Misuse of other people’s money

The quantitative easing programme has resulted in a world so flush with liquidity that it is resulting in misuse. Most savers (investors) give their savings to others to manage, whether banks, mutual funds, portfolio managers or insurance companies. And those in charge of managing other people’s money or OPM are not doing a good job and often misusing it.

Take banks, for instance. The sector is plagued with non-performing loans, totalling a whopping ₹7.7 lakh crore, according to India Ratings and Research (Ind-Ra). This column mentioned the ease with which one Vijay Chaudhary of Zoom Developers was able to dupe five PSU banks of ₹2,650 crore, using fake documents. One wonders at the quality of due diligence at such banks.

Having misused depositor money through imprudent lending, banks have now started charging these same depositors a fee to be able to use their own money! A fee to deposit money and a fee to frequently withdraw money! This is loot! It’s his money! Or is it?

It is not widely known, but the moment a depositor makes a deposit in a bank, he becomes an unsecured creditor (last in line) and the money then belongs to the bank! If, because of imprudent lending, the bank incurs huge losses, then, as a last resort, it can compel depositors to take a haircut. This is what happened in Cyprus when, overnight, the regulator forced large depositors to lose 40 per cent of their deposits.

The Parliamentary Standing Committee is taking a look at the unilateral charge of fees by some banks, as it should. It is misuse of power by these banks.

The excess liquidity and the low interest rate scenario are compelling fund managers to take inordinate levels of risk. They can, with OPM.

Let’s take a look at pension funds. People save money and put it in pension funds for their retirement. In the US, pension funds of all 50 States are broke, because given the low interest rates following QE, they aren’t earning enough. Pension funds need more money to generate the income required to meet liabilities. There is now a $3.85 trillion deficit in US pension funds!. That’s 22 per cent of the US GDP!

In order to fetch higher returns, funds are investing in riskier assets, such as sub-prime auto loans. It was the stupidity of sub-prime mortgage loans that triggered the 2008 global financial crisis. Today, outstanding auto loans total $1.2 trillion, mostly sub-prime. Pension funds buy such assets to chase higher yields, wherein loss belongs to the retirees, whilst the gains, if any, belong to the fund managers via huge bonuses.

A bigger trigger for the crisis in 2008 was the derivatives market to which big banks had huge exposures. Guess what! They have greater exposure now, with the top 25 US banks having an exposure of $225 trillion in the derivatives market! To put this in perspective, that’s nearly three times the global GDP!

Misuse of power, whether financial or political, must be made to have consequences.

(The writer is India Head — Finance, Asia/Haymarket. The views are personal.)

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