a New Incentive to Cheat in the World of Financial Fraud: An Exclusive Interview with James Chanos

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http://www.alternet.org/economy/there-new-incentive-cheat-world-financial-fraud-exclusive-interview-stock-market-super-star




Jim Chanos is one of America’s best-known short-sellers, famed for his early detection of Enron’s fraudulent accounting practices. In deciding which companies to short (short-sellers make their money when the price of a stock or security goes down), Chanos acts as a kind of financial detective, scrutinizing companies for signs of overvaluation and shady practices that fool outsiders into thinking that they are prospering when they may be on shaky financial footing. Chanos teaches a class at Yale on the history of financial fraud, instructing his students in how to look for signs of cheating and criminal activity. I caught up with Chanos in his New York office to ask about what’s driving the current era of rampant fraud, who is to blame, what can be done, and the ways in which fraud costs us financially and socially.

Lynn Parramore: You’re often characterized as a short-seller. How does fraud become a concern in that context?

Jim Chanos: One of things we like to say is that in virtually all cases of major financial market fraud over the past 20 years, the only people who really brought forth the fraud into the light were either internal whistleblowers, the press, and/or short-sellers. It was not the normal guardians of the marketplace – regulators, law enforcement, external auditors or people like that -- that did it. It was people who had an incentive to come forward either for personal reasons or for profit to point out what was going on at the Enrons and the Sunbeams and Worldcoms. Short-sellers played an important role in the marketplace not only in terms of capping, sometimes, irrational exuberance in terms of prices, but also in ferreting out wrongdoing.

LP: Researchers have created all kinds of tools, like software to detect speech patterns associated with lying, to try to detect fraud. What are some of the best tools for catching financial fraudsters?

JC: There’s no single tool that works all the time, and some of them are kind of interesting, like the voice detection, or Bedford’s law, which looks at numbers and repetition patterns. But we have seen some models that we work with and I teach in my class-- frameworks of fraud and fraud analysis – that have been helpful in looking down through the years where we’ve seen patterns continue. One is a wonderful checklist, the seven signs of ethical collapse in an organization. Some are clearly intuitive, such as a board full of one’s cronies or an obsession with making earnings forecasts. But some are not so obvious, for example, doing good to mask doing bad.

[dipsydoodle]

1. "It was not the normal guardians of the marketplace"

which it should have been.

[chervilant]

2. "Short-sellers"

A neoliberal manifestation of the legitimized gambling du jour, also known as the stock market?

Our species' hedonism is a key factor in the relentless convulsions of the global economy. The corporate megalomaniacs -- who've usurped our media, our politics, AND our global economy -- will not rest until they have it all.