Jim Chanos: The Golden Age of Fraud in Finance

Rob Johnson (0:09)

Welcome to Economics and Beyond. I'm Rob Johnson, President of the Institute for New Economic Thinking.

I'm here today with an extraordinary man who I've known back to the days when I worked in finance, but knowing him and being able to keep up with him are different things. This is Jim Chanos. He has his own investment firm, has been involved in the markets now for over 40 years.

Recently, he's been teaching a course, I guess recently for the last 13 years, he's been teaching a course called A History of Financial Market Fraud, A Forensic Approach. Jim has written things on the INET website and in many other places related to financial instability. He's written about China and he is one of the people that when I look at who is successful, independent, high integrity, courageous, and practices what he preach, Jim Chanos fills that bill as well as anyone I've encountered. Jim, thank you for being here today.

Jim Chanos (1:42)

Well, thank you for that over the top introduction, Rob. It's good to be here.

Rob Johnson (1:48)

Well, you got to have a bubble before you can have a crash, but we don't quite have a crash today.

But let's start talking about recently the phrase, the golden age of greed. You've talked about what you're observing, what kind of things are happening in the United States and perhaps in the world economy. And with the global financial market, it's not even clear where the sovereigns are sometimes. But paint the picture for us. What is the golden age of greed?

Jim Chanos (2:18)

Well, it's actually worse than that. It's the golden age of fraud. And so I coined that term a couple years ago as I started to see post-pandemic, the excesses really begin to build in the financial markets, both public and private, culminating in 2021, which was the most speculative year that I've experienced in the markets in over 40 years. And one of the things I teach in my class, Rob, is that the fraud cycle follows the business and financial cycle with a lag. That is, the longer you have an expansion, the longer a bull market goes on, the more the incidence of fraud occurs as it matures.

And then, of course, once things turn down, you begin to get fraud exposed, because many frauds are at their basis a Ponzi scheme and need to raise new and new capital. And so the poster child for that, obviously, is what we saw happen in crypto last year, which was the red hot kind of culmination of speculative frenzy, lack of oversight, lack of law enforcement, and just pure unadulterated greed that got caught up and then exposed in all kinds of schemes that were at their very nature simply Ponzi schemes. And I think that now we see another aspect of what I teach in the class, and that is when people ask, where is the regulation, where is law enforcement, one of the things that is as old as financial markets is that we don't see oversight or new laws and regulations until after people lose money.

And that is certainly now the case in crypto, where after the fact, we're going to see much more regulation. As we speak, the SEC is cracking down now on both onshore and offshore crypto firms and so on. So it dovetails with what I teach.

In real time. In fact, last year, anecdotally, the now infamous interview in Bloomberg with Sam Bankman Fried was released on a Monday afternoon in April. I teach my class at Yale on Monday afternoons. And I was reading this while I was having my coffee before class. And I ran up to our audio video guys to ask them if they could put this interview that I was reading on my smartphone up on my PowerPoint for that afternoon's class because it's very rare that in real time you see an industry luminary discussing his industry by describing it as a Ponzi scheme, which is exactly what SPF did in that interview in late April with Matt Levine and Joe Weisenthal on Bloomberg. And so, you know, it all came together last spring and summer in this particular subspace of the financial markets to talk about, to prove what we've been talking about and what I teach about these cycles of greed and fraud that occur in financial markets when things go too long and oversight becomes lax.

Rob Johnson (5:44)

And do you see, which I might call, a recipe or a vision for a corrective structure of governance that would diminish these overreaches or these calamities that follow excess?

Jim Chanos (6:01)

Yeah, it all depends. And I know that's kind of a weasel answer, but in past cycles where we've seen large amounts of speculation and large amounts of fraud, the evidence is mixed.