Monday, March 23, 2009

A silver lining in the darkest cloud

A silver lining in the darkest cloud

Recently, some alert message on the road-dividers in my city caught my attention. It says :

Speed thrills, but kills .”

Nice way to keep reminding those trying to soar high while sitting on the steering wheel ! Although it is a common knowledge that excessive speed could be dangerous, such constant reminders are required, coz. speed thrills and one tends to get addicted to it. It takes a lot within to resist thrills before it becomes an addiction. Another question came to my mind : does any driver ever see these alerts while driving ? I doubt ! In fact, I also saw this only when I was walking down to the stadium for my morning walk.


So, the points are:

a. Most of the times, common knowledge is very uncommon, in the sense that everybody knows it, but does not internalise - believing that the prophecy, especially if it is bad, will somehow never come true for him/her. (S)he can get away !!


b. Unless a fellow has high self-discipline with internalised values and ethics, one tends to chase thrills one after another, and ultimately loses control. Consequences ? Anybody’s guess !


Reminded me of the recently uncovered Satyam fraud here in my own country ! And the Madoff fraud in US !


On the 12th of March, 2009, Bernard Madoff ( an American businessman and former Chairman of NASDAQ stock exchange - the man, by now world -(in)famous for the largest investor fraud ever committed by a single person involving fabricated gains of about US $ 65 billion), pled guilty and admitted to defrauding thousands of investors through a massive Ponzi scheme, “a big lie” as he puts it.


In his court statement he confessed to what he did and how he did it and how he got away with it .

Here is an excerpt from his court statement,as published in the media, that caught my attention like never before and really got me thinking:


To the best of my recollection, my fraud began in the early 1990s. At that time, the country was in a recession and this posed a problem for investments in securities markets. Nevertheless, I had received investment commitments from certain institutional clients and understood that these clients , like all professional investors, expected to see their investments out-perform the market. While I never promised a specific rate of return to any client, I felt compelled to satisfy my clients’ expectations at any cost. I, therefore, claimed that I employed an investment strategy I had developed, called a “split strike conversion strategy”, to falsely give appearance to clients that I have achieved the results I believed they expected.”


Madoff stated that he wanted to satisfy the expectations of high returns by his clients in spite of economic recession. He admitted that he had never invested any of his clients’ money since the inception of the scheme. Instead, he simply deposited the money into his business account at Chase Manhattan Bank. He admitted to false trading activities masked by foreign transfers and false SEC returns. He used the Chase Manhattan Bank account to pay clients who requested withdrawals, claiming the “profits” were the results of his own unique “split strike conversion strategy”. He declared that he had every intention of resuming legitimate activities in his asset management division, but it proved “difficult, and ultimately impossible” to catch up to the paper profits. ( Sounds familiar ?? Only recently B. Ramalinga Raju of Satyam had also stated his intentions in a similar vein – the essence of which is : keep fooling the gullible lot with false results, siphon funds elsewhere, make good the losses when an opportune time comes before it is about to get uncovered and do something legitimate to convert the paper profits to actual profit. )


How can they forget that they can never escape their day of reckoning ultimately !!!


Now, read the excerpt again … and highlight whatever you feel is crucial to note. I am reproducing the excerpt with parts, which hit me the hardest, highlighted:

To the best of my recollection, my fraud began in the early 1990s. At that time, the country was in a recession and this posed a problem for investments in securities markets. Nevertheless, I had received investment commitments from certain institutional clients and understood that these clients, like all professional investors, expected to see their investments out-perform the market. While I never promised a specific rate of return to any client, I felt compelled to satisfy my clients’ expectations at any cost. I, therefore, claimed that I employed an investment strategy I had developed, called a “split strike conversion strategy”, to falsely give appearance to clients that I have achieved the results I believed they expected.”


I felt compelled to satisfy my clients’ expectations at any cost. This one sentence perhaps says it all !! And if we as a people can take our lessons from this one sentence, I think I will call that the silver lining in the darkest cloud. YES !!

Analyse this way:


He felt compelled - that is not the same thing as he was compelled . He was perhaps not compelled by anyone, but still he felt that compulsion because of what he thought his clients expected from him .. ( refer back to the excerpt…. and understood that these clients, like all professional investors, expected to see their investments out-perform the market .)


And what did he think his clients’ expectations were ? To have returns much higher than the market normally churns out !!! ( The why to this question is the most significant dimension that this whole episode throws up for reflection – I will come back to that, after I complete dissecting this one highlighted statement of Madoff. )


And what did he feel compelled about ?
To satisfy his clients’ expectations at any cost. In any business, feeling compelled to satisfy the clients’expectations is perhaps the most needed driving force to stay in business and get ahead of competition – in fact so far so good . But at any cost ??????? The problem actually starts here and can end here if you believe in doing good business and delivering high returns going out-of-box for efficiency and innovation, and NOT for unethical practices, i.e. business at any cost. He created all this mess because he played his game , at any cost – took to fraudulent ways and showed fake results to please the investors despite the recession.


Now, coming to “ why”s .


Why he thought what he thought ?


And why he got away for such long years
until he, himself realised that it is impossible to carry on with the fraud any longer and surrendered through his own sons ?


Yes, blame it on competition, but the reality is : there is a catch on both sides – the businessmen as well as the clients
. If Madoff thought that his investors expected him to out-perform the market ( i.e. to deliver dazzling results, not commensurate with those possible through running reasonable n good ( read ethical ) business in the market ), then he is not entirely to blame. The majority in the business world in today’s dog-eat-dog competition feel this kind of client pressure. Competition has somehow become synonymous with reckless speed – speed in business, speed in delivery, speed in growth in volume of business, speed in growth in return/profit – the greater the speed at which you move to capture the market, the greater the thrill, the greater the market rewards you !! And who to blame ??


A good share of the blame, in my view, should go to all of us .

We as investors/capital providers/customers/consumers/ the beneficiary at the other end have started demanding miraculous results till we have alternative shops – all in the name of competition. We have got into a habit of a dialogue like this : Okay, if you can not give me enough, there are many others. We get excited when we receive very high returns on money invested/spent and never bother asto how it became possible for such miraculous results to happen!


[For example: How many potential customers for loans ask questions about the financier’s asset-liability management and net margin if they are offered a ridiculously low rate of interest on loans vis-à-vis higher interest rate on deposits? ]


It seems concerns about Madoff’s business had surfaced as early as in 1999, when Harry Markopolos, a financial analyst, informed the SEC that he felt that it was legally and mathematically impossible to achieve the gains Madoff claimed to deliver. Did anybody listen to that ?? Not until very recently in December, 2008, when the present global financial crisis created a rising demand for cash withdrawals by Madoff’s investors and he knew, he can not carry on with his fraud any longer! Obviously, had Markopolos’ whistleblowing caught the attention of the authorities and the till-then happy investors getting very high returns, so much more loss to thousands of clients could have been averted !


So, it is greed, greed and greed on part of both sides – stakeholders concerned only with high returns and businessmen to stay in business by satisfying stakeholders’ expectation at any cost . The age-old chicken n egg syndrome !!


This push by client expectations in a competitive marketplace is good only so long as it leads to qualitative improvements or innovations. But what happens when this ( satisfying client expectations at any cost ) is (mis)taken by the businessman as the sole survival strategy? It starts allowing space to deceit, game-playing, scheming, misrepresentation of facts, figure fudging, fabricated gains, fake results and mind-boggling frauds !! The jet-set speed of their own creation ( read, manipulations) creates such a need for more and more speed ( read, further manipulations) just to stay on course that eventually, it becomes unsustainable and crashes !! Yes, speed thrills, but kills.


The saddest part is : it is not one Satyam or one Madoff - there are many in their family, including corporates, who can not plead all clean when it comes to accounting and fact-sheets! So far as corporates are concerned, apart from market competition, other dynamics relating to trade-off between the short-term and long-term, reward, recognition, financial incentives, career progression etc. come into play and make the leadership as well as ranks within to “project” market-expected performance. Who knows when what will assume which proportion ?? As someone said, truth is only a resting point until the next revelation!!

But how can I not see the silver lining in the darkest cloud ?

Courtesy these filthy episodes, a fresh wave of awakening has dawned upon the entire world.


Let us stop being greedy
and irrational when it comes to our expectations about our own gains as investors or consumers or other stakeholders !

Let us demand more transparency and probity in affairs of the business world!

Let us listen to alarms bells; let us ring alarm bells !

Let us start questioning !

Knowingly, let us not be a party to a foul game !!

Let us stay away from the seven sins , as described by Gandhiji as under :


Seven sins

Politics without Principles;

Wealth without Work;

Pleasure without Conscience;

Knowledge without Character;

Commerce without Morality ;

Science without Humanity;

Worship without Sacrifice .

- Gandhiji

[ I think, if these stinking episodes can remind all of us, the world over, to reflect and drive us to act in a zone, free of the seven sins, that would be much more than just a silver lining in the darkest cloud, I swear !!!! ]

9 comments:

Rajeswari said...

Hi Snigdha,
I do not even know how to react to these unimaginable crimes.The saying is true however-you can fool some people all the time;even the whole world for some time;but not the whole world all the time..It has to come out someday....Hats off to the system called Judiciary.

Rajeswari said...

I really admire the way you have dissected the whole incident with a mature analytic scalpel and laid out your sharp observations .A must-read for all ages!!

Asha said...

Madoff ruined lot of lives, some lost their life's worth of earnings! I don't know how he slept at night but then people like him don't have a conscience or soul I guess!

Gandhiji's thoughts do not survive a day in here. Even after all that Madoff stuff and AIG rip off bonuses, people still are greedy anyway! :D

snigdha said...

Hi, Rajeswari, Hi, Asha - thx for your observations. That's how a majority of us feel - a numbness not knowing how exactly to react to these ghastly inconceivable crimes. And mostly you are true, Asha, that people still are greedy anyway - otherwise, history won't be repeating itself again n again in these ways !There have been many more in the past , too ! and better not predict the future. But I have this great faith in the ridiculously small minority of people who still act in a seven- sins-free zone and a vast majority who are fence-sitters,ready to jump to the side with more noise. So, let's make a lot of noise - so that this vast majority starts reflecting which way to go !!

Deba said...

Really, a nice analysis, a fine dissection to find out the truth! And the truth is that we have to be limited in every sphere of our activity. Even, we have to restrict our thoughts to a certain limit that would result in limited expectation. When one’s expectations become limited, the greediness automatically remains under control. On the other hand, when our expectations are too high, we would be addicted to achieve more and more by adopting any means including fraudulent means. Undoubtedly, it thrills in the first instance, but ultimately kills. The world is presently directing towards such thrills and that is why many scam, etc. However, some people like you are still there who often remind the society through various means to adapt to the right path, correct themselves, distract themselves from the killing thrills and so on. That is why the world is sustaining.
I salute you for such a though-evoking analysis. This truly acts as a silver lining in the cloudy sky.

DEBA

snigdha said...

Hmmm..mm..mm... thx Deba.. feeling a little flattered - not all that bad, ha, ha ! keeps up the motivation. Well, joke apart, your observation has got me thinking again. I think, being limited applies only to "expectations of results/gains" and certainly not to "endeavour in a clean manner for betterment" in any sphere ( real betterment, not concocted ). And there is no need to cap even your expectations of results, so long as you are willing to do the reality checks mid way,time and again along the way and keep adjusting your expectations within the realms of fair feasibilities. This is to avoid the flip sides of both unlimited and limited expectations. Unbriddled expectations "exceeding fair feasibilities" allow space to unethical practices, while limited expectations have the danger of sucking away all fun and challenge from a project. Takes character,wisdom and skill to balance between the two extremes !!

Deba said...

Thanks for your quick response. I’m agreed with you that so far as our intentions are fair and clear and that too for the real betterment, our thoughts and actions should not be capped with any “limit”. In fact, limit is not an absolute term here. It will differ from person to person, being dependent upon ability, capacity, available resources, intelligence, etc of the person in question. If one puts in efforts and expects to stand first in an exam then that is good and fair enough. But, if one doesn’t put any labour and expects to come first in the exam by any means, then that would be bad, immoral and unethical. If he is determined to fulfill his expectation, then he would definitely adopt some unfair means. In that way the expectations, aspirations, etc (exceeding the fair feasibility) should be capped with certain limits depending upon circumstances and other factors relating to it.

Deba

sambit said...

I think all the mothers in the world have taught their children not to trust strangers without scutiny. However kids remain kids and even grown up kids don't learn. They trust their greed to lead them to the frauds and imposters [ to the wolf if i may say so]. I believe it will continue like this - for the truth has a way of surfacing each time such a thing happens to be concealed by the greed till there is a need for it to resurface.

snigdha said...

Hey there, Sambit, where were u ? welcome back.