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G.E. Is Accused of $38B Fraud (nytimes.com)
122 points by airstrike 59 days ago | hide | past | web | favorite | 91 comments




One point that WSJ that NYTimes calls out too is that Markopolos is working with a hedge fund in releasing this report (that I believe is shorting GE stock). He's doing this so he can get paid up-front and not have to wait for potential whistle-blower payout (which takes years). While this doesn't mean his accusations are fake, but it's important to take these into account when evaluating the claims.

https://seekingalpha.com/article/4286597-markopolos-short-re...


Just because Markopolos will profit from his work doesn't mean his work is bogus. In fact, if his work proves to be bogus, he most likely won't profit, and his reputation will be damaged forever.

When GE people go on CNBC and make all kinds of carefully lawyered statements that sound like denials but aren't actually categorical denials, they're also getting paid.

The GE people get paid whether or not their statements hold up over time. Given that, I'd put more weight on Markopolos because he actually has skin in the game.


The hedge fund shorting GE will profit from the value of GE dropping due to the bad news, it will profit from the value of GE dropping if there's an investigation, and it will profit if the accusations turn out to be true.

There's no reason to think Markopolos won't profit if the accusations are bogus, because he profits from the market reaction, not from the actual merits of the accusations. In fact, his experience in the past tells him that even if his accusations are true, they're unlikely to result in successful investigations, and if his accusations are untrue, he's unlikely to face consequences for it.

Also, whilst the people who go on CNBC to defend GE are paid to go on, they're paid a fixed salary, they generally aren't particularly incentivized to boost the stock price.


>There's no reason to think Markopolos won't profit if the accusations are bogus, because he profits from the market reaction, not from the actual merits of the accusations.

The strength of the market reaction is contingent upon the strength of his claims.


I'd like to recommend the book:

The Myth of the Rational Market by Justin Fox


Well put. My knee jerk reaction is to frame Markopolos as the villain here but he does stand to lose much more if he is wrong. That said it is a dangerous game to be playing that can/will have ripple effects on all the folks working at GE that aren’t complicit in the fraud.


Setting up a logical rock and a hard place for poor Markopolos with this one.

If he shorts the stock, he has a bias. If he doesn't short the stock, different people would probably be saying "if he is so certain, why isn't he putting his own money in?".

At least the logical outcome makes sense; everyone in the financial press should be considered untrustworthy at all times on all topics.


You always hear about "the market can remain irrational longer than you can remain solvent." If you can convince the market you're right, I guess there's a lot of money to be made. It's an interesting incentive to search out and call out bullshit.


> While this doesn't mean his accusations are fake

It is my understanding that Markopolos was paid to evaluate the company, and not to deliver a particular result.

His money is in providing the results of his investigation, thus being paid when he delivers them.

There is no need to come up with convoluted conspiracy theories. Occam's razor and all, and also the fact that GE is more than capable of hiring lawyers to defend their bookkeeping.


Here is another look at the GE insurance business with some napkin math regarding the adequacy of their reserves: http://brontecapital.blogspot.com/2019/08/one-more-brief-com...


They hold a non-trivial amount (1,816,994 shares, valued at 19M on filing date, a lot less now) of GE stock: https://fintel.io/i/bronte-capital-management-pty

edit: added value


Wow I didn't know that, he must be sweating.


Other than assuming his accusations are flawed, how else would one "take into account" his motivations?


> stems from understated liabilities in its insurance business, misrepresentation of its cash situation, and improper accounting for its acquisition of a stake in the oil field services provider Baker Hughes.

So it stems from a dispute between the opinions of "fraud hunter" Harry Markopolos and the professionals employed by GE.

This seems to be a "Everything Everywhere Is Securities Fraud" situation.

https://www.bloomberg.com/opinion/articles/2019-06-26/everyt...


During the last financial crisis GE nearly imploded because GE financial was a hotbed of fraud , poor accounting and risk management. It’s not inconceivable that the same practices came back during the last boom years and and are only coming up now because someone looked. The thing is it might be a good buy because it probably won’t blow up nearly as fast as people think


Anyone paying attention to GE will know that it has not had boom years since the recession.


The stock did triple from its bottom before crashing down in the last year or so. Fundamentally I’d agree with you though


If you think G.E. is bad, I encourage you to take a deeper look at Ford and gasp in shock and awe. The 2008 financial crisis didn’t treat either of these two companies well, but I’d much rather deal with G.E.’s finances than have to take on the mess that Ford is.

Ford really should have declared bankruptcy like General Motors did then in the preceding crisis, and it was only through a miracle of financial engineering that they somehow managed to avoid it. To this day, you can still see the incredible burden it carries on the company.


Ford did not declare bankruptcy because it would have taken control from the Ford family. Ford's two-tier stock structure, which goes back about a century, keeps the family in control. That would not survive a reorganization.


The issue with GE is that it sold or spun off a lot of its more marketable parts. What's left is either a focused industrial company or stuff no one wants.


Not sure if you intentionally mentioned both, but it's worth noting that G.E. is General Electric, not General Motors.


Yes, that was intentional. General Motors, the counter part to Ford as a car company, declared bankruptcy in the wake of the 2008 financial crisis. The financial practices that led to General Motors having to declare bankruptcy were largely the same at Ford.

Ford didn’t go bankrupt then, but they basically had to figuratively sell their soul in order to avoid doing so.


Ford got rid of Volvo, Aston Martin, Jaguar, and Land Rover. All of these brands have been doing poorly since Ford sold them.

Ford's relentless pursuit of cost cutting led them to keep many vehicles for far too long. Their former bread-and-butter model, the Ford Explorer, went 9 years in between platform changes. The ford Flex has been on the same platform for 11 years. The Ford Focus went 8 years without a change of platform.

Further, their cost-cutting initiatives have earned many of their vehicles poor reliability marks to such an extent that Ford Focus sales are less than half of what they were in just 4 short years.

I might add that Ford went upscale in price on a lot of its vehicles without an attendant increase in upscale features. The Ford Explorer sells about half of what it used to during its peak.

Selling off car companies was a good idea. However, poor products, poor product planning, poor reliability, and a spineless vision of the future has put them into a bad spot with no real light on the very distant horizon.


Those three companies did better every year post-Ford, with the exception of AML's latest year.


The problem is finance is so unnecessarily complex I have no idea what's going on.


Finance is necessarily complex.


Is it really though? I can understand aspects of nature being necessarily complex, but a human invention's complexity seems almost arbitrary and something to be solved for. Like, mathematics is necessarily complex because it describes the universe. Could you speak more to the necessity of the complexity of finance?


There's an interesting and compelling take on the complexity of finance here (2011): https://www.interfluidity.com/v2/2669.html


Good stuff. So complexity exists for the purpose of obfuscation but this person is saying obfuscation is required for investment.


I'm not the OP but I have an answer. Here me out, I'll start off with some seemingly irrelevant details than bring the whole thing full circle. I start off with a system that is even more complex than finance: Nature. Nature is complex due to natural selection. Random mutations occur and nature selects the mutations that aid with survival. If you iterate over this process over a long period of time you can have systems that are incredibly complex.

Note that natural selection can function at a higher level of abstraction as well. Not just at the biological level, but at the ecosystem level as well. Ecosystems that overload or are unbalanced are killed off. It's not a coincidence that most ecosystems still around in the world today are running in a steady state of equilibrium.

We can bring natural selection to an even higher level of abstraction and consider human civilization. Only the rules, cultures and behaviors that aid with the survival of the civilization live on to form even more complex systems of civilization. The global civilization that enshrouds the world today is the result of such evolution.

Which brings of full circle to FINANCE. The components rules and systems of finance are not some grand design deliberately created by an architect. The concepts you see today were formed organically and under the restrictions of natural selection.

Take banking. The theory is banking formed when people needed a place to store an abundant resource like grain. A business owner opened a grain shop and gave out paper certificates that represented grain storage. The certificates soon became so abundant that people basically began trading the certificates as cash, hence the formation of paper money. The storage owners realizing this now realize they can print these certificates out of thin air and loan it out to people. Hence the creation of loans and mortgages...

You can see how finance forms organically and the concepts that work continue to thrive while the systems that break are eliminated by natural selection.

Like biology over time this leads to more and more complex systems that somehow just work. This is the origin of complexity in finance. You will note that like biology such complexity is completely random and unnecessary like the platypus, the kiwi or the kangaroo. Finance is littered with things like the kangaroo.

Don't ask a finance guy why finance is complex. This question is better served to you by an anthropologist or a historian. The finance guy is concerned with how to out compete the other finance guy, he is not concerned with the how and the why behind the entire system.


Loans and Mortgages predate fractional reserve banking and loans in fact predate institutional banking. They are in fact created by lending out capital to other people. In institutional banks this capital was initially depositors money. The whole concept of bank runs initially existed because if people lose faith in a bank too many of the deposits are lent out to provide the money to everyone who tries to withdraw. Fractional reserve banking comes with the printing of the certificates out of air, but generally from paper money that existed and was controlled by a government acting through an entity like a central bank.


I'm just illustrating the theoretical development of banking in general to serve as an example of how finance is organically complex in the same spontaneous way biology is complex.


No. You are completely and utterly wrong. This is definitive and final.

It is very very naive to say that all the complexity in finance is necessary. It is not. Not. at. all.

We are human and as such we build many things that are needlessly complex. Much of out software suffers from such baggage. If humans can cause such systems to be overly complex, then humans can cause such a thing to happen in the finance industry as well.

You see overcomplexity in all systems that are typically built by more than one human from tax law to software all the way to: finance.

You will note that such complexity in the things humans construct is especially prevalent in things that are abstracted away from the physical world as the physical world is bound by laws that place a huge energy cost on what a person can create. When things are abstract that cost is a magnitude lower. Software and finance are vicious examples that utterly annihilate your statement.


You have posted a nice example of how computer scientists become good at programming and then think they are good at other things. Quoting from Rational Wiki:

> Kurzweil has an unfortunate tendency to think that being brilliant at computer science means every other specialty can be treated as a special case of computer science. He thinks that the genome contains all the information needed to grow a brain, therefore it is a problem of Kolmogorov complexity and computer science, therefore we will be able to simulate one on computers by 2030. Experts on the evolution of brains think Kurzweil does not understand biology and thinks the genome works like a blueprint, whereas most qualified biologists think the right analogy is a recipe that takes as a starting assumption the informational content of the rest of life on Earth. In the case of the human brain, it literally cannot physically develop correctly except in the presence of a human culture (e.g., see Feral child). This leads to a certain exasperation on the part of those who actually know what they're talking about.

https://rationalwiki.org/wiki/Ray_Kurzweil


Man. When did I say I was good at finance? I literally said I don't understand it. I don't understand tax law either, but I don't have to understand tax law to know that it is so complicated that corporations have found loop holes they can use to exploit it.

Literally tell me how this is wrong.


Finance is only complex to those outside of it. It's ridiculously simple after some basic training. I often say I get paid far too much given how simple my work is.

Just like a Python script seems magical to the layman.

Loopholes don't exist because Law is too complex. They either exist on purpose or because lawyers will hack the letter of the law in their favor, not unlike many of us on HN would do.

Your claims are just shallow, I'm sorry to say – you need to understand Finance or Law before you can really have a meaningful opinion on it. Just like Linus doesn't care what a script kiddy thinks of his kernel. Sorry if that seems blunt but hope the analogies show the merit in this reply.


My claims are shallow you are 100 percent correct on this. I do not have quantifiable evidence or statistical evidence for this as over complexity is a very very hard thing to measure.

In other replies to this thread I have provided my inductive reasoning for why I believe finance is overly complex. To your reply I will provide some counter examples since you cite yourself as an example.

If finance wasn’t over complex why does this investigative report require career forensic accountants to dig out the details?

If finance reports weren’t over complex why was GE able to hide fraud by simply changing the formatting of their reports once in a while?

I’m willing to bet even a finance expert can’t uncover fraud by looking at GE finance statements. They are so complex you need a forensics expert to find it.

Another example of over complexity is loop holes in tax law. Loop holes aren’t created intentionally. They are created unintentionally. How? Because complexity of tax law makes the creator of a loop hole unaware that he is creating it. The law maker creates a law to improve the system, the loop hole is created as an unintended consequence hidden by over complexity/

My claims are shallow this much is true. But your claim is equally shallow. Analogies and examples are shallow. If we want to move forward one of us needs a quantifiable measure of over complexity and statistical analysis of this on finance. If neither of us can offer this then we are at a draw.


> If finance wasn’t over complex why does this investigative report require career forensic accountants to dig out the details?

Because this particular company has chosen to produce incredibly complicated financial statements due to a variety of reasons. It's the exception to the rule.

Just like the Underhanded C contest[0] doesn't describe the entire universe of computer programming

And Tax Law doesn't represent the entirety of the body of Law that governs a country. Law is an entirely different beast because there isn't a BDFL who can refactor the existing code into something meaningful, and there is no unit testing to ensure the any refactored law will work as intended won't have terrible adverse effects. Legislating is a social experiment, and if you've ever been part of a group project you know how hard that can be with a handful of people, let alone hundreds of representatives or millions of voters.

My claims are just as deep as they need to be to discredit yours. I'm happy to engage in a deeper debate, but you haven't invited us to one yet. Right now this is just noise, particularly considering that you choose to take the stance of someone who thinks they're right even though they admit to being a layman, instead of asking genuine questions driven by intellectual curiosity and the desire to become better informed.

__________

0. http://www.underhanded-c.org


>Because this particular company has chosen to produce incredibly complicated financial statements due to a variety of reasons. It's the exception to the rule.

The fact that a career with the title "forensic accountant" exists to decode said financial statements mean that there are many many exceptions to the rule. So many exceptions must exist to support such an occupation that it is viable to say finance is overly complex.

>And Tax Law doesn't represent the entirety of the body of Law that governs a country. Law is an entirely different beast because there isn't a BDFL who can refactor the existing code into something meaningful, and there is no unit testing to ensure the any refactored law will work as intended won't have terrible adverse effects. Legislating is a social experiment, and if you've ever been part of a group project you know how hard that can be with a handful of people, let alone hundreds of representatives or millions of voters.

Tax law doesn't represent the entire body of law but it does represent a significant portion of finance. If that significant portion of finance is as you say a "social experiment" that results in over complexity then tax law is a good example of a part of finance that is overly complex.

>Just like the Underhanded C contest[0] doesn't describe the entire universe of computer programming

To describe a universe of things you need quantified statistical evidence about the complexity of the system as a whole. I have offered none. You have also offered none. The reason is no such evidence exists. This argument makes no movement until someone can offer such evidence as no one can make a definitive statement about finance until such statistics and quantifiable measurements are offered.

>My claims are just as deep as they need to be to discredit yours. I'm happy to engage in a deeper debate, but you haven't invited us to one yet. Right now this is just noise, particularly considering that you choose to take the stance of someone who thinks they're right even though they admit to being a layman, instead of asking genuine questions driven by intellectual curiosity and the desire to become better informed.

Your claims offer nothing. You didn't even respond to all my points. This last paragraph is subtle underhanded insult that comments on me personally rather than the argument at hand.

I have said this to absolutely no one else in this thread except you. Due to the underhanded subtle personal insults you have stated against me in your last paragraph... you are not invited to engage in deeper debate with me, you are not invited to respond to me and you are encouraged to leave. I will not respond to you anymore. You will note that I have done this to No one else in this thread except you.


> > Because this particular company has chosen to produce incredibly complicated financial statements due to a variety of reasons. It's the exception to the rule.

> The fact that a career with the title "forensic accountant" exists to decode said financial statements mean that there are many many exceptions to the rule. So many exceptions must exist to support such an occupation that it is viable to say finance is overly complex.

False. It does not follow from the existence of "forensic accountants" that finance is _overly_ complex. At best, you can argue there are certain situations that require a closer look. Forensic Accountants are hired when the words "bankruptcy" or "fraud" are in play. For nearly all other purposes, any Finance-savvy professional can read a public company's SEC disclosures like their 10-Q or 10-Ks. The double-entry accounting system has existed since the year 1340, at least, if not earlier[0]

> > And Tax Law doesn't represent the entirety of the body of Law that governs a country. Law is an entirely different beast because there isn't a BDFL who can refactor the existing code into something meaningful, and there is no unit testing to ensure the any refactored law will work as intended won't have terrible adverse effects. Legislating is a social experiment, and if you've ever been part of a group project you know how hard that can be with a handful of people, let alone hundreds of representatives or millions of voters.

> Tax law doesn't represent the entire body of law but it does represent a significant portion of finance.

No, it doesn't. The world of Finance follows GAAP or IFRS standards, not the Tax code. I know the absolute minimum about taxes and still carry on valuing companies on a daily basis. I just now how to account for differences between cash and GAAP taxes.

> If that significant portion of finance is as you say a "social experiment" that results in over complexity then tax law is a good example of a part of finance that is overly complex.

I said legislation is a social experiment, not Finance. Tax Law isn't really a significant "part of of Finance", even if it is complex. GE is not being accused of tax fraud, as far as I know.

> > Just like the Underhanded C contest[0] doesn't describe the entire universe of computer programming

> To describe a universe of things you need quantified statistical evidence about the complexity of the system as a whole. I have offered none. You have also offered none. The reason is no such evidence exists. This argument makes no movement until someone can offer such evidence as no one can make a definitive statement about finance until such statistics and quantifiable measurements are offered.

You're the one making the claim that Finance is overly complex, so the burden of proof is on you, not me.

Incidentally, in making that claim, you're implying there's a "simpler" form of Finance out there, at our reach, that we choose not to employ. That's quite an extraordinary claim, and unless you can point to what exactly is this better form of Finance, I'm inclined to disagree with your hypothesis.

As a matter of fact, if you believe that there are enough actors whose incentive are to make Finance as easy to understand as possible (professors, practitioners, the FASB and IASB members who are in charge of GAAP and IFRS rules, etc) suggests that the current state of Finance is empirical evidence that no better system is known to us. We might discover improvements as we keep investing time and resources, but as of right this second, our reality is the best we could make of it.

> > My claims are just as deep as they need to be to discredit yours. I'm happy to engage in a deeper debate, but you haven't invited us to one yet. Right now this is just noise, particularly considering that you choose to take the stance of someone who thinks they're right even though they admit to being a layman, instead of asking genuine questions driven by intellectual curiosity and the desire to become better informed.

> Your claims offer nothing.

Again, you're the one making claims, so the burden of proof is on you, not me.

> You didn't even respond to all my points.

It's not my job to respond to all your points, particularly when so many of them can be self-answered through some minimal amount of training and research. There are countless resources out there for you to understand Finance and Law. Go read on this stuff before making wild claims and people will have more patient to engage in meaningful conversation.

> This last paragraph is subtle underhanded insult that comments on me personally rather than the argument at hand.

Hardly. That's just how you choose to look at it. I'm giving you actual constructive criticism: (a) you shouldn't make baseless claims on stuff you don't understand and (b) if you admit to not being an expert in something, perhaps consider opting for a more inquisitive rather accusative tone.

> I have said this to absolutely no one else in this thread except you. Due to the underhanded subtle personal insults you have stated against me in your last paragraph... you are not invited to engage in deeper debate with me, you are not invited to respond to me and you are encouraged to leave. I will not respond to you anymore. You will note that I have done this to No one else in this thread except you.

I don't need your invitation to reply, sorry, and you can't "invite me to leave". This is not your house, it's the internet. Also, I wanted to make sure anyone stumbling upon this thread in the future would understand where I'm coming from, so for that purpose alone I wanted to set the record straight. Whether you did any of the above to anyone else is entirely irrelevant.

__________

0. https://en.wikipedia.org/wiki/Double-entry_bookkeeping_syste...


>I don't need your invitation to reply, sorry, and you can't "invite me to leave". This is not your house, it's the internet. Also, I wanted to make sure anyone stumbling upon this thread in the future would understand where I'm coming from, so for that purpose alone I wanted to set the record straight. Whether you did any of the above to anyone else is entirely irrelevant.

You don't need an invitation to insult me either yet you chose to be highly impolite and insulting. The only record a reader needs to know is that we were engaged in a debate then you suddenly chose to comment on my character and insult me. That is why this debate is over and why I will not respond to any of your points. You can continue to respond despite the fact that your responses are not welcome but the only person you are debating now is yourself.

Many people on this thread highly disagree with me. You are the only one that insulted me and therefore you will be the only one I will not be responding directly too.


It's not an insult to not know something. Nobody is insulting you...


Don't play games with me.

It's not an insult to be stupid. Yet we don't go around commenting about peoples intelligence or what they know or don't know do we? Let's be utterly clear, you made a rude and insulting comment about my intelligence. This is not a choice I made on how to perceive your statement, it is a choice YOU made to be rude. You made the additional choice to feign ignorance and play word games like this.

Games are for an audience, to help others decide who is or who isn't a winner in a game of wits. Unfortunately this is the internet, I don't care what another person thinks. If your goal is to communicate with me or convince me about something rather than play a game or perception you have failed completely.

There is ZERO possibility that I will address any of your points. There is zero possibility of any meaningful debate between you and I once you made the choice to be rude.


>The problem is finance is so unnecessarily complex I have no idea what's going on.

You're not wrong but you're not making any measurable claims. If you want to understand what complexity is "necessary" you should define necessary a bit better for the purpose of discussion. If necessary means "required for the individual stakeholders in the financial enterprise to achieve their goals" that is a productive starting point. If necessary means "required so people are happy" that is a quagmire.


I’m not even the guy who made the term necessarily complex. I used the term overly complex. You should probably ask the initial replier to my statement to define it as he introduced the term, not me.

That being said if finance serves to achieve certain goals I assume necessarily complex means a minimal set of rules and concepts that serve to achieve said goals. Overly complex means a system with way more rules and concepts necessary to achieve a certain goal.

I cannot pinpoint definitively what the overall goal of finance is. Like how it is with everyone else, the notion is vague and complex. I would love to make meAsurable claims but it is hard to do so in a topic that is relatively unmeasurable. What is the measure of complexity in finance? I don’t know. The starting point established here is the best I can come up with. If you can do better by all means do so, I would love to hear more on the science and statistical measurements of complexity in finance.


I want to say don't feel bad about being dogpiled here. Any time you find an in ordinate amount of reflexive blow back like this it means one thing, you've struck a nerve. That itself is interesting.

I'll make a point about technological complexity. It's not necessarily a uniform good. Financial engineering enabled by computers has allowed the finance industry (spit) to grow threefold in 40 years. That's of course very nice for people in that industry. For instance the finance code monkeys that are angry and downv0ting you have done extremely well.

A point, remove computers and computer machinery and the finance industry from US GDP and growth is zero to negative over those same 40 years. So that complexity has enable a large transfer of wealth from the productive parts of the economy to finance. But the total benefit is negative. And for some sectors massively so.


Struck a nerve, or just the Dunning-Kruger effect struck.

I'm not a finance code money, never was, not aspiring to be either.

The simple fact that these high-end/custom/complex finance products/services are not cheap but people buy them means that it provides value to some rich investment people. (And they usually know what makes them money.)

Computers made everything grow since there are computers. Every company uses spreadsheets, uses or subcontracts the use of tax, payroll, healthcare/benefits and accounting software. Email, telephones (modern telephony is completely computerized), and so on (basically everything nowadays depend in its current form on chips and electricity).

Finance was simply one of the most well suited aspects of the business world to benefit from computerization. So it grew a lot. But naturally we're nowhere near the "end of automation". Software is eating the world, but quite slowly, because the world is complex - as you said, however modeling it and putting some tracking indexes on it and quoting a price can be done well. (This is what MSCI do for example. Benchmark indexes are very crude but generally useful things - and their purpose is exactly to paper over the complexity of real life, of "real industry" for business analysis purposes.)


> No. You are completely and utterly wrong. This is definitive and final.

One of the properties of complex systems [1] is emergent properties; the individuals may be simple but when they interact with other individuals, the overall system exhibits behavior that may no longer be simple due to the permutations and stochasticity. There is a complexity that is inherent. In complex systems, the whole is not the sum of its parts.

Take 2 people who trade with each other (barter). The interaction is fairly simple. Now blow that up to a village. And then to a city. Then to a megacity. And suppose the individuals are more or less autonomous (we call this freedom). And they react to things differently (feedback). And then add randomness and variation. Now you have an complex economy. Then they want to do things bigger than any individual is able to pay for, so the stock market came about. Then add the effect of the environment which can harm many facets of human endeavor, now people want insurance against crop failure, shipwrecks, etc. Now you have derivatives (though arguably the world hobbled along just fine without derivatives for a while).

Complexity in finance like other things has two components: irreducible complexity and reducible complexity. If I had to guess (and I could be wrong), I would say the irreducible complexity part of finance is much bigger than the reducible complexity.

Not to say there isn't any reducible complexity -- exotic derivatives etc. are a product of pure financial engineering and one wonders if we could do without these.

But many parts of the finance system are necessary complexity, or at least necessary to power the modern economy. Else, we'd be stuck in the early agrarian world.

[1] https://en.wikipedia.org/wiki/Complex_system


Sure, for anything to even exist there must be a certain level of complexity. I am not saying all the complexity is unnecessary, I am saying that it is OVER complex.

You also break complexity down into two different concepts which I agree probably exists but we don't have an axiomatic theory of the complexity of finance so there's really no way for anyone to say definitively what is reducible and what is irreducible. For example, Which is irreducible... communism or capitalism? None of this is properly defined.

But the OP's claim of necessarily complex is completely wrong.

The spectrum of under complexity and over complexity spans an entire gradient similar to a number line. While Necessarily complexity sits on a single zero dimensional point on that number line. Referencing this number line, By probability Overly complex and underly complex is infinitely more likely than necessarily complex.

Literally GE is using complexity of their accounting statements to hide fraud. That is a case of over complexity in the world of finance. That is not a necessity. You cannot get more definitive than this. That's why I was able to use such hard language because it's literally completely true.


This also feels very much like the software engineer's desire to rewrite something they don't understand because they're sure that it's easier to rewrite than to understand. This stems from a lack of understanding that you yourself identify.


I agree with you completely. I feel that if we rewrite the finance system we'll end up with a different mess. I'm only pointing to a problem not offering a solution.

It's all adhoc design with no theory. If finance consisted of a bunch of axioms and theorems then we could find a algorithm that can optimize such a system.

However finance like software is in the domain of design. As such we construct and create such systems with no quantitative formula for creating better systems or even defining what a better system is... What formula can quantitatively measure how much better capitalism is vs. communism? Or Vice versa. None.

So you, are basically fully correct. A rewrite without formal theory on what is a better "finance" is like throwing darts blind folded. We only know the previous iteration didn't work, and we have no idea if the new design will function. In terms of probability, likely it will be nowhere near the perfection we strive for.


I'm suggesting if you studied finance you may have a different opinion. I haven't so I can't say for sure, of course, but it's hard to point in at a complex system from the outside and demand change without understanding it in the first place. It's like me walking into an operating room and demanding we "restart medicine" because it's "too complex." I'm not a doctor, who am I to say?


A Fair point. I'd prefer if arguments run on their own logical merits rather than my credentials. That being said I have studied extensively the anthropology, history and origins of finance. I have also studied economics. I have not studied advanced accounting, how to read a finance statement or tax law. I would say from this perspective I don't know finance but from other perspectives I know it well enough to comment on things finance guys just don't know about.

Also I never commented on "restarting finance." I said no such thing. I commented on high level issues that are obvious like over complexity.

That being said you can very well comment on aspects of medicine even though you aren't an expert. Medical costs and quality are out of control in the united states. Surely as a consumer of medicine you can comment on it even though you're not an expert. Would you leave all the "experts" to exclusively control the costs? Well doing so results in the broken medical system we have in the United States today. A three day hospital stay in the US costs 30,000k. Medical experts charge you this because they know the cost better. Is it logical to defer to them? No. Not being an expert on something does not preclude your judgement from being correct. You also have the advantage of not being as biased as the expert.


> I commented on high level issues that are obvious like over complexity.

What about it is more complex than necessary?


I’ll give one example. I’m sure you can think of many more.

Tax law is part of finance and is a system that is overly complex. If tax law contains loop holes then by definition it is too complex. Loop holes are created unintentionally when a creator of law adds a rule to a system. The loop hole is an instance of complexity added unintentionally and is therefore an example of unneeded complexity within the system. If a system has unneeded complexity it is then over-complex.

Do you want more? A forensic expert was used to dig through the complexity of the GE fraud. There are plenty of examples there as usually such experts are necessary when a system is complex and in the case where complexity is deliberately created to hide fraud: overly complex.


No offense, but that is a lot of words typed out that do absolutely nothing to actually refute the point of the person you are replying to.


None taken. The person I am trying to refute also didn't offer anything substantial either. I'm not a finance guy because it's complex so I can't point to specific examples of things that are unnecessary.

What I can point to is that when humans create systems that abstract we tend to make things unnecessarily complex. Our software is a perfect example. Statistically if most of the software we create suffers from this phenomenon how likely is it that our finance (which is also a very abstract system) suffers from it as well? Answer: Very likely.

If you want specific examples. The sub prime mortgage crisis was caused by a finance concept called a CDO that was so complex people could hide garbage assets away from view. Tax law (which is also a part of finance) is so complex corporations can find unintended loopholes that benefit them and harm the economy.


Well to be fair, the person who responded to you gave just as much substance as you did in your initial post.

It just sounds like you are stretching a bit - you've admitted that you're not a finance guy so it seems likely that you don't fully understand the reasons for why financial systems might be as complex as they are.

Sure, there probably are some areas that could be structured more efficiently (guessing here) but it also seems just as likely that there are many areas that are complex but for good reason.


If you studied the history of finance. Financial instruments are invented adhoc. They are not made or created as part of a grand design.

For example the theory on how banking came about or how we use paper cash to represent wealth was literally an organic concept that slowly came to be over time. People needed to store grain, so someone formed a grain storage business that gave out paper certificates as proof of storage... people started trading those certificates as if it was cash... the storage business owner realized he could just print out those certificates and loan it out... hence the creation of banking and loaning...

That's the basic idea behind how banking formed organically. It is complex not by design but by evolution.

If you studied machine learning and genetic algorithms you'll know that natural selection and random walk does not always lead to the most optimal minimum and your walk will spend a lot of time wandering the entire space of possibilities before converging on a possible sub optimal solution. Finance is such a walk. Random designs eliminated by natural selection. We are more than likely in the middle of this random walk heading towards a solution that like all of our software is more than likely a sub optimal minimum.

Nobody needs to understand finance completely to know this. They just need an understanding of the properties of the real world in general. Finance IS overly complex you and I don't need to be experts in finance to know this.


Why are you spending so much time arguing this point to anonymous persons online?


My goal in life is to prove the internet wrong.

Seriously, I don’t know why. Because I’m human? And humans do illogical things?


> If humans can cause such systems to be overly complex, then humans can cause such a thing to happen in the finance industry as well.

This is fallacious. Just because something can be so doesn't mean that it is so.

I agree with your position but your reasoning is horrible.


It sounds like an implication based off of an axiom but it is not. It is a implication using probability. I just glossed over it.

Here's a better way to word it.

IF humans create many forms complex and abstract systems which is basically a bunch of rules and concepts put together into a category called software... and if most of these systems end up being over-complex....

Then if we do the same thing of creating a bunch of abstract rules and concepts into a system and give it a different name... lets call it "finance" then by probability the same thing will likely happen again.

There, let me know if you get it. Apologies for being vague.

Basically humans tend to create overcomplicated systems when given an abstract universe to play with, finance and software are both such an abstraction. It is both an intuitive property and a statistical one as I have shown above.


There's nothing to get here.

> most of these systems end up being over-complex

You've provided no evidence for this, and I give you the entirety of mathematics as a counterexample considering it is a quantifiably as simple as possible at every step.


I can't give you exact evidence for over-complexity as the way we're using it in this topic is sort of hand wavy and not formally defined. Mathematics is different. It is axiomatic and exact. In the world of proofs and logic, I wouldn't call anything overly complex. Theorems are necessities that arise from axioms. There's even debate on whether or not these systems are actually designed. Maybe they're existing properties of the world that are discovered and therefore outside of the topic of this conversation as we're mostly referring to systems created by people.

Either way, I'm talking about the worlds outside of mathematics and logic. Science, statistics and design. This world is rife with over-complexity. I can't prove it, but it should be intuitive.

If your a normal person you can most likely think of many, many examples where systems created by people are seemingly over-complex. If you can imagine this, then I would say for this informal dialogue that is pretty good evidence for the case that overly-complex systems are abundant.


I am not seeking your advice. I am pointing out that you did not support your claim that financial instruments are unnecessarily complex. I think financial instruments are unnecessarily complex. I do not claim to have justified this judgement. You have claimed to have justified this judgement and failed to do so. I am not seeking a justification. I am pointing this fact out to you for your benefit. It's probably why people downvoted you, not necessarily because they disagree but because your argument was very bad.


I don’t think people downvote others because of reasoning. People usually downvote strictly from disagreement. People who are disagreeing with me probably work in fin tech. That’s how human psychology works in my opinion. But this is off topic, if you disagree with my opinion on why the downvoting is occurring, then we can agree to disagree, That being said... let’s get back on topic.

I am 100% aware of what you disagree with. You don’t disagree with me, you disagree with my reasoning, and what I am doing is lending more detail to my reasoning so that it is more clear the foundations it is built off of. My last statement served only to do this, it is not written to give you advice.

You gave a counter example, I stated how your counter example is not what I am referring to. Since i have no scientific proof or statistical evidence proving my point I made an appeal to your intuition. Intuitively if you can imagine many abstract systems we design to be overly complex and if such systems are abundant then it is very likely finance which is also an abstract system we designed holds such a property. Is this reasoning flawed or not?

Actually to be honest I think people are voting me down because I used the words: “I have no idea what’s going on” then proceeded to say that someone was completely wrong. Credentials trump logic in human psychology as nobody believes the arguments of someone who has claims he has no idea what’s going on even though his arguments are sound. I think it’s abundantly clear now that I do have greater than expected understanding then what my initial statement implied.


You need to do some self-examination. Give it some time.


What the hell is this suppose to mean. Elucidate, because whatever this is, it sounds like a rude and subtle insult. If it is, this conversation is over.


Yea this is getting a lot of headlines.

The fact that they put up a gefraud.com and they call them "GEnron" is interesting.


> The company’s shares plummeted on the news, falling by 8 percent to a seven-month low. Mr. Culp [CEO of GE] responded by buying $2 million of G.E. stock.


Title should be adjusted to end with “by activist short sellers”


Well that is the point of activist short sellers; not too different from security researchers having a monetary incentive with bug bounty programs.


Short sellers lose money if they’re wrong.


Anyone have any insight into what he's doing as a business model? Basically having a fund, investigating companies (as you would have to do anyways to vet a potentially large investment) and then if you find malfeasance, corruption, etc. shorting the stock and exposing it publicly. You could probably pair it up with a management consultancy or something that could swoop in and charge a fee to clear out the corruption and get things running back on track if you wanted to go long on the stock too. I realize this may be somewhat like what activist investors do but I'm thinking more focused on corruption fully rather than just underperforming companies. Something like what Bill Browder did in Russia back in the day (and if you haven't read his book Red Notice, it's an incredible read, has helped lead to Magnitsky Acts around the world, but I won't spoil it)


The term for this is "activist short seller". It's pretty common. Citron Research, Bonitas, and Spruce Point are some of the firms I've heard of that follow this business model, but there are tonnes of them.


It'd be nice if unaccredited investors could invest in this undisclosed hedge fund :).. I for one believe Markopolos.


If you have a margin account, you can always short GE, but if GE's claim is right, the damage has been done.

Let's also start with which hedge fund it might be.


is this another pension scam a la toys r us and usps?


Fuck. This is not good in either situation. If it's market manipulation, then shorters will be out in force. If not, then an org the size of GE will be a catalyst.


Can you explain why more shorters means share prices drop? Is it all perception or am I missing something? Sorry n00b here.


Share prices usually drop if there's a ton of short demand, because to short a stock -- you literally borrow a stock and then sell it. The idea is, you'll buy it back later (hopefully at a lower price) and return it to who you borrowed it from (hopefully for a profit).


You have the definition of shorting right, but it doesn't mean that shorts cause a stock to drop. Beyond meat has had a crazy amount of people shorting it, but that hasn't stopped it's 800% rise


Short selling does directly cause the stock price to move down due to increased selling pressure.

What you're seeing with BYND is not directly because of the act of short-selling, but the knock-on consequences and market dynamics. In part that has to do with the fact that BYND has very few of the total shares floated, all available shares were shorted (around 50% of float), and what little organic retail demand for their shares existed was enough to move the price materially. Eventually the market cap crossed the threshold for inclusion in the Russel 2000 index, forcing ETFs tracking the Russel to buy BYND shares too. This all caused the short-sellers to get liquidated, forcing them to buy at whatever price was available. This in turn liquidated more shorts. And so on. That was a textbook short squeeze.

IMO the reason it didn't go all the way up to the moon is that brokerages were charging 140% APR to short the shares, so we were seeing consistent turnover in the short positions.

The answer to "Who would buy BYND shares for $250" is "the trader and/or index fund who has no choice." It's worth more than 25% of the companies in the S&P 500, but only has $87M in revenues and 200 employees in a warehouse in LA with a handful of pea patties.


It doesn't matter who is shorting etc

It matters if people are looking to sell the stock. Existing owners can also plummet a stock by selling even if there are no shorts.


Shorters _are_ people looking to sell the stock at the current asking price with the hope that they can buy the underlying equity at a discount in the future. Your statements are literally at odds with one another.


no they're not. I said that existing holders and shorts can both cause a dip. It doesn't matter if its shorts or longs doing the selling.


I took

> It doesn't matter who is shorting etc

to mean that short activity had no consequence.


Short-selling does cause the price of a stock to drop because the process of a short-sale is this:

(1) You borrow shares from your broker, and agree to return the same number of shares at some point in the future without regard for what they'll be worth then.

(2) You then immediately sell those shares on the market. Increased selling does cause downward pressure on shares as a result, in the same way that increased buying pressure pushes shares up.

(3) Eventually, you re-purchase shares for what is ideally a lower price and return them to the brokerage. Your profit (or loss) is the difference in price between when you short-sold and when you re-purchased, minus the fees your brokerage charged you to borrow the shares.

Where it gets a little messy is if the stock price goes up, you run out of margin, and your brokerage forces you to purchase shares to cover your position. Then you're buying them at whatever price you can get them. This in turn moves the stock further up -- far enough, and it may cause other short-sellers to get liquidated too, and so on. The stock may go parabolic like BYND and TLRY. This is called a short squeeze.


Share prices don't drop because of shorts. Tesla had a ton of people shorting them but it still didn't drop immediately in the short term. So does beyond meat. That doesn't change how beyond still surged 800% post ipo




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