That Lehman went bust was not a surprise. The real surprise was how did this scam last so long. Back in 1998, I had written a piece for BusinessWorld, positing that Wall Street Investment Banks, with on-balance sheet leverage of 20x (back then), plus nearly inestimable off balance sheet risk and leverage, were a time bomb waiting to explode, because a mere 3-5 percent swing in net asset prices would be enough to propel them into bankruptcy. Merrill did come very, very close to that, in the 1998 Asian crisis. But it survived, and the Great land of the Free, made things even freer for Wall Street, after that.
Things have rolled on since 2008. Well sort of. And largely downhill. The only saving grace has been that no real banking crisis has followed. It’s just been the little irritant of half of Eurozone teetering on the verge of bankruptcy. And this sovereign crisis has also brought out to fore, the intrinsic immorality of markets: all talk of bailouts, some dim-witted liquidity package, anything that creates more debt for the future generations but lets the current generation survive, is greeted by a rally in global markets, ours included. But let our government announce a scheme that benefits the poor, and see how the intelligentsia, economists, analysts, come out in full force against such measures. “Wasteful”, “subsidy burden”, etc. A cut in dividend tax, that benefits Mukesh Ambani and a handful of others, is always “progressive” and worthy of celebrations in the op-ed pages.
The world economy is slowly sliding into stall speed, if not already there. About the only major economy that has weathered the post-Lehmann storm well is India. And it would have been even better had people like the CAG not concocted “scams” out of thin air, like in 2G and coal allocations. And most interestingly, all CAG calculations of loss begin from 2004-5, when the UPA came to power. As if there were no allocations of anything prior to that, in the NDA regime. Very, very interesting...
It is my belief that the independent institutions in India....the Judiciary, the RBI, the media, the CAG, are the real reasons why the mood is so despondent. The 2G judgement by the Supreme Court is a travesty for the many industry players who have not even been named in the so-called scam. The RBI’s obdurate stand on interest rates, in the face of overwhelming evidence against it. The media’s perma-negative stand on just about everything happening here. The CAG’s wonderful perfect hind-sight based calculations...one of the pleasures of living abroad is that there is no “blood-pressure” TV, of the kind India has.
The last and most important point, four years out, that emerges, is that financial services as an industry, worldwide, is in a secular decline. Investment banks, brokers, asset managers, hedge funds....all are hurting as this bear-bull market is exposing the hollowness of the industry in adding value to end-investors. Equity, as an asset class, is also being exposed, for giving low returns with excessive risk.
India looks the only clear winner in this very difficult world post- Lehman. If only we Indians started analysing, instead of asphyxiating on self-created gloom.
Shankar Sharma
Vice-Chairman, First Global
