The Best Way to Rob a Bank
March 9, 2021·12 comments·In Brief
A major investment bank collapsed this week, but the real story isn't its failure. It's that major institutions knowingly bought obviously bad loans, top regulators looked away, and politicians profited from the scheme while ordinary investors lost money in supposedly safe funds. The fraud wasn't hidden. It was protected by institutional incentives that made looking the other way more profitable than stopping it.
- The same investment bank sold obviously fraudulent loans to one major fund in 2019, that fund collapsed, and investors lost billions. Within months, another mega-bank began buying even more of the same loans from the same originator.
- The investors in the second bank's funds didn't know that some of their co-investors were actually funding themselves through the same bank. They thought they were in an arm's length financial arrangement. They weren't.
- When a company couldn't repay a $435 million loan, the lender exchanged it for equity in a bankrupt company and reported zero loss. The accounting was clean. The math was fiction.
- Major regulators eventually shut the operation down, but only after an insurance company got spooked and dropped out. The same regulators that were shocked by a similar collapse two years earlier. The same patterns. Different actors.
- Now regulators are asking if the damage is contained. But the real question is whether anything has changed since the last time this happened, or whether the same mechanisms that protected this fraud are still in place.
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This commentary is being provided to you as general information only and should not be taken as investment advice. The opinions expressed in these materials represent the personal views of the author(s). It is not investment research or a research recommendation, as it does not constitute substantive research or analysis. Any action that you take as a result of information contained in this document is ultimately your responsibility. Epsilon Theory will not accept liability for any loss or damage, including without limitation to any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Consult your investment advisor before making any investment decisions. It must be noted, that no one can accurately predict the future of the market with certainty or guarantee future investment performance. Past performance is not a guarantee of future results.
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Comments
That was one of my favorite financial history books:
https://www.amazon.com/Best-Way-Rob-Bank-Own/dp/0292754183
I was waiting to see if you guys would pick up this story. Credit to ZH for picking at this scab early.
Great article Ben, impressed with your ability to not only figure it out (adding colorful details) but writing so clearly so that your readers completely get it
Thank you
It will be fascinating to see who gets burned through this. A few thoughts from Bronte capital on ‘who is holding the bag’.
http://brontecapital.blogspot.com/2021/03/greensill-who-is-holding-bag.html
After three decades in this business, the only thing that surprises me is that supposedly smart people continuously fail to do even the tiniest bit of due diligence. And yes, there is always a “rogue (fill in the blank)” to blame.
Wherever there’s a carcass with bits of meat still remaining on the bones, Leon Black cannot be far away. Something tells me that a few months from now Apollo investors can look forward to being sold a new and exciting distressed asset fund filled with only the sort of opportunity that the brain trust in the Solow Building could find.
Amazing how many of these “rogue” employees seem to exist and yet nobody ever bothers to put in controls to catch them. If only there were some sort of hierarchical structure that could be created that applies due diligence to deals before they are executed…
Yes, those pedo-apologists seem to have a keen eye for the distressed.
“You got fins to the left, fins to the right and you’re the only bait in town.”
Thanks Ben. Enjoyed the presentation.
The fallout continues. Now the Scottish Nationalist Party has been dragged in to this mess.
https://www.spectator.co.uk/article/the-snp-s-foray-into-high-finance-has-come-at-a-big-price
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