That is the hypothesis Avivah Litan, security analyst at Gartner proposes in a November Forbes article. She said that “in recent months, banking clients have been warning her of a spike in fraud, much of it based on the use of stolen financial data. There's been a marked increase in the number of attacks and the number of successful fraud attempts.”
Litan cites the growing pool of unemployed IT workers as a major fraud catalyst because they possess the “technical abilities needed to steal data or perpetrate fraud” and intimate knowledge of former employers’ IT systems.
Desperation often pushes regularly rule-abiding people into taking risks they wouldn’t in normal circumstances. "In times like these, people need the cash," says Litan. I am afraid she has identified yet another serious threat to the financial system and your bank account in the coming months.
Monday, November 24, 2008
Tuesday, May 6, 2008
Words of Wisdom from Omaha's Oracle
"Capitalism without failure is like Christianity without hell" - said Warren Buffet from Berkshire's annnual shareholders meeting this week.
Wednesday, April 23, 2008
Somber Demographic and Spending Trends Poised to Create Major Headache for Next President
Washington Post Columnist Robert Samuelson today outlined the demographical and economic trends behind the current slow down of consumer spending. While we are all familiar with the current credit crunch, he also points out that natural “life cycle” spending will also contribute to a consumer slow down as the US population continues to age.This is a very somber but important insight as people borrow and spend more in their 30s and 40s and slow in their 50s and 60s as they borrow less and incomes decline.
As you can see in the chart based on US Census Bureau data, a substantial percentage of the US population will be in the 50+ ranges moving forward. Real estate and investment income can prop up incomes and increase spending as it has for much of the last decade, but the likelihood of that happening in the next two to five years is slim. I would assume that wealthy older Americans should have conservatively constructed portfolios in the current trough and housing doesn’t look
to recover anytime soon either. For an even gloomier look into our economic future, look at where AARP says older American’s income comes from as of 2004 – Social Security…So what does this mean for politics? Samuelson goes on to say that “The ebbing shopping spree may challenge the next president in ways that none of the candidates has yet contemplated.” While all candidates may have contemplated a slow start to their term, have they dreamt about what it will feel like to bear the brunt of public frustration in a long-term recession? This sets the stage for a likely four and out scenario.
(charts from wallstreetexaminer.com/blogs/winter/?p=362)
Saturday, March 15, 2008
Spitzer Caught in His Own Mouse Trap?
Some may not be aware that Spitzer was an important catalyst in developing the market for robust transactional monitoring technologies that the financial services industry today uses to uncover money laundering, fraud and market manipulation.
Eliot Spitzer as Attorney General was a major proponent for the use of transactional monitoring technologies within the securities industry. As such, he was intimately aware of the types of sophisticated ‘suspicious’ scenarios analytics can uncover from mountains of data. Data mining and advanced analytics accurately distinguish one or two market manipulating trades from hundreds-of-millions of legitimate trades. The same goes for uncovering suspicious money transfers and fraud within the billions of transactions performed every day in the global marketplace.
Several factors probably contributed to the filing of the SARs (Suspicious Activity Report) that fueled the Spitzer’s investigation. To understand why his banks are required to file SARs with the US federal government, you have to understand what goes into uncovering ‘suspicious activities’. The US BSA (Bank Secrecy Act) and the Patriot Act define banks’ responsibilities around uncovering and reporting money-laundering activities. To do so, each bank account holder and entity a bank deals with is AML (anti-money laundering) risk profiled and ultimately given a numerical score. This score measures one’s potential to launder money. The three leading variables in Spitzer’s case that likely increased his AML risk score include:
1. PEP list – As a ‘Politically Exposed Person’, Spitzer is almost certainly on PEP lists used by the banks he holds accounts with. Banks cross check these lists and score PEPs a bit higher than the general population.
2. Structuring – A common money-laundering strategy is to break a large transaction into smaller transactions below the well known must report $10,000 threshold. Spitzer’s multiple wire transactions to one entity totaled around $19,000. The group of transactions would have scored higher in any AML monitoring system.
3. Shell Companies – The business entities used by Spitzer had many characteristics of what banks would label a ‘shell company’. This would include entities that do not have complete filings, confirmed addresses, our unclear business models. Simply put, many launders set up entities distance the money source from the recipient. Banks have models to look for this type of movement and score transactions that flow through suspected shell companies as higher risk.
While there are dozens, if not hundreds of other variables that go into creating a risk score for a single or set of financial transactions, these are likely the top three that moved Spitzer’s Emperor’s Club transactions to the top of his bank’s list of possible suspicious activities. Once his bank’s system raised the red flag, they were obligated to report it to FinCEN (Financial Crimes Enforcement Network). This database is then accessible to many levels of federal, state and local investigative agencies.
The real questions mark in this case is why where these particular SARs investigated? The overwhelming majority of SARs in the FinCEN database go uninvestigated, and yet Spitzer’s seemed to pop up immediately. That should lead us to believe that someone had an ongoing investigation into Spitzer or the entities he was wiring money to, or Spitzer’s political enemies were on the prowl for dirt on New York’s Steamroller Governor.
Spitzer pursued investment banks and brokerages after the tech bubble, and extracted $1.4 billion in fines and payments for pumping up stock prices. Additionally he went after mutual fund brokers for giving preferential treatment to hedge funds and key clients. This resulted in new regulations around separation of research and banking in investment banks and ‘late trades’ and market timing trade monitoring. In the process, Spitzer insulted, defaced and pissed off a good percentage of Manhattan’s business leaders.
What can we learn from the Spitzer story? If you have powerful enemies and know that all your financial transactions will be examined under a microscope, you shouldn’t document your shady and/or illegal activities. And at a minimum if you can’t control yourself, at least explore the option of paying in cash…
Eliot Spitzer as Attorney General was a major proponent for the use of transactional monitoring technologies within the securities industry. As such, he was intimately aware of the types of sophisticated ‘suspicious’ scenarios analytics can uncover from mountains of data. Data mining and advanced analytics accurately distinguish one or two market manipulating trades from hundreds-of-millions of legitimate trades. The same goes for uncovering suspicious money transfers and fraud within the billions of transactions performed every day in the global marketplace.
Several factors probably contributed to the filing of the SARs (Suspicious Activity Report) that fueled the Spitzer’s investigation. To understand why his banks are required to file SARs with the US federal government, you have to understand what goes into uncovering ‘suspicious activities’. The US BSA (Bank Secrecy Act) and the Patriot Act define banks’ responsibilities around uncovering and reporting money-laundering activities. To do so, each bank account holder and entity a bank deals with is AML (anti-money laundering) risk profiled and ultimately given a numerical score. This score measures one’s potential to launder money. The three leading variables in Spitzer’s case that likely increased his AML risk score include:
1. PEP list – As a ‘Politically Exposed Person’, Spitzer is almost certainly on PEP lists used by the banks he holds accounts with. Banks cross check these lists and score PEPs a bit higher than the general population.
2. Structuring – A common money-laundering strategy is to break a large transaction into smaller transactions below the well known must report $10,000 threshold. Spitzer’s multiple wire transactions to one entity totaled around $19,000. The group of transactions would have scored higher in any AML monitoring system.
3. Shell Companies – The business entities used by Spitzer had many characteristics of what banks would label a ‘shell company’. This would include entities that do not have complete filings, confirmed addresses, our unclear business models. Simply put, many launders set up entities distance the money source from the recipient. Banks have models to look for this type of movement and score transactions that flow through suspected shell companies as higher risk.
While there are dozens, if not hundreds of other variables that go into creating a risk score for a single or set of financial transactions, these are likely the top three that moved Spitzer’s Emperor’s Club transactions to the top of his bank’s list of possible suspicious activities. Once his bank’s system raised the red flag, they were obligated to report it to FinCEN (Financial Crimes Enforcement Network). This database is then accessible to many levels of federal, state and local investigative agencies.
The real questions mark in this case is why where these particular SARs investigated? The overwhelming majority of SARs in the FinCEN database go uninvestigated, and yet Spitzer’s seemed to pop up immediately. That should lead us to believe that someone had an ongoing investigation into Spitzer or the entities he was wiring money to, or Spitzer’s political enemies were on the prowl for dirt on New York’s Steamroller Governor.
Spitzer pursued investment banks and brokerages after the tech bubble, and extracted $1.4 billion in fines and payments for pumping up stock prices. Additionally he went after mutual fund brokers for giving preferential treatment to hedge funds and key clients. This resulted in new regulations around separation of research and banking in investment banks and ‘late trades’ and market timing trade monitoring. In the process, Spitzer insulted, defaced and pissed off a good percentage of Manhattan’s business leaders.
What can we learn from the Spitzer story? If you have powerful enemies and know that all your financial transactions will be examined under a microscope, you shouldn’t document your shady and/or illegal activities. And at a minimum if you can’t control yourself, at least explore the option of paying in cash…
Tuesday, March 11, 2008
US Recession to Push into 2009
According to CNN, “President Bush acknowledged that the economy has slowed down but said the United States is not headed toward a recession.” Actually Bush expect a feeble tax rebate of $600 to $1200 for households earning less than $75K per individual or $150K filing jointly to pull us back from the brink of calamity. 
This directly contradicts many unbiased experts on the topic. The consensus seems to be that the economy may pick back up, but not until 2009.
Optimists beware: there will continue to be blood on the streets. Be especially leery of the financial services sector. Lehman announced another 5% lay off yesterday. Rumors are abounding that other major firms, including Merrill Lynch, will swing the ax again soon.
Just look at a couple quotes below. Who do you think has a better read of the US economy: Bush or Blackstone?
"We are in the midst of a severe financial crisis," said [Blackstone] Chief Executive Stephen Schwarzman. "How long will it last? I am not certain, no one knows the answer."
Blackstone's Hope
Do Dark Days Mean Opportunity?
By Peter LattmanMarch 11, 2008
“Last week’s awful employment data from the US ended all arguments about whether the US is heading for a recession: it is already in one.”
The Short View: US recession
By John Authers, Investment Editor
March 10 2008
This directly contradicts many unbiased experts on the topic. The consensus seems to be that the economy may pick back up, but not until 2009.
Optimists beware: there will continue to be blood on the streets. Be especially leery of the financial services sector. Lehman announced another 5% lay off yesterday. Rumors are abounding that other major firms, including Merrill Lynch, will swing the ax again soon.
Just look at a couple quotes below. Who do you think has a better read of the US economy: Bush or Blackstone?
"We are in the midst of a severe financial crisis," said [Blackstone] Chief Executive Stephen Schwarzman. "How long will it last? I am not certain, no one knows the answer."Blackstone's Hope
Do Dark Days Mean Opportunity?
By Peter LattmanMarch 11, 2008
“Last week’s awful employment data from the US ended all arguments about whether the US is heading for a recession: it is already in one.”
The Short View: US recession
By John Authers, Investment Editor
March 10 2008
Thursday, March 6, 2008
Give me Liberty or give me…a National Security Letter? F#$% that!
Bear Arms while You Still have the Chance
What happened to the rebellious Patriot spirit that preferred death to government intrusion into one’s personal liberties? The US Founding Fathers would roll over in their graves if they could see what we’ve so easily given up post 9/11. This is a serious situation that, if not corrected, will lay waste to the founding principles we all hold dear.
The FBI admits that it used ‘national security letters’ to improperly obtain “telephone logs, banking records and other personal records on thousands of Americans from 2003 to 2005.”[1] Actually, the FBI issued over 150,000 national security letters from 2003 to 2005. Alarmingly, these incidents are not the only violation of our liberties. The government maintains secret courts that issue orders without proper oversight from people who value citizens’ liberties.
I liken this to the story about the frog and boiling water. If you drop a frog into a boiling pot of water, it will immediately recognize the threat and jump out. If you place a frog into a cool pot and slowly heat it to a rolling boil, the frog will sit unaware until it is fully cooked. As a generation that witnessed 9/11, we did not imagine the lasting repercussions of the Patriot Act when it was quickly passed to protect American citizens. One could easily argue that drastic measures were necessary at the time, and as someone that watched two towers fall in my City, I can honestly say the situation demanded an equivocally deliberate response. I argue now that, like the frog, we did not notice the fire someone turned on below us.
Now that the dust has settled and we have had a chance to read and measure the full impact of the Patriot Act, it is obvious that it is simply un-American document. It contradicts everything we value as a country. What rights do we have left now that they have taken away our privacy? Can we still bear arms? I’d recommend stocking up because many government agencies can now walk into your home at any time without reason under the guise of ‘national security’.
I urge you to contact your Senator and/or Congressperson and demand they fix our system to protect your privacy.
What happened to the rebellious Patriot spirit that preferred death to government intrusion into one’s personal liberties? The US Founding Fathers would roll over in their graves if they could see what we’ve so easily given up post 9/11. This is a serious situation that, if not corrected, will lay waste to the founding principles we all hold dear.
The FBI admits that it used ‘national security letters’ to improperly obtain “telephone logs, banking records and other personal records on thousands of Americans from 2003 to 2005.”[1] Actually, the FBI issued over 150,000 national security letters from 2003 to 2005. Alarmingly, these incidents are not the only violation of our liberties. The government maintains secret courts that issue orders without proper oversight from people who value citizens’ liberties.
I liken this to the story about the frog and boiling water. If you drop a frog into a boiling pot of water, it will immediately recognize the threat and jump out. If you place a frog into a cool pot and slowly heat it to a rolling boil, the frog will sit unaware until it is fully cooked. As a generation that witnessed 9/11, we did not imagine the lasting repercussions of the Patriot Act when it was quickly passed to protect American citizens. One could easily argue that drastic measures were necessary at the time, and as someone that watched two towers fall in my City, I can honestly say the situation demanded an equivocally deliberate response. I argue now that, like the frog, we did not notice the fire someone turned on below us.
Now that the dust has settled and we have had a chance to read and measure the full impact of the Patriot Act, it is obvious that it is simply un-American document. It contradicts everything we value as a country. What rights do we have left now that they have taken away our privacy? Can we still bear arms? I’d recommend stocking up because many government agencies can now walk into your home at any time without reason under the guise of ‘national security’.
I urge you to contact your Senator and/or Congressperson and demand they fix our system to protect your privacy.
Tuesday, February 19, 2008
SocGen the latest Casualty of One Nightmare Employee?
Jerome Kerviel socked it to SocGen with a whopping $7.16 billion loss. The biggest loss incurred by a rogue employee to date, which has rocked the foundation of a bank recently considered a pillar of the French and global economies. Now there is a good chance the bank will cease to exist in its current structure. The bank’s planned $8 billion stock offering may buy some time, but it may be too little too late as BNP Paribas and Credit Agricole circle an institution already dazed by a wallop of US sub-prime debt.
The shear size of positions and trading losses by Kerviel shocks and surprises the general public, but there are those that can remember similar situations not too long ago. Rogue employees bring down companies every single day. Brian Hunter lost $6.6 billion at Amaranth in 2006, collapsing the hedge fund. Nick Leeson brought down Barings in 1995 after losing $1.3 billion in improper trades. Kidder Peabody crashed and burnt after bond trader Orlando Joseph Jett racked up $330 million in losses.
What do these stories have in common? Poor risk management. In every single case, employees gambled firm assets against unmeasured risk…and lost. We learn time and again that without the proper controls, employees will burn you. The Association of Certified Fraud Examiners (ACFE) estimates that US organizations lose 5 percent of annual revenue to fraud. With a U.S. Gross Domestic Product for 2006 of $13.037 trillion, this suggests losses around $638 billion among all US organizations, despite existing anti-fraud controls.
The very technology put in place to improve trader productivity and to execute on more and more complicated transactions of more and more complex securities is sometimes blamed for rogue employee behavior. The availability of technology makes it easier in some cases to hide suspicious transactions. From the criminal’s perspective, the anonymity of bits and bytes make executing fraud a faceless victimless crime.
The shear size of positions and trading losses by Kerviel shocks and surprises the general public, but there are those that can remember similar situations not too long ago. Rogue employees bring down companies every single day. Brian Hunter lost $6.6 billion at Amaranth in 2006, collapsing the hedge fund. Nick Leeson brought down Barings in 1995 after losing $1.3 billion in improper trades. Kidder Peabody crashed and burnt after bond trader Orlando Joseph Jett racked up $330 million in losses.
What do these stories have in common? Poor risk management. In every single case, employees gambled firm assets against unmeasured risk…and lost. We learn time and again that without the proper controls, employees will burn you. The Association of Certified Fraud Examiners (ACFE) estimates that US organizations lose 5 percent of annual revenue to fraud. With a U.S. Gross Domestic Product for 2006 of $13.037 trillion, this suggests losses around $638 billion among all US organizations, despite existing anti-fraud controls.
The very technology put in place to improve trader productivity and to execute on more and more complicated transactions of more and more complex securities is sometimes blamed for rogue employee behavior. The availability of technology makes it easier in some cases to hide suspicious transactions. From the criminal’s perspective, the anonymity of bits and bytes make executing fraud a faceless victimless crime.
Don’t expect the SocGen story to be the last of its type. Companies need to take note of the techniques used by Kerviel and fight technology with technology. Without proper risk management and internal controls, we’ll see more banks losing firm and customer assets.
Thursday, February 7, 2008
A vote for George W. Bush is a vote for…Change and Diversity?
Something about that doesn’t quite make sense, but in a sense it is true.
Think about this – if George W. Bush hadn’t been such a horrible President on so many fronts, the likelihood of another old, white, Protestant, Republican male being elected to the Whitehouse this November would be pretty high.
Thanks to W’s incompetent performance as President, he has insured that a vote for anyone is a vote for ‘change’. Beyond that, his performance will probably push a democratic minority or woman into the top seat for the first time ever. Who would have guessed that W would be the biggest catalyst for promoting diversity in the world’s most powerful leadership role? -Not him!
Think about this – if George W. Bush hadn’t been such a horrible President on so many fronts, the likelihood of another old, white, Protestant, Republican male being elected to the Whitehouse this November would be pretty high.
Thanks to W’s incompetent performance as President, he has insured that a vote for anyone is a vote for ‘change’. Beyond that, his performance will probably push a democratic minority or woman into the top seat for the first time ever. Who would have guessed that W would be the biggest catalyst for promoting diversity in the world’s most powerful leadership role? -Not him!
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