Being Reckless on WallStreet

For some strange reason I was drawn towards finance and market. I took up Economics 101 and Finance 101 as optionals in my undergrad. Thanks to it I could at least attempt to read the Business page of the newspaper instead of directly flipping over as 95% people do.

Twice I attempted to read “Fault Lines” by RBI governor Raghuram Rajan and had to put it down in between. It has to be the toughest book (non-curriculum) I have read (unsuccessfully) till date. The book talks about how Rajan could foresee the 2008 economic crisis before many of his peers and even had the guts to call spade a spade. He was one of the few people to have correctly called the crisis as coming.

Anyways the botched reading attempts didn’t dissuade me. I had already gathered a fair idea about the economic crisis 2008 and its causes from the internet and my 101 classes. Impropriety, no moral compass, government hand-in-glove with the executives in lieu of their funding, no accountability and astronomically high bonuses for the CEOs irrespective of the company’s performance are some of the key reasons that came up on trying to figure the problem. Surprisingly the same reasons came to the fore when I read Liar’s Poker – giving an account of late 1980s i.e. roughly 20 years before 2008. Nothing had changed in those 20 years! While Wall Street did very well to come up with innovative new financial derivatives (CDOs) but everyone turned a blind eye to the unethical, unfair prevalent practices.

I accidentally happened to come across a list of “Movies to Watch” which centered on finance and markets. Quickly I saved it and gradually started ticking off them one by one.

If you watch “Too Big To Fail” - you will realize how blatantly the financial institutions kept aside all caution and rules in the mad race to make more money. It pushed the world on the precipice of a financial collapse and it did. Sadly no one was held accountable for why proper due diligence was skipped. The financial system already had enough checks & balances – but they were rendered useless because those who were supposed to ‘Say No’ didn’t say NO! And one major reason for it is that those in the higher echelons in the finance world (investment banks etc.) were in cahoots with those running the Office or planning to run for the office. On watching the Academy Award winning documentary “The Inside Job” – you will end up shaking your head in disbelief to see as to how come the head of investment bank (to know the name watch the documentary J) who threw all caution to the wind was appointed as an advisor to the US President. And this is after he took home a million dollar cheque even though most of the people around him lost most of their life-savings primarily due to his company’s reckless behavior. No accountability!

However, a non-descript country like Iceland showed the way when it punished the bankers responsible for the financial crisis. It’s a long shot but let’s hope that others follow suit too.

If you think that what happened in 2008 was only the one time all these reasons combined together to create havoc at such a large scale – then you’re wrong.  The most spectacular collapse in the history of Wall Street has to be Enron. All the reasons which precipitated its collapse are exactly the same as 2008. In fact, I should say the other way round – the reasons why 2008 financial crisis occurred were the same as late 1980s and 2001-02. Absolutely no heed was paid to the lessons learnt and we have no reason to believe that this won’t happen again.

Fortune Magazine [2000] - Enron was the most admired then

However, Enron scandal has to be the mother of all accounting and financial scandals – the company fooled the Wall Street analysts, the regulators for 8-10 years – cooked up the numbers, showed profits which were non-existent, hid its debts thanks to Mark-to-Market accounting principle. Its executives took home multi-million dollar salaries and encouraged its 20000 employees to put their savings and retirement funds in Enron stock. They did all this while completely knowing that the Enron stock which was shooting up year after year was standing on thin ice. They even opened up a billion dollar energy plant in Dabhol, India – and there were no cash inflows from it still they propped up the investment as successful to investors.

It is a matter of little satisfaction that the executives were punished but the amount of money people lost, the mental anguish can never be compensated.

I got to know most of this when I watched “Enron: The Smartest Guys in the Room” – again an Academy Award winner and also mentioned on the Movies to Watch list.

Another key standout from it was the California Energy Crisis (2000-01). In the state of California, electricity was deregulated thus it had many players who could price it based on the demand.  A few blackouts occurred in the state of California while it was struggling to supply power and Enron made use of it and used to shut down its power plant which abnormally increased the demand resulting in the increase of electricity prices to 800%. Naturally, the incumbent governor (Gray Davis) was blamed. However, Enron president (Ken Lay) was a close friend of George W. Bush who as the President refused to put a federal cap on the electricity prices. Ken Lay invited Arnold Schwarzenegger for a lunch in May 2001– and by some strange co-incidence Arnold defeated Gray Davis in the polls for the next governor in 2003. Anyways, Enron pocketed billions exploiting Californians misery in 2000-01 while they didn’t earn a penny from most of their other ventures.

This is one of the most glaring examples of how dangerous Capitalism and free markets can be. No wonder we have movement like Occupy Wall Street going on where people are demanding a reduction in the influence of corporations on politics, more balanced distribution of income, more and better jobs, bank reform (especially to curtail speculative trading by banks), forgiveness of student loan debt, and alleviation of the foreclosure situation.

 

Although it is unlikely that their demands will be met anytime soon until matters come to a head, but with economic crisis spreading its fangs in Greece, Portugal, Spain and now in Puerto Rico (defaulted on Jan 1, 2016) more and more people will see the crystal clear disparity. Only the top 1% hold most of the wealth (90% and above) in almost all countries – a perfect recipe for unrest, disharmony and all that is anti-social.

Grudge Against the System

I recently watched the movie Manjhi and was filled with admiration for Dashrath Manjhi for the uphill task he completed single-handedly. We have had lot of good cinemas in recent years which highlight the real picture of society and this helps people in appreciating how lucky and privileged they are to have not been born in those parts of the country. However, often in the audience I sense this palpable feeling of harboring a grudge against the System. They feel that the System wronged the protagonist robbing him and his family a shot for a good future. Amidst the tip-tapping on their phones and tablets updating their friends via the social media with their opinion of the movie, often people forget how much times have changed since Independence.

I think as the generation of ’47 era gradually phases out, the struggles and societal condition of the time just after independence will become lost in public memory more or less. Very few in my age group and even less in the present generation know about what it was like to live in a society that was in the throes of casteism, poverty and in the absence of daily utilities we take it for granted now. Not that I had a first-hand experience of them but got to know a little by reading through accounts of those times in books and I have found it very rare to find people reading through such historical accounts. Sharing 1-2 minute videos on National Holidays are not sufficient to make people feel how lucky they are to be born in a time when many of the ills plaguing our country at the time of Independence – famine, ridiculous social practices, total absence of health-care and access to information – have almost now vanished.

People cook a snigger when told that some considerable progress has been made. In these times when sweeping judgements are the norm - no one bothers to check facts and is trigger-happy to paint you as any right/center/left sympathizer. But governance objectives seem to be an ever-evolving process. Some 50 years ago it was all about Roti, Kapda aur Makaan now it is about No corruption, access to better roads and free internet (check Delhi and Bihar election manifestos). And it will evolve further into probably an unthinkable dimension. Technological advances have led the society to instant gratification – people want instant results and so the pressure on the System has grown too. Demands of good governance have joined the chorus of election rally with political leaders falling over each other in promising the Best governance possible. However, the general public seemingly remains oblivious of the mammoth task this monolithic, rigid System has to perform. There are rising demands by the countless number of groups which want the System to first cater to their demands. Everyone expects a metaled road leading to his house, with street lights paving the way with 24 x 7 electricity and the best school and hospital in the vicinity. How will this be possible across the length and breadth is not what people bother about. Not that it is a wrong or unrealistic expectation but as they say the devil lies in the details. Finance, logistics and long term planning are aspects which our administrators and politicians are still new to.

The biggest achievement of democracy is that social inequality has come down to a larger extent. Poverty has also reduced but not to that degree and perhaps this is why still one-fourths to one-thirds of the population still lives under poverty depending on which measure you adopt. However, the rise of lower castes in politics, their assertion to reclaim their dignity and access to opportunities is a heartening result of 67 years of our democratic process. The British left us in 1947 assuming that this country had enough diversity to disintegrate into as many nations as in Europe and spiral downwards into chaos. To add to that, social malpractices, poor agricultural produce made matters worse. People of lower castes couldn’t enter temples while their cattle could (read about lower castes like Ezhavas in South India) and the females were subjected to unspoken humiliations.

But now if you look around lower castes rule the corridors of power from the North to the South – and barring a few aberrations we don’t hear the atrocities on them anymore. A person of any caste, any background has access to all opportunities. Social injustice has reduced to a larger degree – oppressed sections of the society have found their voice. Women – the oppressed gender have more opportunities than before and are waging a battle to have more doors open for them. For an unbiased, well-informed eye this is a very heartening sight.

Although, it pinches a bit when educated, well-to-do people (probably in the 80-95% percentile based on income) blatantly question the need of a System or even a democracy. In their fit of anger they even question the point of why we should pay taxes to the govt. The discontent is so deep-rooted that it’s hard to drive home the point to them over a cup of tea or snacks. The basic idea of us as a nation is to have each other’s’ back irrespective of your religion, caste, creed and gender – or in plain simple words Inclusive Growth. But sadly it has been reduced to a mere political slogan associated with a much derided political party. I’m not sure if that’s the reason why the significance of it has been lost on people or the education system failed to emphasize more the basic principles of our nationhood or perhaps somewhere down the line while growing up, joining the rat-race all these stopped making sense to us.  Of course this is the pessimistic view of things which often make us think that the future is bleak.

But India has always defied the norms, the predictions of observers and probably will still continue to do so. Mark Twain and Sir John Trachey had famously predicted that after the British leave the country – there would be civil war and unrest owing to the abundant regional, linguistic and cultural diversities enough to fill the whole of Europe. What they failed to realize that the Indian freedom movement was very unique and its orchestrators had successfully laid a strong foundation for Billions of peoples tryst with destiny. Had they been alive they would have surprised to see how Indian democracy has gone from strength to strength. So it will not be wrong to expect India to shine brighter as a democracy, as a place where in the words of Tagore – the mind is without fear and the head is held high.