Schools for scandal

The cure might lie in things like improving market intelligence, responding to early signals, improving efficacy of prosecution, and understanding structures and inter-dependence, writes T N Ninan

T N Ninan, Business Standard
14th March

In Mind without Fear, Rajat Gupta tries to make out that he is victim and not culprit. The ex-McKinsey boss contends that New York prosecutors went after him because they could not catch the big fish in the financial scandals of 2008, and therefore wanted to show success in chasing smaller fry. It is of course true that the “masters of the universe” (in Tom Wolfe’s evocative phrase) who ran the big investment banks were involved in chicanery and fraud, and got away, but that is nothing new. More often than not, the big financial fish are Teflon-coated. The rigging of the Libor (London inter-bank offered rate) market, crucial for setting interest rates, went on for more than two decades. Yet, only a single UBS trader was penalised. Similarly, after the 2008 financial collapse, a single small-timer was convicted for illegality – as a footnote in the film version of The Big Short informs us.

In India’s age of financial scandal, with YES Bank and the incredible Rana Kapoor in focus, no questions are being asked of its board of directors and senior management. It’s no different with the 2018 collapse of IL&FS; key players have not yet been questioned, let alone prosecuted. Indeed, India’s prosecutorial establishment would collapse under system overload if all the mountebanks in the system had to be brought to justice.

So whom do you trust with your money, if a single individual can bring down a longstanding firm – as can happen only in the financial world? Remember the collapse of Barings because of a solitary rogue trader in Singapore. In the opposite scenario, why do regulators stand by while a whole institution gets corrupted? Consider the venerable Deutsche Bank, once a pillar of the German establishment. As David Enrich has detailed in his newly-released Dark Towers, Deutsche Bank was involved in everything from money laundering and manipulating markets to violating international sanctions, and from getting into bed with Russian oligarchs to bribing public officials while deceiving governments and regulators.

As Indian savers and investors are learning, the financial world is a dangerous place. Banks can collapse, markets can be rigged, investment instruments can become worthless overnight, auditors can fail to blow the whistle, board directors can be asleep, and regulators can be incompetent. But why worry, when Indians have their safe harbour: the public sector banks? Except that building that safe harbour costs money, lots of it. When the state-owned banks ran into trouble five years ago, the government announced what it called the most comprehensive reform package since the 1969 bank nationalisation. The announced cost was Rs 70,000 crore. Five years later, the government has pumped in five times that sum, with more likely to come. Savers have their safe harbour so long as the taxpayer picks up the bill.

In any case, private banks are safe, too, since India has no appetite for bank failure. A number of private banks have disappeared into the embrace of other banks, sometimes voluntarily but mostly not: Global Trust Bank, Centurion Bank, Times Bank, etc. Fortunately, they were small banks that could be digested. What if the system were really tested? Already, the government finds it has no fiscal room for a war-chest.

It has been said that what the system needs are better managers, so the public sector banks should hire from the private sector. Perhaps, but Rana Kapoor spent many years in Bank of America; he was succeeded at YES by a hapless official from Deutsche Bank; and IL&FS was run by an ex-Citibanker.

When multiple and varied shenanigans put trust at a discount, there is no silver-bullet solution. Instead, boring things need to get done, like improving market intelligence and responding to early warning signals, improving accountability and the efficacy of prosecution, understanding structures and inter-dependence. Only then will confidence get rebuilt. So the Reserve Bank has much to think about, apart from questions to answer. Still, when “the main thing about money”, as the one-liner in Wall Street goes, “is that it makes you do things you don’t want to do”, the financial world is always ripe for the next scandal.

Disclaimer: This information is from a third party—Business Standard—offered through a tie-up to Kotak Securities customers for free for life. The third party content is not created or endorsed by any business offering products or services through it. The provision of this third party content is for general informational purposes only and does not constitute a research call, recommendation or solicitation to purchase or sell any security or make any other type of investment or investment decision. Also, the views and opinions stated in the content belong to Business Standard. Kotak Securities does not uphold nor promote any of the views. These reports do not, in any way, qualify as a Kotak Securities research report.

A few links for further reading

Not quite flying: Why Modi govt's UDAN scheme is struggling

At least two airlines that won UDAN contracts have folded up; scores of airports and airstrips cannot accommodate flights, and policy changes make business difficult.

Are Indian banks out of the woods?

Earnings season is over at most Indian banks. Looking at the September-quarter results, one might be tempted to say the worst is behind for the India banking industry.

Fix the holes in your investments and insurance plans ahead of the new year

Make changes where required so that your investment and insurance portfolio are equipped to meet the rigours that 2020 may have to offer. With the year drawing to a close, your thoughts may have turned to taking a holiday and visiting a new destination. Or you may want to just curl up in a blanket and laze around by a bonfire. While you do deserve some rest after toiling for the entire year, one essential task you must not overlook is to check your financial portfolio and ensure it is in good shape.

Want to get this in your email?