The Blame Game
Who is most accountable for this mess? Who is primarily to blame?
“It’s not whether you win or lose, it’s how you place the blame.” – Oscar Wilde
Wasn’t it too long ago (circa 2002) that the Enron and WorldCom accounting scandals broke out? Didn’t the venerable auditing firm: Andersen go down as a casualty of the Enron fiasco? In the aftermath, didn’t Sarbanes-Oxley Act come along to transform governance and accountability in corporate America and had ripple effects across the global business community? Wasn’t the multi-billion dollar, global industry spawned by “Sarbox” or “SOX” compliance developed to protect the shareholders from reckless management practices and to provide early warning signals for financial malfeasance? And by the way, didn’t the regulatory burden of SOX compliance squelch the listing of high-growth entrepreneurial companies on Wall Street and greatly benefit London to supplant New York as the new worldwide leader in public equity listings?
Defenders of SOX would argue that it prevented many more accounting scandals, it made CEO’s and CFO’s more accountable for their companies’ financial statements, it provided greater oversight powers to Audit Committees of publicly and privately held companies, and in any case, SOX had little to do with the amount of leverage an institution could carry on or off its balance sheet. It is posited that the Basel II regulations were supposed to take care of issues like banks’ risk management, capital adequacy, and leverage ratio issues.
Auditors, rightly, would point out that the odds are stacked against them because the complexity to which accounting standards have evolved – and the disparate, distributed and fragmented nature of their clients’ global operations – makes for a breathtaking challenge to uncover financial irregularities. It is like finding the proverbial needle in a haystack.
In the ra-ra years of easy credit and even easier profits from the toxic derivatives that have been lately uncovered as the poison that ate away our collective trust in the markets and in each other, surely there must have been voices of reason within risk management departments of financial institutions and corporations across the world. But since this train-wreck was ultimately not averted, one can safely hypothesize that those voices were drowned out by aggressive and greedy bankers, corporate lenders, fund managers, among others. Even if the bankers were scrupulous or discerning enough to understand what was going on, they did not want to disrupt the gravy train of multi-million dollar bonuses coming their way.
Then, there were Wall Street’s research analysts who track company performance for a living. They were expected to scour the financial statements of the companies they cover for issues that could be material to the ongoing profitability and viability of these companies. Prior to the financial crisis, there were few analysts who forewarned investors in stark enough terms to provoke a response toward the stocks of publicly-held investment banks indulging in this high-stakes gamble. The ratings agencies fell spectacularly short of assessing the risk profiles of various companies and the securities floated by these companies for the public capital markets. There were brokerages – which make a living ostensibly by advising clients on helping pick investments that would yield them an appropriate risk-adjusted return on their investments. Then there was the not-so-elegant dance that investment banks, insurance companies, and bond issuers were doing together around Credit Default Swaps (CDS’) – exposure to which was not being reported to the investing public with the appropriate level of transparency. These constituencies were not even in a position to price CDS’ on a “fair market value” basis – especially as markets got ever more illiquid.
There were auditors, accountants, and consultants who were supposed to ensure that companies’ strategy, operations, and finances are up-to-snuff in the face of an ever-changing business landscape. And of course, there were journalists, reporters, and commentators who were supposed to report back on the anomalies they had to uncover in the first place. Were they sleeping at the switch – or more aptly at their computers while the derivatives bubble was enveloping us from all sides? Were they entranced into reporting on nothing but America’s perpetual “war on terror” to the point that everything else happening right under their noses was just a distraction?
Then there were financial and economic policy experts. There were academics who study the performance and behaviors of individuals, companies, industries, markets, economies, and societies in new, involved, and esoteric ways. Prof. Nouriel Roubini at New York University is one of those in sliver thin minority who continually and vocally predicted the collapse of the financial markets thanks to the bubble that the markets were blithely perpetuating.
Of course, there was the government: regulators and bureaucrats and politicians – all there to protect and serve.
All of them together still fell short for this enormous bubble to be allowed to form and then for it to explode in such a disastrous way.
Indeed, the current financial morass has worn thin the collective and individual legitimacy (to varying degrees, of course) of all these constituencies to protect the shareholders on Wall Street – let alone the larger set of stakeholders on Main Street.
Is it that among all of these constituencies, it was only a handful of feeble voices that, ultimately, were not heard well enough by those in power to prevent this crisis?
Blame it on the GOP
“Democracy is the process by which people choose the man who’ll get the blame.”
– Bertrand Russell
Politically, much blame has been directed at the current US administration that allowed the US financial services industry to spread this global contagion through the tattered nets of a lax, out-of-date and imprudent regulatory regime. A regulatory framework – with SEC in the center – that was ill-equipped to track, monitor, let alone regulate, these new types of derivative instruments. After all, the current crisis was largely triggered by the unraveling of the US real estate market bubble and the underlying collateralized securities backed by debts such as mortgages taken out on US real estate assets, personal loans, credit card debt, among others. Add to that, the traditional small government, fiscally conservative Republican Party’s GOP (government in power) became the torch-bearers of running massive fiscal deficits on ill-conceived wars and a “pro-business” agenda (read little regulatory oversight originating from corrupt lobbying practices across industries from oil to healthcare to automakers to real estate and, to our very own, lead actors: financial services sector).
It almost seems like the economic policy of the Bush administration was the dog being wagged by a tail of narrow, special interest lobbies of the military-industrial complex, oil companies, and automakers, among other big businesses. Alan Greenspan, of course, shoulders some of the blame for his relaxed monetary policies that created years of cheap liquidity – which in turn fostered imprudent lending practices – which in turn gave consumers a distorted view of their purchasing power, and so it goes. In the name of being an “ameliorative government,” the current Bush administration is to blame for concocting the lethal combination of a distorted interpretation of Keynesian deficit spending policies on a doctrine-driven “war economy” – and a perverted and extreme interpretation of Milton Friedman’s Monetarist agenda. Of course, there is a whole different discussion about the burgeoning US current account deficit and US national debt, the sinking US Social Security program, the ravaging “war on terror,” and other spectacularly large and potentially de-stabilizing crises that could have just as easily contributed to a US economic meltdown – and afflicted the rest of the world in its aftermath.
To paraphrase former US Secretary of Treasury and ex-Harvard University President, Lawrence Summers: For the first time in the history of civilization, the greatest super-power in the world is also the biggest debtor in the world.
In effect, there is plenty of blame to go around.
Life Without Consequences
“Too many people spend money they haven’t earned, to buy things they don’t want, to impress people they don’t like” – Will Smith
It seems there were a lot of characters in this fairy tale where life was lived without thought given to the consequences of our actions. We, the Main Street (consumers and investors) cannot absolve ourselves of the imprudence that we have exercised to help create the morass that we find ourselves in. There was little individual responsibility for actions. We could buy and consume ourselves out of anything. Anxiety, depression, insecurity, loneliness, inadequacy, frustration, anger, and so it went. You name it and the local mall down the road could solve it. Positive experiences were on sale too: love, happiness, comfort, warmth, friendship, wisdom, and so forth. Credit was cheap, home equity lines were flowing, and having our cards swiped at the counter was our endorphin “quick fix.”
About the Author: Sahil Alvi is a management consultant and a writer. He presently works with KPMG in Dubai. Previously, he has held management consulting roles with Ernst & Young and PricewaterhouseCoopers in the US. He can be reached at: email@example.com