The (Greed) Party is Over…Understand this 3-part series on how the greed contagion can derail corporations and us in ‘Fall Out, Wipe Out, Bail Out…And No Way Out? – An Anatomy of Greed’.

Fall Out, Wipe Out, Bail Out…And No Way Out? – An Anatomy of Greed (Part 1)

Bear Stearns, Freddie Mac, Fannie Mae, Lehman Brothers, AIG, Washington Mutuals, and Wachovia – all these firms have been brought down by the financial meltdown.

Now the contagion has also hit the European market: Fortis in Belgium, Bradford & Bingley (B & B), HBOS in England, Hypo Real Estate in Germany, and Glitnir in Iceland.

How many more will succumb is anybody’s guess. It seems that no institution is safe. The list goes on and the contagion of corporate failures is just beginning.

Many have speculated on what went wrong. I am not an investment banker. Neither am I a financial expert. But I consider myself a keen observer of the trends and times.

After plowing through a mass of articles, websites, and interviewing some of the best brains in town, one cannot help but come to the single most important factor that has caused the collapse of all these institutions - GREED.

When I shared this with a friend who’s a venture capitalist, he acknowledged, “Simple but true”.

As Nayan Chanda, Director of Publications at the Yale Center for the Study of Globalization, writes poignantly “Sub-prime mortgage-backed securities have turned out to be greed’s latest vehicle, a worthy successor to the one-of-a-kind sure-fire ‘winners’ that came before it, ranging from tulips in the 17^th century to North Sea oil and Internet start-ups in the 20^th.”[i][i]

Among these others, how else would you explain these phenomena?

·                     How CEOs are allowed to take high stake risks and fail but still get rewarded. In order to pursue growth and meet quarterly results, how is it possible that highly intelligent, experienced CEOs with the smartest leadership teams in Wall Street can expand beyond their capacity in order to buy ‘toxic assets’ and chalk up impressive P & L statements?

·                     How reputable institutions can ignore signs of under-capitalization and financial ratios but rely on their brand names to work in collusion with Wall Street fund managers to come up with beautifully packaged funds?

Anyone of us could have succumbed to the same temptations if we put ourselves in similar situations.

What is GREED?

Greed is an innate, growing, and unbridled desire for or pursuit of money, wealth, power or other possessions driven by self-interest to maximize short-term gains while denying or minimizing the same goods to others.

Allow me to examine its anatomy.

1.                   Greed is global and pervasive

No matter where we are, in Delhi, Dubai or Detroit, greed’s tentacles spread far and wide and reach deep into every nook and cranny. With clever marketing and packaging, shrewdly disguised low-interest mortgage-loans and seemingly highly lucrative derivatives tug at our depraved human heart, which is greed’s innate residence, and lure the incipient into full bloom.

From Wall Street hedge fund managers to average homeowners, we all went for easy money and short-term profits by investing money we do not have and by betting on future earnings. Homeowners went into borrowings not only to buy but also to flip. 

As Jonathan Eyal of the Straits Times European Bureau rightly points out, “And though the current attention is on shady speculators, the reality is that ordinary consumers everywhere must share some of the blame. Some were accidentally sucked into the maelstrom - with unsolicited credit cards, for instance. But many willingly engaged in the credit orgy. Speculating on one’s house by borrowing against an existing mortgage - ‘releasing equity’, as it was politely called, became an honorable occupation in all Western countries.”[ii][ii]

I mention greed as one of the chief causes of this global meltdown not to stand as a moral judge, but to realize that greed affects everyone. It is too easy to look at ‘the speck of another and forget the log in our own eyes’!

2.                   Greed is unstoppable because it is intoxicating

John McCain, the Republican presidential nominee, recently proclaimed, “We’re going to put an end to the greed.” Personally, I don’t think greed can be buried. It will rear its ugly head again sometime. Why? Because we are born with it.

As Chanda writes insightfully, “Greed is the mother’s milk of global commerce.”[iii][iii] Greed is our human inclination waiting to be released given the right opportunity. As the good book says, ‘It is like a lion crouching at your door.”

Also, the close cousin of greed is ambition. It is very difficult to differentiate between the two. Both are emotional and adrenalin-pumping elements that make us dissatisfied with the status quo and keep us creatively engaged but can also lead us into disastrous decisions, as has been seen in this financial meltdown.

Look at how greed keeps rearing its ugly head:

REGULATION

Following the Stock Market crash of 1929, in 1933, under Franklin D. Roosevelt, the Glass-Stegall Act prohibited consolidation of investment, commercial banking and insurance services. It also created FDIC to insure consumer bank deposits.[iv][iv]

The act was intended to stop bank executives from steering consumers’ deposit into risky investments and to prevent the collapse of financial institutions.

DE-REGULATION

In 1999, the Gramm-Leach-Bliley Act repealed the Glass-Stegall Act and freed financial institutions by allowing consolidation among banks, securities firms and insurance companies and created competition.[v][v] 

Even Alan Greenspan, the former Federal Reserve Chairman, proclaimed, “American consumers might benefit if lenders provided greater mortgage-product alternatives to the traditional fixed rate mortgage.”[vi][vi]

INDUSTRY EXPANSION

Then the greed party started. Commercial lenders began engaging in highly lucrative trading of mortgage-backed securities (MBS) and collaterized debt obligations (CDO) just like investment firms. The derivative market grew from almost $100 trillion in 1998 to $600 trillion in 2007.[vii][vii]

BOOM AND BUST

With the Fed lowering interest rates, cheap mortgage loans were readily available for consumers, who in turn generated a thriving investors’ market for derivatives such as MBS, CDO and other exotic securities. However, as interest rates rose, homeowners defaulted and put derivatives at risk. That was the beginning of the financial tsunami.

My verdict on John McCain’s statement is: Greed can only be contained but never eradicated.

I agree with the Minister Mentor Lee Kuan Yew of Singapore, who with his pragmatic outlook proclaimed, “Have we learnt nothing from the last Great Depression? Everybody has read Charles Kindleberger (Manias, Panics and Crashes), what shouldn’t be done the next time. I think (the US economy) will pick up again. But does that mean the end of all crashes? No.”[viii][viii]

John Ng, Ph.D

President

Meta Pte Ltd

Tel: (65) 6419 5255

Fax: (65) 6227 7170

Email: john@meta.com.sg