peteg's blog - noise - books - 2019 01 12 DanDavies LyingForMoney

Dan Davies: Lying for Money: How Legendary Frauds Reveal The Workings Of Our World.

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'Settlement'. The process of checking the trade’s paperwork, updating the shareholders' registers and sending the payments from the buyer's bank account to the seller's. The sort of thing which people, even very experienced traders and investors, don't tend to think about. People outside the market would presume that this happens instantaneously and auto-magically over big sophisticated computers and tend to be surprised and appalled when they find out the extent to which it doesn't. Actually, things have got a lot better since 2008, but that only means that if you wanted to carry out this sort of fraud [Bayou Capital] today, you'd have to do it in emerging markets or in credit derivatives or some other market with less efficient settlement systems than the New York Stock Exchange. Things tend to improve in settlement systems one megafraud at a time.
— Maybe! But that's not how the ASX sells it.

Kindle. Who doesn't want to know how to get away with financial fraud? This is a book-length expansion of that Guardian article. Amongst many others we're told about the massive Bre-X mining fraud, which reminded me of an otherwise forgettable McConaughey movie. Davies often points to the lack of existence of incentive-compatible mechanisms in many markets; for instance, pharmaceuticals start to look like movies and BitTorrent to me (and I'll have the generics thanks, even so). Particularly valuable are his explanations of why fraud cases are so difficult to prosecute and what to look out for. He gets funnier as he goes along as he builds up a foundation for referential humour.

The whole thing is worth a read, if only to see how pervasive trust is and how little that's going to change whatever the technology.