Sunday, July 1, 2012

There's something very rotten in Finance

Can a whole industry be rotten ? Definitely not. As in any field, you should expect the good, the bad and the ugly. But increasingly it is difficult to spot anything good with the financial services industry. Consider the latest scandal to hit the headlines - the manipulation of LIBOR by Barclays and 20 other banks.

LIBOR (which stands for London inter bank offer rate) is one of the prime interest rate benchmarks in the world. Many interest rates are fixed at LIBOR plus a premium. LIBOR should therefore be an impartial market rate based on which a whole lot of other transactions revolve. But it now comes out that Barclays has been manipulating this rate for a while. A fine of $450m has been imposed on Barclays and a probe is on with 20 other banks.

I know greed is a universal vice and an industry that directly deals with money is especially vulnerable to an overdose of greed. Yet it would be difficult to find an industry that has so allowed its core to rot . One after another, examples of insane risk taking, outright fraud, manipulation and criminal behaviour is coming to light. Action by governments has been patchy at best.

There is almost no  financial player that has remained untouched. Mention banks and every bank of renown has been in trouble. Mention insurance and the likes of AIG and Marsh & McLennan come to mind. I don't even need to comment on the likes of hedge funds and other less savoury players. Even the most reputable names in the business (Barclays is one of them) have been caught in wrongdoing. How can this be - a whole industry cannot be bad ?

The best brains in the world go into finance. And this is the field that seems to have the deepest rot.  Says something about the value systems of bright people. The state of the industry has gone beyond outrageous levels and has to be stopped.

Draconian action has to be launched by governments against the industry. It has to be made the most boring business in the world - so much so that the best minds recoil from going there.  All the scare mongering that capital for business would dry up should be discarded - there is enough capital in the world and like water, it will find its way to the best businesses. If some forms of risk management become impossible - it doesn't matter; the plethora of so called hedging products have created more risk than provided insulation against them.

The Reserve Bank of India stands out , amongst global central banks, by being bulldogish and refusing to allow any form of sex appeal in Indian banking. They have tried their best to keep Indian banking a boring business. By and large Indian financial institutions have escaped from major disasters - we have the RBI to thank for this. 

I hate to say this, but even Ramamritham has his uses !