Thursday, September 18, 2008

Greed and the credit crunch

The fairy tale ended for Lehman brothers! Such a sad ending indeed, just the way Elliot thought it would ‘not with a bang but with a whimper’. My heart does bleed to see big brands going belly up, but bleeds harder to see once well paid, employees cast away overnight. It is funny that there was a job posting for a ‘quantitative specialist’ at Lehman on public job sites as late as 15th September. Does this say anything about the disconnect between the top and the grass root levels in the company? Or is it that some HR who was not well versed with the status of the company scheduled an automatic re-posting of the job! What ever it is, it is sad. For me it is sad because Lehman was so big, so big that I always dreamt of being able to work, after all I am a brand-o-phile. I love big brands, brands that command respect, recall value and command a following. (Somehow I don’t like coke-a-cola, even though the brand meets all these criteria)

So there it goes Bear and Sterns, Lehman, Meryl Lynch, all of them big investment banks.

So how they did they all come about it? McCain and Obama say they were greedy corporations and we should not be sympathetic to them when they fall prey to their own greed. Interesting, I wonder if they ever held stocks in any of these banks! They were greedy no doubt, but what does it boils down to? These banks are not some machines, some faceless creatures greedy for more; they were owned by stockholders, investors like you and me, very human indeed. So why did these banks grow greedy? Because investors demanded they do, else they would be prone to hostile takeovers, and the top management would loose their jobs. So they do everything to maximise profits. After so many complex theories about behaviour of firms and managers, it all still boils down to profit maximisation.

Look at Goldman; it is no doubt the strongest of all the investment banks (now that only two remains) It is fundamentally solid, its competitors have been wiped out, so their revenues and business opportunities will definitely improve. Most importantly they are good in what ever they do. They have the best of brains and they keep exporting their brains to all branches of the industry. They still eked out a profit during such turbulent times, their revenues grew, but. But their stock prices are falling in the stock markets because of lack of confidence on part of the investors. So people like me and you are selling Goldman shares faster than there is buyer for the same. So what are we as a group of investors doing, pressurising a firm to make huge profits, a modest profit is no good.

It is at such points that the firms are forced to take irresponsible risks after all, higher the risks higher will be the gains. The unlucky ones though will loose the bet and the lucky ones get away with it. Lehman proved to be unlucky. So whose greed are we to blame? I did say the investors, and the whole capitalise system that has an unshakable faith in the magic of markets and the invisible hand!!!

The second point is the greed of individuals. The whole crisis started with the housing markets when people started buying one, two, three and god knows how many houses on mortgages on the belief that the values of the houses will keep increasing and that they will be able to pay the mortgage every month. Bad planning and extremely risky behaviour and the banks encourage such behaviour by lending crazy to such customers. So they went belly up first, took with them mortgage lenders like Country-wide( they should thanks their stars that BofA brought them, otherwise they did be out there on the street long time back) Indymac and later Bear & Sterns, Lehman and Meryl Lynch!

It now threatens the whole system.

My only question is how legitimate is the accusation of McCain and Obama that investment banks were greedy and they deserved to die? It is a sort of judgement debated in G.B.Shaw’s Doctor’s Dilemma! But how far is it acceptable?
The greedy millionaire investor in a rich custom made suit might what be in the minds on Obama and McCain as they speak of greedy corporation, but it is not a very narrow view? Were not we at fault, as individuals, as customers, as greedy investors, as a part of financial markets? Did we not invest in products we hardly knew but someone told would maximise our returns? Did we not buy additional houses because we though housing prices will go up and it will earn us a quick buck? So how should we blame? Ourselves? Or should be start searching for a scapegoat? Like say Lehman now that it is gone. If there were no buyers for pricey homes, no one would have built it much less sold it! If there were no buyers for risky securities, there would have been no securitisation, no subprime and Lehman would still be nearing their 200th anniversary. (You never know they still might, I cant believe they are gone, I still feel they will come out of Chapter 11, to occupy the office space they have leased till 2033!!!)

So who is the root of all these mess? For me, it is us, collectively, our collective greed to make the extra buck over everyone else. So we all should learn our lessons alright.

The lesson is frightfully simple. Never stretch beyond limits. Never go after investments that claim to double your investment in six months, or even 2 years. Anything that earns a little over inflation should be the bet. Those expecting beyond this should be ready to burn their finger in choppy waters and not whine about ‘greedy corporations’, ‘regulatory failure’ or ‘government intervention’. It is ‘us’ who needs to learn a lesson rather the ‘greedy’ corporations. If not for us, there would be no greedy corporations!

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