I agree with Elizabeth Warren !

Readers of my last few posts on TPP would have noticed my complete disagreement with one Elizabeth Warren - junior Senator from the Bay State of Massachusetts. In this blogger's humble opinion she is a card carrying member of the loony left. And yet, here is proof that even from the loony left, an occasional wise word may arise (granted this is as rare as a bright sunny day in the great state of Oregon, but ..... !)

Her utterance was actually from last year - "The message to every Wall Street banker is loud and clear. If you break the law you are not going to jail", said the good lady. Well, let us pass lightly over the fact that there are no banks on Wall Street and that the New York Stock Exchange is not the same as banks. She has a point, which has been doubly proven in the events of lastweek.

It was a familiar story. Six banks agreed to pay $5.6 bn in penalties for manipulating currency markets. Five of the six admitted to the crimes. And yet, there is not a single banker going to jail. In fact , in all the settlements (LIBOR rigging, abetting client tax evasion, etc etc), the penalties are in billions of dollars. And nobody has gone to jail.

The details of the current forex manipulation case are not the purpose of this post. The  banks formed a cartel and used coded communication in online chat rooms to rig the daily fixes of the exchange rate between the Euro and the US dollar. We won't get into the details. Suffice to say that this is a fraud, and that if prosecution were to be brought against the perpetrators, they would go to jail. Yet this never happens. Why ?

Firstly it is hellishly difficult to prosecute banks. They have access to the best lawyers, tons of money, and their actions are of such a highly specialist nature that proving the fraud in a court of law is extremely difficult, time consuming and expensive.  Secondly the authorities drool at the prospect of these huge settlements and greed wins them over the principle of criminal deterrence.  Thirdly, even though banks agree to these huge settlements, it is far from clear that a criminal act was actually involved - banks are so terrified about losing a case and having their banking license revoked (an automatic consequence) that at the first possibility, they agree on a settlement however outrageous the amount is and however strong or weak the case against them is.

Look at who wins and loses. The shareholders of the bank lose (after all these settlements are being paid out of their profits). Their customers lose - by rigging forex rates they essentially screwed their customers. The winners are firstly the bank management and the actual employees who committed the fraud. Nothing happens the bank management. As for the employees caught in the act, they get fired allright, but simply join another bank or fund house across the street. Worse, they get to keep their bonuses.

This is an outrageous state of affairs. This will keep happening again and again. Fines, even of such gargantuan amounts, mean nothing to them. The bank committing the fraud must be taken to court. The employees who actally did the deed must be locked up in jail. The bank must lose its license and suffer the consequence. Only such a deterrence will prevent such monstrosities from happening again and again.

In this stand I am in the camp of the said Elizabeth Warren, the Tea Party (they are outraged at this too) and The Economist ! Strange bedfellows, eh ?

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Tax evasion is a crime. Tax avoidance is a .... ?

In the good old days, this was an easy cliche. Tax evasion (breaking the law) was a crime. Tax avoidance (minimising paying the tax within the law) was something you were duty bound to do. Whether you are an individual, company, whatever. Period. Now it isn't so clear cut an answer.  And that says something about our times.

Witness the case of Apple. It does aggressive tax planning (all within the law). It has a big subsidiary in Ireland and has done a deal with the government there for a low tax rate. It does not bring overseas profits into the US, because it is double taxed then; so it leaves all its overseas profits overseas. All very legitimate. And yet there has been a huge outcry and a Congressional hearing where Apple is accused of not paying "its fair share of taxes".

Similar accusations are levied on Amazon, Google and Starbucks in the UK and indeed in many other countries. Nowhere are the authorities claiming they broke the law. They are just angry that these companies pay a low or zero tax despite large businesses in those countries.

From a public's point of view, there is no difference between evasion and avoidance. The expectation is that all companies must pay lots of taxes irrespective of the law and facts. Equally all rich people must pay big amounts of tax even if the law does not require them to do so. But for each individual himself, it is perfectly OK to evade tax (breaking the law). Queer set of values.

Almost everybody in India breaks the law when it comes to taxes. And before you protest too much, please answer if you have disclosed your savings bank interest as income in your tax return and if you have done no cash transactions above Rs 10,000. The less said about professions like lawyers, doctors and the like, the better. The salaried class is one of the worst offenders - their salaries are caught by the taxman under the withholding tax regime. Everything else, in the eyes of the salaried man or woman is not to be disclosed as after all they are paying "lots of tax" on their salaries.

Why does this work like that. Why is it OK for us to evade tax, but not for others even to avoid it. Is it just pure jealousy against the rich ? Is it just one law for everybody else and one law for us ? What is going on ?

For corporates and rich individuals, there is an expectation of  social responsibility at play here. It is not enough to follow the law. It is now required to be seen as "being fair to society" everywhere. This is a woolly concept ; after all what is the concept of fair.  But each company has to make its own "contract" with society. The more successful you are, the more demanding the contract.

Social responsibility has gotten an altogether new meaning, A far more challenging meaning. Companies have to be seen as "good citizens, whatever that means. Notice that the public's definition of a good citizen is "I break the law, but you shall do over and above the law". "

Its a tough world out there.

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Even crooks deserve a fair deal

Remember Jérôme Kerviel  ?  OK, very excusable if you have forgotten who he is. He was the rogue trader who almost brought Société Générale ( a reputed French bank) to its knees. This happened in 2008. Kerviel was a trader who punted like crazy in the casino, that is euphemistically called financial markets - he was making gigantic bets that involved European stock index futures. The whole thing unraveled, he was fired, Société Générale tottered and ultimately lost € 4.9 bn.

 

Criminal proceedings were launched against Jérôme Kerviel  and he was sentenced to prison and a fine. He appealed, and, on Friday, lost his appeal. What caught me was the quantum of the fine. He was fined € 4.9 bn, the quantum of the loss that Société Générale incurred.  A fine of € 4.9 bn ???? Kerviel has no money and is unemployed and probably unemployable. How on earth is he expected to pay  € 4.9 bn ?

 

This is outright crazy. The judges have fallen hook line and sinker to Société Générale's assertions that it didn't know what was happening and that Kerviel acted alone. PPPPlease ........ That, to put it mildly, is nonsense.  His bosses must have been cheering loudly as long as he made profits and have thrown the book at him, when the whole thing collapsed.  The bank didn't know ??????? Baloney.

 

Société Générale , and the judge, argue that the massive fine is to prevent him from capitalizing on his story by writing a book (which he has done) or making a movie. That is extreme logic. Every crook tries to make money from his infamy. Jeffrey Archer wrote a whole book about his prison experience and sold God knows how many copies. The fault is not that of the crook - the fault is with those who buy the book or go see the movie. 

 

Kerviel is not your ordinary villain. Sure he broke company rules and did unauthorized trading. But then a few thousand bankers have done the same . He made no money personally - even his bonus wasn't obscene. He was a case of gambling instincts gone completely out of control. Does he deserve a € 4.9 bn fine ?

 

The logic that employees are personally responsible to make good the losses that arise if they violate the rules is a dangerous one. Sometimes company rules are not explicit. Sometimes bosses nod and wink when they expect employees to do things that are shall we say, fifty shades of grey ! If I were to calculate the possibility of personal liability, when taking a business decision, I would never make a decision in the first place. Something like this is what is happening in Indian government circles today - no babu is making any decision for fear that Kejriwal will allege that he is corrupt. Everything has ground to a complete halt.

 

It is a reflection of the anger against bankers that public opinion has no sympathy for Kerviel. Nobody, but a few busybodies have raised a whimper. I however think this is an outrageous court decision. Kerviel deserves to be punished. He deserves to go to jail. But he should not be fined € 4.9 bn.

 

It is a mark of civilized society that even crooks are given a fair deal.

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Oh no; Not again

Yet another rogue trader has emerged. This morning is ablaze with the news that UBS (a Swiss bank) could have lost some $2bn on account of the actions of one trader - Kweku Adoboli at its London office. Adoboli has been arrested last night and the details are only slowly emerging.  Nothing is proven as yet , but Adoboli might very well join his illustrious predecessors - Nick Leeson of Barings, Jerome Kerviel of Societe Generale, et al in the hall of Notoriety.

Apparently the losses stemmed from the trader placing bets, using the banks'own money on something called Delta One - trading in financial instruments linked to exchange traded funds. To lose $2bn, the trader must have been trading staggering sums of money. Clearly UBS has egg on its face. Quite apart from the massive loss, questions will be asked about risk management in the bank. How could they let such a big loss build up.

The question to be asked is what on earth banks are doing even indulging in such activities. They are cloaked under the respectable heading of "investment banking", but this is nothing other than pure gambling. Is this what banks should be doing - gambling in esoteric instruments that nobody else would even understand ? Banks think that they can build big risk management systems, but the truth is that traders are incredibly bright and frighteningly sharp and they will  find a way to beat the best of control systems. After all, traders often hold their managers and risk departments in utter contempt and consider it almost a rite of passage to hoodwink them.

The fig leaf that this is all somehow a very respectable activity couched in terminology such as risk management, investment diversification, hedging, providing liquidity and such other gobbledygook must be once and for all removed. Banks, if they wish to indulge in such activities, should label these departments as "Pure unadulterated gambling department", "Better than a Las Vegas casino department", "" The Wild Wild West",  "Punters Inc",   "Rogues' Lounge" , etc etc.

Plain English helps. Free drinks served by scantily clad waitresses roaming up and down the aisle is optional.

And bankers wonder why they are unloved by the public.

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The world's most outrageous CEOs

The media loves to makes lists – the richest people in the world, the biggest companies in the world and so on. Forbes has compiled a rather unusual list – the 10 most outrageous CEOs of 2009.

Bernie Madoff would have been a slam dunk for the winner – but his place in the sun was last year – so he’s disqualified.

This year’s list is full of people who have been charged or indicted of fraud. Robert Moran sentenced for tax fraud at No 10, David Rubin indicted for fraud at No 9, Allen Stanford accused of misappropriation at No 8, Danny Pang accused of running a Ponzi Scheme at No 7, Thomas Peters on trial for fraud at No 5, Ramalinga Raju, in jail at No 4 and Raj Rajaratnam charged with insider trading at No 3.

Sandwiched between them are Ed Libby of AIG at No 5, for the retention bonuses he decided to pay the executives of the financial products divisions who brought ruin to the company in the first place and John Thain of Merill Lynch at No 3 who pushed through bonuses before the takeover by Bank of America.

But standing at the pinnacle is Lloyd Blankfein of Goldman Sachs – by any standards a superb CEO of a brilliant company. He should be at the top of the most outstanding business leaders in the world. And yet here he is at the top of Forbes’ “outrageous gallery” sharing the stage with some of the worst corporate fraudsters. His famous joke to the Sunday Times that bankers like himself were doing God’s work, must have propelled him to the winner's post.

Just goes to show that however brilliant you may be, however successful your company may be, you will be tried at the altar of public opinion. All the millions cannot buy you respect. Character and grace are still priceless. They cannot be achieved by just business success.

For more humbler mortals like me, who may not reach such lofty heights there is still a lesson to be learnt. For every act I do, however humble a job, it would be prudent to ask the question - if what I did was splashed on the front page of the newspapers, will I be lauded; or will I be crucified ?

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The unfortunate PWC partners

Is there a justice system in India ? Does it really work ? I’m not so sure.

These plaintive questions are in response to the continued detention of S Gopalakrishnan and Srinivas Talluri, the PWC partners who had certified the accounts of Satyam Computers. I argued that their detention is completely unwarranted here.

They continue to be behind bars. One after another, their bail petitions are rejected. When I wrote the earlier piece in April, I had expected that they would be released shortly. We are in end June, and it has still not happened. Read an account of their ordeal here.

I am not a legal man. I am just an ordinary citizen of India. But India is a democracy. The ordinary citizen has a voice too. So here’s mine. This is an open letter to anybody in the justice system in India

- May I remind you that in law, you are innocent until proven guilty. It appears that this principle does not apply in India.

- Detention pre trial is not a matter of routine. I know you lock up thousands of people for periods beyond what their jail sentences would have been even if they had been found guilty. That doesn’t justify doing it all the time. Shame on you.

- In this case, there is absolutely no reason to believe that either of these two gentlemen, or PWC for that matter, would not cooperate in the investigation. They have provided you 50,000 pages of information. They are not going to run away – you have enough ability to prevent that.

- Your system stinks. When umpteen Members of Parliament have criminal cases pending against them and they sit in Parliament, when convicted criminals are at liberty for years as the appeals process drags on, you lock people up , at will, for months and years, even before their case comes up for trial.

- Bring these two gentlemen to trial. If they are found guilty, by all means lock them up and throw away the key. But only after they are proven guilty. Right now, it appears they were guilty of incompetence, but not guilty of a crime. If incompetence is a criminal offence, the entire lot of you must be locked up for ever.

- What happens if after trial these two are not found guilty. Who’s going to recompense them for the months they have spent in the hellhole you call a jail. I would suggest that the Head of the CBI and the judge who keeps rejecting their bail petition spend an equal amount of time in the same cell in repentance.

Let me also suggest to the Institute of Chartered Accountants in India that you deserve to be quartered and censured for not even whimpering when two of your members are being subject to blatant injustice. Can you please justify why you exist ?

Let me just clarify that I don’t know either Gopalakrishnan or Srinivas, have never met them, never worked with them and hold no candle for them as individuals. But they deserve better, in this country of ours, where we claim the rule of law prevails.

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The Satyam investigation

The Satyam affair broke out in early Jan with Raju's famous letter. Since then, two parallel chain of events have happened - one handled brilliantly and one handled abysmally.

When the news broke, the company was on the verge of immediate collapse. The government acted swiftly in naming an eminent Board to take over. These individuals demonstrated why they are of so eminent a stature. They immediately took control, kept the business going, reassured customers and employees, staved off an immediate crisis, held an auction, found a buyer (can you imagine how difficult a task that would have been) and did a deal in 3 months flat. There is now a reasonable future ahead for the company, its employees, its shareholders and its customers.

By any yardstick this is a stupendous achievement. I haven't really heard, or read about, the plaudits they richly deserve. They deserve a medal. Messers Karnik, Parekh, Achutan and everybody else involved in saving the company - take a bow.

The other chain of events has been the "investigation" into the fraud. It would be difficult to find something more shabbily handled. Numerous government agencies are falling over each other in their so called investigations. The AP police and the CBI (you could not imagine two organisations worse equipped to investigate something of this nature) have taken four months and achieved precious little. Other than catching hold of everybody in sight and locking them up.

Here's a situation where the perpetrator of the fraud has owned up. And pray, what are they investigating? In four months, they haven't been able to bring a case on a self confessed fraud.

India's justice system is frankly pathetic. People get locked up and remain undertrials for periods longer than their sentences would have been if they were guilty. A basic tenet of justice is that a person is innocent until proven guilty. Raju may be guilty by admission, But what about some of the others. Especially the PWC partners who have been jailed. As I posted before, this is a complete travesty of justice.

In many ways this story is a true reflection of India. There is an India which is brilliant, can achieve fantastic results and is breathtaking. There is another India, which is pathetic and shameful.

Three cheers to Karnik & co. Three brickbats and a kick on the backside for the judicial process.

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The Satyam case - PWC partners

The PWC partners, S.Gopalakrishnan and Srinivas Talluri, who signed the Satyam balance sheets over the last few years are in jail for the last three months. Their latest bail petition was rejected yesterday.

Is it right for them to be jailed now ? I am not a legal man and have no pretensions to expertise in law, but from a common sense of what is right and wrong, this does not seem to be right.

The two partners seem to have been collectively charged, along with Raju and the others on criminal conspiracy and other counts, cheating (the famous 420) etc.

The fraud was not committed by them ; it was committed by those at Satyam. They may be guilty of colluding with Raju, but that has to be proven in a court of law. They may have been negligent, in which case they need to be dealt with by the Institute of Chartered Accountants of India. Or they may have just been incompetent in detecting the fraud, which is not an offence under law - if incompetence were an offence, millions of people would have to be in jail !

What is the logic for keeping them in jail before the trial has even started ? That they will tamper with the evidence ? Nonsense. Its already 4 months since the CBI has been investigating and if by now they haven't secured the evidence, they never will. That they will not cooperate with the investigation ? There seems to be no evidence of that - both the firm and the partners have said they will cooperate. That they will flee the country ? That can be easily achieved without locking them up. The ex CFO of Satyam, who is himself in jail, has said that the partners were not in a conspiracy. Raju has said the same thing. So why keep them in jail ?

I am proud to be a citizen of India, where, at least in name, the rule of law holds. Detention before a trial is not something to be summarily and endlessly used. If the partners are held guilty by a court , and if the verdict warrants a punishment in prison, by all means do so. But not until then.

I think this is a case of mobocracy. Everybody is angry at the fraud. So catch hold of anybody in sight (the more "important" they are, the better) and lock them up. Anger is somewhat assuaged. The mob is happy that VIPs are in jail.

That's not the India I am proud of. You are innocent, until proven guilty. Gopalakrishnan and Srinivas have not been proven guilty. They do not deserve to be in jail.

PS - After I made this post, I got an email from Niraj Kapasi who has posted a very good perspective on the affair in his blog at http://productiveexperiences.blogspot.com/

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Tha anatomy of a fraud

Most, if not all, corporate frauds start small. Probably not even as a clear cut fraud. It then builds momentum, becomes a monster, and gets out of hand. Two recent cases lead me to muse on how, and why, frauds start.

Bernard Madoff pleaded guilty yesterday and was taken in handcuffs to jail. He will spend the rest of his life in a cell. Three months ago, in India, Ramalinga Raju the Chairman of Satyam Computers owned up to a massive accounting fraud and has been in jail since then. He too faces a long prison sentence.

Madoff said yesterday, that "he felt compelled to deliver at all costs". He said that "he had started the scheme in the 90s when financial markets were struggling amidst a US recession" . "He had hoped to end the scheme in short order, but it spun out of control."

Ramalinga Raju in his now famous letter said "what started as a marginal gap between actual operating profit and the one reflected in the books of accounts continued to grow over the years" and that "it was like riding a tiger, not knowing how to get off without being eaten".

People, who commit fraud and get caught, of course try to say the right things. Even discounting for this, I think there is some truth, and learnings, in both their statements. Two cases, by themselves, cannot be the basis of any generalisations. But I will still speculate on a few hypotheses.

What is the motive for a fraud. In most cases, its of course, to get rich quick. But increasingly there is an added motive - to look big and successful in the public eye. Both Madoff and Raju wanted to be seen as giants and when they couldn't perform as giants, they committed fraud to maintain that image.

Frauds seem to start small. After all, inflating profits by $ 100,000 cannot be a real crime, can it ? Or deliver a quarter's return by the Ponzi scheme cannot be all that criminal surely ? Taking a temporary small "loan" from the company for 15 days to settle a personal debt isn't all that serious. This is where the critical point is, I believe. I think you are eventually doomed if you cross it, thinking its only a small step and that you'll only do it once. Its only a matter of time before it will catch up with you, even if you rectified the original misdemeanour.

A third ingredient in the mix, I believe, is overconfidence. A belief that one can get away with it. After all, am I not so big and competent and that I won't be caught and I can anyway clear things up well before there is any danger of getting caught. A giant sized ego is another cause for white collar crime.

There is no such thing as a small fraud. It will grow in size. Once the fraud starts to become big and gather momentum, a whole series of forces seem to come into play. It keeps multiplying, although the incremental addition to the fraud seems small by itself. The capacity of the fraudster to delude himself that it can still be corrected and he won't be caught, seems to rise exponentially. There seems to be no way out, other than to get deeper and deeper into the mess. I believe in the development of a fraud, there comes a point of no return. Before this point, some people do turn back. But once this is crossed, there is a only a one way ticket.

What could be some lessons for ordinary mortals like me.

• Ethical dilemmas occur for all people in the corporate world; not only to the likes of Madoff and Raju.
• The smaller dilemmas are more difficult to deal with than the larger dilemma. If I was faced with the possibility of inflating profits by $100 m, the answer is easy - no way. If I was faced with the choice of inflating profits by $100 K, that's a little more tempting.
• May I have the strength to never cross the first line and being human, if I sometimes do, may I have the strength to come quickly running back.
• Let expectations not completely take over me. Expectations might be from the boss, from headquarters, from the market, whatever. May I have the strength never to let this be an excuse for crossing the line.
• Keep the ego firmly in check. Yes, of course, I want to be seen as a great guy - who doesn't ? But I ask for the strength to accept being seen a shade below what I truly am, rather than a shade above.
• When faced with a possible temptation, may I have the courage to seek a counsellor.

I suggest an ethical "test" to guide when faced with such a situation

• If I add three zeroes to the amount in question, would I still do it ?
• Can I live with it if my mother/wife/daughter knew what I had done ?
• What if it came on the TV tomorrow ? Play in my mind what I would say in front of the camera.

Give me the strength to take a rap on the knuckles now, and look silly, rather than commit an improper act and try to look good.

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