By Digoy Fernandez
THIS particular blog will not bore you with statistics nor will we provide a chronology or a timeline for the present economic crisis. I have received enough forwards, looked into a myriad number of web-pages and articles about how the crisis began and how it is playing out. Instead, I would like to dwell a bit on the motivation that drove otherwise sensible bankers and finance whizzes into making catastrophic (in retrospect) decisions on a truly grand scale. In a word, we find that, in almost all cases, the common denominator was GREED!
Someone commented that bankers and finance men (and women) who are currently in their 50s or 60s and above, would be boggled at the type of financial products developed and marketed during the past two decades. These so-called financial products tend to confuse the traditional finance people, schooled as we were in the basics of borrowing and lending. But the new mavens have gotten to the point of fashioning intricate debt or credit instruments that have become less based on fundamentals and more on an ability to flip the products through the mill, earning one a hefty commission in the process.
In the good old days, our bosses told us to know our clients very well, and to know their companies and products to the point of being well-versed in the nuances of these businesses. We did cash flows of the firms’ products and their cycles, and we knew when and how much to lend to these corporations. Lending and investment were based on good old fundamentals.
Unfortunately, the traditional way of doing business was deemed too arcane and too sluggish for the financial wizards of today. Born and schooled in an age of instant gratification, they tended to live in a world divorced from the Main Streets of the world. In another publication where I write with a group of the country’s top finance people, I have long tended to look askance at financial derivatives and financial analysts who track a company based on quarterly results. Because of this tendency to focus on quarters, top executives have also been inclined to take short cuts or measures that would ensure good quarterly results, often sacrificing a firm’s long term prospects in the process. I am not sure if there is a direct correlation, but the pressure to produce regular rosy reports has probably tempted not a few CEOs to sweep problems under the rug…like hiding them in innocuous sections of the contingency accounts of the balance sheet.
Naturally, to participate in such a shameful process, a CEO must probably be motivated by his or her own personal bottom line by way of high salaries and benefits, significant profit sharing schemes, and the ultimate in bailout plans – the golden parachute. This last item, the golden parachute, was originally designed as a “poison pill” that would discourage predatory funds or investors from gobbling up a particular fund, because they would have to pay a very large up-front fee just to get rid of a sitting CEO, for example. Over time, the golden parachute evolved into a necessary part of a CEO’s remuneration, allowing him or her to avail of very large payouts whether or not the company under his or her care made money or was leaking red ink during the period of stewardship.
A classmate forwarded a thread that showed how many of the CEOs involved in the institutions being bailed out by various governments were eased out of their respective positions, but not before availing of generous separation benefits. Even the US Congress was incensed enough to point out this fact in their deliberations regarding the $700 billion bailout fund.
The CEOs of today will have to remember that, at the very least, they are stewards of their companies, whether they have a significant financial stake in these institutions or not. They are, after all, responsible to a number of employees and their families who depend on the firm for their daily and long term sustenance. Furthermore, the good health of a company, and of all companies for that matter, help ensure the health of the economy in the long term.
It will take quite a while, if at all, for the world economy to get back on its feet. This was a Mortal Wound. And it was powered by insensitive Greed, because, to this day, what they did still doesn’t make sense to the man on the street.
11 Feedbacks on "Greed powered the bottom line!"
Rosalee
Amen to all that.
Herbert Hoover once said that “the problem with capitalism are the capitalists, they are damn too greedy”
That was said during the great depression in the United States in the 1930’s.
Need I say more?
Josh Centro
That’s what it’s all about, greed. Just like what Michael Douglas said in the movie Wall Street, “Greed is good.”
mark
And what is greed? Greed is just another word for self-interest. It merely means to pursue one’s interests. Interests that can range from simply making lots of money to giving to charity. Just as it is Warren Buffet’s interest to give away his billions.
Everybody follows their own self-interest. But what makes one person greedy? What do you want to propose? That transactions like these be overseen by “disinterested experts”. Who will keep them in check? The masses who are apparently incapable of understanding the complexity of the financial system in its entirety because they are too busy making a living?
No it wasn’t greed. It was a lack of proper regulation that encouraged rent-seeking (to profit at someone else’s expense). We do need more regulation, not to stamp out greed (that is nonsense). We need more regulation to ensure the consequences of any act is borne by the actor.
mark
Please watch this:
http://www.youtube.com/watch?v=RWsx1X8PV_A
Victor
a). This is the kind of analysis that insults the intelligence. No, you don’t need statistics - just compare the amounts that you think was lost to greed (CEOs, bankers, etc). Compare that to the values destroyed by the craven pols that caused this crisis (when such could still be demonstrated). If you know some economics, you would understand why the easiest things to blame are not necessarily the right explanation.
b). Even if there is a fine raft of evidence, do you really know what you are sayiing when you condemn greed without offering a substitute?
Think about it.
anseljr
The general consensus seems to be that the big financial institutions that came tumbling down last month were the monsters that had caused this meltdown. We fail to realize that at the core of this derivatives craze and eventual fall were the credit-addicted lifestyles of millions of Americans chasing the “American Dream” but who are now unable to pay.
As that US senator said to the CEO of Lehman: You privatized the gains, and socialized the losses. Now that the world has taken a bite out of this poisonous pie that America dished up, we, the rest of the world, are now paying the price with bailouts that could have been used for more beneficial, humanitarian purposes.
Isidro C. Valencia
Remember the Exxon corporate scandal involving executives several years ago?
And Dennis Levin, an infamous Wall Street insider trader who profited usd11.6 miilion in US investment banking scandal?
In the local front, the BW Resources inside trading implicating former President Joseph Estrada in the alleged siphoning of SSS pensions?
These exposed the GREED of executives in American wardrobes. Their necktie is a symbol of “hanging their necks.”
Americans did learn not from these bitter lessons. Maybe, because they think they can print dollar bills at their own gusto.
I admired a well known politician who said, “kung busog ka na, tigil na ang kain at baka mabitak na ang likod mo.” (If you’re full, stop eating, otherwise your back will crack.)
jmajf
Of course there were many other extraneous causes for the financial crisis, among them, the overuse of debt to fund affluent consumer lifestyles. It is now clear that certain regulators actually sought to keep the markets from being regulated or vetted closely, leading the financial market whizzes to take advantage of the lack of oversight to increase their corporate and personal earnings. Now, the trashy nature of many of these derivatives — those that had not fundamentals backing them up whatsoever — is coming back to haunt either the issuers, guarantors, or ultimate buyers. The market for derivatives is estimated at roughly $680 Trillion, and I would think that the great majority of these would be in the subprime category. Just like junk bonds, subprime mortgages or debt will drag everything down in a market that has become increasingly bearish with the passing of each day, drowning in red ink or bad news.
Ramonl
To Isisdra C valanecia
I don’t recall an EXXON executive scandal, were you referring to ENRON? If not, when did this scandal happened.
Thanks.
Bert
The creed drilled into us from childhood had always been - get an education, work hard, provide for your family, buy a home, save and invest for your retirement and live the American Dream.
All of that has gone down the toilet. People are getting laid off, losing their homes, retirement funds dwindled to almost nothing. Frustrated, angry, depressed, they are everywhere.
1)Easy credit = instant gratification = financial disaster
2)Tight or non-existent credit = living within your means = cash and carry only.
Guess what country started #1.
In a third world country, where abject poverty is prevalent, one suddenly shifts his priorities- it’s a matter of self-preservation. As one NBA player was quoted - “Get all you can while you can.”
Greed is ugly when somebody gets caught with it. But when you do it, it’s in the guise of “capitalism.” “Just providing for my family and their future.” Morality is thrown out the window. It’s every man for himself.
Nobody wants to relive the great depression and find himself in a soup line.
victory7
I pity all the folks who hold on to these explanations for the ongoing financial crisis. Greed to them explains everything, the market is totally bad, and they pine for that idyllic world where everybody would look out for every one else. Where in space do you find these folks?
They need answer only one question: do you really believe that if these guys in the midst of the crisis (or, as you desperately want to put it - caused it) had their way they would have deliberately done what it is that led to the crisis? And if they could, what makes you believe you are better than they in calculating the fine balance between both sides of the issue (Note: greed may be bad but do you know that it is what makes you live well? Sometime ago I read this sanctimonious columnist blaming Americans’ materialism for verconsumption. It probably never entered the writer’s mind that if America did nto overconsume, given the rest of the world’s aversion to spending (coupled with its parsimony) that millions more would have wallowed longer in poverty; that this demand balance could only happen because both sides thought they were engaged in a mutually beneficial bargaining? Pity, pity, when folks can be so self righteous that they forgot what made it possible for them to express such view in the first place.
Those who can not honestly answer this question should take a course in systems dynamics or at least make their living out of it. Until you have done both for a good number of years, just keep your beliefs to yourselves. Of course blogging them out helps people know how lucky they are to understand that difference.
Folks, sometimes the only reason we can opine so boldly is that we may not know what the hell we’re talking about. But just the same, keep talking maybe someday you may get it finally.
Please Leave a Comment!