By Sanjay Jha
( As Occupy Wall Street gathers world-wide momentum, it is the perfect time for introspection for the overpaid investment bankers. And for Friedman to revisit his flawed hypothesis of a flat world)
Morgan Stanley had just completed a whirlwind road-show across India, ensnaring giddy-headed investors into buying its much-hyped NFO for a close-ended mutual fund scheme marketed with such masterful strategy that the gullible lot thought they had bought into a galloping Reliance IPO. Some of India’s leading hot-shot merchant bankers had duplicitously allowed a false notion to pervasively prevail that Morgan Stanley was like glittering gold; an investment that was a roadmap to El Dorado. Investors thought that a unit and a stock were both interchangeable. Expectedly, the NFO was a mind-boggling runaway success, accumulating a record sum. It’s subsequent fall from grace is legendary. That was 1994-95.
Morgan Stanley is now a traditional commercial bank , not an investment bank with other financial products to attract affluent risk-prone investors. Post- the cataclysmic collapse of 2007-08 following the credit default swaps bloodbath , the white-collared dark-suited Wall Street breed has been permanently vanquished, their cocky demeanor tumbling dramatically as US Treasury salvaged them by playing fairy god-mother. But even in earlier heady days, when working with a blue-blooded investment bank was considered a career pinnacle, one suspected something rather extraordinarily strange about this sublime , sacrosanct breed called investment bankers.
“What do you think, should we invest in this stock or just ignore it?”, asked the foreign-educated, market savvy, media-obsessed portfolio manager for a global asset management firm. Outside, a rotund, gold-plated spectacle-wearing burly man with a grin wide enough to accommodate the Grand Canyon waited anxiously. The concerned stock was seen as the then “Ipod” of the emerging portfolio; the broker had some strong insider information on a proposed bonus issue straight from the horse –owner’s mouth.
We shrugged our shoulders; after all, it was the chief investment officer who had to take the final call, the rest of us were mere signatories on pre-printed forms, part of a larger committee as per the company’s due diligence norms. A dart -board stood framed disconsolately on the blank white walls opposite the CIO’s desk. ” Let’s take a shot. If it hits the bull’s eye, we buy full quantum. If we score under 8, we pick up half the recommended allocation. If it’s less, we give it the thumbs down”. He took the sharp-pointed dart in his hand, and taking aim glided it towards the bull’s eye. This is not a sardonic exaggeration, rest assured, it actually transpired. Of course, it may have been in lighter vein and not practiced in deadly earnest, but the more pertinent point is the cavalier attitude to investor funds.
In all fairness, I do not know whether the CIO finally executed that transaction based on the result of his Robin Hood aim, but that was the style , mood and attitude that prevailed. Equity research did not mean plant visits, extensive deliberations with production staff, interacting with the firms’ suppliers and dealers, analyzing industry trends, or assessing customer feedback. Most decisions were a function of secondary published research, subjective calls, insider trading , business networking, and confidential invitations to promoter boardrooms. There was something disturbingly disquieting about this category of money-managers.
I was to meet a well known head hunter later by sheer accident at a private gathering, and asked her; ” So what do you think of the current global mess? Don’t you think it exposes the over-rated over-paid over-promoted tribe of “I” bankers. The I, Me, Myself lot who cannot see beyond their annual bonuses and extravagant off-sites, and yet appear so pious about stakeholder interests ?”. Her reply stunned me.
“Oh , come on ! It’s not their fault at all . They are greedy. It’s the regulators to blame”. Of course, it was also a system failure, borne out of regulator apathy, thanks to America’s passionate embrace of pure market capitalism, but didn’t the regulator and the government work over-time to bail-out the massive losses on account of speculative CDS derivatives and subsidize the hefty pay packets to preserve sanity on Wall Street ? As a disgruntled friend told me ” The next time you hear these guys saying they are bullish on TV channels, all you will think of is that they are all bull”. Welcome to the world of cowboy capitalism! And now to a rag-tag, disaffected bunch protesting on Wall Street.
Of course, the commercial and investment bankers can always justify that the CDS ( credit default swaps) was a breakthrough product, meant to create a new derivatives market, and free up capital for more structured lending. Ultimately, it would have ostensibly meant higher ROI for both customers and investors. But surely, investment bankers were not expected to be so stupidly naïve about the risk of over- exposure multiplying through a vicious chain of internecine investments , which portended a huge systemic fall. Even a high school student could have predicted a stratospheric nosedive , if just one variable—-home loan defaults , began to escalate. After all, they were sub-prime by definition, weren’t they? That is exactly what happened. Are investment bankers serendipitous by nature, or what?
Which brings me to Mr Friedman. Perhaps that is what the acclaimed author/columnist Thomas Friedman ( of New York Times) meant when he said The World is Flat, his much touted international bestseller, titled with an appropriate catch-phrase for grabbing eyeballs, based as it is on an oxymoronic factual fabrication. As central banks all over the world converged to salvage the US financial mess and their own , it’s repercussions were felt world-wide. Perhaps this is the “level-playing field” that Mr Friedman postulated on in his book, which at best, can now be called pulp fiction.
The Wall Street fiasco which led to the investment banks tumbling in a calamitous heap, best explains why Friedman’s book is based on fragile assumptions of continuous world-wide prosperity, over-dependence on technological innovations , internet connectivity creating everlasting boundaries. In the 1930’s , the Great Depression was a function of the stock-markets tumbling on speculative investments; almost 78 years later , it was a similar chain of avaricious misdeeds that led to the big bubble burst. What goes round, comes round and around, Mr Friedman. And that can only happen if the world is round. Not flat. Galileo can rest in peace, even as Mr Friedman scripts another bestseller in his quiet backyard. Hence, the world reels in with the Euro crisis, Greece and Italy are on the brink of a precipice and apprehensions of a double-dip are rampant even as I write.
But maybe Mr Friedman biggest blunder in his entire book which wants us to believe that the world is flat, is that his world conveniently does not include Africa, calculatedly forgetting the dark continent of the world. Because Africa is HIV/aids infected, suffers regular epidemics, starvation levels are shockingly high, ethnic genocide continues, and it is politically irrelevant and economically bankrupt. It has no “value added proposition”, perhaps. Its recent upswing courtesy Chinese interest is yet piecemeal. Level-playing field?
Mr Friedman will be best advised to look inwards and introspect on a simple maxim which applies to investment bankers today; surely, if stock market experts were so proficient they would be buying stocks, not selling advice, right?? If New Orleans itself is so far removed from Manhattan, Mr Friedman, don’t you think it has been rather presumptuous on your part to hard-sell to us all that the world is flat? And as Occupy Wall Street categorically establishes, before embarking on promoting a universal theory on the shape of the world, one should have taken a long deep look in one’s own enclosure to discover that America itself is not flat; it’s undulating. Uneven. Excessively lopsided in income distribution.
The fact that Occupy Wall Street has spread to different cities in the US, Europe and Asia is a manifestation of the global outpouring of anger against the Big Business-government nexus. We do live in a world grossly unequal. 73% of the world’s population does not even use the internet, for heaven’s sake, Mr Friedman! It is a flat fact.