Why Understanding Financial Fraud Is The Secret To Understanding Business

Joe Weisenthal (0:09)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

Tracy Alloway (0:16)

And I'm Tracy Alloway.

Joe Weisenthal (0:18)

Tracy, I think you're really gonna like today's episode.

Tracy Alloway (0:23)

What is it?

Joe Weisenthal (0:24)

I mean, I guess I would hope that you like all of the episodes, but I feel like this is a topic that just from what I know about you really animates you. But we are going to be talking about fraud and financial fraud.

Tracy Alloway (0:38)

Fraud, wait, should I take that as like a personal slight that you think I'm really interested in financial fraud?

Joe Weisenthal (0:45)

No, it's not a slight. I just feel like that you have a mind that likes to figure out frauds.

Tracy Alloway (0:52)

Leans towards fraud.

Joe Weisenthal (0:54)

Yeah, exactly, and figures them out and understands how they happen and the conditions that allow frauds to take place and how people missed everything.

I feel like that's a you thing. Am I wrong?

Tracy Alloway (1:07)

No, you're right.

You actually nailed it on the head in what you just said. It's the fact that people miss these things when they're happening, and then as they unfold, you kind of go back and you see all the warning signs and you think, how could people not have seen this coming? That's what fascinates me the most. It's people missing out on something that is quite clear in hindsight.

Joe Weisenthal (1:31)

Yeah, it's pretty incredible when we have these stories about big financial frauds, how egregious they seem always in retrospect and how there just always seem to be numerous red flags that anyone with half a brain should have been able to pick up on. And yet somehow we have this sheer delusion where nobody sees it or maybe people who saw it decided it wasn't worth pointing it out.

And then we have to relearn human history and human behavior all over again for the next time.

Tracy Alloway (2:02)

Yeah, exactly. And there's an example that springs immediately to mind, probably one of the most famous recent financial frauds, Bernie Madoff.

And you remember after he got arrested, people started circulating charts that showed the historical performance of the fund that were coming from the Madoff Fund's marketing materials. And they were just a straight, smooth line pointing upwards. And of course, in hindsight, everyone thought that was deeply, deeply suspicious. But at the time, people, some of them anyway, seemed more than happy to just accept that as fact.

Joe Weisenthal (2:38)

Yes, it's a perfect example because it's one of these things that in hindsight, as you say, is like, oh, of course, that could never have been realistic.

Where was everyone at the time saying how impossible it was? It's a perfect example of how something happens and the exact same fact goes from being, oh, this is very impressive to, oh, this is obviously a scam.

Tracy Alloway (3:00)

Yeah, how quickly things change.

Joe Weisenthal (3:02)

Yeah. So maybe we could avoid frauds in the future or spot them quicker if we really studied the patterns and instituted some good practices about the weak spots in our behavior and in organizational behavior that fraudsters like to exploit.

Tracy Alloway (3:22)

I think that would make a lot of sense.

Joe Weisenthal (3:24)

So maybe we'll start on that road with our guest today. His name is Dan Davies, and he is the author of a new book called Lying for Money, How Legendary Frauds Reveal the Workings of Our World. And it is a fascinating book, and it looks at lots of frauds and historical patterns and how they come about. And Dan joined us now. Now.

Dan, thank you very much for joining us.

Dan Davies (4:00)

Thanks very much for having me.

Joe Weisenthal (4:02)

Dan, before we get into the frauds and the patterns of fraudsters and why we miss them and all this stuff that we're talking about, let's just talk about your career. I kind of think of you as someone who just knows about everything, and you can talk about political referendums, and you can talk about technical things. And tell us a little bit about your career background and why you wanted to write a book on this topic.

Dan Davies (4:30)

Well, I was basically an equity analyst for 15 years. I started out at the Bank of England as a regulatory economist, and I used to be in the office next door to the guy who was the lead supervisor of Bearings Bank at the time of the Nick Leeson crisis, which was kind of an interesting set of office traffic to watch.