Time to get serious about Financial Fraudsters, Shysters, Crypto Shills, Elon Musk, and the role of Alternatives

Blain’s Morning Porridge, August 16 2022 –  Time to get serious about Financial Fraudsters, Shysters, Crypto Shills, Elon Musk, and the role of Alternatives

“Sceptics are miserable, but tend to go bust less often…

This morning: Financial fraud has been around as long as money, but FOMO and opportunistic shysters are exploiting regulatory inaction to exploit the credulity of savers like never before. It’s time for Regulators to wake up and hang a few bad-uns “pour encourage les autres” and make clear Alternative market risks

Let me make clear this morning’s Porridge – like every Porridge I write – is wholly my personal opinion – and does not reflect the views of any firm or investment I am associated with.

Last Night’s BBC Panorama Documentary – The Billion-Pound Savings Scandal – was an instructive delve into the mechanics and consequences of one particular financial fraud – the Blackmore Bond.

It uncovered how two shysters, Phillip Nunn and Patrick McCreesh, were able to skirt financial regulations as an unregulated entity, sell £46 million of dodgy mini-bonds to 2000 unsuspecting and trusting pension savers through a litany of lies and glossy brochures, and effectively make off with the whole sum through inflated fees and bogus intra-company transfers.

Investors have lost everything – leaving many bereft of life savings. Nunn and McCreesh say they have done nothing wrong, haven’t been charged with any crime, and remain at liberty. The UK Regulator, The Financial Conduct Authority, (disclosure: I am FCA regulated), has not taken any action over the scam, despite being warned by financial professionals years earlier that it was occurring.

Seldom has anyone looked as guilty as Nunn did last night – a complete scumbag. It would be encouraging to see Nunn and McCreesh flung into pokey with no hope of bail till the money is recovered… or they rot. Once we left pyrates hanging from a gibbet on the Thames, an instructive lesson to others. Similar action now would be a clear signal financial fraud is taken seriously.

The BBC is probably right when it says Blackmore is just the tip of investment scandals that rip off over $1 bln per annum from UK savers. The broadcaster puts the blame on the regulator for its failure to act on tip-offs, or to oversee the markets it’s supposed to make safe. Harsh – but probably with an element of truth. I’ve had the genuine pleasure to meet many FCA staff over the years – they are good and well intentioned, but they seem to swim in the treacle of bureaucratic gloop that seems to gum up every overworked and underpaid institution in the UK.

Let’s not underestimate what the FCA has achieved.

In traditional markets – regulation is now taken very seriously. Some say that has occurred at a cost – that markets have become less efficient as a result of onerous regulations. In the real markets of regulated firms, banks and institutional investors it’s impossible to deal without first being greenlighted by legions of compliance, risk control and onboarding teams. Dealers spend their days completing dull-as-ditchwater financial training videos and are pilloried if they fail to score highly in the tests necessary to complete them.

Regulation is a pain in the posterior – but it works. There is a genuine understanding of the importance of the rules and fair dealing for customers across the traditional financial markets. The City is far fairer today than when I started way back in 1985.

Now, the FCA needs to step up its regulation of the financial periphery. Making its efforts effective is a leadership issue. They need to make clear to the whole financial industry its serious about cleaning out the stables.

The forces of Law and Order also need to step up. I must have missed the part of the Panorame programme that said the Police were investigating where the Blackmore money had gone. (Not that they would have found it – 99% of Bike Thefts in UK go un-investigated!)

The history of financial fraud is a long as the history of money. Anyone with savings is at risk from increasingly sophisticated cons. Yet, over the past decade it feels like the pace of financial knavery and the credulity of the marks – the targets – have increased quadratically. The rise in Ponzis, emperors-new-clothes-schemes, and outright scams in recent years amazes me – but does not surprise me. There are bad people out there – and they are very clever.

It doesn’t help that abusing financial rules and industry standards is often seen not as criminal, but a sign of innovation and inventiveness. As I’ve said before – fish rot from the head down. If the richest man on the planet can avoid the consequences of his actions in financial markets – why not every other shyster, conman and street thief?

Elon Musk’s contempt for due process, SEC rules and “fairness in his dealings”, hasn’t held back his success – which, to be blunt, is largely on the back of the force of his personality rather than his imagined engineering vison. His image is founded in his contempt for the authorities. Time to throw the book at him. Rules are rules – on one is above them. Let Musk off then regulators enable worse.

Desperate times – like real wages tumbling on the back of inflation – make for a fertile hunting ground for financial scammers. Since the Global Financial Crisis in 2008, and the widespread perception global bankers were bailed out by the poor people, it’s been easy to frame a narrative traditional banks and finance firms are parasites. It’s the classic conman trick – warning the marketplace about thieves and pickpockets while making off with the mark’s watch and wallet.

For years I’ve been writing about the emptiness behind the crypto-currency boom-bust signal. I’ve asked, repeatedly, for one single thing crypto does better than fiat money. I’ve called blockchain a solution in search of a problem. I’ve called out obvious crypto-scams and the way they are manipulated. Yet, crypto has thrived and billions have been made by a tiny number of uber-scammers, the whales at the top of the tree. Millions of acolytes have been sucked into the scam in the hope they too can get rich the easy fast way Crypto promises. Don’t get me started on NFTs.

Easy money has funded the who speculative bubble in thematic investments like disruptive tech. To be blunt, there isn’t that much difference in the speculative mumbo-jumbo spouted by Tech-Investment-Gurus like Mayashi-Son and Cathie Wood of ARK and what shysters like Nunn and McCreesh were promising. It’s all been driven by the strongest force in markets – FOMO; Fear of Missing Out. Wild undeliverable promises (oft called analysis) should be questioned.

Or how about Adam Nuemann? When his creation, We-Work, was the market’s darling back in the late 2010s I wrote acres of Porridges about how it was just an overvalued commercial property play, rather than a 100x earnings disruptive tech genius innovation set to change work patterns. I was right. But this week Nuemann is back from the dead, announcing a new firm, FLOW, which will “reinvent” the residential real estate market… Nobody has yet seen anything describing how/what/when or why Flow works, but he’s attracted $350 mm of investment already! Christ on the proverbial bike…

Yesterday, former Deputy Governor of the Bank of England, Paul Tucker was in the news for proposing stricter rules on “Shadow Banking”. He warned about fragility and illusions – including crypto as a “safe” place to put money. He warned against retrospective regulation and called for new approaches to define potential investments. He’s spot on – rather than talk we need action and that means more regulation.

Readers have asked before about my day-job – and that has a bearing on how non-financial assets are sold to investors. I run Alternative Assets at Shard. I only sell to institutional investors or work within our own investment funds. The aim is to generate returns from the real economy rather than trying to second guess traditional financial markets.

I’ve been fascinated to watch how standard listed financial assets became detached and distorted from the real economy during the last 20-teens. Markets rose spectacularly despite lethargic economic growth. Equity and bonds prices soared as a result of 10-years of monetary experimentation, ultra-low interest rates and QE. Easy monetary policy drove the equity bull market since 2010 and spurred the speculative in “improbables” like crypto, NFTs, disruptive tech, and hopeless illusions like ARK.

Regulation has contributed to the rise of shadow banking. Conventional Banks no longer take risk. Risk has largely been absorbed by the investment industry – potentially the next big crisis as an investment crash will directly impact all savers. It has also driven the emergence of new direct lenders – the shadow banking sector.

Smart investors have seen how distorted markets were and went to seek more reliable and stronger returns from the real “alternative” assets market instead. However, alternative assets require much more work than traditional financial assets. Information is not as available or public. There are no liquid investments to peruse daily.

It’s a matter of doing more analysis to understand returns, the opportunity, the threats and the likely outcomes. Alternatives reward smart, clever buyers who take the time to understand their complexity – but can quickly devour investors who try to cut corners. It is not a market for retail savers.

Alternatives cover a wide spectrum of assets. Anything that provides a real return is potentially an alternative; like the stream of lease payments on an airplane, commercial rents on warehouses, or power contracts from a windfarm. It can be speculative – working out the risks and return profiles of new technologies. It may be direct lending to SME Businesses that are fed up trying to source bank support. Or, it may be investing off market in areas like private debt or equity.

The size of these all these alternative markets and alternative investment strategies have all increased following the global financial crisis in 2008 as new capital regulations have reduced banking appetite for risk, moving it onto the balance sheet of institutional investors.

Investing in alternatives is perhaps even more skilful than simple stock picking. The major threat at present is the risk of stagflation in Europe – so finding real assets that are inflation insensitive; for instance public utility equipment, is a key goal. Another big theme is the current redrawing of geopolitics – meaning nations suddenly becoming re-aware of issues like energy and natural resource security.

It’s very simple to invest in risk-on and risk-off alternative scenarios, but the big issue investors have to be aware of is illiquidity – because alternatives tend to be bespoke there is no liquid secondary market in these deals. Dealing with illiquidity should be a key investment parameter for any potential investor in non-financial assets.

In short – eyes wide open and don’t be surprised if it goes badly wrong. Be able to afford your investment risks.

Five Things To Read This Morning

BBerg – Elon Musk Says He Was Joking About Buying Manchester United

Bberg – Traders Bet Bank of England Will Double Rates in Next Six Months

FT – Gas markets leap on both sides of Atlantic as traders search for supplies

Torygraph – American Airlines orders 30 “son of Concorde” supersonic jets

WSJ – Liz Cheney Concedes to Trump-Backed Challenger in Wyoming Primary

Out of time and back to the day job…

Bill Blain

Strategist and Head of Alternatives – Shard Capital