Fraud

Crime in London – The Bill’s Feb 2018 snapshot isn’t pretty

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The Met Police in London has listed the following year on year trends in crime as at Feb 2018 as follows:

Murder: +42.4%

Robbery of personal property: +41.0%

Burglary – residential: +33.5%

Theft from Person: +32.1%

Burglary – commercial: +32.0%

Violence w/ Offensive Weapon: +32.1%

Rape: +20.3%

Motor Vehicle Interference/Tampering: +19.9%

Motor Vehicle Theft: +17.3%

Theft or Push Bike: +15.6%

Theft from Motor Vehicle: +15.4%

Fraud & Forgery: +13.7%

Common Assault: +9.4%

Sexual Assault: +8.5%

Violence causing grievous bodily harm: +7.7%

Drug Possession: -5.9%

A pretty sorry tale of crime rates in London. The trends since 2014 have been a reasonably steady upward climb. Last year, 891,507 crimes were logged by the police.

The Met has also listed a hate crime section on its website. The YoY stats vs Feb 2018 are as follows:

Anti-Semitic: -1.89% (+40.5% month on month)

Domestic Abuse: +5.8%

Faith Hate Crime: +20.1%

Gun Crime (Lethal Barrel Discharge): +14.2%

Homicide: +35.5%

Homophobic Hate Crime: +3.5%

Islamophobia: +34.4% (-39.0% month on month)

Knife Crime: +26.0%

Knife Crime (w/ injury): +11.7%

Where to avoid in London based on YoY figures?

Knife crime in the Borough of Enfield is +52.2%

Islamophobia in Westminster is +95.4%

Homicide in Southwark is +83.3%

Anti-Semitic hate crime in Harrow +228.6%

Taser Deployments year on year in Feb 2018: +8.7%

15% of the 2649 Taser deployments were in Lambeth and Tower Hamlets.

Is it a question of police being hamstrung from taking more heavy handed responses to crime by enforcing political correct responses or are they just too stretched?

From the London General Assembly:

“Since 2010-11, the Met’s general grant funding from the Government has fallen by more than £700 million, or nearly 40 per cent in real terms, on a like-for-like basis. The Mayor of London, Sadiq Khan, will commit today to investing an additional £110million into the Metropolitan Police in the next year.

Budget cuts have led to the loss of a third of police staff posts, which are down from 14,330 to 9,985, as well as two-thirds of police community support officer (PSCO) posts, which are down from 4,607 to 1,591. In addition, there are now 114 fewer police station front counters and 120 fewer police buildings.“

There were 1146 Anti-Semitic hate crimes against a 168,000 Jewish population in London vs 1,741 Islamophobic reported hate crimes against the 607,000 Muslims living in the British capitol. So Jews, per head of population, are 2.3x more likely to face hate crimes than Muslims according to the Met’s statistics.

 

Blood seems thicker than water

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18 months ago CM wrote on Theranos (which was set to rule the blood analysis world) saying its biggest problem was gaining trust – not of the company itself but the switching costs for medical professionals to use it. It turns out it was really about a lack of trust, not with doctors but investors. Theranos swindled $700m over three years from investors yet the punishment will be that its founder Elizabeth Holmes pays a $500,000 fine, return 18.9m shares and face a ban from public companies for 10 years after the SEC charged her with “massive” securities fraud. Why no jail? Allen Stanford received 110 years for his $7bn Ponzi scheme. Fraud is fraud. Shouldn’t 1/10th the fraud lead to 1/10th the jail time?  Enron’s former CEO Jeff Skilling was fined $45mn with the $11bn failure of the company. Seems like not all fraud was created equal in the eyes of the law.

That’s the retirement sorted then

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I guess the brilliance of these scams is that the people who don’t respond can be eliminated and those that do can get gouged for what pittances they probably possess. How could one not fall for the impeccable qualities of Mrs Grace Innocent?

Truly sickening US Public Pensions data

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Following on from the earlier post and our 2016 report on the black hole in US state public pension unfunded liabilities, we have updated the figures to 2016. It is hard to know where to start without chills. The current state of US public pension funds represents the love child of Kathy Bates in Misery and Freddie Krueger. Actuarial accounting allows for pension funds to appear far prettier than they are in reality. For instance the actuarial deficit in public pension funds is a ‘mere’ $1.47 trillion. However using realistic returns data (marking-to-market(M-2-M)) that explodes to $6.74 trillion, 4.6-fold higher.  This is a traffic accident waiting to happen. US Pension Tracker illustrates the changes in the charts presented.

Before we get stuck in, we note that the gross pension deficits do not arrive at once. Naturally it is a balance of contributions from existing employees and achieving long term growth rates that can fund retirees while sustaining future obligations. CM notes that the problems could well get worse with such huge unfunded liabilities coinciding with bubbles in most asset classes. Unlike private sector pension funds, the states have an unwritten obligation to step up and fill the gap. However as we will soon see, M-2-M unfunded liabilities outstrip state government expenditures by huge amounts.

From a layman’s perspective, either taxes go up, public services get culled or pensioners are asked politely to take a substantial haircut to their retirement. Apart from the drastic changes that would be required in lifestyles, the economic slowdown that would ensue would have knock on effects with state revenue collection further exacerbating a terrible situation.

CM will use California as the benchmark. Our studies compare 2016 with 2008.

The chart above shows the M-2-M 2016 unfunded liability per household. In California’s case, the 2016 figure is $122,121. In 2008 this figure was only $36,159. In 8 years the gap has ballooned 3.38x. Every single state in America with the exception of Arizona has seen a deterioration.

The following chart shows the growth rate in M-2-M pension liabilities to total state expenditure. In California’s case that equates to 3.2x in those 8 years.

1 MKT PER HH DEBT EXP GROWTH

Sadly it gets worse when we look at the impact on current total state expenditures these deficits comprise. For California the gap is c.6x what the state spends on constituents.

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Then taking it further,  in the last 8 years California has seen a 2.62-fold jump in the gap between liabilities and state total expenditures.

1 MKT PER HH DEBT TAX EXP 2016 VS 2008

This is a ticking time bomb. Moreover it is only the pensions for the public sector. We have already seen raids on particular state pension funds with some looking to retire early merely to cash out before there is nothing left. Take this example in Illinois.

Sadly the Illinois Police Pension is rapidly approaching the point of being unable to service its pension members and a taxpayer bailout looks unlikely given the State of Illinois’ mulling bankruptcy. Local Government Information Services (LGIS) writes, At the end of 2020, LGIS estimates that the Policemen’s Annuity and Benefit Fund of Chicago will have less than $150 million in assets to pay $928 million promised to 14,133 retirees the following yearFund assets will fall from $3.2 billion at the end of 2015 to $1.4 billion at the end of 2018, $751 million at the end of 2019, and $143 million at the end of 2020, according to LGIS…LGIS analyzed 12 years of the fund’s mandated financial filings with the Illinois Department of Insurance (DOI), which regulates public pension funds. It found that– without taxpayer subsidies and the ability to use active employee contributions to pay current retirees, a practice that is illegal in the private sector– the fund would have already run completely dry, in 2015…The Chicago police pension fund held $3.2 billion in assets in 2003. It shelled out $3.8 billion more in benefits to retired police officers than it generated in investment returns between 2003 and 2015…Over that span, the fund paid out $6.9 billion and earned $3.0 billion, paying an additional $134 million in fees to investment managers.”

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To highlight the pressure such states/cities could face, this is a frightening example of how the tax base can evaporate before one’s eyes putting even more pressure on bail outs.

This problem is going to get catastrophically worse with the state of bloated asset markets with puny returns. Looking at how it has been handled in the past Detroit, Michigan gives some flavor. It declared bankruptcy around this time three years ago. Its pension and healthcare obligations total north of US$10bn or 4x its annual budget. Accumulated deficits are 7x larger than collections. Dr. Wayne Winegarden of George Mason University wrote that in 2011 half of those occupying the city’s 305,000 properties didn’t pay tax. Almost 80,000 were unoccupied meaning no revenue in the door. Over the three years post the GFC Detroit’s population plunged from 1.8mn to 700,000 putting even more pressure on the shrinking tax base.

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Madoff wasn’t so long ago

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It was just over 9 years ago that Bernie Madoff pleaded guilty to a Ponzi scheme that cost investors over $65bn. While many happily point fingers at greedy banksters we tend to forget that despite Harry Markopolos, handing the SEC (the US regulator) the details of the case in 1999 on a platter it failed to act. His testimony points directly to the kind of problem that exists with government regulators – no track record in the fields they legislate. In the 9 years prior to Madoff pleading guilty, Markopolos caught him at the $6bn stage. The SEC after multiple investigations turned nothing even with a treasure map provided by Markopolos that someone with markets experience would have discovered in 30 minutes. Throw on all the other scandals (ratings agencies etc) that the SEC failed to capture and it cost taxpayers $700bn.

Willful negligence? I gave a speech at the Japanese financial regulator (FSA) on fraud and insider trading  at the time of the Kobe Steel data scandal. When presented with comparable data with other exchanges the blind eye is no less scandalous. So before hanging the financiers out to dry perhaps people ought to question the regulators whose incompetence and inaction is at fault. If you give a child a box of matches unsupervised then don’t be surprised if the whole house burns down.

Kobe Steel scandal may make Takata look like a picnic by comparison

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Actually this could be so much worse than the Takata scandal. Kobe Steel’s data falsification on its products – especially to Subaru Corp – could raise the risk of insolvency of the former. Subaru is responsible for the MOST crucial part of the Boeing 787 – the centre wing box (CWB). While Boeing has assured us that there is no imminent safety risk, the question is one of determining the fatigue of the substandard materials supplied to Subaru by Kobe are part of the CWB. What many fail to realize is that commercial aircraft approval by the regulators makes getting drugs approved by the FDA as easy as shelling peanuts. Every time a plane is in the air it has to be as near as makes no difference 100% safe. Drugs that give you a side effect of drowsiness is not a big deal to the FDA. In fact for aircraft it gives “do not operate heavy machinery” a whole new meaning.

The CWB effectively is the piece that connects the wings to the body. It is without doubt the most important structural piece on the plane. Worse, it is perhaps the most difficult part to replace in terms of man hours. Effectively the plane would have to be broken apart and reassembled. The sheer logistics of this would also be mind boggling. The retrofit (if even feasible) would be a $20-30mn per job including the parts, labour and time out of service (compensation to airlines) and recertification. That’s per aircraft. So that would cost around $10-15bn.

The question then becomes of the 500 odd 787s in service what the FAA decides to do. Perhaps the planes’ useful 25 year life are reduced to 15 years. That would smack residual values and airlines would demand compensation for the gap and the potential for lost revenues. So were 500 aircraft to lose 40% of the serviceable life at $150mn a copy that is $75bn.

While this is worst case scenario analysis for Kobe Steel which would be liable for the lot, we are staring at the risk of a wipe out. Kobe Steel has $1.8bn in cash. Somehow it’s $8bn market cap may fall much further.

Hardly any of this is priced because the FAA doesn’t take things lightly until it has all the facts.

This article is not intended to be sensational rather highlight the potential for a huge weight from the US (not Japanese) regulator to push for a safety recall of epic proportions. We won’t know yet but buyer on dips beware.

Kobe ‘Steal’ – will the market referee wave a red card at what looks a lot like insider trading?

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If the referee caught Kobe Steel’s (5406) rugby team up to such foul play it is likely that players would be red carded. While unconfirmed speculation at the moment, it would appear that since September 21st Kobe Steel shares came under heavy selling pressure in what a seasoned market punter might suspect looks like insider trading via aggressive short selling. 7 straight negative candle sticks. Kobe Steel spilled the ball on its data manipulation on October 8th.

This would not be the first time that a broker conspired with a fund to short sell a stock ahead of a negative release on insider information where several weeks later news broke and sent the shares collapsing. This is the current action of Kobe Steel shares.

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So excluding borrowing costs or any leverage, if one had managed to short sell Kobe Steel at 1350 (on Sep 21) and brought back at today’s prices a quick fire 53% return would be gained.

The important question is whether the regulator will investigate any potential foul play when looking at the video replay. I will be asking this question directly to the Financial Services Agency (FSA) as I have been invited the regulator to give a speech on ways to improve Japanese corporate governance in a few weeks time.

This won’t be just a beat up of Japan’s corporate governance as foreign corporates have made countless scandals post the introduction of Sarbanes Oxley in 2002.  However it will aim to be a realistic overview of tolerating what seems to be endless preventable insider trading scams with paltry penalties of $500 and a slap on the wrists with a feather duster.

Until serious punishments for flagrant market manipulation are thrust front and centre in front of bewildered and annoyed (foreign) investors, the cynicism will remain that Japan is not a safe place to invest. Remember insider trading is effectively fraud. Perhaps your pension fund owns Kobe Steel in a global portfolio meaning that some shady investor has stolen your retirement to feather his or her nest.

Perhaps I should thank Kobe Steel for getting dirty in the ruck area to help the final presentation draft.

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