Sunday, March 15, 2009

Dharma fails on Wall Street

‘Oh, so you are one of them!’ is how someone greeted my nephew, who is embarrassed to tell people that he is an investment banker. ‘I’d rather say that I run a brothel,’ he says. ‘At least, that’s a business people understand.’ Bankers, having brought the world economy to its knees, have become pariahs overnight and a target of people’s rage. International Labour Organization warns that global unemployment could hit a staggering 50 million. A typical knee jerk reaction is call it ‘greed’ but that is not helpful. We have always known that if envy is a sin of socialism, greed is a failing of capitalism. Much has been written of this crisis but not enough about its moral quality. Do free markets inherently corrode character?

There were many dharma failures in this drama. When U.S. house prices were rising and interest rates were low, even the poor got a chance to get a mortgage and a home. Who could oppose that! Banks combined these mortgages into a collateral debt obligation (CDO), got it rated, and sold it to institutions, who also gained through better returns. When the housing market turned down the CDOs became toxic. Who do you blame? In a sense all are guilty. There is a fine line between self-interest and selfishness and the balance of dharma tipped the wrong way. The undeserving recipient of the loan lied about his ability to repay; the banker, moved by short term reward, promoted the ‘sub-prime’ mortgage; the rating agency was dishonest in colluding with the bank; the institution who bought the risky CDO failed in its duty to protect its shareholders.

The calamity might have been contained if Lehman Brothers had been bailed out on September 14, 2008. The old rivalry between Dick Fuld, the CEO of Lehman Brothers, and Hank Paulson, the former CEO of Goldman Sachs may have come in the way. The blue bloods at Goldman Sachs had long harboured a deep prejudice against the upstarts at Lehman. Fuld was arrogant and always managed to steal the limelight. But Paulson, as U.S. Treasury Secretary, possibly unconsciously, allowed personal prejudice to distort his thinking when he refused to save Lehman. When Lehman collapsed, so did confidence and bank liquidity, and this was the tipping point of the global collapse.

It is extraordinary that there is no remorse. Investment bankers who tipped the global economy into a recession, still expected bonuses, as though they had a God given right to earn more than ordinary human beings, much like the aristocracy just before the French Revolution. Particularly embarrassing was the disclosure about John Thain, chairman of Merrill Lynch, who spent $1.2 million to do up his office, which included a $1400 waste paper basket and $35,000 commode in the bathroom. He paid $4 billion in bonuses to his executives when Merrill Lynch had declared a loss of $15 billion in Q4. When he said that bonuses were needed ‘to retain the best people’, someone quipped, ‘What best people? They just lost you $15 billion!’

It is a lesson for the millions in India who have just risen into the middle class. Successes of capitalism produce over time enervating influences when a generation committed to saving is replaced by one devoted to spending. Ferocious competition is a feature of the free market and it can be corrosive. But competition is also an economic stimulant that promotes human welfare. The choice is not between the free market and central planning but in getting the right mix of regulation. No one wants state ownership of production where the absence of competition corrodes the character even more. The answer is not to seek moral perfection which inevitably leads to theocracy and dictatorship. Since it is in man’s nature to want more, let’s learn to live with human imperfection, and seek regulation that not only tames crooks in the market but also rewards dharma-like behaviour.

A person who lost her job because of troubles on Wall Street, insistently asks, ‘Why me? What did I do to deserve this?’ Draupadi asked the same question in the Mahabharata. ‘When everything was going well for us, why was our kingdom stolen in a rigged game of dice?’ She wants her husband to raise an army, and win it back. But Yudhishthira says that he has given his word. ‘But what is the point of being good?’ she asks. To which he replies, ‘I act because I must’. It is the uncompromising, compelling voice of dharma. This is an answer that the investment bankers might ponder.


VonJum said...

Mr Das,

First of all, I'm a big fan of your articles and book. I'm so glad to have found a thinker such as you who can simplify complex human acts and characters into words with great references from epics that we have grown up with. In fact in early times of little or no formal education, these epics provided a reflection of the id, ego and super-ego in human beings and how human beings can come together in communities and live in harmony within their microcosm.

Your views on the current events, problems, dilemmas from a epic/role perspective are outstanding.

Thanks for being there and enriching our lives with your very intelligent, critical (yet forgiving of the imperfect human), and thought-provoking words.

Anonymous said...

Why did it only fail on Wall Street.
How about so many thousands (or even hundreds of thousands) who took home loans with false incomes ?

They are the only ones who actually committed fraud or something wrong legally.

Other than them, show me who else committed fraud or lied on paper ?

Wall street could have done mistakes in assessing the housing prices falling down, due to greed or self denial or self interest....

But show me, that they lied or cheated in that process.

Also the US govt, doesnt want to prosecute any home owners who cheated to get a loan. Why not ?

Is it not intellectual denial or playing to their vote banks ?

How come they dont pursue fraud in stating their the home-loan applicant's income ?

Boston123 said...

There are many economists who are questioning whether maximizing your 'self interest' necessarily maximizes the economic well being of society. All metrics seem to indicate that the financial services industry( in the US) had grown to a percent of GDP, way out of proportion to its importance.

Clearly something was wrong when anyone with a pulse( and absolutely no idea of credit risk was being asked to originate home loans, so they could be rolled up, and sold to the people throwing money at the I-bankers,in search of higher yelds..I understand people were being snatched up from bars for example, to become mortgage brokers/ originators with just one thing in mind.. making your volume quota, and never mind the credit risk!And of course the rating agencies( S&P, Moody's) were complicit in this! Would you buy a bond rated AAA by these guys??

I honestly don't think the finance industry in New York City will rise to the prominence it enjoyed over the last 20 years.. and that's perhaps good for all of us.

We need better mechanisms for raising capital, and deploying it effectively in new industries, with better governance mechanisms.

Take a look at GM, that just fired its CEO.. you wonder what the Board was doing, that it had to wait until the government came in and told them they had to get rid of the debt(bond holders and retiree benefits) on their balance sheet, and shrink to a much smaller company than Rick Wagoner was willing to get to !! I mean this board was comatose!

Capitalism is no good if we do not let the failures die and redirect capital to the survivors.. Instead what we are seeing with the US banks and others is government sponsored 'Life Support', and then whining( note AIG, Citi..)when the government raps them on the knuckles for the way they spend their money!

Gurcharan, the captains of industry in the US are not risk takers, or owner/ entrepreneurs.. they are simply Agents of shareholders, a point they seem to forget, when lining their pockets with unearned bonuses.. and the public is rightfully mad!.

I just read The White Tiger, by Arvind Adigha, and thought that was appropriate.. it highlights the Nexus between politicians and business owners in India, and how that could keep down even motivated kids.

Anrosh said...

If we collected all the money in the world and distributed it equally among every single person is it possible the same financially rich would have collected back more or less the same amount in a few years ?

...the bailout is a gimmick and the models on which the products were built were faulty -- those who made knew it and those who sold knew it and those who bought them thought they were being saved by the swaps -- every body knew something and as long as the business was drummed up - the monkey and the madari was happy.

and nobody wondered about food until the day the bridge that they built themselves collapsed !

They saw it 10 years ago but pretended to close their eyes and ears.

Yashila said...

very special and mystic

Sidharth said...

Good one Sir...

keep writing...

Making Indian weblife a comfortable journey...

Meera Vijayann said...

Mr. Das, I wish I could ask how you write the way you do. But then the question would be an arbitrary one wouldn't it? I've read all your books and follow the articles you write closely. Your writing makes me think, it makes me wonder, and most of all it helps me understand the country I love, better.

Anonymous said...

Mr Das

It is not correct to say that it is dharma failed on the wall street. It is adharma which got exposed as the entire system which was started in 2005 collapsed as did not have support of dharma.

The vedic notion of dharma is not a appropriate concept to use as it requires the human agent to verify the calculus of the actions he/she is going to take and check that ehy proceed from Sattwa quality. The vedic treatises on dharma clearys state the actions which proceed from the rajasic guna suffer from the bias of profit motive which are not of certain nature.

The investment banking industry did not have any safety code to guide their operations in a risk free manner. On the contrary, they undertook risky operations using invalid risk models.

The ancient law maker, Manu, clearly states that the three human goals of dharma, kama, and artha correlated with the three qualities of lucidity, passion/energy and ignorance. The mark of sattwa(dharma) is religion, the mark of rajasic (energy) is profit and the mark of tamas (darkness) is pleasure.

We have this crisis due to the qualities rise of rajasic and tamas and suppression of sattwa.

In the market capitalism, the main feature is that of adharam which arises out of rajas and tamas . This is the root cause rather than failure of dharma.

Anonymous said...

Bank's are capital allocators and "not" profit making entities. They are not doing "real" work ! The way banks can sustain is directing maximum transactions through them and problem has occurred because competition between banks forced them to allocate capital to innocent people and defraud them. Jews have been doing this for centuries together where they have defrauded the innocent and now the big banks do it. Murder results in capital punishment and financial crime is a slow poison which affects the society at large and those involved should get no less than a death penalty. All the fancy derivatives which the banks roll out to HNW customers are nothing but piece of crap where you are trying to get maximum returns at the expense of the other. Theocracy should be the way because most men don't understand how to rule the state.

Anonymous said...

the hindu hierarchy was brahmins - kshatriya's - vaiyshya's - shudra's

in capitalism, vaiysha's have assumed dominance creating the current mess ( none of the marwari's / jew's community person was a scientist, engineer and that community does not deserve any respect ). they have effectively curbed the brahmin like thinking in men, made warriors their pawns and exploited the workers beyond recognition.

Anonymous said...

jews and marwari's will never have control , because they can be shot anytime !

Anonymous said...

they are the source of corruption and illegitimate generation of wealth in this world. all such elements should be eliminated.

Anonymous said...

you have committed a crime by idolizing the marwari community because you have not traced their methods of earning money throughout centuries. that community is in trouble. free riders of wealth will not be tolerated.

it's me said...

if why me is a question at such times.The dharma or adharma answer is:you are chosen to fight with it.I feel so.May be because of your deeds and may be because you deserve to make a's all in our hand as how do we talk it.

i see it's time testing us as how do we stand.being on dharma side is toughest but if one's on it,one would stand tall the way Yudhisthira did.

"Yada Yada Hi Dharmasya Glanirva Bhavathi Bharatha,Abhyuthanam Adharmaysya Tadatmanam Srijami Aham'. Here Lord Krishna says to Arjuna: Whenever there is decay
of righteousness O! Bharatha
And a rise of unrighteousness
then I manifest Myself!

So it means the right things would win ultimately.Dharma can't fail.Else we would be having more following adharma.

Vinod said...

'I act because I must’.

The above answer of Yudhishtra could neither satisfy Dhraupdi nor could avert the War of Mahabharat.

This means his answer was very very vague. In fact he did not follow his 'Dharma' at many points in Mahabharat.

For example it is not 'dharma' of a King to gamble away his entire kingdom and Yudhishtra also did not follow 'dharma' of an elder brother or a husband when he put at stake his brothers and wife in a game of dice.

We can not by sympathetic with Yudhishtra just because he was cheated in the gamble. The fact that he agreed to gamble away his kingdom, brothers and wife itself was 'Adharmic' of Yudhishtra.

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