several of the examples are exceptionally well known (Ponzi, Theranos) but I enjoyed learning about the Portuguese Banknote Affair, Poyais, Pigeon King International, Boston Ladies’ Deposit Company, and especially the Great Salad Oil Swindle.
As the author said, the book is useful for understanding how the economy works, and leads you into developing some effective anti-fraud controls. A great point is that the ideal level of fraud is not zero, since that implies very high anti-fraud costs, but a level somewhat above zero, and that the amount of anti-fraud measures in an industry have something to do with the society in which they operate (high trust societies actually need more anti-fraud machinery than low trust ones to catch frauds; before the modern era, no one trusted anyone in anything except shipping to the point where complex fraud was a serious concern.)
Overall, one of my favorite books of the year (so far).
The book describes a few major categories of fraud -- long firm (aka the "bustout" from Boston), counterfeiting (which goes beyond just "producing fakes" but a variety of subversions of chain of provenance), control fraud (where someone takes a firm over and then uses it to do a variety of things beyond simple embezzlement -- a great example of principal-agent), and crimes against the market itself.
Several of the examples are exceptionally well known (Ponzi, Theranos) but I enjoyed learning about the Portuguese Banknote Affair, Poyais, Pigeon King International, Boston Ladies’ Deposit Company, and especially the Great Salad Oil Swindle.
As the author said, the book is useful for understanding how the economy works, and leads you into developing some effective anti-fraud controls. A great point is that the ideal level of fraud is not zero, since that implies very high anti-fraud costs, but a level somewhat above zero, and that the amount of anti-fraud measures in an industry have something to do with the society in which they operate (high trust societies actually need more anti-fraud machinery than low trust ones to catch frauds; before the modern era, no one trusted anyone in anything except shipping to the point where complex fraud was a serious concern.)
Overall, one of my favorite books of the year (so far).
July 18, 2021
Very interesting book on financial fraud. The author identifies four different fraud types: long firms, counterfeiting, control fraud, and market crime. Each type is illustrated with stories of famous fraud cases.
The name "long firm" comes from "gelang", meaning fraudulent, and "firm" (like the Italian "firma") referring to a signature. So it refers to the crime of signing a fraudulent bill of goods. An example given for this type of fraud is from the Kray brothers in London in the 1960s. They set up companies, made larger and larger orders on credit, and once the order was big enough they shut down the company without paying for the last order. A similar type of fraud, exit fraud, has happened in online drug markets (like Silk Road), where you take money for orders that you don’t intend to deliver (and then you exit the market). Another example was the Salad Oil King in New Jersey, that used tanks of seawater, that supposedly contained vegetable oil, as collateral in a “warehouse lending” scheme. The author also emphasizes that it can sometimes be hard to tell the difference between a fraud and a badly run company.
Next, there is a chapter called The Snowball Effect, the brings up the tendency of many frauds to get bigger and bigger in order to avoid being found out. The typical example is the original Ponzi scheme by Charles Ponzi. In 1920 he discovered an arbitrage opportunity of sending International Reply Coupons (IRC, for mail) to Italy and back to the US. To exploit this mispricing, he needed money, and he promised people a 50% return in 90 days, which was too high. The money poured in, but he didn’t actually use it to buy IRCs, since he got so much money from people who wanted in on it. Since he promised such great returns in such a short time, he had to keep growing the scam in order to avoid getting found out. The author goes on to describe other pyramid schemes, like the Pigeon King (breeding pigeons), Bernard Madoff, and Bayou Capital.
Counterfeiting. Examples include the 1925 case of Portuguese banknotes that were supposed to be for Angola (at one tenth of the value), but were instead used in Portugal. These notes were printed the same way as the official notes, but since they were not approved by the central bank, they were still forgeries. A more modern example is that of the Canadian mining company Bre-X that faked samples from an Indonesian mine to show that there was gold there. Another example is counterfeit drugs, and stressing benefits of a certain drug while suppressing reports of its side effects (Vioxx from Merck).
In the chapter Cooked Books, the author gives examples of ways dishonest accounting can inflate the value of a company: fake sales, swapping similar assets at inflated prices, up-front recognition of revenue (an Enron specialty), delayed recognition of cost, completely fake assets, and unreported debt (Enron used this with “off-balance sheet vehicles”). There is also a good discussion here about how the vast majority of auditor are honest, but how fraudsters that happen to find dishonest ones take advantage of that. The author (himself a former securities analyst) also explains how hard it is for analysts to spot fraud, in part because frauds are so rare.
Control fraud. The story of Nick Leeson in Singapore bankrupting Baring Brothers by unauthorized trades in index arbitrage of the Nikkei index starts this chapter. One problem here is that traders share in the upside of the profits they generate, but aren’t affected by losses. This gives them an incentive to take huge risks. The other problem was that Nick Leeson both did the trades (front office) and the record keeping of them (back office), so he could hide his losses. It all fell apart when the Kobe earthquake led to a large overnight drop in the Nikkei index. Another example covered is the Savings and Loans crisis of the 1980s.
The chapter ends with the example of the British Payment Protection Insurance (PPI) mis-selling scandal. The author uses the term “criminogenic” (having the tendency to incentivize criminal behavior) to describe the setup. Banks were selling people insurance that they often did not or could not use, and at inflated prices. This made a lot of money for the banks, but it is hard to draw the line between incentivizing the wrong behavior for the sales staff, and outright fraud. Even though the author doesn’t make the comparison, this reminds me of the reckless housing loans that triggered the financial crisis of 2008.
In the chapter The Economics of Fraud, the author observes that to understand how to manage something is also knowing how to defraud it. For complex tasks, as a manager you can’t check everything that is done. Instead, you have to find representative parts to control. But because you can’t check everything, there can also be fraud slipping through. Frauds often use weaknesses in the control system.
The chapter Cold Cases gives examples of fraud throughout history: the Bible, the Icelandic sagas (inheritance fraud), and Victorian England. One fascinating indication of how lax the laws were is the estimate that up to one-sixth of all stock market flotations between 1866 and 1883 were frauds. But, as the author mentions several times, trying to stamp out all fraud will also limit growth.
Examples of Market Crimes are insider trading, cartels, and toxic waste dumping. The chapter on Defrauding the Government covers tax avoidance, for example carousel trades, and money laundering.
There were many interesting stories about fraud in the book. However, to me it was not always clear which category of fraud they belonged to. The order of the chapters was also a bit weird – for example, The Economics of Fraud comes before all types of fraud have been discussed. It would have been better to have it last I think.
In addition to the good stories, I also like the author’s sense of humor. For example, in a footnote he writes: the phrase “corporate drone” is meaningless. Drones don’t do the work in beehives. Worker bees do. A “corporate drone” would be someone whose only purpose was to fertilize the corporate queen, and I can’t think of a single company that’s managed that way. Another example is when he quotes: I respond to incentives / You game the system / He is a crook.
The name "long firm" comes from "gelang", meaning fraudulent, and "firm" (like the Italian "firma") referring to a signature. So it refers to the crime of signing a fraudulent bill of goods. An example given for this type of fraud is from the Kray brothers in London in the 1960s. They set up companies, made larger and larger orders on credit, and once the order was big enough they shut down the company without paying for the last order. A similar type of fraud, exit fraud, has happened in online drug markets (like Silk Road), where you take money for orders that you don’t intend to deliver (and then you exit the market). Another example was the Salad Oil King in New Jersey, that used tanks of seawater, that supposedly contained vegetable oil, as collateral in a “warehouse lending” scheme. The author also emphasizes that it can sometimes be hard to tell the difference between a fraud and a badly run company.
Next, there is a chapter called The Snowball Effect, the brings up the tendency of many frauds to get bigger and bigger in order to avoid being found out. The typical example is the original Ponzi scheme by Charles Ponzi. In 1920 he discovered an arbitrage opportunity of sending International Reply Coupons (IRC, for mail) to Italy and back to the US. To exploit this mispricing, he needed money, and he promised people a 50% return in 90 days, which was too high. The money poured in, but he didn’t actually use it to buy IRCs, since he got so much money from people who wanted in on it. Since he promised such great returns in such a short time, he had to keep growing the scam in order to avoid getting found out. The author goes on to describe other pyramid schemes, like the Pigeon King (breeding pigeons), Bernard Madoff, and Bayou Capital.
Counterfeiting. Examples include the 1925 case of Portuguese banknotes that were supposed to be for Angola (at one tenth of the value), but were instead used in Portugal. These notes were printed the same way as the official notes, but since they were not approved by the central bank, they were still forgeries. A more modern example is that of the Canadian mining company Bre-X that faked samples from an Indonesian mine to show that there was gold there. Another example is counterfeit drugs, and stressing benefits of a certain drug while suppressing reports of its side effects (Vioxx from Merck).
In the chapter Cooked Books, the author gives examples of ways dishonest accounting can inflate the value of a company: fake sales, swapping similar assets at inflated prices, up-front recognition of revenue (an Enron specialty), delayed recognition of cost, completely fake assets, and unreported debt (Enron used this with “off-balance sheet vehicles”). There is also a good discussion here about how the vast majority of auditor are honest, but how fraudsters that happen to find dishonest ones take advantage of that. The author (himself a former securities analyst) also explains how hard it is for analysts to spot fraud, in part because frauds are so rare.
Control fraud. The story of Nick Leeson in Singapore bankrupting Baring Brothers by unauthorized trades in index arbitrage of the Nikkei index starts this chapter. One problem here is that traders share in the upside of the profits they generate, but aren’t affected by losses. This gives them an incentive to take huge risks. The other problem was that Nick Leeson both did the trades (front office) and the record keeping of them (back office), so he could hide his losses. It all fell apart when the Kobe earthquake led to a large overnight drop in the Nikkei index. Another example covered is the Savings and Loans crisis of the 1980s.
The chapter ends with the example of the British Payment Protection Insurance (PPI) mis-selling scandal. The author uses the term “criminogenic” (having the tendency to incentivize criminal behavior) to describe the setup. Banks were selling people insurance that they often did not or could not use, and at inflated prices. This made a lot of money for the banks, but it is hard to draw the line between incentivizing the wrong behavior for the sales staff, and outright fraud. Even though the author doesn’t make the comparison, this reminds me of the reckless housing loans that triggered the financial crisis of 2008.
In the chapter The Economics of Fraud, the author observes that to understand how to manage something is also knowing how to defraud it. For complex tasks, as a manager you can’t check everything that is done. Instead, you have to find representative parts to control. But because you can’t check everything, there can also be fraud slipping through. Frauds often use weaknesses in the control system.
The chapter Cold Cases gives examples of fraud throughout history: the Bible, the Icelandic sagas (inheritance fraud), and Victorian England. One fascinating indication of how lax the laws were is the estimate that up to one-sixth of all stock market flotations between 1866 and 1883 were frauds. But, as the author mentions several times, trying to stamp out all fraud will also limit growth.
Examples of Market Crimes are insider trading, cartels, and toxic waste dumping. The chapter on Defrauding the Government covers tax avoidance, for example carousel trades, and money laundering.
There were many interesting stories about fraud in the book. However, to me it was not always clear which category of fraud they belonged to. The order of the chapters was also a bit weird – for example, The Economics of Fraud comes before all types of fraud have been discussed. It would have been better to have it last I think.
In addition to the good stories, I also like the author’s sense of humor. For example, in a footnote he writes: the phrase “corporate drone” is meaningless. Drones don’t do the work in beehives. Worker bees do. A “corporate drone” would be someone whose only purpose was to fertilize the corporate queen, and I can’t think of a single company that’s managed that way. Another example is when he quotes: I respond to incentives / You game the system / He is a crook.
August 16, 2019
Decent overview of a bunch of common scams. I’d prefer more detail on the stories. One chapter was very in the clouds and I skimmed it. A few stories needed to be edited and rewritten, the flow and explanation were off.
I really loved Bad Blood, Liars Poker, Black Edge, Red Notice, and other similar financial crime books (morbid curiosity and hopefully a warning of what people to avoid as I work in the finance/tech industry). This was in a similar vein but didn’t quite scratch the itch. Probably needed more drama and characters to match those titles.
I really loved Bad Blood, Liars Poker, Black Edge, Red Notice, and other similar financial crime books (morbid curiosity and hopefully a warning of what people to avoid as I work in the finance/tech industry). This was in a similar vein but didn’t quite scratch the itch. Probably needed more drama and characters to match those titles.
December 16, 2023
I love a good scam! As long as people aren't physically hurt in the process, I enjoy reading about scam artists and Lying for Money delivers. The book ranges through various fraudsters, but my favorites are Elizabeth Holmes, Charles Ponzi, and that girl I went to high school with that keeps sliding into my DMs in an attempt to get me into her home to tell me about a "wonderful opportunity" aka an MLM scheme. The end is a bit technical, and to be honest, I tried to listen to the audiobook during a road trip and almost fell asleep. Otherwise, this is a solid read!
August 9, 2022
1. The Basics
Leslie Payne, Kray brothers, build trade credit, place large order on credit, sell the goods, declare bankruptcy
Hire purchase scam, insurance scam - fake insurance company (disappear with poremiums)
Trade credit, Canada paradox
2. Long firms - borrow, don't pay back
Silk Road, disappearing drug dealers
Anthony 'Tino' De Angelis, The Salad Oil King
Who would lend him money? Greedy people, desperate people and people who didn't know what they were doing.
Warehouse lending as collateral (another bank should own the warehouse; Tino owned the warehouses, rigged oil tanks).
OPM (Other People's Money), Mordecai Weissman, Myron S. Goodman, computer leasing, sell lease agreement, use the money to pay back for loan used to buy the computers (bridging loan). 'Residual value' of computers quickly dropped.
Short firms, Medicare (false or inflated claims); 'shotgun, then rifle'
Getting away with it - normal bankruptcy or layers of obfuscation.
Poyais bonds, Sir Gregor MacGregor
3. The snowball effect
Ponzi, scheme for buy IRC coupons in Italy, sell them in the US (works only for small amounts)
Pyramid scheme, Bernie Madoff, The Pigeon King (market for pigeon is was quickly saturated)
Sam Israel, Bayou Capital, fake audit firm, hedge fund clients don't withdraw money if the returns are 'Due from Brokers' on balance sheet, sending accounts to brokerage late on a Friday
'prime bank securities'
4. Counterfeits
Alves dos Reis, same notes used in Portugal and Angola at different exchange rate, convincing company that printed the real notes to print notes with supplied serial numbers
Mining Fraud, Bre-X - faked rock samples with added gold flakes
Vioxx drug, Alzheimer's disease, heart attacks
5. Cooked books
Inflating value of company to rise price of shares, selling shares
Jordan Belfort, Wolf of Wall Street, pumping up values of fraudulent companies, selling hidden shares
Accounting fraud:
a) Fake sales
b) Meaningless sales (swapping inventory between companies, lending cash to another company which is used to purchases goods)
c) Up-front recognition of revenues
d) Delayed recognition of costs
e) Fake assets
f) Unreported debt, Enron shell companies
Bribing, bullying auditors
6. Control fraud
Brazilian straddle (betting on market movement, premium up front)
Nick Leeson, errors and omissions 88888 account used for covering broker errors, taking orders at a loss to attract clients
Savings and Loans, S&L small banks with many long term fixed rate of interests mortgages; when interest rates went up, interests on deposits grew but on mortgages stayed the same, merging and borrowing, inflating value of real estate used as collateral for loans ('my dead horse for your dead cow', 'cash for trash')
Distribute control fraud, PPI (Payment Protection Insurance), bank managers selling unreasonably high seales goals, employees forcing the products on clients
7. The economics of fraud
Big frauds occur in brand new lines of business. What does a fraudulent transaction look like?
F.A. Hayek; futility of central authority, importance of tacit knowledge, private information, principal/agent problem
Measuring cost indicators (lower quality) vs measuring quality indicator (higher cost)
Control engineering, 'Law of sufficient variety', reduction of variety to make it manageable
Risk management, quality control
Fraud is what happens when you can’t check on everything.
8. Cold cases
Fraud in ancient world
Fraud is possible to the extent that people are prepared to trust strangers, or to leave valuable objects out of their immediate control; the ancients had much less occasion to do this than we did.
Ship owners, risk management, first syndicates
‘Bottomry’, loan secured against a ship; don’t need to pay if the ship sinks
Victorian stock promoters
‘Knights of Industry’, Rollo Reuschel vs crooked credit agency
9. Market crimes
Insider trading, cartels, need for regulation (toxic waste)
Piggly Wiggly, short selling, market manipulation
10. Defrauding the government
Bradley Birkenfeld, UBS WMA
Tax evasion (illegal), tax avoidance (legal)
VAT carousel
11. The bottom line
Fraud triangle - need, opportunity, rationalisation
Golden rule - ‘anything which is growing unusually quickly needs to be checked out, and it needs to be checked out in a way that it hasn’t been checked before’.
Leslie Payne, Kray brothers, build trade credit, place large order on credit, sell the goods, declare bankruptcy
Hire purchase scam, insurance scam - fake insurance company (disappear with poremiums)
Trade credit, Canada paradox
2. Long firms - borrow, don't pay back
Silk Road, disappearing drug dealers
Anthony 'Tino' De Angelis, The Salad Oil King
Who would lend him money? Greedy people, desperate people and people who didn't know what they were doing.
Warehouse lending as collateral (another bank should own the warehouse; Tino owned the warehouses, rigged oil tanks).
OPM (Other People's Money), Mordecai Weissman, Myron S. Goodman, computer leasing, sell lease agreement, use the money to pay back for loan used to buy the computers (bridging loan). 'Residual value' of computers quickly dropped.
Short firms, Medicare (false or inflated claims); 'shotgun, then rifle'
Getting away with it - normal bankruptcy or layers of obfuscation.
Poyais bonds, Sir Gregor MacGregor
3. The snowball effect
Ponzi, scheme for buy IRC coupons in Italy, sell them in the US (works only for small amounts)
Pyramid scheme, Bernie Madoff, The Pigeon King (market for pigeon is was quickly saturated)
Sam Israel, Bayou Capital, fake audit firm, hedge fund clients don't withdraw money if the returns are 'Due from Brokers' on balance sheet, sending accounts to brokerage late on a Friday
'prime bank securities'
4. Counterfeits
Alves dos Reis, same notes used in Portugal and Angola at different exchange rate, convincing company that printed the real notes to print notes with supplied serial numbers
Mining Fraud, Bre-X - faked rock samples with added gold flakes
Vioxx drug, Alzheimer's disease, heart attacks
5. Cooked books
Inflating value of company to rise price of shares, selling shares
Jordan Belfort, Wolf of Wall Street, pumping up values of fraudulent companies, selling hidden shares
Accounting fraud:
a) Fake sales
b) Meaningless sales (swapping inventory between companies, lending cash to another company which is used to purchases goods)
c) Up-front recognition of revenues
d) Delayed recognition of costs
e) Fake assets
f) Unreported debt, Enron shell companies
Bribing, bullying auditors
6. Control fraud
Brazilian straddle (betting on market movement, premium up front)
Nick Leeson, errors and omissions 88888 account used for covering broker errors, taking orders at a loss to attract clients
Savings and Loans, S&L small banks with many long term fixed rate of interests mortgages; when interest rates went up, interests on deposits grew but on mortgages stayed the same, merging and borrowing, inflating value of real estate used as collateral for loans ('my dead horse for your dead cow', 'cash for trash')
Distribute control fraud, PPI (Payment Protection Insurance), bank managers selling unreasonably high seales goals, employees forcing the products on clients
7. The economics of fraud
Big frauds occur in brand new lines of business. What does a fraudulent transaction look like?
F.A. Hayek; futility of central authority, importance of tacit knowledge, private information, principal/agent problem
Measuring cost indicators (lower quality) vs measuring quality indicator (higher cost)
Control engineering, 'Law of sufficient variety', reduction of variety to make it manageable
Risk management, quality control
Fraud is what happens when you can’t check on everything.
8. Cold cases
Fraud in ancient world
Fraud is possible to the extent that people are prepared to trust strangers, or to leave valuable objects out of their immediate control; the ancients had much less occasion to do this than we did.
Ship owners, risk management, first syndicates
‘Bottomry’, loan secured against a ship; don’t need to pay if the ship sinks
Victorian stock promoters
‘Knights of Industry’, Rollo Reuschel vs crooked credit agency
9. Market crimes
Insider trading, cartels, need for regulation (toxic waste)
Piggly Wiggly, short selling, market manipulation
10. Defrauding the government
Bradley Birkenfeld, UBS WMA
Tax evasion (illegal), tax avoidance (legal)
VAT carousel
11. The bottom line
Fraud triangle - need, opportunity, rationalisation
Golden rule - ‘anything which is growing unusually quickly needs to be checked out, and it needs to be checked out in a way that it hasn’t been checked before’.
July 24, 2024
What:
A discussion of some famous historical frauds with the added twist of trying to put these in a organized taxonomy and provide some insights into what enabled them and how they conform to or differ from others of a similar family of frauds.
Some High Points:
This book is the first time I've encountered a really believeable explanation as to why nobody went to jail after the 2008 financial meltdown. Not an answer that makes me happy (the criminals got away, free and clear) but at least a plausible reason.
I consider myself a hobbyist of this genre of history and I was surprised to encounter some frauds I had never heard of before, along with some very familiar ones. (Big names like Charles Ponzi and Bernie Madoff get a few pages).
You will also gain some insight into just how hard it can be to call "Fraud", even when you are certain it is happening. And it is even harder to make something happen from that call. The history and experience of such whistleblowers contains a lot of disbelief and a lot of personal misery.
Reasons to Read:
If financial history and especially, financial mis-behavior is enjoyable reading, this will be right in your wheelhouse.
If you enjoyed John Steele Gordon's "The Scarlet Woman of Wall Street" I think you'll like this. Gordon's book is better reading, but less rigorous and of course, focused only on the Eerie Railroad manipulations of the 19th century.
If you are wondering why it is so hard to stop these things, you'll be well (and somewhat sadly) educated at the end of this book. I didn't capture the quote but there is a line in the book to the effect that while it might only take a minute for you to recognize something is very fishy with a circumstance or a person, it could take you a year or more to find the evidence of the fraud you are certain is right in front of you. Fraudsters are often quite brazen and can be very litigous.
Reasons to Skip:
If you are expecting a book like Tim Harford's books or something like his "Cautionary Tales" podcast, you might be disappointed. The author of "Lying for Money" takes us through some convoluted financial particulars, some of which are less riveting than you might care for. Both authors are informative, Harford is more entertaining and has a broader theme connecting his stories.
The author has a style of humor (which I rather enjoyed) but might not sit well with everyone.
A discussion of some famous historical frauds with the added twist of trying to put these in a organized taxonomy and provide some insights into what enabled them and how they conform to or differ from others of a similar family of frauds.
Some High Points:
This book is the first time I've encountered a really believeable explanation as to why nobody went to jail after the 2008 financial meltdown. Not an answer that makes me happy (the criminals got away, free and clear) but at least a plausible reason.
I consider myself a hobbyist of this genre of history and I was surprised to encounter some frauds I had never heard of before, along with some very familiar ones. (Big names like Charles Ponzi and Bernie Madoff get a few pages).
You will also gain some insight into just how hard it can be to call "Fraud", even when you are certain it is happening. And it is even harder to make something happen from that call. The history and experience of such whistleblowers contains a lot of disbelief and a lot of personal misery.
Reasons to Read:
If financial history and especially, financial mis-behavior is enjoyable reading, this will be right in your wheelhouse.
If you enjoyed John Steele Gordon's "The Scarlet Woman of Wall Street" I think you'll like this. Gordon's book is better reading, but less rigorous and of course, focused only on the Eerie Railroad manipulations of the 19th century.
If you are wondering why it is so hard to stop these things, you'll be well (and somewhat sadly) educated at the end of this book. I didn't capture the quote but there is a line in the book to the effect that while it might only take a minute for you to recognize something is very fishy with a circumstance or a person, it could take you a year or more to find the evidence of the fraud you are certain is right in front of you. Fraudsters are often quite brazen and can be very litigous.
Reasons to Skip:
If you are expecting a book like Tim Harford's books or something like his "Cautionary Tales" podcast, you might be disappointed. The author of "Lying for Money" takes us through some convoluted financial particulars, some of which are less riveting than you might care for. Both authors are informative, Harford is more entertaining and has a broader theme connecting his stories.
The author has a style of humor (which I rather enjoyed) but might not sit well with everyone.
January 8, 2025
I've long loved reading about the blurry line between scams and legitimate ventures, so this book was right up my alley. Davies is probably most famous for his legendary 2004 Iraq War blog post "The D-Squared Digest One Minute MBA - Avoiding Projects Pursued By Morons 101", but by day his profession is high finance; you can draw a straight line from that blog post eviscerating the massive fraud used to justify that war to this thoughtful and wide-ranging assessment of financial fraud. With the air of a magician explaining how his fellow conjurors perform their tricks, Davies reviews numerous historical and contemporary frauds in order to both taxonomize them (from "long firms" through "counterfeiting" and "control fraud" to "market crimes") as well as explain how each instrument of fraud is carefully designed to exploit the web of trust that so tenuously links together every level of modern commerce, from the humble counterfeit goods retail scammer all the way up to the world-impacting LIBOR fraudsters. An important insight is that while many frauds begin with the straightforward intent to deceive, many others exist in a gray area where a simple peccadillo gradually unleashes a slow-moving catastrophe as the perpetrator is inextricably committed to a fatal course towards bankruptcy and prison, ruining what could have been perfectly legitimate enterprises via simple mistakes that just can't be undone. Theft is easy but fraud can be as complex as the economy itself, given the perpetually irresistible lure of a quick buck. As Davies says: "The English language has an irregular verb to describe the problematic effects of performance contracts, depending on how much sympathy you feel for the person at the sharp end: I respond to incentives / You game the system / He is a crook."
February 1, 2025
On one hand, one cannot help but praise Dan Davies for his self-awareness, where he admits early on that he will not "get bogged down in the detail" (19), sometimes even to "really horific" extents. But on the other, give that his book lacks in technical detail, it is doomed by the fact that Davies is lacking as a storyteller. Fundamentally, his book (and the chapters within) are poorly structured---he will often begin discussing a case of fraud, jump around to another case of a similar fraud while inserting bits and pieces of new information about the first fraud, and then potentially yet another case later finally finish discussion of the first fraud. Beyond that, he writing style itself is not particularly compelling, and does not do a good job of journalistically crafting a story. In this way, it is not clear that this book really is worth reading beyond its use as a list of "archetypes of fraud" (found in the first chapter), and its list of specific frauds. Interestingly enough, I think the book is at its strongest when not discussing literal illegal frauds, but rather when discussing legal "fraud-adjacents" like Donald Trump, which do at least some work at showing how difficult it is to control economic and legal systems broadly. However, these are not enough to redeem the book as a whole, which at the end of the day, compares very poorly to a mix of Matt Levine's newsletter (for examples of financial frauds, or financial close-to-frauds, with some cases like LIBOR being discussed by both) and Patrick McKenzie's Bits About Money (for more in-depth discussion of certain frauds and the systems around them, and the way that "the optimal level of fraud is not zero").
September 24, 2024
It is highly unlikely that the optimal level of fraud is zero.
I picked up Lying for Money on the recommendation of Patrick McKenzie (aka Patio11), one of my favorite people on the internet.
The book is exactly what it says on the tin: a broad overview of financial crimes, their perpetrators, and the implications of those crimes on our understanding of the modern financial systems. Many of these crimes and characters are entertaining in hindsight and Lying for Money is a delightful read because of this.
The book is probably best remembered for it’s assertion that eliminating all fraud is both: not possible and not preferable! Davies’ details how most frauds are the results of equilibrium conditions in our economic ecosystem, and alterations to that balance will often have undesired and suboptimal consequences, given the inherent limitations of human operators.
I recommend this book to anyone with an interest in modern finance, or someone looking for a quick, entertaining sojourn through a cast of recent history’s more colorful characters.
https://www.timothyrice.org/lyingform...
I picked up Lying for Money on the recommendation of Patrick McKenzie (aka Patio11), one of my favorite people on the internet.
The book is exactly what it says on the tin: a broad overview of financial crimes, their perpetrators, and the implications of those crimes on our understanding of the modern financial systems. Many of these crimes and characters are entertaining in hindsight and Lying for Money is a delightful read because of this.
The book is probably best remembered for it’s assertion that eliminating all fraud is both: not possible and not preferable! Davies’ details how most frauds are the results of equilibrium conditions in our economic ecosystem, and alterations to that balance will often have undesired and suboptimal consequences, given the inherent limitations of human operators.
I recommend this book to anyone with an interest in modern finance, or someone looking for a quick, entertaining sojourn through a cast of recent history’s more colorful characters.
https://www.timothyrice.org/lyingform...
February 8, 2019
Terrific, entertaining history of financial scam and accounting fraud from a hugely insightful author, who's able to leverage expertise to get around what seems to be (to paraphrase Bill Shankly) a simple game made complicated by charlatans (to confuse juries).
Highly recommended, not least for the (largely male) names of the constellation of con-men who feature in the case studies, including Jordan Belfort ('simpering, sniggering' inspiration for the dull flick, Wolf of Wall Street), Dapper Dan Coakley (Charles Ponzi's attorney), Timo De Angelis (the 'Salad Oil King'), Dan Marino ('Chief Operating Officer' of Bayou Capital, who created a fake auditing firm to rubber stamp billions of bullshit investment dollars in a prequel to the Bernard Madoff scheme - which itself scaled a "ratio of nonsense to theft" of "well above 99%"), and Leslie Payne (accountant to the Krays', who "makes a good teacher for an introductory course in commercial fraud" despite his advice to Reggie - against recording specific details of criminal income in expensive ledgers - being ignored).
Highly recommended, not least for the (largely male) names of the constellation of con-men who feature in the case studies, including Jordan Belfort ('simpering, sniggering' inspiration for the dull flick, Wolf of Wall Street), Dapper Dan Coakley (Charles Ponzi's attorney), Timo De Angelis (the 'Salad Oil King'), Dan Marino ('Chief Operating Officer' of Bayou Capital, who created a fake auditing firm to rubber stamp billions of bullshit investment dollars in a prequel to the Bernard Madoff scheme - which itself scaled a "ratio of nonsense to theft" of "well above 99%"), and Leslie Payne (accountant to the Krays', who "makes a good teacher for an introductory course in commercial fraud" despite his advice to Reggie - against recording specific details of criminal income in expensive ledgers - being ignored).
March 25, 2021
A very well-written and captivating overview of various kinds of fraud, which also proposes the interesting rule that there is an optimum level of fraud in a society.
In the same way that someone who has never missed an airplane is probably spending far too much time in airports, a society without fraud probably spends far too much effort on double-checking everything.
The "Canadian Paradox" is that Canada, which has one of the highest levels of general trust, also has one of the highest levels of fraud. (Vancouver is apparently well-known for mining frauds.) At the same time, in Greece shipping magnates do multi-million deals with a handshake, exactly because they only deal with people they already know.
The book has lots of examples, ranging from Charles Ponzi's original scheme to UBS's representative Bradley Birkenfeld admitting to tax evasion while also pocketing a $70M whistleblowers fee. The most interesting is, however, not the individual cases, but the analysis and description that's intermingled with the real-world examples.
In the same way that someone who has never missed an airplane is probably spending far too much time in airports, a society without fraud probably spends far too much effort on double-checking everything.
The "Canadian Paradox" is that Canada, which has one of the highest levels of general trust, also has one of the highest levels of fraud. (Vancouver is apparently well-known for mining frauds.) At the same time, in Greece shipping magnates do multi-million deals with a handshake, exactly because they only deal with people they already know.
The book has lots of examples, ranging from Charles Ponzi's original scheme to UBS's representative Bradley Birkenfeld admitting to tax evasion while also pocketing a $70M whistleblowers fee. The most interesting is, however, not the individual cases, but the analysis and description that's intermingled with the real-world examples.
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