Allocating Resources: Financial Fraud vs. Terrorism

Interesting trade-off:

The FBI has been forced to transfer agents from its counter-terrorism divisions to work on Bernard Madoff’s alleged $50 billion fraud scheme as victims of the biggest scam in the world continue to emerge.

The Freakonomics blog discusses this:

This might lead you to ask an obvious counter-question: Has the anti-terror enforcement since 9/11 in the U.S. helped fuel the financial meltdown? That is, has the diversion of resources, personnel, and mindshare toward preventing future terrorist attacks—including, you’d have to say, the wars in Afghanistan and Iraq—contributed to a sloppy stewardship of the financial industry?

It quotes a New York Times article:

Federal officials are bringing far fewer prosecutions as a result of fraudulent stock schemes than they did eight years ago, according to new data, raising further questions about whether the Bush administration has been too lax in policing Wall Street.

Legal and financial experts say that a loosening of enforcement measures, cutbacks in staffing at the Securities and Exchange Commission, and a shift in resources toward terrorism at the F.B.I. have combined to make the federal government something of a paper tiger in investigating securities crimes.

We’ve seen this problem over and over again when it comes to counterterrorism: in an effort to defend against the rare threats, we make ourselves more vulnerable to the common threats.

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Posted on January 9, 2009 at 6:54 AM • 32 Comments

Comments

Clive Robinson • January 9, 2009 7:46 AM

The question is what other more human crimes have been neglected.

We know that post 9/11 that several investigations against NY police bit the dust.

What other crimes by US “security” personel have gone uninvestigated, and how much damage has this done to the confidence of the US people in the countries governance.

HJohn • January 9, 2009 8:05 AM

There is no doubt in my mind that they are spending too much money on the wrong things.

To be fair, however, if they were focusing on the financial and another terror attack occured, we’d be here discussing whether their priorities were wrong in the opposite direction. While I think they should spend less on counterterrorism, it’s not hard to understand why one would prioritize life and death threats over fiscal ones.

I’m sure we will see it shift though. When we were focusing on the economy 9/11 happened, and when we focused on terrorism the financial collapse happened. A few years ago, people were more worried about terrorism and a government was elected on that issue. Now people are less concerned about terrorism and worried financially and we just elected a government based on that. In a few years, the pendelum may swing back, or shift to something entirely different. And, if history is any indicator, we’ll take a hit where we are not looking.

Anonymous • January 9, 2009 8:14 AM

The general point is good, and there’s some merit to the specific, though I suspect that in this last administration, a decrease in financial crime investigation would have happened anyway; terrorism being as much an excuse as a reason for it.

Xyz • January 9, 2009 8:46 AM

@HJohn

“Now people are less concerned about terrorism and worried financially and we just elected a government based on that.”

That’s not evident at all; the elected government has roughly the same foreign policy stances and subscribes to the same corporate nationalist “bailout” economics that the outgoing government created for it. The only difference so far is that there are rumors that the President-Elect is willing to talk with Hamas. That’s all. Voters have signed up for a surge of troops to Afghanistan, as well as bailouts for the Big 3 — Iraq and Wall St. all over again, respectively. Pile on an economic stimulus package that promises to be bigger than the Bush one, and exactly what is different??

Carlo Graziani • January 9, 2009 9:22 AM

Clive hit it on the head. It’s been clear for years that the FBI’s focus on terrorism has come at the expense of all criminal investigations, certainly not only ones directed at financial fraud.

I would go one further: even in anti-terrorist investigations, the FBI and the DOJ appear to have lost the ability and the will to build actual criminal cases, opting instead for fast-track, high-profile, press-conference-worthy busts in under-investigated “cases” that lead to enormous court embarassment, in those cases where they are actually forced to take their charges to court.

The mandate to “break up terrorist plots/cells” and the “ticking time-bomb” mentality that attends our national terror-hysteria apparently prevents the Feds from even attempting to build the sort of criminal cases against terrorists that the UK cops successfully built against those would-be liquid bombers in 2006.

This is really sad. The organization that once played legal and successful high-tech surveillance and investigation games against the mob, and that could often manage undetected surveillance of KGB agents around New York and D.C., is now so afraid it might be blamed for letting an attack through that they now pounce first and investigate later, if at all. It’s also worrying that to the extent that a culture of legal obligation once existed among FBI field agents, that culture has been so weakened by a decade of flabby, lazy investigations.

Brandioch Conner • January 9, 2009 10:06 AM

Was this ever in question? There’s only so much money and time and agents available.

When you start spending all three on extremely unlikely investigations you sacrifice the necessary investigations.

@HJohn
“To be fair, however, if they were focusing on the financial and another terror attack occured, we’d be here discussing whether their priorities were wrong in the opposite direction.”

Maybe you would. But most of the people here understand security better than that.

“When we were focusing on the economy 9/11 happened, and when we focused on terrorism the financial collapse happened.”

Are you attempting to imply some kind of causality there? Because it does not exist.

“And, if history is any indicator, we’ll take a hit where we are not looking.”

So, without looking them up, name three previous terrorist attacks by foreign extremists inside the USofA. Not attacks outside the country on embassies or military installations.

The extreme rarity of terrorist attacks has been discussed here, over and over and over.

It’s easier to name three or more recessions without looking them up. And yet those recessions were not preceded by terrorist attacks.

Enquiring Mind • January 9, 2009 10:25 AM

I suppose I need more information to accept this: What, exactly, is an F.B.I. “anti-terrorism resource?” What does an agent with an “anti-terrorism” tag do that wouldn’t already be done? I suspect that they have still been monitoring the U.S. markets, except they replace the phrase “looking for scumbags” with “looking for terrorists.”

old guy • January 9, 2009 10:27 AM

How’s it go again, “post hoc, ergo propter hoc”? Excuse me for not googling it if it is wrong.

It was a culture. Even Greenspan, who many held in high esteem, thought that Wallstreet was smart enough to police themselves.

derf • January 9, 2009 10:41 AM

The FBI has always been financially motivated. If you can’t show a significant loss from a computer breach ($100k or higher), for example, they’re just not interested in hearing from you. $50 billion is enough to get them off their collective duff.

realist • January 9, 2009 10:59 AM

“The FBI has always been financially motivated. If you can’t show a significant loss from a computer breach ($100k or higher), for example, they’re just not interested in hearing from you.”

@derf

With due respect, you’re buying into horse-hockey P.R. excuse the FBI gives.

The FBI has always been politically motivated.

If you can’t show loss to a significant campaign contributor ($100 K or higher), they’re just not interested in hearing from you.

If you can show any loss to a corporation with political influence ($100 K campaign contributions, lobbyist expenditures), then the FBI and DoJ will figure out how to inflate the loss to get it over the $5000 CFAA threshold.

2Easy2Worry2MUCH • January 9, 2009 11:04 AM

But actually in a rather ironical way the posts referred to in this entry show how we might have granted a spectacular and systemic victory to terrorists! I wonder if they (the terrorists) knew all along that this would happen. If so, then they’re likely much cleverer than we’ve given them credit for and maybe we had better really be worried — oh no it’s happening again! Or are they just putting the lessons of history to good use? Can anyone enlighten?

George • January 9, 2009 11:18 AM

Perhaps the most visible example of “in an effort to defend against the rare threats, we make ourselves more vulnerable to the common threats” is the agency we love to hate, the TSA. Their dubious attempts to prevent the rare threat of another 9/11 terrorist attack make passengers’ property more vulnerable to the very common threats of theft, loss, or damage. To my simple little mind, “security” encompasses protection from all threats; and a system that focuses only on very rare (but very spectacular) threats while ignoring or facilitating more common (and more mundane) threats is not “security” at all. But the appointed “homeland security” experts apparently know better than that.

Also, by forcing crowds to wait at checkpoints for screening, the TSA has made passengers themselves vulnerable to suicide bombing and IEDs, actual terrorist tactics that are far more common (and far simpler) than airplane hijacking. This failing is obvious and frightening to anyone who uses an airport, but Kippie seems utterly oblivious to it. (Could that be because he and the other people who make TSA policy travel by government jet and never set foot in public airports?)

On the other hand, the FBI eagerly embraces powers and tools specifically meant for terrorism for the Drug War. Their use of national security letters for drug cases has been documented, and most likely they’ve taken advantage of warrantless wiretaps for investigations having nothing to do with terrorism. And various prosecutors have had time to continue their fight against the serious obscenity threat. While there is certainly a tendency for officials to focus on threats that are rare but high-profile (and career-enhancing), ideology certainly is a factor in the failure to protect the nation from financial meltdown. An administration that regards any interference with “the free market” as abhorrent and greed as virtuous will not put any priority on investigating fraud and abuse in high places.

djb • January 9, 2009 11:36 AM

We could say that this is a classic demonstration of trade offs: In order to address a particular vulnerability or problem, another problem probably won’t receive the attention it deserves.

We could also say that this is an example of the perennial security problem: Scarcity of resources. When there are more problems than resources, something will fall by the wayside. We’d like to think that what falls by the wayside is determined through deliberative risk management. More likely, it’s decided based on politics and agendas.

I see another possible reason: Follow the money. Since 2001, chasing terrorists has been a sure way for the FBI to (1) get lots of funding and (2) increase policing powers while (3) not having to show consistent results for the investment.

Public outrage at financial scandals requires expensive investigations and trials, with no guarantee of conviction. These are burdens for the FBI. Public fear of terrorism simply puts dollars and power in the government’s hands with far fewer checks, balances, or commitments to use their resources well.

realist • January 9, 2009 11:42 AM

“The organization that once played legal and successful high-tech surveillance and investigation games against the mob…”

@Carlo Graziani

Yeah, remember mobster Whitey Bulger and his FBI controller John Connolly.

“Miami jury convicts ex-FBI agent in 1982 killing”
http://www.usatoday.com/news/nation/2008-11-06-fbi-trial_N.htm

“MIAMI (AP) — Former FBI agent John Connolly was convicted Thursday [6 Nov 2008] of second-degree murder ….

“Connolly is already serving a 10-year federal prison sentence in the corruption case. He was indicted in 2005 in Miami for the killing of Callahan, 45, whose body was found stuffed in the trunk of his Cadillac at Miami International Airport in August 1982. He had been shot at least twice.

“Confessed mob hit man John Martorano testified that he shot Callahan — at one time a good friend — based on Connolly’s warning that the gangsters would probably all go to prison if Callahan talked to the FBI about an Oklahoma businessman’s killing a year earlier.

“A cornerstone of Connolly’s defense was that his job as a top FBI organized crime-buster meant dealing with unsavory characters — “top-echelon informants” in FBI parlance — who possessed sensitive information about top Mafia kingpins in Boston.

“But Flemmi, Martorano and other mob figures testified that Connolly made sure the gang was shielded from prosecution for numerous crimes, even multiple murders, and supplied information about possible turncoats or “rats” in their own ranks that needed elimination. Prosecutors said at least two other men who were FBI informants died violently because of Connolly’s leaks.”

kangaroo • January 9, 2009 11:45 AM

Seriously Bruce, do you believe that this was an unintentional trade-off?

We know the political ideology of the current administration (not much longer!), and we know that “regulation” was intentionally discarded.

When you pretend that economics is somehow autonomous from politics, culture, religion, etc., your bound to mutter nonesense like your quotes on this piece.

PackeagedBlue • January 9, 2009 11:58 AM

Article from Reuters, Jan 05, 2009, FBI…had launched on of the largest hiring blitizes in its 100 year history.

Everybody wants money and power from disasters today. GRR.

Alex P • January 9, 2009 12:08 PM

I’m not convinced by the articles. A lot of the lax attitude comes from Mr. Bush, Mr. Greenspan and the Republican party trying to have “less government” which they equate to less rules and accountability. Their philosophy, as Allen Greenspan admitted, was wrong. One can argue that as a result of this philosophy they spent that money elsewhere but the primary reason this all went down hill is because their base philosophy was wrong. Had 9/11, Afghanistan & Iraq not occurred we’d probably be in the same mess we are in just with not as much federal debt from the war on two fronts.

Pat Cahalan • January 9, 2009 12:23 PM

@ Brandioch, HJohn

HJ> “To be fair, however, if they were focusing on the financial
HJ> and another terror attack occured, we’d be here
HJ> discussing whether their priorities were wrong in the opposite direction.”

BC> Maybe you would. But most of the people here
BC> understand security better than that.

To be fair to both sides, the general public discourse would definitely be heavily slanted towards whether their priorities were wrong in the opposite direction (let’s be completely free of illusions here, the general public would be screaming their collective heads off). So we would be talking about it here, but only in the context of “Egads”.

Clive Robinson • January 9, 2009 12:59 PM

Folks,

Please remember that the financial crisis although not compleatly global has certainly effected most of the first world countries.

Arguing that GWB / AG etc are responsable is a little dubious.

Lets be blunt most countries failed to regulate their financial markets. The liberation started in the Thatcher / Regan years and nobody has seen fit to slow things down.

Take Hedge funds for instance the most that was done to regulate them in the UK was when the FSA advised that they should not be used as investment vehicals by individuals…

Then there was Naked Futures Trading, thats about as close to rekless behaviour as you can possibly get and makes spread betting look positivly tame by comparison.

The simple fact is that since before the LMX spiral at Lloyds in London the financial markets had run out of traditional finance and where inventing new ways to bring in “new money” investment.

In order to do this they had to promise high returns and there was quite a bit of “robbing peter to pay paul” going on in one way or another.

Put simply times where good and a feeding frenzy developed, and new instruments where invented as “hot potato” games where high risk was sold as low risk with high returns.

Everybody appeared to ignore the basic advice “If it looks to good to be true, then it is to good to be true”.

When people ignore traditional financial metrics (such as mortgages to <=3*income) then problems are going to happen.

But blaiming individuals is pointless, it was a collective failier by nearly all polititians who basicaly did not want to stop what they saw as a “good thing” whilst ignoring the lessons of history such as the Dutch Tulip Bulb market colapse.

old guy • January 9, 2009 1:09 PM

Clive,

Even though it was a global event, we (U.S>) are/were world leaders. From what I gather, the U.S. was spear-headed bundling these bad loans as investments. This was possible because of the culture or philosophy of our leaders. It is true that the philosophy could have been influenced by forces outside of the U.S., though.

old guy • January 9, 2009 1:31 PM

Thank, parca.

I still don’t buy that the FBI lost oversight of financial crimes because they concentrated resources on terrorism.

Fraud Guy • January 9, 2009 1:42 PM

From discussions with an agent and some police, going back to 90’s, as well as attempts to get law enforcement interest in various crimes against companies I worked for.

FBI used to start taking an interest in financial crime at the $50K level. Especially on internet crimes, they were the only ones with the resources to collect the information necessary.

In 2002, I was advised by a Postal Inspector working on a multi-million fraud ring that the FBI had pushed their minimum over the $500K level, which curtailed the resources he had to track his fraud group (which he finally pulled down in ’04). He got some help because it was an international ring with ties to at least one ME country.

By 2005, some local LE in the midwest were able to get the local DA to step in on a $200K fraud ring, because the FBI and the US Attorney would not touch under “millions”. It was also commented that local DA had raised his threshold because of the lessened presence of the Feds (giving him more financial/fraud crimes to pursue). If our 5 figure loss was the only one, they wouldn’t have been interested.

JimFive • January 9, 2009 2:22 PM

@Clive,
I don’t mean to be a grammar nazi, but I’ve seen it quite a few times.

The word is spelled “failure”.

JimFive

Adam • January 9, 2009 2:43 PM

Here’s the thing. Eight years ago the “.com bubble” was bursting, Red Herring was probably considered mainstream, and there were more IPOs, takeovers, mergers, and so on than there have been over the past several years. How much more was happening then that could go wrong? Much more. To say that bringing far fewer prosecutions is directly related without pointing out these other facts seems less than honest, whether the original assertion is true or not.

Clive Robinson • January 9, 2009 3:59 PM

@ JimFive,

“I don’t mean to be a grammar nazi”

No worries, I’m one of the first to admit my spelling is not what it should be.

And unfortunatly the current access I have to the Internet (a mobile phone) does not have a spell checker.

Carlo Graziani • January 9, 2009 4:22 PM

I’m with Clive. Everyone is responsible for losing their own money in the (latest) popped bubble, irrespective of whether they live in the U.S. or abroad.

This is a very old story. International investors are constantly searching the globe for promising opportunities, so called “emerging markets”. When they find one they rush in. Sometimes it works out, sometimes a lot of people lose their shirts — especially those late getting out.

The US real-estate market and its derivative securities were just the latest “emerging market”. And while US regulators and market players have a great deal to answer for, adding “misleading poor innocent foreigners into losing their money” to the considerable gravamen is silly.

Just like everyone else, the poor foreigners were perfectly happy to accept their eye-popping returns when the bubble was growing, and subscribed with their whole hearts to every bubble-deprecating utterance of Greenspan’s. They would have been among the first to squawk had the Fed actually done its job and taken away the punchbowl when the party got going. But now the bubble has popped, destroying all that wealth, and the German foreign minister would like people to think that German banks were misled into buying US mortgage bonds and attendant derivatives. Give me a break.

Mike • January 9, 2009 5:13 PM

My wife points out that Enron and Tycho happened well before 9/11. The financial stuff appears to be more of that. It seems like an erroneous correlation.

Clive Robinson • January 10, 2009 12:58 AM

@ Mike,

“My wife points out that Enron and Tycho happened well before 9/11.”

And a whole load of other companies as well.

Basicaly a companies share price should be determined by a number of factors based on real asset value and real profit. Not some artificial value cooked up by accounting tricks.

Unfortunatly investors in the Atlantic WASP countries lost sight of the real value and chased the trick value.

When company executives have an average life of 27 months (ranges from18-36 depending on who you listen to) their decisions will be short term in view.

Therefore the temptation to use tricks to boost shareholder value and jump ship is enormous.

One trick that was often used was the takeover or merger of companies who’s assets appear undervalued. And in the process you re-value them to new silly values.

The cost however was significant borrowing and paying very high fees to the people that put the deals together. Which comes back to haunt the shareholders in short order. So another aquisition is required etc etc.

Now an interesting thing happened at the banks and investment houses. For some reason that is difficult to explain cohearantly, they stoped diversifing and all started investing in exactly the same things.

Now as a company you have to appeal to the investors or your share value plumits. So you have to compeate with these other types of investment. So you have to jump on the same merry go round.

This further inflated the bubble on these investments.

It became clear to many that it was not sustainable but it was not in tha majorities interest to do anything but stay on the merry go round, or start a new one.

Some realised that this realy was a hot potato game. So what they did was broker deals wherby they borrowed money put it into mainly risky business and then by washing it through financial vehicals made it look like good risk investment and sold it back to the very same people they had borrowed the money from…

Now this forced companies to compeate still further for investment, which could only be achieved by cost cutting. Workforces where downsized or outsourced. But costs still had to be cut so the outsourcing moved off shore.

Unfortunatly this was probably the final nail in the coffin. As this removed money from the home money supply and moved it into other countries…

And so the money spiral that had developed was just like the more obvious pyramid selling, and the merry go round stops when the money supply slows or stops.

The layoffs and offshore outsourcing had removed the small investor who now needed to start selling to stop their houses being repossesed etc…

Effectivly the money spiral behaved just like a hurrican hitting shore.

Greed and a short term view made the market, the politicians and everybody else where happy to let it run. But as history shows it had to stop at some point.

The silly thing is, is that very little has changed, a house is still a house, a ton of coal is still a ton of coal the intrinsic value has not changed, just the perceived value.

Oh and ask yourself where the money for the financial bail outs is coming from, where is this vast untapped supply of finance?

And so the spiral game starts again…

Doug Bedell • January 13, 2009 7:53 AM

This is a really good question. I’ve seen the same thing happening in nuclear power plant communication capacity. Visitors centers have been closed, community outreach pulled back, with evident disdain for communicating, all in the name of “this is as terrorism era.” Wrongheaded as can be for a technology that needs public understanding.

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