Wednesday, June 27, 2012

Gram Scams in the Information Age

The expression “con man” is a short form of “confidence man,” which describes a scammer who employs ruses that gain the trust of his victims. Scams that target vulnerable groups, such as the elderly, using confidence tricks have been around a long time. However, the loss of privacy brought about by the Internet has allowed scammers to concoct more enticing stories because of ready access to personal information.

 My father-in-law lost $6250 in a matter of hours to a scam last year, and this month, almost exactly a year later, my father became a target of scammers using the exact same techniques that tricked my father-in-law.

The theft from my father-in-law unfolded in the following way:

The phone at his house in Holmen, Wisconsin rang and when he answered his 24-year old grandson Isaac spoke on the other end with his familiar greeting of: “Hi grandpa, how are you?” Isaac, who lives in another part of the state about 150 miles away, went on to recount a disturbing sequence of events that had just happened to him. He had travelled to Canada with some friends to attend a funeral. They were pulled over for speeding and cocaine was found in the car. He needed $5950 within two hours to pay the bond to get out jail. He begged his grandfather to please wire him the money and not tell anyone because he didn’t want it to get out what had happened.

My distraught father-in-law went immediately to the bank, withdrew the money, went to Western Union, followed the wire transfer instructions, and in addition to the $5950, paid a $300 transfer fee. Within an hour Isaac called back. He needed an additional $5000 to pay a lawyer. Still in shock, my father-in-law went back to the bank to withdraw more cash, but this time the bank refused his request. The bank manager told him that he was being scammed.

How was he being tricked? The person on the other end of the phone line was impersonating Isaac. The real Isaac was still in Wisconsin having an ordinary day at work. Phone calls to Isaac’s mother and then Isaac himself confirmed that he was not in Canada, or in any kind of trouble.

Impersonating grandchildren in severe distress is an effective technique for emotionally upending grandparents to the point at which they will suspend normal skepticism. Last week my father became the target of the exact same scam. The phone at his house in Clifton Park, New York rang and a person claiming to be my 23-year old son Tom recounted a similar story. He was in Baltimore with some friends and had to attend a funeral. Afterwards he and his friends went out for some drinks. There had been a car crash and he had been arrested for drunk driving. Then a second person got on the line, his “court appointed attorney,” who told my father he needed to wire $6300 for a bail bond, and gave him instructions on where and how to use Western Union.

As any good storyteller knows, filling your narrative with vivid and compelling details is the way to emotionally engage your audience. This story had plenty of upsetting details. My son’s “nose was broken in the crash,” a “woman had been hit and her medical condition was unknown,” police alleged that he had a “blood alcohol level of 0.12,” the charge was “felony drunk-driving,” and the jail was “rat-infested.” He needed to be bailed out immediately and he didn’t want anyone else to know what had happened to him.

Deeply shaken, my father said he would need about an hour to go to the bank to get the money. The “attorney” said he would call back in about an hour. Fortunately my sister and brother-in-law were visiting. My brother-in-law, who is a real attorney, told my father it was scam and suggested the obvious, that he call my son. Fortunately my son had programmed his cell phone number into my father’s cell phone a couple months earlier. Fortunately when my father called, my son answered immediately. My son was having an ordinary day at work in Rochester, New York and was nowhere near Baltimore, let alone in any kind of trouble.

So why is this scam so effective? My father-in-law, Dean Baldwin, was absolutely convinced that he was talking to Isaac on the phone. He thinks that the scammer dubbed his grandson’s actual voice. The article about the crime that appeared in the Lacrosse Tribune reported the following:

 "They dubbed his voice," Baldwin said. "It was his voice. He said ‘Hi Grandpa, how are you.' That's the way he opens a conversation. We would have never fallen for it if they hadn't used his voice."

Holmen Police Chief Mike McHugh said dubbing a voice is a different twist. "That would really take a lot of preplanning by the person, but it's possible," he said. "They already know a lot about the person they are faking."

Brock Bergey, spokesman for the Wisconsin Department of Agriculture, Trade and Consumer Protection, said he had heard about software that allows people to manipulate voices, but he had not heard of it being used in the Gram Scam before.

When I talked to my father about what happened, he too thought that the voice on the other end of phone was my son Tom’s. The act is very convincing. So are the thieves surreptitiously recording voices and then using software to synthesize fake conversations? My belief is that the scammers aren’t that sophisticated, and don’t have the time or technical know-how to bother with such an elaborate ruse. I don’t think that they need to. Real voices already lose much of their fidelity when transmitted over phones. I cannot tell the difference between the voices of my two daughters over the phone, but have no trouble doing so in person. For octogenarians (my father is 85, my father-in-law is 84) who rely on hearing aids for normal conversation, voice recognition over phone lines is much more difficult than they realize. All voices of distraught 20-something males are going to sound similar, and as a result the grandparents assume the person is whoever he claims to be.

What makes this scam believable is the knowledge of personal details that grandparents unconsciously assume are not readily available. The thieves are able to piece together family networks that extend over large geographical distances. Who else but a close friend or family member would know that my son, who grew up in Baltimore County, has a grandfather living more than 300 miles away in Clifton Park, New York? And when my son’s impersonator says he is in Baltimore that gives him immediate credibility because my father expects him to be in Baltimore. The scammers also know that grandchildren and grandparents that live far apart are probably not in daily contact, so the false story of the funeral will not be immediately challenged.

However, personal details about anyone’s life are not as personal as many people believe. Using Google searches, social media Websites, and online public records, it is now possible to pick any person and easily learn a great deal about his or her life story, friends and family relationships, and age and income level. The elderly in particular are unaccustomed to the loss of privacy that now pervades our entire society. As a result they are more susceptible to the kinds of unconscious assumptions that make this scam so effective.

The privacy genie is out of the bottle and it is not going back in. Everyday more and more personal data accumulates on the Web in databases that are easily searchable and will stay public forever. We all must be aware of the fact that thieves can now know a great deal of personal information about someone without knowing that person at all.

Monday, April 30, 2012

The Consumer Financial Protection Bureau: Reining in Greed

“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.”

--Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations

The assumption behind Adam Smith’s concept of the “invisible hand of the marketplace” is that if participants in a free market seek to maximize their personal gains, society will benefit as a whole even though the individuals have no other motivation beyond their self-interest. The character of Gordon Gekko in the 1987 film Wall Street expressed the idea succinctly with his exhortation that “greed is good.”

However, in practice there have been a few problems with relying completely on “the invisible hand.” First, for numerous psychological reasons people do not always act according to their self-interest. For example, many people are greedy and greed is not the same as self-interest.  Greed is a self-destructive desire that is listed as one of the “seven deadly sins.” Second, people do not always know the course of action that is in their self-interest. In our modern complex economy the best financial decision for an individual is not always obvious. Most agreements concerning mortgages, consumer financing products, credit cards, and bank accounts are complex contracts that are difficult for anyone to fully understand. Without knowledge and understanding it is not possible for consumers to act in their self-interest.

The government can do little to change human nature, but it can put in safeguards against its excesses. For example, the government can require that financial contracts be written so that consumers actually understand the agreements. To better inform consumers, in 2011 the federal government created the Consumer Financial Protection Bureau (CFPB). The purpose of the bureau is to regulate consumer financial products so that the agreements are fair and transparent. But, since its inception, the CFPB has been excoriated by the banking industry, and the bankers have unleashed lobbyists in Congress in a successful bid to limit the CFPB’s effectiveness.

The irony of this hostile action against the CFPB is that the banks blamed consumers for the financial crisis. Consumers purchased homes that they couldn’t afford, falsified mortgage applications, charged too much on credit cards, and in general didn’t understand the obligations and consequences of the agreements they signed. In other words, consumers were greedy and greed isn’t good for the banks.

However the banks want to continue the same consumer lending practices that preceded the financial crisis. Without the obfuscation and one-sidedness characteristic of many of their lending agreements, the banks feel that they can no longer profit. In other words, greed is good for the banks, except for the fact that it wasn’t, which is why so many of them failed.

Complex contracts designed to disguise inherent unfairness, benefit neither party. If a contract is so one-sided that a clear understanding of its terms would not lead to an agreement, it is better for both parties that there be no agreement. The banks should actually be vocal advocates of the CFPB because adequate regulation would insure a level playing field.

Much like the role of drug testing in sports, in which no competitor should be able to get an unfair advantage by engaging in unhealthy practices, financial product regulation should serve the same purpose – keep all players healthy.

But the banking industry continues to push for unfair advantages because greed is good. In other words, greed drives the market. At least until the market crashes, in which case the destructive consequences of greed are everyone else’s fault and everyone else should have to pay.

What is often overlooked in Adam Smith’s quote is that the butcher, the baker, and the brewer all need each other if they are each to have a complete meal. If greed ruins anyone of them, it will ruin them all. In other words, greed is not good and it is not what Adam Smith meant by self-interest.

Friday, March 30, 2012

Understanding Insurance

It is clear to me from reading public reaction to arguments made in the Supreme Court this week on the constitutionality of the new healthcare law, that many people do not understand the concept of insurance.

Insurance is a means for a group of people to share the financial burden from losses that are unpredictable for the individual members, but predictable for the group as a whole. All members of the group contribute to a pool of money that is used to pay for individual losses when the need arises. Insurance is not a means for getting other people, corporations, or governments outside of the group to pay for losses. It is the members of the group that pay for losses and share in the benefits.

Insurance agreements work best when the loss events are truly random occurrences for individuals, but have well known probabilities so that the loss rate for a large population is a known quantity. I cannot know for certain if my house will be struck by lightening this year, but I do know that it is a certainty that someone's house in my community will be struck by lightening. If everyone contributes a small amount to an insurance pool so that the total equals the expected communal cost of lightning strikes, then those that do experience lightening strikes will not suffer a catastrophic loss. Not knowing who among the group will suffer a loss that is almost certain to occur, motivates everyone to contribute to the insurance pool.

Unpredictability is what makes an insurance contract possible. Whenever loss events become predictable, the entire concept breaks down. There are two ways that predictability can enter the system.

•People's behavior: The likelihood of an auto accident is partly random and partly the result of a driver's skill and tolerance for risk. Because these traits tend to correlate with demographics, market pressures arise for insurance pools to either exclude, or demand higher payments from people who fit certain demographic profiles. As a result, teenage boys pay more for auto insurance than middle-aged moms. A person with a history of traffic infractions and accidents might not be able to purchase auto insurance. Even though in the auto insurance market people are treated differently solely because of age, gender, and prior history, these pricing practices are not considered discriminatory.

• Past events: Obviously you cannot insure the past or else no one would contribute to the insurance pool for the future. Unlike the future, the past is entirely predictable because it has happened. No state would sell lottery tickets after the drawing. No bookie would accept bets on a football game after it has been played. No auto insurance company will sell a policy to someone after that person crashed. If this were allowed all these businesses would be broke in a matter of weeks.

I feel like I am stating the obvious, but many people in the healthcare debate do not understand these points. My people are outraged that the new law forces everyone to buy health insurance, and at the same time support the provision in the law that forbids insurance companies from denying coverage to people with pre-existing conditions. But if no one bought health insurance until it was needed, no pool of money would exist to pay for claims. The insurance model would breakdown quickly and no one would have insurance. The belief that it is possible to have universal healthcare coverage without a universal mandate to contribute is completely irrational.

In fact, without the new healthcare law the insurance model will breakdown in the near future. Too much concerning an individual's need for healthcare is predictable. Age and prior history are big factors in predicting healthcare costs for an individual, and just like for auto insurance, market pressures have arisen to exclude older and sicker individuals from insurance pools, either by barring them or pricing the insurance out of reach. But, unlike auto insurance, for which most states mandate coverage in order to drive, there has not been a health insurance mandate, so there is little incentive for the young and healthy to contribute to insurance pools that pay the cost of care for the aged and ill. Financing the healthcare system through a patchwork of private insurance plans simply isn't working because the predictability of the need for healthcare undermines the entire concept of insurance.

Opponents of the new healthcare law argue that mandated health insurance is different from mandated auto insurance because people can choose not to own or operate motor vehicles. Therefore it is possible to opt out of paying for auto insurance. But the irony is that as a consequence of our mortality, the need for healthcare is truly universal. Even though many people would prefer not to pay for health insurance and to opt out of the healthcare system, that choice is not possible. Almost everyone will need healthcare at some point in his or her life and federal law already requires that emergency rooms treat all patients. That means that healthcare is already socialized.

Unfortunately the emergency room is the most expensive and inefficient place to provide healthcare, and many uninsured are using emergency room services and not paying because they have no other choice. This practice further drives up insurance costs for those that do pay and prices more people out of the health insurance market. The current system is spiraling out of control. Eventually when so few people are insured that the healthcare system can no longer cover its overhead, it will experience a financial crisis with an unpredictable outcome.

The demand for healthcare is universal and government works best when addressing universal needs. The ideologues who denounce all government interventions ignore the fact that without government action there would be no Interstate highway system, no universal electrical service, no universal phone service, no Internet, no national defense, and the list goes on. Private enterprise could not have provided these services that we regard as essential to the modern functioning of our society. The loud voices denouncing all government intervention in the marketplace ignore reams of facts. Conservatives may long for a simpler past, but I doubt many of them would be willing to go back and live in the past, and give up all the modern conveniences they take for granted today.

Obama's affordable healthcare law is not a perfect solution, but first attempts to solve complex problems always need modifications. Scrapping the law and doing nothing leaves in place a healthcare financing system that is unsustainable. It is time to stop the shouting and have a serious, informed, and reasonable discussion on how to move forward with our nation's healthcare policies. Unfortunately in our current political climate, characterized by fear mongering, rigid ideologies, insatiable greed, and blind irrationality, I don't see that happening.

Saturday, February 25, 2012

My Troubles with the U. S. Postal Service

The troubles of the U. S. Postal Service have been in the news over the past year. Unfortunately, its financial situation continues to deteriorate with no conceivable path to solvency in sight. This saddens me because I have always liked the business of the post office—the delivery of actual words on paper—typed, printed or written by hand—to any person in the United States. But, modern technology has rendered much of what the Postal Service does obsolete, and in performing the tasks for which it still has a purpose it functions badly. In fact, “self-destructive” might be a better description of its methodology.

To be fair, the Postal Service is in a position that is by definition untenable. It is suppose to function as a private company without the need for government subsidies. In principle, that would require it to keep its expenses in balance with its revenues. Of course any private corporation with falling revenues would be forced to slash expenses or face bankruptcy. The Postal Service cannot undertake either action without Congressional approval. It cannot cut services without Congress intervening at the behest of constituents who continue to demand every service that they have been accustomed to in the past. Nor can the Postal Service simply cease to exist, as is the case with most insolvent corporations.

But what does the Postal Service do today? Currently, I receive three types of mail:

• Junk Mail: The economics of the modern junk mail phenomena perplex me. It must cost a great deal of money to produce, print, and ship the myriad catalogs, circulars, and direct mail solicitations that go directly from my mailbox to the recycling bin. I have found that if I make a single purchase from a vendor, no matter how small, I will receive mail for years to come, even if I never buy another thing. How can they make money from that practice? Even I want to buy again, I have found that a Google search is faster than getting up from my desk and searching for a printed catalog. Therefore, there is no reason to keep a printed catalog, which I use to do in the past. When will the advertisers catch on to the amount of waste involved with junk mail?

• Invoices: Companies plead with me not to have paper invoices sent. Most vendors prefer that I receive statements via email and pay the bill with an electronic check. Evidently billing departments are more conscious of the cost of paper than marketing departments. However, I still receive and pay most of my bills the old-fashioned way, with paper statements, checks, and first-class stamps. I do this so that my wife can see how our money is being spent and a private email account would hide that information from her. I have heard of couples opening up an email account with a shared password just for the purpose of receiving and paying bills. That is not a bad practice to consider.

• Periodicals: I still like to read printed magazines. Subscriptions have become incredibly cheap as publishers struggle to attract eyeballs just so that they can charge for advertising. I think publishers have given up getting readers to pay for the actual cost to produce and mail magazines. I might be old fashioned in regards to periodicals because the paper format is probably on the way out.

But, it’s only in this last category of mail—periodicals—that I find enjoyable to receive. However when it comes to the delivery of periodicals the Postal System is at its worse. I speak both as a receiver and sender of periodical mail. I routinely receive weekly magazines two to four weeks late. I’m certain that it is not because of the publisher.

I also work for a publisher—The Correspondence Chess League of America (CCLA)—editing and mailing a periodical—The Chess Correspondent. That job requires me to navigate the byzantine practices of the Postal Service’s system for Periodical Mail.

The price for mailing a periodical is computed using a multi-part, multi-page form 3541, laden with cryptic jargon and acronyms, which is so complex that no one at my local postal office understands it. When I walk into the post office, I am not a customer that the postal clerks want to see. My arrival means that one of the clerks will have to take money from me in payment for a service that they are unsure of how to price. In the bureaucratic, CYA (cover your ass), mentality of employees of the Postal Service, it is better not to have customers than risk being held responsible for messing up completion of a form.

The clerks all complain that they have not been “properly trained” in filling out the periodical mailing form. You would think learning the form would be a routine part of the job. However, the training for periodical mail involves spending a week at a special school in Oklahoma. As a result it is not uncommon for the clerks to procrastinate on processing my periodical mailings.

In mid-December, I mailed an issue of The Chess Correspondent that vanished for nearly four weeks. It showed up in no one’s mailbox, including my own mailbox just 3 miles away. (I always send a copy to myself to make sure they process my mailing.) Only after I returned, spoke directly to the postmaster, and asked for my money back, did issues start being delivered.

I find it ironic, that my post office would rather not process my periodical, which is about playing chess using the mail, a practice that appears to be about as old as the game itself. While much of modern correspondence chess has migrated to the Internet, there are still many correspondence players who continue to send their moves on postcards through the mail system. Many players enjoy receiving hand written postcards from distant opponents, and believe or not, prefer the slower pace of a correspondence game played in the manner that it was for centuries before the Internet— using regular mail.

Companies in trouble should be happy to see paying customers. Even better, I am a customer with a publication that promotes the use of the U. S. Postal Service. Instead the postmaster told me when I complained that forced cutbacks have decreased the resources that he can allocate for periodical mail service.

In the mean time I’m encouraging more of my readership to subscribe electronically. Like most periodicals, we publish dated material that needs to be read by a certain deadline. Given the delivery problems, it would be cheaper and easier for our organization to not have to deal with the Postal Service. For a discount on membership fees, The Chess Correspondent can be delivered in PDF format via email. Transit times are measured in seconds, not weeks. Better still, if you lose it I can easily send you another one. That is something I can’t do for the many members still waiting for their paper copy, nearly three months later.

Tuesday, January 31, 2012

Eric Cantor’s Misunderstanding of Compromise

The 60 Minutes interview with House majority leader Eric Cantor broadcast on January 1, 2012 had a number of moments that revealed the causes of the current dysfunction in Congress. One particularly revealing response occurred when Leslie Stahl asked him about compromise. He said:

"Comprising principles, you don't want to ask anybody to do that. That's who they are as their core being."

Stirring, noble words, but deeply misguided when the issues that Cantor is being asked to compromise on are considered. Somehow, Cantor has pulled off the ultimate misdirection when it comes to governing. Instead of debating the morality of what the government does, he has re-framed the debate to be on the morality of having a government.

Cantor is part of a loud contingent in Congress who refuse to compromise on budget and tax policies because according to their narrative, government itself is the problem. The constant refrain from Republicans, like Eric Cantor, that the normal activities of government are immoral, leads me to question why they even want to be a part of an institution that they abhor. If their idea of a utopia is a place without a government, maybe they should consider moving to Somalia, a country where a functioning central government ceased to exist many years ago. Of course the results have been far from utopian. With no government, Somalia has been racked by widespread famine and constant civil war, and its chief industry is international piracy.

The preamble of the U. S. Constitution sums up the reasons for the existence of the federal government: "to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity,.." Obviously for the government to exist and carry out its mission, Congress must appropriate money through taxation, enact laws and regulations, and appoint judges and executive officials. There is nothing inherently immoral about any of these activities.

However, by framing the normal activities of government as immoral, Cantor gets to have it both ways. He can avoid the tough moral choices that actual governing involves. He can say that his failure to effectively govern is the better outcome. In short, he can avoid responsibility for doing his job. But, this approach is dangerous and destructive because it paralyzes government, poisons relationships, and worst of all cheapens morality.

When even the most basic functions of government are subject to debate, it becomes impossible for the government to operate at all. When Congressmen and staffers are denounced for doing their jobs, it becomes impossible to foster productive, cooperative relationships between people who need to work together. When all disagreements are framed as battles between good and evil, it becomes impossible to recognize real moral issues.

In fact, the vast majority of disagreements people have with their co-workers, business associates, friends, and family members do not have a moral component to them. Most disagreements are about the best choice of action from a menu of equally moral choices. Since none of us are omniscient, disagreements with the people around us are a normal part of life, which is why at a young age (kindergarten) most of us learn how to compromise.

The government is a necessary institution; it must be funded through taxes, and in the interest of the common good, it must to some extent curb individual freedoms. Reasonable people will of course disagree on the best courses of action to accomplish the goals of government, and that means compromise is necessary.

Framing normal disagreements in terms of moral absolutes, clashes between good and evil, heroes struggling to prevail against villains, makes for compelling narratives. But, the stories told are fraudulent. The only morality tale I see in the 60 Minutes interview with Cantor is the one of his hubris, self-aggrandizement, and intellectual dishonesty.