Profits Privatised Losses Socialised!

Profits privatised, losses socialised

The Hispanic investment analyst I was listening to this morning on CNN was upset. He was angry as to how an insurance company, AIG, the biggest in America, with over a trillion US dollars in assets, could involve itself with risky sub-prime investments instead of safe, sound and doubly secure bonds.

There is similar outrage and bewilderment with regard to the fate of the 158 year old Lehman Brothers, regarded as a blue-chip investment bank till even two weeks ago, and Merrill Lynch too. These were, till a week ago, amongst the most coveted places to go to work. But now, watching images of hundreds of investment bankers walking out across the plazas outside their offices, holding the contents of their office desks in cartons; it is as if there never was a sense of responsibility in the Boards of Directors that determine policy in these top-notch financial institutions.

So what really happened? We need to understand, because there will be more and more revelations and collapses, because of globalisation, and interdependency, and the common belief that risk shared is risk diminished; in America, in Europe, Japan, China, Australia, Singapore.

A lot of this is happening because of a relentless pressure to achieve higher and higher profits. Companies, banks, and Boards are constantly analysed and commented on for their performance. Accounting systems are honed to deliver results in as short a time-span as possible. The future is seen as a continuum of the travelator-like present. No CEO dares to deviate and must need understand that no tomorrow can compensate for a poorly performed today.

But naturally, big profits, month on month, quarter after quarter, cannot come without accompanying risk. And as the competition intensifies, high street banks and insurance companies start behaving like investment banks, and investment banks look uncannily like hedge funds, and the whole hyperactive daisy-chain looks normal each to each, because speculation is the common language.

And the speculative, robber-baron style activity, designed to deliver multiples in profit, replaces the erstwhile 7 to 15% returns, from boring banking and commission based processes. And this roulette wheel style of placing business bets, is conducted not just with the institutions own money and reserves, but with multiples, borrowed against such reserves, and every asset in sight, owned, pledged to it, or even committed to on paper but not yet turned into reality!

And if anybody in this frenetic food chain, fuelled by luxury condominiums, luxe holidays, first class travel, top-end cars and massive salaries/ bonuses, feels nervous; why, they just look around themselves and simply do as others, peers, superiors, everyone they know professionally, do.

Abnormal is bound to seem normal in this context. All “oversight” reboots to treat the prevailing wind as a given or constant; anxious to be up-to-date, and not be left behind in the race.

Audit looks at processes rather than the executive decisions behind them, which, unless, it violates laws, is none of their business, besides. And laws are never onerous in a capitalist system based on risk and chutzpah, especially in the richest and mightiest country in the world.

Rating agencies rate according to levels of profit achieved and not according to the degree of caution shown. Caution, as Gordon Gekko might have said, in his heyday, and much before the fall, is for wimps.

And then, when it all comes unstuck, there is a baying for scapegoats that are not easy to find. Unless, that is, one intends to punish the entire financial services sector of the Western World and probably a good deal of the globalised Eastern world as well.

Lehman, it turns out, is funded quite substantially by the Chinese, the South Koreans, the Japanese.

The point about Capitalism is that it is prone to exploiting the system. It has done so once again. And this will not be the last time by any means, no matter how much knee-jerk oversight and controls are put in.

Once, in the Great Depression, inspired by concepts of divine retribution being the just desserts for greed; the US government refused to help. It let over 11,000 US banks collapse unaided, but had to spend a decade cleaning up the mess and alleviating the suffering caused to ordinary men, women and children.

That hopefully, will never happen again. It is altogether appropriate therefore that the US government should step in to rescue any financial institution that touches the lives of ordinary people no matter how irresponsible they may have been. That is what a mighty government does. At least one that believes its own rhetoric about being of the people, by them and for them.

So, it is good that AIG has been given an expensive bridge loan of 80 billion US dollars against 80% of its equity at nearly 12%. It is also good that the government has nudged American Bank to purchase Merrill Lynch and Barclays Bank to pick up the pieces of Lehman gone into Chapter 11 bankruptcy.

Lehman may not touch the lives of ordinary Americans but letting the Chinese, the Japanese and the South Koreans down is also not acceptable in today’s world.

This is obviously not devil take the hindmost capitalism, nor the purity of a free market left to its own devices. But it is right because the consequences of being dogmatic can result in nothing but pointless pain. Of course, in the process of bailing out the collective of culprits, the government of America, of those in Europe, of all elsewhere in the free world affected by this crisis, are, as the Hispanic analyst said, letting them get away with the profits while picking up the losses with taxpayer money.

But let us remember that most financial services players too have been caught in the flytrap, and are looking not just at loss of livelihood but near or total depletion of their net worth.

Here in India we don’t allow such risk taking. We are therefore largely insulated from its worst excesses but it is clear that we can neither grow nor prosper if the free world does not do so as well. So being safe does not mean we are not sorry for our compatriots overseas. But then, on the bright side, just because they are down today hardly means that they are out.

(1,050 words)

17^th September 2008

Gautam Mukherjee

Updated version entitled "Down, but not yet out" published in The Pioneer, OP-ED Page on September 22, 2008 and online at www.dailypioneer.com

Pay the Piper Never Mind the Tune

Pay the Piper Never Mind the Tune

Sailing the ship of state is, at all times, an expensive proposition. In India, for over fifty years now, ever since the last vestiges of Gandhian austerity faded away, we have been treated to the spectacle of excessive government spending, on itself, and the way it works. This ranges from the housing, security, entourages and junkets of our elected leaders, both at the central and state levels. It continues unabated in the spendthrift manner the bureaucracy, in turn, conducts itself. There is little or no accountability to the public. Most of this expenditure is off-budget and tucked under various heads. It dwarfs the sanctioned direct cost figures by many times.

It is therefore something of a wonder that this country continues to grow. There are much richer, more developed, albeit smaller countries, that make the business of government a simpler, more efficient, and less expensive affair. But India takes its cues, probably from the Mughals and the British of yore, neglecting, conveniently, to focus on the fact that their establishments and equipage were nowhere near as vast in absolute terms!

So, it stands to reason that putting yet another raft of large figures on the table in the nature of a recurring bill, tends, inevitably, to irk. That is why most of the bigger operating expenses are not displayed for public scrutiny, except in a theoretical sense, under charades such as the RTI.

But when an item of expenditure pokes the public in the eye, being in the public domain, supported ultimately by our taxes, we tend to react adversely. It is another matter that this sense of our proprietorship is largely belied by the government’s cavalier reliance on its sovereign borrowing and inflation inducing deficit financing. But be assured, we citizens are not required to give our permissions, even as we pay the bill with interest! The moot point, as always, is, are we getting anything like our money’s worth?

But, leaving the grand macro-economics, the ultimate liability and cost-benefit questions aside for a bit, it must be admitted that when it comes to the government servant’s salary hike, it is indeed long overdue. And it is hard to imagine any of the recipients being more than shrug-worthily happy. This, despite an average net jump of over 30 per cent. That is why, we, the public, must stay unsurprised when the 6th Pay Commission’s recommendations, endorsed on the eve of our 61st Independence Day, with an upward revision, and with retrospective effect from January 2006, are met with more sighs than cheers.

The numbers, given the size of our gargantuan bureaucracy, are neither negligible nor huge, compared, for example, to the farm loans waiver, or the cost of armaments. The total cost of implementation of the Pay Commission’s recommendations, to benefit 55 lakh Central government employees, is about Rs. 17,798 crore annually. This excludes the arrears, those retrospective benefits inevitable in a system that grinds both slowly and fine. The back pay will, in fact, whack the national exchequer with a single blow of Rs. 29,373 crore, and additional hikes beyond the suggestions of the Commission will cost another Rs. 11,000 crores annually.

And then there’s the pension entitlements of our many central government superannuated. All this comes on top of the existing central government wage bill of roughly Rs. 30,000 crore per annum. So, the total, under various heads, will look more like the Rs. 71,000 crore farm loan waiver after all. And coincidentally, it will make about the same difference to the state of affairs in government, as far as the public is concerned, as the loan waiver has made to the poor farmers.

And the foregoing does not take into account the Commission’s impact, if its recommendations are implemented, in the States. The States may be notoriously profligate, but will be under moral pressure nevertheless to give their babus as much as the centre does.

If one is not churlish, it should not be anyone’s case to grudge the government servant his pay hike. But having said that, in the public mind, the sheer size and multiplicity of our government is incomprehensible. It is this, and the fudging of our real deficit figures, that might see the ship of state run aground yet, as it did in the USSR.

There was a time, in the fifties, when business, industry, the private sector and services were all in their infancy, when it could be argued that it made sense to employ five to do one man’s job. It represented a measure of welfarism in a land of little opportunity and fitted in nicely with the Fabian Socialist cum Soviet derived statist thinking of the times. But later, particularly nearly two decades on from the open sesame of 1991, it is clearly an unwieldy government we have, bossy, unfriendly, ponderous, and, taking into account the natural ingenuity of the Indian people, in the way.

We have a robust democracy today and a free press/media, but one that is largely unable to deliver change. Most of our political energies likewise go into managing each other rather than contributing to the progress of the country. Perhaps the answer, Ronald Reagan and Margaret Thatcher fashion, lies in less intellectualism, less partisanship, and a determined effort to cut down “big government” that has proved inefficient all over the world.

We need no longer fear that the government is the sole repository of faith for the common man. All that was self-serving socialist propaganda after all, and may ultimately account for most of those sighs over cheers on the part of government employees.

At least we can be sure of one thing today--government may still be the biggest employer but not perhaps the preferred one anymore. We have a big fiscal deficit problem of course, much bigger than we officially admit, estimated by the World Bank at nearer the 10 per cent mark, when one adds in all the election year sops, the PSU losses and State Electricity Board bad debts.

In any case, it is much higher than the wildly optimistic 3 per cent the government cites. The government knows this, but it is banking on buoyant GDP growth rates to keep itself afloat. But shouldn’t the government, a much smaller one, content itself with responsiveness to the public and governing instead?

(1,050 words)

Gautam Mukherjee
September 10th, 2008

Also published by The Pioneer on 16th September, 2008 on the OP-ED Page as "Just pay the piper!" and online at www.dailypioneer.com