Posted by Shyam Moondra
In 1986, the late actor John Houseman made a TV commercial for the investment bank, Smith Barney, which instantly became a classic. In that commercial, Houseman delivered the famous lines: "Smith Barney. They make money the old-fashioned way. They EARN it." The modern version of that commercial would be "Goldman Sachs. They make money the easy way. They stick it to the investors."
In the last ten years, the financial sector, and for that matter the entire U.S. economy, has increasingly become more speculative in nature than at any other time in history. The days are gone when stocks, bonds, commodities, and currencies would be the primary vehicles for investment. Now, the companies and individual investors can bet on all sorts of derivatives, sports events, political elections, movie box-office receipts, etc. Not only that, they can also buy the so-called credit default swaps as an insurance to protect against losses on their bets. Even individual investors are now more apt to trade in options, sell short, and engage in day trading based on short-term speculation rather than invest based on sound long-term fundamentals.
America, as a society, is increasingly becoming greedy and turning more and more to gambling. The investor's greed made it possible for Bernard Madoff to pull-off his Ponzi scheme that cost billions of dollars to the investors. Greed made corporate CEOs to fake short-term profits by sacrificing the long-term interests of their companies and walked away with millions of dollars in stock options. Gambling has made it possible for many financial giants with assets of hundreds of billions of dollars, such as Goldman Sachs, to make lots of money quickly by manipulating markets and deceiving investors, thanks to the SEC staff that were too busy watching porno websites on their office computers. But, as we all know, gambling is never a sure thing. So it has also produced dramatic falls such as Enron, Lehman Brothers, Bear Sterns, and General Motors. Excessive risk taking culminated into the crisis that brought financial ruins to millions of families and state governments, and it led to the unprecedented high levels of federal budget deficit and national debt.
Now that we have seen the catastrophe caused by the financial meltdown, the key question is could it happen again. Alan Greenspan, the former Fed Reserve chairman, said that unless a way can be found to change human nature about greed, another crisis is inevitable. As is evident from the SEC suit brought against Goldman Sachs, there is a pervasive mindset in the corporate world that they can do what they please to make money with very little regard to ethics and playing by the rule. The financial reforms proposed by President Barack Obama are a necessary first step but we also need aggressive enforcement by the SEC, CFTC, and FDIC, to minimize the chances of another financial crisis. When criminals sense that the police is not cruising the streets, they would tend to commit crimes. If the enforcement agencies were doing their jobs and the companies were fearful that they would be caught doing the wrong things and there would be consequences, may be we could have avoided some of the wrongdoings that have become so widespread in the financial sector.
Another problem in the financial markets is manipulation by the big players. Companies like Goldman Sachs with assets close to a trillion dollars have enormous financial resources that they can marshal to make the markets move in a certain way. When some stocks move sharply or are pinned down at a certain price level near the options expiry date, it's quite obvious that they are being manipulated. The big players often combine short selling, options trading, and the issuance of research reports at strategic moments to move stocks in the desired direction. They call it strategizing but it fits the definition of manipulation. The SEC knows what is happening, but so far they have been too lax in enforcing the laws.
Reforming the derivative market is critical to controlling excessive risk taking, as are the reforms in how compensation is structured for the executives and professionals. We need to go back to a reward system that encourages long-term accomplishments rather than artificially manufactured short-term profits.
It's clear that we need to strengthen regulations and enforcement of the financial sector. However, we need to do it in such a way so that we do not stifle legitimate innovations. In parallel, the corporate world must also show increased sense of responsibility and accountability for the greater good. They must go back to the culture of ethics and integrity that served us so well for generations.
