I was presented with a book entitled `Other People’s Money’ by Nomi Prins. The title sounded intriguing. Who does not like money – more so, other people’s money. It is fascinating to use other people’s money and even more so to swallow it in massive doses.
Nomi Prins left the banking industry after a fifteen year climb up the corporate ladder. When asked by his friends why he did so, he answered: Goldman-Sachs. He says that when he reached the inner sanctum of that aristocratic and hypocritical organization, he realized that he had to get out. He told his boss, the head of Fixed Income Research, when he resigned early in 2002, “I know exactly what I need to do to be successful – and I have no desire to do it.” Prins says that his decisions coincided with corporate malfeasance of epic proportions which made him realize that it was more important to use his knowledge to be part of the solution rather than to continue being part of the problem. He left the firm a week later and has not looked back since then – except to examine how the collaboration among firms like Goldman-Sachs, Corporate America and Capitol Hill pumped up and then brought down the economy and other people’s futures with it.
We in India are reaching a similar state of affairs rapidly. That is why what Nomi Prins says on these matters is very relevant and very important for us, and I was to place before the concerned citizens some of the issues to which he has drawn attention.
When Prins worked at Goldman-Sachs in New York, he was an ardent Ralph Nader supporter and marched to Washington against George W. Bush’s Supreme Court enabled Presidency and against World Bank and International Monetary Fund (IMF) control of Third World countries economic agenda, while grappling with Goldman’s rhetoric on how globalization was good for its bottom line and the general future of the Universe. The fact of the matter is many investment bankers exist in a cocoon of their own self-worth and entitlement. Appearances and “spin’’ become far more important than the truth. The belief that what bankers are doing is extremely valuable pervades the investment banking community.
Prins states that the real danger the general society comes from white collar criminals. The former CEO and President of World Com, Bernie Ebbers was convicted for perpetrating America’s biggest fraud and sentenced to twenty five years in prison, pending appeal. His CFO, Scott Sullivan who played ball more expertly with Government got five years behind bars for the same crime. Prins says that jail and punishment are not the most crucial components of a system which wants to rectify itself. The larger point is the continued dismantling of a regulatory foundation which, by its very disintegration invites accounting sleight of hand.
To make things a little less in obfuscation, I must place before the concerned citizen little more of explanation and elaboration.
Quoting Ralph Nader Prins says, “The US needs to crack down on corporate crime, fraud and abuse that have in the last four years rooted and drained millions of dollars from workers, investors, pension holders and consumers.’’ These are the very players whom “our” Government is inviting to come to this country and have a free hand, and promises to do whatever “reforms” are needed.
Over 60% of US corporations paid no federal taxes during the period of booming corporate profits from 1996-2000, according to a General Accounting Office survey released on February 2004. Three months later the Senate voted to reward Corporate America with a generous gift of 170 billion $ of fresh tax cuts; (concerned citizens may recall how many lakhs of crores of rupees our Government had doled to the industrial services and other sectors by way of tax cuts, tax rebates, etc. during the last five or six years). It is puzzling, says Prins, that there was no louder public outcry against corporate fraud. The reason for the lack of a deafening shout for corporate justice is that, other than those involved in share holder, investor, and other corporate governance activism, people have other overriding concerns in their day to day life. Besides, the magnitude of the fraud involved, the amounts of money which executives cashed out, and Corporations have still hidden in their books is huge: the sheer enormity of that is almost incomprehensible. The accumulated wealth which executives secured during the late 1990s and early in the new millennium is astronomical. However, all of these things relate to senior corporate executives and business strategies focused on short term gains, at the expense of slower, longer term growth or stable business plans which would ensure long term job security with adequate pensions and other benefits.
Every time a big business merger happens, or a company cannot pay off its massive debts, or a company stock reaches new lows, or the company goes bankrupt, people lose their jobs due to lay offs. Corporations use pension funds evaluations in order to manipulate profit, in the absence of strict financial reporting transparency. Lack of transparency has contributed to inflated earnings in bull market – and severe short fall and diminished benefits to retirees when there are market downturns. According to a survey which was conducted, estimated assets of the pension funds dropped from 6.1 trillion $ in 2000 to 5.1 trillion $ at the end of 2002. US corporate pensions declined 23% in 2000, and public pension went down 18%. The companies with the largest plan, including GM, IBM and Verizon, each lost an estimate 15 billion $ or more during that period.
The Senate was raising the US debt by 1 trillion $ in May 2003; around that time there was a 300 billlion $ pension short fall for retiring workers. Health benefits for current retirees was declining sharply, and companies were using the economic downturn as an excuse to decimate corporate and Government pension plans. In our country, these throwaways of tax dues running to lakhs of crores of rupees are given by the Executive and even Parliament approval is not taken. Prins says that Congress has not mitigated employee pension risk or pushed for integrity in pension plan evaluation. Congress has increased its support for 401 K plans which put the investment risk on the employee instead of the corporations concerned, unlike the pension plans of old through which the company guaranteed a certain level of income to its retirees. Negligent or criminal corporate leadership has already depleted pension funds sharply.
This should serve as a warning to the Government employees who have been brought under the new pension schemes. One hopes that the labour organizations fight tooth and nail all such attempts by our Government to copy the US framing rules and regulations. Without appropriate employee representation at the bankruptcy cases, workers will continue to pay a high price for corporate fraud induced bankruptcy.
In passing, I wish to draw attention to a few things. Prins mentions that the banking industry’s non-current rate on C&I loans – loans for which corporations are behind in payments but on which they have not defaulted so far – increased from 2.87% to 3.01% during the third quarter of 2002, the first time since the first quarter of 1993 that it had risen above 3%. But, you try to ask any bank what its largest exposures are and to who; you will not get an answer, because the banks are not obliged to disclose the information. The situation is the same in India. Bad debts are euphemistically called non-performing assests. The bad debts carried in the books of the bank are huge; so are the periodical write-offs. But the citizens are none the wiser as to which parties secures these favours (or loans from the banks) on which grounds, for what purpose, etc., and how they were actually utilized. These big wigs among the loanees swallow these amounts with ease, while our poor farmers either do not get loans at all, or if they do, many are harassed and even driven to suicide if they default for a variety of reasons.
A few words about some of the leading luminaries on the FDI/FII horizon who are the sole refuge for our Government to come forward and salvage the Government’s GDP growth story.
The fight for market share by the warring banks led to an already aggressive pack of financial institution wolves to fabricate a hyped up environment from which to extract profit. This peculiar situation led to an exaggerated extolling of corporate virtues that inflated quarterly earnings and share prices. It fostered a lattice of co-dependent and destructive relationships between the banks and corporations. Together they build the bubble, and separately they used each other and then blamed each other for its bust, as the 21st century fraud disclosures, bankruptcies, asset garage sales, and law suits became the agreed norm. Mutual and pension funds bought those over-hyped hot stocks, whose selection was not based on corporate fundamentals, in an effort to outperform their competition. The end game meant that executives cashed out at or near the top, and resigned before their companies were went bankrupt, or they were hit by indictments. It was a fascinating and lucrative game – provided you do not think about the ramifications of playing fast and lose with other people’s money – or the consequences for workers, share holders and overall economy.
I crave the permission of the concerned citizen to place before them a few facts on the track record of some of the key players in our Government’s expectations of FDI.
J P Morgan-Chase: The biggest US bank posted 4.4 billion $ of credit trading losses – though it said it had cleaned up the group responsible for the bad debts – due to betting on credit derivatives. The bank pushed 459 million $ of the losses from the bad credit trades into the first quarter – as the traders had mis-stated the value of the positions of that period: the bank had material problems with its financial controls at that time – which speaks volumes of how this doyen among banks was functioning! In April 2012, the bank generated an internal report that showed the losses, in worst case conditions, could reach 8-9 billion $. This will seed a debate over how strictly large financial institutions are regulated, and whether some of the behemoth banks are capitalizing on their status as being too big to indulge in risky trades. Lynn Turner, a consultant and former chief accountant of the SEC said that J P Morgan made slow stupid decisions – taking risks with derivatives which they did not understand; and second, selling assets which high income which they cannot replace.
A report from London, dated July 2, 2012 said Barclay’s ClE Chairman, Marcus Agius quit on July 1, after an interest rate rigging scandal, a devastating blow to the bank’s reputation. He was the first casualty from the scandal which was likely to draw in more banks and could equally embarrass regulatory authorities. The affair came at a time when banks in Britain already under fire for their role in the financial crisis, are facing a new wave of public outrage. Barclays had been fined a week back 453 million $ by British and US regulators for submitting inaccurate submissions in the LIBOR (London Inter-Bank Offered Rate) interest rate—it is used worldwide as a bench mark for prices in about 350 trillion $ of derivatives and other financial products. The events showed unacceptable standards of behavior within Barclay’s bank. The scandal concerning the manipulation of the LIBOR and EURIBOR (Europe Inter-Bank Lending Rate) may implicate other institutional banks and trigger criminal prosecutions.
We may note another instance of corporate fraud. Days before Bank of America shareholders approved the bank’s 50 billion $ purchase of Merill-Lynch in December 2008, top bank executives were advised that losses at the investment firm (Merill-Lynch) would most likely hammer the combined companies earnings in the years to come. But shareholders of the bank were not told about the losses looming large. What Bank of America’s top executives, including the then CEO knew about Merill’s past mortgage losses, and when they knew about them, emerged in court documents filed in a shareholder law suit in the US Federal District Court in Manhattan. The disclosure was likely to reignite concerns that federal regulators and prosecutors had not worked hard enough to hold key executives accountable for their actions during the financial crisis. (How one wishes that there is a way of making the Council of Ministers in our Government accountable for the losses they have caused to the public exchequer by their willful and dishonest actions.)
The CEO (Kenneth B. Lewis) conceded in his testimony in the suit that before the Bank of America stockholders voted to approve the deal, they had received loss estimates relating to the Merill deal, which was far higher than those reflected in the figures which had appeared in the proxy documents filed with the regulators.
There is the case of the HSBC. The Office of the Comptroller of the Currency (OCC) which is the bank’s primary federal regulator, found that HSBC with headquarters in London allowed affiliates in countries such as Mexico, Saudi Arabia and Bangladesh to move billions into the US without adequate controls.
While our Government wants us to believe that the future of our country lies entirely in the hands of multi-nationals, foreign banks and other investment companies, Americans trust in MNCs has waned. They ask whether the LIBOR scandal is worse than packaging billions of dollars worth of dubious mortgages into a bond and having it stamped with a AAA rating to sell to some dupe down the road, while betting against it or, how about forging documents to foreclose fraudulently on countless home owners? The misconduct of the financial industry no longer surprises most Americans, while only about one in five have much trust in banks, according to Gallup polls. Not only banks – trust in big business overall is declining: supporters of Walmart may please note 52% of Americans believe corruption is widespread across corporate America. The parade of financiers accused of misdeeds, booted from executive suites and even occasionally jailed is undermining the essential element – of trust. Have corporations lost any ethical compass they once had? Evidence suggests that they behave as corruptly as they can – and, in this respect, they will be quite at home in our country, within whatever constraints are imposed by law and reputation.
The US is tightening the noose on banks. The Justice Department’s criminal division is building cases against several financial institutions and their employees, including traders at Barclays. The prospect of criminal cases is expected to rattle the banking world. Collectively civil and criminal actions could cost the banking industry tens of billions of dollars. The multi-layer investigation has ensnared more than ten big banks in the US and abroad.
At a time when the financial sector is being blamed for much of the global economic mess, Y. V. Reddy, former Governor of the RBI, has said that some financial conglomerates are more powerful than even the central banks. He has referred to leading rating agencies (some of which give the scare to our Government to embark on its reforms push) and accounting firms enjoying an oligopolistic power over the markets. International banks have the incentive conduct operations involving tax avoidance – and thus enjoy significant influence over the political economy in many countries. Dr. Reddy said that there appears to be an erosion of trust in the financial sector as a whole and banking in particular, in advanced economies.
It will be abundantly clear from the above that the Government is fooling the people of India by harping that the FDI/FII is the sine qua non for financing of infra-structure projects and for development in the country. These Institutions are not charitable ones for investing in or undertaking development work in other poorer countries. They are there, using other people’s money to make quick and massive profits. We should use our own resources for infra-structure development in education, medicare, public health, communication and umpteen other works which go to eradicate want, poverty, etc., and make life livable for the 70% of the population whom this myopic Government cannot see. It is a monstrosity that a bunch of discredited financial institutions and rating agencies of western countries should lay down the economic (and political) agenda for this country, and the Government is all set to implement it, confusing the people by calling these measures as reforms. The Directive Principles of state policy laid down in the Constitution seem to be nowhere in the picture.
I crave the permission of the reader to place before them this quotation: “The man who never alters his opinion is like standing water, and breeds reptiles of the mind.”’ – William Blake
These reptiles are pursuing the country and the people. The prevailing environment is best illustrated by what George Bernard Shaw had said: “When a stupid man is doing something he is ashamed of (read for which he should be hauled up) he always declares that it is his duty (read this is coalition dharma)!”
By C. A. Balasubramanian
Additional Controller General of Accounts, Government of India (Retd.)