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.
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| 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.
