People often compare the current economic crisis to the Great Depression. But it's a lot different, and more worrying, because it's global in scale. The nature of modern high finance, with its complex derivatives, side bets and mind-numbing mathematical models, finds no analogue in the 1920s.
To be sure, the causes of this disastrous meltdown are as complex as they are intractable. In the final analysis, the buck stops nowhere, and everywhere.
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For example, many right-leaning pundits would blame Fannie Mae and Freddie Mac whose implicit promise of government guarantees helped engender a colossal industry of mortgage-backed securities trading. But Fannie and Freddie, by themselves, could have wreaked no havoc were it not for the throngs of institutional investors--banks, insurers, hedge funds, etc.--who gobbled up Fannie and Freddie's repackaged mortgages, slicing and dicing them ad infinitum, gambling with taxpayer dollars in pursuit of myopic gain; or the mortgage originators who peddled hundreds of billions in loans to consumers with questionable credit and dubious incomes; or, lest we forget, the consumers themselves who couldn't afford the loans and knew it. Perhaps the most pervasive delusion was that real estate would forever move northward, despite all historical evidence to the contrary. Everyone, it seems, harbored this fantastical conviction. The culprits are everywhere, but nowhere in particular.
Consider the recent news about Wall Street bonuses for 2008, which totaled a whopping $18.4 billion. Who's to blame? Considering the size of the average bonus--a relatively modest $112,000--it's no one and everyone. It's the "system."
These, however, are not very satisfying answers for most. We crave to blame someone specific. Everyone has a bat in hand--we just need a nice fat piñata.
Thankfully, from time to time over the last few months there's emerged single, fleshy individuals on whom we can pin blame and otherwise vent. Like Dick Fuld who, as Lehman teetered on the brink and with the help of virgin CFO Erin Callan's pretty fronts, continued to paint a rosy picture of the company far beyond the point of no return. When the house of cards came crumbling down, Fuld blamed everyone and everything else--the SEC for enforcing mark-to-market asset valuations so that Lehman, according to Fuld, had to "mark our positions to the weakest competitors’ fire-sale prices of assets"; the naked short-sellers who, Fuld said, spread "false rumors" leading to Lehman’s collapse; an outdated regulatory and risk-assessment regimes. ("Some have compared the regulatory and risk management systems of our current markets to trying to run a bullet train on ancient track," he said during congressional hearings in October 2008.) Ultimately, Fuld's attempts to pass the buck weren't very persuasive, at least not to the dude who knocked Fuld out cold at the Lehman Brothers gym in October after the firm's collapse.
Bernie Madoff, who bilked investors out of as much as $50 billion in the largest Ponzi scheme known to man, is a somewhat more satisfying target than Fuld because, unlike Fuld, Madoff shouldered all the blame in an astonishing confession. "It's all a big lie," he told his sons. When investigators asked Madoff whether he had an innocent explanation, he responded: "There is no innocent explanation." Still, Madoff seemed to feel no remorse for what he did, as he pushed his way through a mob of reporters on the day of his confession.
And then there is Ramalinga Raju, chairman of Saytam Computer Services, one of India’s largest outsourcing companies serving one-third of the Fortune 500 (including some of the world’s largest banks, manufacturers, health care and media companies), who in a stunning resignation letter confessed that what began as a little lie, a "discrepancy" if you will, grew into what will likely be India’s largest fraud scandal to date. It’s being called India’s own "Enron." In his mea culpa, Raju wrote:
What started as a marginal gap between actual operating profit and the one reflected in the books of accounts continued to grow over the years. It has attained unmanageable proportions as the size of company operations grew. It was like riding a tiger, not knowing how to get off without being eaten.
Raju said he frequently falsified the company’s records as it grew from a tiny family operation to global outsourcing giant with 53,000 workers in 66 countries. This was not about cutting corners or merely embellishing. It was a systemic fraud where fiction sqaushed fact with respect to a substantial portion of the company’s finances:
A huge piece of Satyam’s finances was a fantasy. Of the 53.6 billion rupees in cash and bank balances the company listed as assets at the end of its second quarter, 50.4 billion rupees ($1 billion), were nonexistent, according to Mr. Raju’s letter. Revenues for the quarter ended Sept. 30 were actually 20 percent lower than the 27 billion rupees reported, and the company’s profit for the quarter was just 10 percent of what it reported at the time.
That's not just cutting corners. That's a big, big lie. And, like Madoff, Raju took sole responsibility.
The most recent example of a fraud perpetrated by the power of one involves the French bank, Société Générale which lost $7.2 billion because one 31-year-old rogue trader made bad bets on stocks and then, jumping up on the same unwieldy tiger Ramalinga Raju rode, attempted to cover it up, over and over again. Jérôme Kerviel, a mid-level trader with a modest pedigree, somehow was able to slip through multiple layers of computer controls and audits for as long as a year, piling up humongous losses. One man, $7.2 billion.
Now that's a piñata.
The Post Partisan