Bubbles and Fraud

Bubbles and Fraud

We often write about the intended actions of central bank largesse, but what is often less talked about is some of the more unintended consequences. Now, at this moment you might think I’m about to write about valuations and bubbles, but actually I’m going to write about fraud!

 

It's a word that sends shivers down any investor’s spine and sadly it’s becoming more and more evident that booms in asset valuations are also causing a boom in greed.

 

Charles Kindleberger who wrote “Manias, Panics and Crashes: A history of financial crises” put it as follows:

 

“Swindles are a response to the appetite for wealth (or plain greed) stimulated by the boom; the Smiths wanted to keep up with the Joneses and some Smiths engage in fraudulent behaviour to do so. As the monetary system gets stretched, institutions lose liquidity and as unsuccessful swindles seem about to be revealed, the temptation to take the money and run becomes virtually irresistible.”

 

While this may sound a bit Orwellian, it’s quite remarkable how common this behaviour has become, even just over the last few months. Very recently, one of Grenke’s board members resigned and the shares fell 35%. The firm is currently under investigation for fraud. A few other headlines over the past year also illustrate the point:

 

“Wirecard collapses into insolvency after it was exposed as one of Germany’s biggest post war accounting frauds”

 

“China’s Luckin Coffee files for bankruptcy in US, months after Nasdaq delisting over ‘fraudulently’ inflating sales”

 

“Nikola’s shares fall as SEC reportedly examines fraud claims”

 

“UPL stock falls on report of whistle-blower claim about financial fraud”

 

“Tupperware is investigated for Securities Fraud”

 

So how much fraud is actually out there and can we as investors do anything about it? The dotcom bust led to the uncovering of fraud in organisations such as Worldcom; and the global financial crisis led to the uncovering of fraud by the likes of Bernie Madoff.

 

Can we do anything about this as investors? Well we can’t stop it happening, but we can put a strong ESG framework in place to ensure we only lend to the most well-governed businesses, and that’s exactly what we do at AAM. ESG investing isn’t a simple token gesture, it is the foundation to our credit work as we enter into a new era of weeding out the ‘haves’ from the ‘have nots’.

Mark Benbow

Investment Manager, Fixed Income

Mark Benbow is an investment manager in the Fixed Income team. 

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