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