Unbridled greed of men of finance

An article in the New York Times recently bemoaned the fact that greed was the root cause of violence in many African countries, which goes to the root of colonialism, military takeovers, and suppression of democratic movements.

Greed to exploit resources such as oil in Nigeria has led to oil spills and corrupt regimes; exploiting diamonds in the Congo has led to wars and unstable societies; to exploit cocoa beans in Cote d’Ivoire and Ghana, children continue to be employed; dumping toxic wastes and breaking ships from the rest of the world have made a few wealthy and ruined much land and water bodies. Violence follows the greed as the powerful and wealthy protect their interests.

The absence of any corrective mechanism domestically in these countries led the author to call for greed to be declared a war crime so that the International Criminal Court can step in. That is a desperate cry; to seek supranational bodies to intervene in countries with weak institutions.

Taming greed, a challenge

It may not be easy to tame greed. Gandhiji famously said that there was enough to satisfy man’s needs but not his greed. But greed is also the driving force of capitalism.

The desire to be wealthy drives enterprise and innovation as the eighteenth century Scottish economist Adam Smith argued very effectively. It is not by the benevolence of the butcher and baker, but from their own self-interest that we get our dinner, he observed.

Regulated capitalism hopes to make the greedy behave. But trying to keep the motives to make money alive without causing damage to society is a problem of the commons. In 2008, the financial crisis in America (known in many parts of the world as the Lehman crisis on account of the collapse of Lehman Brothers, a financial services firm) started a downward spiral for the US economy and consequently the rest of the world.

There is no doubt that greed, or to put it in more acceptable terms, the easy money policies of the US Federal Reserve (i.e., central bank) that created irrational exuberance, had a major role to play in the disaster. Many wondered if the greedy would be made to pay.

Early in his first administration, President Barack Obama was expected to take a hard stand against Wall Street and the financial services sector but he did not and was found appointing the usual financial sector suspects to important positions.

Now, as he begins his second term, one is in a position to re-evaluate his administration’s efforts and the hope that justice must be done seems to be coming to fruition.

Some successes

At the core of the financial crisis were several banks aided by shady brokers who gave housing loans to borrowers who were either ineligible, or on terms that were unfavourable to the borrower (such as ballooning payments that were not explained). When the housing market crashed, we had the start of the sub-prime mortgage crisis that resulted in the avalanche.

One early success in making the guilty pay was when Bank of America agreed, in early 2012, to a $1-billion (about Rs 5,300 crore) settlement under the False Claims Act.

The bank also settled with the government on charges that it had misled investors with regard to its acquisition of brokerage firm Merrill Lynch. Three other banks also settled paying fines, admitting and accepting responsibility for some of their conduct in their lending practices.

Towards the end of 2012, the New York state government brought two other cases. One was against JP Morgan Chase, alleging fraud by that firm’s Bear Stearns unit in the sale of mortgage-backed securities. (At the height of the greed, the bank was said to be packaging what it knew were questionable mortgages into bonds for sale to investors.)

In another case, the federal government filed charges against Wells Fargo for faulty mortgages, including bad origination and underwriting of government-backed loans.

Focus on rating firms

And now, it is the turn of the credit rating firms. This is an industry that violates all definitions of conflict of interest.

Debt issuers hire these firms and pay them to rate their securities, and the investing public relies upon these ratings!

The three that dominate the field are S&P, Moody’s and Fitch. In 2009, an employee of Moody’s, who had resigned, publicly accused his employer that it had knowingly given high ratings for dodgy securities and that his objections while he was employed were not taken seriously.

The federal government has now sued S&P for having violated its own standards by giving rosy ratings for mortgage bonds, especially the collateralised debt obligations (CDOs), which included bundles of sub-prime mortgages.

A government inquiry commission had found that the credit rating firms were key enablers of the financial meltdown.

The government was in negotiations with the firm over the charges and it is noteworthy that it decided to take the case to court rather than agree to fines and watered-down charges. A penalty of $5 billion (about Rs 26,500 crore) is being sought from S&P.

It is good that the administration is not making blustering speeches threatening all and sundry of consequences, for that will surely upset the markets and make what little economic recovery we are seeing even more remote.

The government will also have to pick cases based on evidence that will stand in court. This is a slow process but it is heartening that the administration has not given up on bringing at least some of the guilty to book. But what about the ‘greedy’ individuals in these companies who made the decisions that drove the corporate behaviour?

Our attempt to regulate capitalism has not yet made a dent there.

(The author is professor of International Business and Strategic Management at Suffolk University, Boston, US. >blfeedback@thehindu.co.in )

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