13:35 May 31, 2011
I am not referring to Osama bin Laden being given away by an insider as reports now suggest. This piece isabout The Inside Job movie which is more like a documentary on the financial crisis between 2007 and 2010. Directed by Charles Ferguson, this film did get an Academy Award under the Best Documentary Feature in 2011. I know it is a bit late to write about the movie, but given current statements in media of a possible repeat of the September 2008, I thought it is apt. In spite of being made by an American, it throws light on the American way of business, especially high finance. Experts who talk more about less regulation should watch the movie closely.
This movie highlights regulatory lapses and conflict of interest, and how they can bring an entire system to ruin. The US Treasury is indirectly influenced by Goldman Sachs and it is public knowledge that many of key treasury staff are Goldman alumni. AIG bailout was funded by the tax payers’ money and a big part of the bailout was wired to Goldman the very next day. Nobody even tried to negotiate a better price and this was potentially possible because AIG was close to bankruptcy. I am sure if they had put a pistol on Goldman’s head, Goldman might have agreed to a price discount. Needless to say, Goldman executives got heavy bonuses. It is a very good example of taking money from the common tax payers and then redistributing it to the very rich in the name of merit and capitalism.
Let’s talk about conflict of interest. Whenever pundits from haloed institutions like Harvard write any report praising a particular thing, one should check whether there is a monetary payoff involved. Most of these institutions get funded by Wall Street biggies and as a matter of obligation; they churn out reports influencing public policy favouring them. There was one such report about benefits of liberalization in Irelandand the strength of its banks before the blow out without disclosing that they had received money from Ireland Chamber of Commerce to write the report.
In late 90s, before derivatives took off, some people / regulators actually wanted to regulate them. They were harshly ticked off by luminaries like Greenspan and Lawrence Summers in thename of capitalism and free markets. Private derivative contracts need not be regulated because they were signed between “knowledgeable” and “sound” parties and they can manage risk. When the system blew out, the same privately negotiated contracts were bailed out by the government because it put system torisk. Regulators turned a blind eye even when told about the impending crisis and if media reports are to be believed they were busy surfing the Internet onmore unmentionable ‘interesting matters.’
The best explanation was given by a Chinese Minister who gave an entirely new twist to the entire financial turmoil. He attributed the problem to the end of Cold War. Most of the brilliant physicists and mathematicians were designing nuclear weapons during the height of the Cold War. After its end, they had no jobs and hence turned their energies to the construction of new weapons of mass destruction – derivatives. Only a mathematician can take two risky assets and combine the two and come up with a product which has less risk.
The lesson for the investor is that he should take time and understand the product he is investing in, especially risk factors. If you want higher returns, you must be willing to live with extra risk. If you can’t understand the product, avoid it, because even the greatest investor in the world, Warren Buffet does not invest in businesses he does not understand. He did not invest in technology stocks in spite of being friends with Bill Gates because he did not understand technology.
Needless to say, when an American gives a lecture on corporate governance and conflict of interest, you know where to run. I strongly recommend you buy the DVD and watch The Inside Job.