Capitalistic corruption

I have been a longtime subscriber of the London based newspaper The Economist. And, there are some side benefits. Once in a while I will receive an email asking me to take part in a survey, typically to assess the effectiveness of an advertisement campaign of a bank, an insurance company etc. The bait used to be a free book – this is how I have a library of three books from the stable of the newspaper: its style book, a book on management and one on Wall Street.

All books are good in some sense or the other. For example, even as I may not agree with everything it says on the style of writing for the newspaper, the book says it with style. But, alas, all good things have to come to end sometime or the other. The free book bonanza has stopped and it is now a dollar donated to a charity I favor, say UNICEF, Medecins sans Frontieres, CRY … This too is good, at least for a moment of self-satisfaction, smugness at no cost.

The last such book gift I got was entitled Wall Street, authored by Richard Roberts (ISBN 1 86197 464 7). I received it in December 2004. And, shame on me, I read it only about a month back, eight years, almost to the day since I received it. The book flew under my reading radar and that must tell you how very nonchalant I am about money / finance and such, obviously much to the detriment of my personal finance. Is that so?

Perhaps not. The book, particularly Chapter 3 named Wall Street scandals tells me that there was a chance I would have lost whatever little nest egg I have now had I been an investor. Given my temperament I would never have been a wise investor.

The chapter, surprisingly coming from the mouthpiece of global finance, spreads out the scandals, scams, corruption on Wall Street – individuals and institutions that make up the US finance system. It was all a big con game, every scandalous bit. Just take in what the chapter heading means in the context of the book – the other chapters are named so prosaic: What is Wall Street?, How we got here, Markets, markets, markets, The securities industry, Banking … you got the point. The only dramatically headlined chapter is on corruption – “scandals” is the name it goes under in the capitalistic system.

This chapter is 30 pages long and the average for the other chapters is 15! In a sense, in statistical terms, is it Six Sigma? Is it a Black Swan chapter that defines what the capitalist system is – corruption institutionalized? Let me give you some interesting details from the chapter.

Wall Street began in 1896, more than a full century after “the US securities market came into existence in the 1780s”. We do not know whether there have been any scandals in the first century of this market. Let us assume in the negative. Anyway, the book deals only with Wall Street as it has come to be in the past 106 years (the book was published in 2002), and as regards scandals, only since 1920s – not quite nine decades.

The book, even if nothing else, is thorough and organized. The typology of the recent scandals: auditors, fraud, professional conflicts of interest, underwriting. The historical subset Common financial scandal types includes bank advances, market ignorance and manipulation, rogue traders, speculation, unsound financial structures. So you have them, the straitjackets into which to stuff the scandals that get listed subsequently. And, there are many.

There have been 11 speculative manias (not including the securitization mania that led up to the 2008 crisis), involving “cotton, coffee, land, silver, gold, railroad stocks”. “By September 2001 nearly 300 fraud suits had been filed in US courts against securities industry firms,” basically for leading the investors astray. Then, Enron came along and in its wake Arthur Anderson, its auditors and consultants too! Global Crossing, a large international fibre-optic cable network company drummed up “the appearance of lively business by trading” with similar companies with no money changing hands. The economics of bandwidth allowed this. I recall someone, with tongue firmly in his cheeks, suggesting two people exchanging ownership of houses to each other repeatedly to drive up the real estate market!

The failings of auditors came out strong when KPMG screwed up auditing Xerox – the time reversed echo of what HP is going through now (and I am typing this piece on a HP laptop! – conflict of interest, anyone?). Then, we have Tyco, Adelphi, WorldCom. “Investment bank analysts had become salesman – of their bank’s investment-banking services to their client’s stocks, both as IPOs and in the secondary market, to investors.”

But so far, I have not gone before 2002. Let me do that now, but try to be brief. “On Wall Street in the 19^th and early 20^th century stock fraud was not exceptional or even particularly reprehensible; indeed it was part of the system.” This is precisely what led me to write in my earlier post that, “[T]he system is designed to be vulnerable.”

“Most of the leading figures of the era of the ‘robber barons’ and beyond – Rockefeller, Vanderbilt, Gould, Drew, Fisk, Stanford, Morgan, Kennedy – made their fortunes through shameless scams and chicanery.” Whew, what a list, and not a complete one at that! Far surpasses the list of politicians currently on the dock in India!

The president of the New York Stock Exchange looted “the funds of … Exchange’s Gratuity Fund, a charitable endowment for the widows and orphans of deceased members, to the tune of $ 1 million [in the mid-1930s].” Again, time reversed echo and at far off place, the Kargil war widow affair.

The savings and loan scandal of the 1980s deserves a chapter by itself! I will give it in two sentences: “Charles Keating of Lincoln Savings and Loan of Irvine, California … ran the thrift into the ground, eventually costing US taxpayers $2.3 billion in in deposit insurance.”

Well, I have come to the end of this brief post. What I wanted to point out was that if it is the politicians who drive corruption in India, a specious claim, as the other side of the transaction is let off, it is the capitalists who do so in the US, equally specious as the politicians are let off. Remember, the narrative in the book stops on the far side of Leyman collapse and that would have added a couple of pages in the book, making the chapter a blacker swan.

It is a never ending saga. As far as there is capital there will be scams and scandals and corruption. As far as there is politics, of the democratic kind, there will be corruption. It can only be moderated / attenuated and never extirpated, no matter what is claimed by the aam aadmi or the Aam Aadmi Party.

Raghuram Ekambaram