Matt Levine on “Fraud is no fun without friends.”

Link post

Someone recently told me “Matt Levine’s Finance Newsletter is really good”, and then I signed up. Most post so far are about… well, I don’t actually know the jargon to say what they’re about, but “good typical econblogger stuff” I guess.

This is an excerpt from a particular newsletter that seemed to tie into other LessWrong interests.

The link is paywalled. If you sign up for the newsletter you’ll get future essays via email for free. I’m not entirely sure about whether it seemed reasonable to quote this substantively, but FWIW I endorse signing up for future newsletters.

The way a lot of financial crime works is by slow acculturation. You show up at work on your first day, bright-eyed and idealistic, and meet your new colleagues. They seem like a great bunch of people, they’re so smart and know so much and seem to be having so much fun. They go out for beers after work a lot, and sometimes they let you tag along and listen to their hilarious jokes and war stories.

During the day, they teach you how to trade Treasury futures, and it is all so exciting and high-stakes and important. You shadow one experienced trader and quickly find yourself imitating his mannerisms, looking up to him, hoping to be like him one day. “Here is where I put in some fake orders to spoof the price higher,” he says; “a little razzle dazzle to juke the algos.” “Isn’t that, uh, illegal?” you ask timidly. “Hahahaha illegal!” he replies ambiguously. You do not press the matter. Three months later you are bragging in the desk’s electronic chat room about your own big spoofing victories. As you type “lol i just spoofed em so good hope i dont go to jail” into the chat window, you feel a rush of pride; now you really fit in, you are one of them. You go out for beers that evening and you are the center of attention; everyone congratulates you and celebrates your achievements. It is a great day. Six months later you are arrested.

Now imagine the same story except that you show up at work your first day on Zoom, and your colleagues seem kinda nice but talking to them is awkward and disjointed, and you have no idea what they do after work because nobody leaves their house, but you have a Zoom happy hour once and that’s pretty awful. And there is an electronic chat room, sure, and your colleagues make jokes in the chat, but you don’t get a lot of them because they reference stuff that happened in the office, in person, before you arrived. You learn to trade Treasury futures by reading some training materials. “I just put in some fake orders to spoof the price higher,” says one experienced trader in the chat one day. You frown and reference the training materials, which say “spoofing is super duper illegal and should be reported to compliance immediately.” You shrug and send the chat transcript to compliance. Your colleague gets fired and prosecuted. He may or may not feel a sense of personal betrayal that you turned him in, but you’ll never know or care.

The SEC knows what I’m talking about:

> The work-from-home phenomenon has triggered a fresh frustration for U.S. corporations: Americans are blowing the whistle on their employers like never before.

> The proof is in the data, with the U.S. Securities and Exchange Commission receiving 6,900 tips alleging white-collar malfeasance in the fiscal year that ended Sept. 30, a 31% jump from the previous 12-month record. Officials at the agency, which pays whistle-blowers for information that leads to successful investigations, say the surge really started gaining traction in March when Covid-19 forced millions to relocate to their sofas from office cubicles.

> The isolation that comes with being separated from a communal workplace has made many employees question how dedicated they are to their employers, according to lawyers for whistle-blowers and academics. What’s more, people feel emboldened to speak out when managers and co-workers aren’t peering over their shoulders.

> “You’re not being observed at the photocopy machine when you’re working from home,” said Jordan Thomas, a former SEC official who helped set up the agency’s whistle-blower program a decade ago. “It’s never been easier to record a meeting when you can do it from your dining room table,” added Thomas, who now represents tipsters as an attorney at Labaton Sucharow in Washington.

> Adam Waytz, a psychologist and professor at Northwestern University’s Kellogg School of Management, agrees.

> “When you feel disconnected from work, you feel more comfortable speaking up,” said Waytz, who has studied the motivations of whistle-blowers.

Also I would guess that somewhat more financial crime is now coordinated via email and electronic chat than it was a year ago, when you could just turn to the person sitting next to you and talk live about your crimes. And if you’re going to blow the whistle to the SEC, it helps to have electronic chats to forward to them. Though I would not put too much emphasis on this explanation; traders seem to love talking about their crimes via electronic chat even when they are sitting right next to each other.

I guess this story is good news from a prevention-of-financial-crime perspective, but it is sort of a sad story from a human perspective. All these people feeling disconnected from their work and their colleagues, with no strong personal ties of loyalty and friendship and common mission. Sure the common mission in these particular cases was crime, but still.

One way to read this story is that one sort of business that is conducted at offices is fraud, and people in the fraud business have become 31% less loyal and motivated and conscientious since the pandemic started, which is causing some previously viable fraud businesses to have to shut down. (Because the SEC caught them.) Which is not a loss for society or anything. But the mechanism here, of people feeling disconnected from their jobs and disloyal to their colleagues, is not unique to the fraud business. This story is a sort of leading indicator of a breakdown in morale and group cohesion generally as so much work is done from home. That is probably bad for a lot of projects; it’s just that one of the projects it’s bad for is fraud.