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How AI Is Supercharging Financial Fraud–And Making It Harder To Spot

It might go down as one of the worst financial market calls ever, akin to&nbsp;BusinessWeek&nbsp;declaring the death of equities on the eve of a booming era for stocks.



Ray Dalio, the billionaire who founded the world’s biggest hedge fund firm, had a message for the billionaires and CEOs who met at the World Economic Forum in Davos, Switzerland, in January.



“Cash is trash,” Dalio said. “Get out of cash. There’s still a lot of money in cash.”



Two months later, cash has become king across global markets and the economy. Dalio’s big Bridgewater Associates macro hedge fund, meanwhile, has&nbsp;<a href="https://www.bloomberg.com/news/articles/2020-03-14/dalio-s-macro-fund-plunged-about-20-this-year-as-market-tanked" target="_blank" rel="noreferrer noopener">plunged by 20%</a>&nbsp;in 2020.



Businesses and investors have rushed to cash as known cases of Covid-19 passed 140,000 globally and the World Health Organization has declared the virus is now a global pandemic.



With global stock markets plunging, investors have sought the safety of cash. U.S. money market funds experienced $87.6 billion of inflows in the seven days prior to Wednesday, according to Lipper. Bank of America reported that last week investors plowed a total of $136.9 billion into cash.



The U.S. banking system entered the coronavirus pandemic in&nbsp;<a href="https://www.forbes.com/sites/antoinegara/2020/03/12/why-banks-are-likely-to-help-america-recover-from-the-economic-fallout-of-the-coronavirus/#4883d09b7eb1">strong shape</a>&nbsp;and is much more resilient than it was during the financial crisis. The Federal Reserve moved on Sunday to further safeguard the financial system by launching a $700 billion quantitative easing program.



Last Thursday, as stock were plummeting, yields on 30-Year U.S. Treasuries were rising and gold fell. Bitcoin, which its proponents have advertised as a safe haven, crashed. Cash was where nervous investors wanted to be. It isn’t just any currency that is king. U.S. dollars are in particular demand as borrowers around the world start to pay a <a rel="noreferrer noopener" href="https://www.reuters.com/article/us-health-coronavirus-moneymarket/feds-failure-to-fix-credit-plumbing-leaves-markets-scrambling-for-dollars-idUSKBN2130XP" target="_blank">premium</a> to obtain U.S. dollars.



Corporations also moved to make sure they had sufficient cash on hand. Boeing, already dealing with the grounding of its 737 Max aircraft, moved last week to tap a $13.8 billion credit line it had secured about a month ago. Other companies like Hilton, Wynn Restorts and Seaworld Entertainment, which are dealing with a swift deterioration in their business related to Covid-19, also drew on credit lines last week. There have been reports that private equity firms are looking to push their portfolio companies into considering tapping their credit lines as well.



The big U.S. banks that are funding those credit draws, like Citigroup, JPMorgan Chase and Wells Fargo, all moved on Sunday to put their stock repurchasing programs on hold to conserve cash.



States also&nbsp;<a href="https://www.syracuse.com/coronavirus/2020/03/as-coronavirus-strains-budgets-states-turn-to-cash-reserves.html" target="_blank" rel="noreferrer noopener">moved</a>&nbsp;to tap their rainy day funds to help them fund efforts to deal with Covid-19. Washington state, for example, is drawing $200 million from its rainy day fund, mostly to support public health efforts. &nbsp;



The rush into cash has been intense enough to include physical cash. Over the weekend <a rel="noreferrer noopener" href="https://www.nytimes.com/2020/03/14/business/coronavirus-cash-shortage-bank.html" target="_blank">The New York Times reported </a>that a Bank of America branch in Manhattan for a short period ran out of $100 bills as customers were pulling out tens of thousands of dollars at a time. <a rel="noreferrer noopener" href="https://www.bloomberg.com/news/articles/2020-03-15/new-yorker-anxiety-in-hamptons-leads-to-requests-for-hard-cash" target="_blank">Bloomberg News reported</a> that a Chase bank branch in the Hamptons had fielded a request for $30,000 in cash that it had to review under its protocols.



&#8211;<a href="https://www.forbes.com/sites/nathanvardi/">Nathan Vardi</a>, Forbes Staff, <a href="https://www.forbes.com/hedge-funds-private-equity">Hedge Funds &amp; Private Equity</a>

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Cash Is King In The Time Of Coronavirus

The world is still reeling from the shock of the financial crisis of 2008. For South Africa, the biggest takeaway was there are no substitutes for strong institutions.

It has already been 10 years since the collapse of Lehman Brothers in the United States (US), an event that shook the world and triggered the biggest financial crisis since the Great Depression of 1929.
People from New York to London, Hong Kong to Johannesburg, lost billions as stock markets crashed and the global economy plunged into recession.
Watching it all happen was Russell Loubser, the former boss of Africa’s largest stock exchange, the Johannesburg Stock Exchange (JSE), located on Gwen Lane in the plush suburb of Sandton. For him, memories of September 15, 2008, are as clear as day.
“I will never forget it, I was too scared to leave the building,” says Loubser.
<div id="attachment_37534" style="width: 210px" class="wp-caption aligncenter"><img loading="lazy" decoding="async" aria-describedby="caption-attachment-37534" class="size-medium wp-image-37534" src="https://www.forbesafrica.com/wp-content/uploads/2018/10/GettyImages-94887185-200x300.jpg" alt="" width="200" height="300" srcset="https://cms.forbesafrica.com/wp-content/uploads/2018/10/GettyImages-94887185-200x300.jpg 200w, https://cms.forbesafrica.com/wp-content/uploads/2018/10/GettyImages-94887185-300x450.jpg 300w, https://cms.forbesafrica.com/wp-content/uploads/2018/10/GettyImages-94887185-600x900.jpg 600w, https://cms.forbesafrica.com/wp-content/uploads/2018/10/GettyImages-94887185-768x1152.jpg 768w, https://cms.forbesafrica.com/wp-content/uploads/2018/10/GettyImages-94887185-683x1024.jpg 683w, https://cms.forbesafrica.com/wp-content/uploads/2018/10/GettyImages-94887185.jpg 1365w" sizes="(max-width: 200px) 100vw, 200px" />Russell Loubser.</div>
<blockquote>“I was convinced the world financial markets were on the brink of collapse.”</blockquote>
He wasn’t alone.
Never before had the world seen such a crash of that magnitude. Finding an investor that thought rationally was almost impossible. Panic was the name of the game. This showed in the 40% plunge in share prices across the JSE. The JSE all-share index nosedived from about 32,000 points to just below 18,000 as investors tried to save as much money as possible by exiting the risky bourses. The rand’s fortunes were no different (it weakened from XXX to the dollar and settled at XXX).
And despite repeated calls for calm, there was very little bosses like Loubser could do.
“I remember I was contacted by my regulator, the FSB (known today as the Financial Sector Conduct Authority or FSCA) and the South African Reserve Bank (SARB), and asked what we were doing about stabilizing markets.
“Other stock exchanges stopped trading and banned short selling. I said we would not do the same thing because short selling is a vital exercise that allows overvalued share prices to be brought back to market levels under controlled circumstances. And we had that,” he says.
Turns out, the former JSE boss made the right call as stock exchanges in New York and Europe that had banned trading, eventually reversed what they had panicked into.
So what was really behind the crisis?
<a href="http://www.forbesafrica.com/focus/2012/05/01/time-africa-cash-now/" target="_blank" rel="noopener">READ MORE: The Time For Africa To Cash In Is Now</a>
Simply put, greed, reckless lending, poor management and loose regulations. Bankers from mainly America cashed in on opportunities to make big bucks from buying up cheap US home loans, packaging them with better quality mortgages and then selling them on as risk-free assets known as mortgage-backed securities.
They lent recklessly even to people whose credit scores were not up to scratch. In 2006, when interest rates in the US started rising, many Americans could no longer afford their home loans and defaulted. House prices subsequently fell and the securities initially deemed risk-free were revealed to be toxic resulting in big losses. The collapse of Lehman Brothers was the match that set the crisis alight.
Big US banks like Citibank, JPMorgan and Merrill Lynch had to be bailed out by the Federal Reserve. Then chair Ben Bernanke, along with other central bank chiefs in Europe, entered uncharted waters. They printed trillions of dollars to starve of the drought of liquidity in the financial system. These unconventional monetary policies were known as quantitative easing (QE), something Japan had been doing prior to 2008.
Many South Africa banks, however, suffered minimal losses and remained sound. Even those with their headquarters in New York and London like Citibank, Goldman Sachs and HSBC. The South African Reserve Bank (SARB) governor at the time, Tito Mboweni, explains why.
“Mine was a basic Tzaneen approach”, says the former governor referring to the tropical garden town located in the Limpopo province of South Africa. “You don’t adopt what you don’t understand,” he adds, speaking of the synthetic derivative products used by American bankers in the build-up towards the crisis.
“Thank God I didn’t understand a damn thing. Growing up in Tzaneen helps, it kind of makes you slower but that saved the situation,” he says with sarcasm.
Looking back at what the former South African governor describes as a traumatic time when headline inflation reached 11.5% &#8211; the worst in two decades – and prime lending rates spiraled to 15%, he says one of the most revered institutions in the country did the right thing by sticking to its mandate of inflation targeting.
He says its ability to act independently during that time was and still should be, sacrosanct.
Sizwe Nxasana, the former CEO of FirstRand, one of the biggest banks in South Africa, agrees SARB played a big role in averting a banking crisis in the country and a run on the banks.
“Clearly, there was a lot of concern at that time. What helped calm people down was the messaging from the SARB that the risk for retail depositors (losing their money) was low. That assurance helped.”
He also agrees that global central bankers made the right call by implementing QE.
“When you look at what was going on at that time, the response was absolutely correct. They injected liquidity, which is the lifeblood of the banking system. The impact was that confidence was returned to the banking system, although this has had some unintended consequences,” he says.
One of these consequences that arose with tighter lending criteria has made banks more cautions to lending to small business and startups, deemed more risky, even though these enterprises are pitted as the future economic-spinners and job creators for Africa’s economies.
So what are the lessons learned from the biggest stock market crash the world has seen?
For Donna Nemer, the ex-CEO of Citibank South Africa, one of the American banks that lost billions during the crisis, it’s a return to basics.
“What we saw after that were very significant changes that happened in banking. There was a far greater focus on compliance, security and risk… I believe the world has learned a lot, some of that regulation may have been too tight but the bulk of regulation was good,” she says in reference to the Twin Peaks and Basel codes that caution banks to exercise greater prudence in lending and risk management.
For governor Mboweni, the biggest lesson is to never allow the banks to run away with products that banks can’t regulate. And for the former boss of the JSE – the biggest takeaway from the historic crash is that there are no substitutes for strong institutions like the SARB and the FSCA. “People come and go but institutions must be left to continue.”
When I asked the experts whether the 2008 financial meltdown is the last the world has seen or are we at risk of another crisis? The response of caution, that there would be another seismic event that would shock the financial system, was unanimous. It’s not clear, however, where it would come from.
One of the potential triggers was the looming trade war between the world’s biggest economies – China and the US. The end of QE, rising US interest rates and lower US corporate taxes, was also flagged as a risk. Unconventional monetary policies benefited emerging markets, which offered investors better financial returns than their US counterparts, helping their currencies strengthen. The risk is that the reverse will happen or the unexpected may occur because the reverse of QE has never been tested before. The 2008 crisis took the world by surprise and many continue to worry about it 10 years on. The world is wiser, but really, is it?
&#8211; Fifi Peters

Tag: Financial Crisis

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How AI Is Supercharging Financial Fraud–And Making It Harder To Spot

Cash Is King In The Time Of Coronavirus

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