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 12^th 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 !!!! ]