Ex European Union commissioner finds new job as chairman of Goldman Sachs London...

[Lexicus]

Fraud isn't really a concept in economics.

Actually not true, but in a way you're right! Contemporary mainstream economics essentially erases fraud from its theoretical purview - one of many glaring problems with contemporary mainstream economics.

Although, again, you wouldn't find it as such. It would be under the heading of supply and demand.) Saying that a financial crisis is caused by fraud isn't really any sort of explanation. Economically speaking, fraud doesn't cause anything. Unless - and this is an important sine qua non/I] - it is followed by some sort of panic. (As, for instance, news of the Brexit did to the stock markets. Then you do have an economic consequence.) So, if an event of fraud causes loss of trust, you may have a cause. But as a rule, that would not be a major event. In any case, the actual cause would not be the fraud itself, but the loss of trust among interested parties. It would be different if, say, an entire company had a policy of committing fraud; that, indeed, could have major repercussions. (Think: VW diesel scandal.) It still wouldn't result in a financial or economic crisis though. For that to happen you need an entire line of companies acting on economically unsound policies.

I grow weary of repeating this in this discussion but - you don't know what you're talking about.

And of course "an entire line of companies acting on economically unsound policies" is exactly what caused the economic crisis. This is due to something called "control fraud" which is a type of fraud where the CEO runs the company as a fraudulent entity for self-enrichment.

There was a bubble in the housing market and the reason it hyperinflated and came to this ruinous point is because the CEOs were all running the classic control fraud strategy of

1- buy or originate massive amounts of bad debt, that you know is bad, but you don't care because,
2- you can record massive profits in the short-term by ignoring the fact that the debt is bad, and
3- you structure compensation (throughout the whole firm, not just for yourself) such that it is mostly determined by short-term profitability.

In this way, you can loot the bank and when (when, not if) it collapses and has to be bailed out by the government, you're already rich.
There were other secondary fraud epidemics - in the appraiser market for example, because they needed people who would attach needed (ie, higher than market) prices to properties.

The FBI warned about this in 2004, the appraisers were warning about it as early as 2000.

 

[Agent327]

Yes, I'm sure the FBI are very active as an economic watch dog... Oh, wait, they aren't.

It's interesting how you consistently manage to miss the point. The reason why fraud isn't an economic concept, is because it's a legal one. But try explaining that to someone who's never visited an economics class...

 

[Hygro]

Yes, I'm sure the FBI are very active as an economic watch dog... Oh, wait, they aren't.

It's interesting how you consistently manage to miss the point. The reason why fraud isn't an economic concept, is because it's a legal one. But try explaining that to someone who's never visited an economics class...

Control fraud is a model explaining the outcome of agents in a structure responding to incentives.