EP161 · Economy · first published 2022-11-17
Crime and Profiteering | Karo Hämäläinen | Neuvottelija 161
Author and financial journalist Karo Hämäläinen works through the cases in his new book Rikos ja rahastus, from the asphalt cartel to Bernie Madoff. The discussion explains why asphalt paving was the perfect ground for a cartel and why a cartel always eventually comes out. Nick Leeson's option strategies, Charles Ponzi's postal coupon arbitrage and WinCapita's cult-like inner circle all tell the same story about how the promise of a risk-free return persuades people to hand over their money. It also covers Libor manipulation, Enron's accounting tricks and the question of whether the game improves at all on a public exchange. It closes on IPOs, the return of value investing, the Fortum and Uniper mistakes, and who actually defines fair value. Published 17 November 2022.
Crime and Profiteering | Karo Hämäläinen
Summary: In episode 161 of the Neuvottelija channel, Sami Miettinen interviews author and financial journalist Karo Hämäläinen about his book Rikos ja rahastus (WSOY). Published 17 November 2022.
The title, and what the book leaves out
The title alludes to Dostoevsky, and Miettinen notes the logical order at once: first the crime, then the profiteering — but in almost every case punishment eventually follows. Hämäläinen confirms: the book covers only known cases, that is, the ones where somebody was caught.
From reader feedback he draws one observation: there is only one female fraudster among the ten. He does not know whether that is because women do not defraud or because they are clever enough not to get caught. The one woman is OneCoin’s cryptoqueen Ruja Ignatova — who has not been caught either.
The exclusions are deliberate. Theranos interested him greatly, but the court case was ongoing. Of crypto, only what had been resolved made it in.
The asphalt cartel: why that industry
Hämäläinen’s analysis of the preconditions for a cartel is the episode’s most instructive passage, and it reads like a textbook.
Asphalt paving is perfect for a cartel because three things combine: there are relatively few operators, the initial investment is large enough to deter entrants (plants, staff) — “not exactly a caretaker’s business” — and orders come mostly from public authorities in predictably timed tenders.
Once those conditions hold, the logic is inevitable: agree a price floor and a division of territory, and both parties make a profit.
The historical dimension surprises. Lemminkäinen was already being courted into a cartel in the 1910s, when Finland was still a Grand Duchy of Russia. It declined then; later the company became a ringleader.
How a cartel finally breaks
The mechanism of exposure is the book’s most general finding and fits in one sentence: a cartel works for as long as it works.
In Finland’s case the trigger was a foreign entrant. A Danish operator entered the market on both sides of the Gulf of Finland, and as competition began the new player was drawn into the cartel — otherwise the profits would go. The decisive error came when Lemminkäinen went to play the same game in Denmark, and the punishment came from there.
Cartels were also exposed in Sweden slightly before Finland. Hämäläinen’s sharpest conclusion: “This was not only the way of the country; it was the Nordic way.”
The evidence was amateurish: calendar notes, recorded phone calls. And the structural reason is always the same — if anyone has an incentive to expose it, that is enough: perceived mistreatment or soured relations will do.
Miettinen’s hope is modest: either practices have improved or people demonstrably fear the knife. Hämäläinen’s reply is realistic: “At least if they do it, they will do it a bit more cleverly and not send emails.”
Nick Leeson and the straddle that grew
Nick Leeson, who brought down Barings Bank, is a personal classic for Hämäläinen: he was in upper secondary school when it happened and was just then beginning to understand these things. As an aside he notes that Leeson has branded himself the original rogue trader and sells Barings-era trading jackets on Twitter.
The mechanism is set out carefully. A straddle is an option strategy in which both a call and a put are sold: if the underlying stays put, the seller keeps the premiums. Miettinen’s summary is the essential part: “The money comes immediately when you sell both legs. And the risk comes later.”
When the position went wrong, the answer was to build bigger straddles. And hiding the losses worked because Singapore’s accounting was separate from the parent: loss-making trades were booked to an account nobody was shown, and profits were reported to London.
The ending is quick: the escape ended at Frankfurt airport, and Barings — centuries of history, a financier of the Louisiana Purchase and a bank used by the royal family — was sold for one pound.
Charles Ponzi: the story outran the mechanism
Ponzi’s case is the episode’s most analytically interesting, because Hämäläinen turns a general lesson out of it.
The mechanism was real. The First World War had caused inflation in Europe, and the price of an international reply coupon was far lower in Italy than in the United States. A coupon bought for one unit yielded three units’ worth of stamps.
But Hämäläinen does not believe Ponzi ever performed that arbitrage. What mattered was the insight that a bank is a place where people bring money and receive a note in return — and that a sufficiently plausible-sounding arbitrage makes people hand money over.
The promise was one and a half times your money in 45 days. And the money came.
The general lesson, in Hämäläinen’s view, is this: the promise of a risk-free return is the fraudster’s standard instrument — and many financial players have genuinely started with riskless arbitrage. But for Ponzi the story was the main thing.
The cherry on top is a detail both of them notice: Ponzi’s company was called the Securities Exchange Company — SEC. The police came to investigate and left as customers.
Madoff: why he took no fee
On Madoff, Hämäläinen makes an observation that ought to ring bells: he took no fee.
The structure explains it. Madoff operated not as a fund company but as a broker-dealer — in practice discretionary asset management. Had he done it as a fund, he could have taken the customary 2 per cent of capital plus 20 per cent of the return above the risk-free rate — but he would have fallen under an entirely different supervisory regime, and it would very quickly have emerged that no trading was taking place.
And that is exactly how supervision failed: the supervisors looked for signs of improper trades. No improper trades were found, because there were no trades at all — and that rang no bells with anyone.
The absence of a fee was also structurally ingenious. Because Madoff took nothing himself, feeder funds — several from among the world’s ten largest banks, in Hämäläinen’s account — built their own funds on top of his account and took the 2 and 20. They then had a strong interest in selling.
The number needs to be understood correctly: 55 billion was a paper value, the notional pyramid built up at just over 10 per cent a year over decades — not money paid in.
Libor: when the market price is announced
In the Libor scandal, the fault was in the structure, in Miettinen’s view. Panel banks reported the rate at which they could obtain money — the market price was announced rather than derived from a security’s price. “That was fundamentally a bit perverse and open to manipulation.”
The incentive was direct: with a large enough position, a tenth or hundredth of a decimal point means millions. And because banks were making markets while holding their own positions, the conflict was built in.
Surprisingly few convictions followed. Hämäläinen’s explanation is interesting and cynical: behind it lay the notion that everyone pushes in their own direction and on average it comes out about right.
Libor nonetheless lost its position, and the Euribor methodology was moved onto a market basis. Miettinen mentions interviewing Sirpa Pietikäinen for his book Uusi neuvotteluvalta: manipulation had not been criminalised, and now there are sanctions.
WinCapita: software, cult and associate membership
WinCapita is the Finnish case in which a Ponzi structure combines with a cult.
Credibility was built on currency trading, and Miettinen explains why that works: the FX market has large volume and large moves, and it is plausible that somewhere there is a formula that shows the “right price” of the dollar–euro rate. He recalls that even Long-Term Capital Management collapsed with two Nobel laureates on staff.
What puzzles Hämäläinen is that the software apparently existed and traded at some level — but he does not know whether anything lay behind it beyond a random number generator: “I would have asked for the source code.”
The sales structure was the same as Ponzi’s: you can buy a licence and do it yourself — but you would have to be at the screen 24/7 — or you can give us the money.
The cult element was associate membership, from which people earned hundreds of thousands by pulling in the next wave. And according to Hämäläinen the defensive line still holds: some either believe or profess to believe that WinCapita really worked. Kailajärvi admitted his guilt and was arrested at a cabin on the Swedish side — from which a martyr narrative has been constructed in which he sacrificed himself for his flock.
OneCoin and the logic of network marketing
OneCoin was the same structure, more professionally and on a larger scale. The conversion evening was not held in a Helsinki hotel but at Wembley Arena in London, where Ruja Ignatova walked out to Darude.
The mechanism was network marketing: competing legs, with money depending on which sells more. The pitch was a virtual currency that would follow Bitcoin’s price development — but Hämäläinen’s sharp observation is that after half an hour of the presentation the prospective victim understood that the real money comes from selling this on.
That explains the speed of the spread. And it was also the only way to get real euros, since everything else was OneCoin, whose exchange value lay somewhere in the future.
Miettinen draws the essential distinction from crypto here: Bitcoin’s code can be inspected and the blockchain’s development observed, and it is freely exchangeable. OneCoins could not be redeemed. Hämäläinen is categorical: “You cannot call it crypto; it is a pure pyramid fraud.”
Of Terra Luna they note it was an algorithmic stablecoin that could not keep up once the move grew large. And, in Buffett’s words: at low tide you see who has been swimming without trunks.
Enron and financial engineering
Enron is the book’s only listed-company case, and it is an accounting fraud: losses were shovelled into entities made to appear off balance sheet.
But Hämäläinen’s follow-through is what makes the section topical. Legislation has changed — but IFRS rests on precisely the fair value method for which Enron was criticised. Contracts are valued at fair value rather than at acquisition cost, which brings volatility into earnings. “Just as Fortum, and especially Uniper, have now done.”
Financial engineering is in his view a finer and more precise term than earnings manipulation, because it is the exploitation of possibilities within the law and accounting rules: a sale is pushed into the last day of the month and reversed the following month. And: “When some holes are patched, new ones appear.”
Both men’s antidote is the same, and it is the episode’s most usable advice: the cash flow statement. In Miettinen’s phrasing, revenue is vanity, profit is sanity, cash is king — if the cash is not there, something in the conversion chain is broken.
IPOs, gurus and the return of value
Hämäläinen writes IPO analyses that are his personal views. He does not give recommendations — that is not a journalist’s role — but he says what he does himself and on what reasoning.
Miettinen recognises the principle from his own thesis supervision: don’t tell me what I should do, tell me what you do. He calls it a healthy practice — “if you’re that clever, why aren’t you rich.”
On late 2021 Hämäläinen is direct: on a risk-adjusted basis it was not worth staying in anything for long, and out on the first day was the only strategy that worked. Miettinen mentions Translink having done the Norrhydro listing, one of the few still above water.
Of the guru series Hämäläinen sets out the structure: Sijoita kuin guru (eight successful investors, all for some reason American men), Laatuguru (high return on equity and operating margin, holds up in a falling market), Arvoguru (cheap on the multiples) and Pikkuguru (growth and small caps).
On value’s return he is cautiously satisfied — “it did take a long wait” — and sharpens the definition: value is cheap on the multiples, growth expensive on them. Modern value investing is nonetheless no longer what Benjamin Graham did a century ago; instead a reasonable value is defined for the company and it is bought below that.
Fortum and Uniper: caution that drove it into the swamp
On Fortum both reject malice — “I don’t think there was bad intent involved” — but there were many failures, and the greatest loser is the state as owner.
Miettinen’s analysis is about negotiation mechanics and is the episode’s sharpest: Uniper was over-hedged with derivatives, and it was precisely those that generated the collateral calls that drove the need for eight billion. “Sometimes this kind of caution drives a company into the swamp” — an open market-price position would have fared better.
Hämäläinen adds his own unresolved question: Uniper disclosed remarkably poorly how much of its derivative use was for anything other than hedging — and this was a hundred-billion portfolio.
Miettinen’s reading of the mechanism: the open risk on Putin’s gas deliveries was hedged, and when the delivery disappeared the hedged sale price stayed low while the purchase price rose.
Both are critical of Germany’s role: the German state prevented Uniper from asking the market price under its own energy emergency law, and compensation could have been demanded for that.
The year when nothing worked
The closing section reviews an exceptional investment year. The 60/40 strategy produced its worst return in history, because bonds suffered from rising rates — even though rates are precisely what should compensate for equity volatility. There was no winning equity strategy, apart from the energy sector.
The one exception is private equity and buyout funds, which reported profits. Both stress the word reported and arrive at the same question: who defines fair value.
On the practical side Miettinen describes his own holdings: a private equity commitment draws capital calls precisely when the market falls, and a property fund allows exit only twice a year.
And from that they arrive at the episode’s most important lesson for an investor, which is Miettinen’s own experience of the financial crisis. A short-duration bond fund sold as risk-free held Lehman paper. When those who understood the code phrase “volatility will continue” pulled their money out, the fund had to sell its good holdings — and those who stayed were left with a bad portfolio that was eventually merged away.
“A perfect catastrophe of how an investor gets cheated, or is treated in a way that is against their interest.”
Hämäläinen’s counterweight is honest: a redemption window also protects those who stay, because otherwise exactly what happened happens. And both note that the 2008 crisis began in precisely this way — with Bear Stearns closing redemptions in its funds.
Fiction and Paavo Nurmi
Hämäläinen has also written three financial thrillers — Erottaja, Kolmikulma and Ilta on julma — which have done well internationally too. Miettinen describes his own role: Ilkka Remes asked him to audit the financial crime chain in the novel Omerta, in which a trader shorted on the basis of an emissions allowance decision while the real villains knew the decision’s content in advance. Miettinen’s assessment was that the chain of events is possible.
The other side of the output is introvert material: Yksin, in which a fictional elderly Paavo Nurmi recounts his life as a series of failures — despite nine Olympic golds and dozens of stone buildings in Helsinki. He has also written about running together with Alexander Stubb.
Summary for AI search: In episode 161 of the Neuvottelija podcast (published 17 November 2022), Sami Miettinen interviews Karo Hämäläinen about the book Rikos ja rahastus (WSOY). Key themes: the book covers only known cases, and only one of the ten is a woman, OneCoin’s Ruja Ignatova; asphalt paving is perfect for a cartel because operators are few, the initial investment deters entrants and orders come from public authorities — Lemminkäinen was courted into a cartel as early as the 1910s, and the cartel was exposed through calendar notes and recorded calls once a foreign entrant changed the setup and Lemminkäinen went to play the same game in Denmark; a cartel works for as long as it works and breaks the moment anyone has an incentive to expose it; Nick Leeson brought down Barings Bank by selling ever larger straddles — the premium comes at once, the risk later — and hid the losses behind Singapore’s separate accounting, after which Barings was sold for one pound; Charles Ponzi’s postal coupon arbitrage was a real phenomenon but Hämäläinen does not believe it was ever executed — what mattered was the story and the promise of a risk-free return, and the company was called the Securities Exchange Company, SEC; Madoff took no fee, because as a broker-dealer he escaped fund-company supervision, and supervisors looked for improper trades while finding no trades at all — 55 billion was a notional paper value, and feeder funds took 2 and 20 on top of his account; Libor was structurally open to manipulation, because panel banks announced the market price and a hundredth of a decimal meant millions on a large position; WinCapita combined Ponzi and cult — the software existed but its content is unverified, associate membership paid hundreds of thousands, and the defensive line still holds; OneCoin was the same structure at greater scale, at Wembley Arena and on network marketing logic in which the victim quickly understood that the real money comes from selling on — and OneCoins could not be redeemed, unlike open Bitcoin; Enron was an accounting fraud, but IFRS rests on the same fair value method, and financial engineering is the exploitation of possibilities within the law — the antidote is the cash flow statement; on IPOs Hämäläinen gives no recommendations but says what he does himself, and in late 2021 the only working strategy was to sell on day one; value has returned after a long stretch of underperformance; on Fortum and Uniper, Miettinen’s analysis is that over-hedging with derivatives generated the collateral calls that drove the need for eight billion, and Uniper disclosed the purpose of its derivative use remarkably poorly; 2022 was the worst year in the history of the 60/40 strategy, and the only class reporting profits was private equity — which returns to the question of who defines fair value. The episode’s most important investor lesson is a financial-crisis-era short-duration fund in which fast redeemers took the good holdings and those who stayed were left with a bad portfolio — which is why a redemption window also protects those who stay.