Finance and Social Media: A Dangerous Combination

Financial crises and the scandals associated with them recur over the years, and it’s no different now. After the great crisis of 2007-2008, they actually seemed destined to disappear, but the reality is that they are as relevant as ever, even though they haven’t reached the level of intensity of those years. With respect to the past, their quality has changed, as demonstrated by some very recent events which can provide us with interesting information.

I will cite four of them, three that are very similar, and one that is different due to some “new” aspects. On the one hand, I refer to the bankruptcies of Wirecard, which I have already addressed and commented on in part in this location,[1] Greensill in the United Kingdom, and Archegos in the United States; on the other, there is the question of GameStop, again in the United States. The protagonists of the first three were non-bank financial intermediaries, while the fourth saw a strange new combination between the stock market, some hedge funds, a sea of speculators, and the world of social networks. The latter led investors to carry out massive operations on a stock, whose performance on the market was entirely anomalous and led to both great gains and great losses for those who participated in the game.

I will concentrate on the first three, that have many points in common. First of all, as I mentioned, they are bankruptcies of non-bank financial intermediaries not subject to the rules of law and oversight applied to banks. In one of the cases, the absence of those rules allowed an intermediary, or better a “family office,” whose regulation is even more opaque than that of non-banks, to be owned, administered, and managed by someone who did not have the requirements of integrity set by our laws. Bill Hwang, as the fellow is named, had in fact already been sanctioned in 2012 and had to pay a very stiff fine for insider trading, and in 2014 was even excluded from trading in Hong Kong. How did institutional investors come to trust him, and give him such large amounts of money to manage? And why did the financial authorities, even without having specific responsibilities for the case, not intervene to prevent a crash that could have been avoided?

The authorities did intervene in the other two cases mentioned, but with a very light touch and without conviction, also in regard to the banks that were part of the failed groups. The interventions were late, as by now happens very often. It is incomprehensible that, in the cases of both Wirecard and Greensill, the authorities did not recognize the existence in those groups’ international networks of companies established well before the bankruptcy to prepare the process of diversion of funds to the detriment of the creditors and also minority shareholders.

This structure also entailed a strong relationship with the world of politics, that is almost always – as it certainly was in these cases – deleterious.

The bankruptcies in question were also, and perhaps above all, caused by poor management, based on: an imprudent evaluation of the reliability of the clients provided with funding, an excessive concentration of the loan book, an anomalous use of algorithms, little consideration of conflicts of interest, and a lack of transparency of the recording of credit lines and utilizations in the balance sheet. How much these elements were due to errors or deliberate behavior is difficult to say, but it is certain that when the management of those intermediaries insisted on advertising that their goals were to conduct low-risk, high-return operations, it should have been recognized that this combination couldn’t work. In the cases discussed, there were actually high risks and catastrophic returns.

It is also astonishing to recognize that the funding of these intermediaries was ensured by the massive intervention of large investors and leading insurance companies. We must ask why they funded these types of debtors. The question is even more serious if we think that some of them, like Credit Suisse, were involved in two of the bankruptcies in question, which recalls the old proverb that to err is human, but to persevere is diabolical.

A final phenomenon that unites the four scandals was the role played by the mass media. The Wirecard bankruptcy was actually brought to the attention of public opinion, and even to the oversight authorities, by the Financial Times. Something similar happened with Greensill, on which the same newspaper published over forty articles in the early months of this year, highlighting in particular the relationships between the financier at the head of the group with national and international political authorities. Media attention was strong in the case of Archegos as well, but different than in the previous two cases. The latter had stakeholders typical of retail activities, while the Archegos family office had fewer, because it operated with a maximum of fifteen clients, towards which it behaved as a classic asset manager. For the first two, media attention examined at length the cause of the failures, their consequences for creditors, and the responsibilities of the company management and oversight authorities. For Archegos, the attention was essentially concentrated on the figure of the financier that managed the company, the naivety of the clients who in reality should not have been so naive, the usual oversight authorities that don’t appear to have done their job, and finally, the deficiencies of legal regulations and oversight, that turned out to be too easy to violate or avoid and thus need to be changed.

In the case of GameStop, the media involved played the classic role of disseminating and commenting on the news, but social media platforms became true protagonists of the events. They invited millions of followers to purchase GameStop shares at a time when prices were falling due to substantial sales by hedge funds. Encouraged by social media, shareholders were able to reverse the trend in just a few days, leading to incredible gains for those who bought at the right time. Then when they began to sell, prices fell rapidly and many found themselves holding the bag, as they say. This could not have happened without social media, which says a lot about its power, that is destined to increase. We will see much more in the financial market, and for this and other reasons, scandals and panic will increase just as the crises of banks and financial intermediaries will come again, with a sense of déjà-vu.

Other conditions being equal, the media will be increasingly important in these matters, and depending on circumstances, may increase or mitigate the damage caused. The role of the media will become more delicate, and the ethical standards followed will reach an importance that is at least equal to, or even greater than, those of managers in the world of finance, who whether willing or not, are protagonists of temporary difficulties, true crises, panic, and financial and bank scandals, very dangerous events especially when they are combined in vicious circles that are difficult or impossible to stop.