Why do we like reading about financial scams so much?

A reader asks: why do we like reading about financial scams so much?

Archer replies: The novelist Gore Vidal once said that “Every time a friend succeeds I die a little.” It would be nice to think that this kind of thing only afflicts intellectuals and artists, but that would be wrong. Vidal differs from his fellow human beings only to the extent that he is willing to admit to the impulse.

Much the same is true when we read about financial fraud; there is a guilty frisson. This can come from an appreciation of the scam itself – that someone thought of it, that someone fell for it. It is book-ended by the smug self-assurance that we ourselves would never have fallen for something so transparent. Maybe. Maybe not.

In truth, there are all kinds of frauds and all kinds of victims. Ponzi schemes are perennial favorites, maybe because they can go on for a long time and siphon off huge sums of money. Bloomberg recently reported on a “former Chicago commodities trader arrested and charged with fraud for lying to clients” about everything from a “non-existent collection of 122 luxury cars” to “phony returns that exceeded 200%.”

And there’s more, as Bloomberg wrote, “When one victim tried to redeem $190,000 of her investment, Galles (the portfolio manager) told her “’among other things, that he had switched banks, Tyche (the fund) had been the victim of fraud, banks and wire payments were not working properly, and he was ill,’ according to the government.” So fake up and down: fake billionaire invests in fake investments to generate fake returns. Pretty standard fare as these things go, but a good story nonetheless. This is the kind of thing readers love.

But why leave it at fake returns when you can create an entire universe that runs on an imaginary currency that can be used to buy other imaginary things and produces sometimes real, but ultimately not so real, returns? And inside this world, there is perfect coherence; it’s a thing of beauty, but it tends to evanesce when it encounters a dollar-based reality.

Celsius Network is a cryptocurrency lending company that went bankrupt. Its founder and former CEO was arrested. Bloomberg’s Matt Levine summarized the matter as follows: “Celsius was allegedly engaged in two related investment scams: There was its business, which involved getting customers to deposit cryptocurrencies with Celsius, promising them safe yields of as much as 17% on their money, and then lending it out to crypto hedge funds; and there was its token, which was a form of quasi-stock in Celsius, a way for investors to bet on Celsius’s success. The business was allegedly a scam because Celsius couldn’t generate safe 17% yields (obviously!), and the token was allegedly a scam in the normal way that penny-stock promotions are scams: Celsius allegedly lied about how good its business was to get people to buy its token.”

Celsius was started in 2017, when 10-year treasuries yielded a little over 2.0%. That yield would drop to below one percent in 2020. Safe, double-digit returns would seem like kind of a stretch during those years. And yet. Crypto spins its own web of logic, and people will believe what they want to believe.

In my old hometown there was an annual comedy sketch show produced by the parents of children attending a certain grade school. In one year, around 2008, it included a skit poking fun at the local mayor and town council who were bringing in a consultant to help invest the town’s dwindling pension fund assets, post-financial crisis. The consultant, one Bernie Made-Off, arrives with armful of charts, including one in the shape of a pyramid. Laying out his case, he concludes with, “… and then I invest your money based on a proprietary process I like to call ‘none of your business.’”

Heads nod all around. Where do I sign? says the town council.

So to our love of a good scam story, there’s finally this: no matter how many dumb things we’ve done, it’s comforting to know there’s always someone out there who’s done something dumber.

Woof.

P.S. - As long as we’re on the subject of Gore Vidal, there’s this one. He has written a dismissive review of one of Norman Mailer’s books on the subject of something or other. They are both at a party in New York for Princess Margaret, no less, and Mailer, famous for having stabbed his wife a few years prior, crosses the room, throws a drink in Vidal’s face, and slugs him.

Vidal is undaunted. As reported in The Guardian, he takes out a handkerchief, wipes a dribble of blood from his mouth and declaims, “Once more words fail Norman Mailer.”