Sir David Walker is a leading City grandee and was the chairman of Morgan Stanley, the investment bank. In 2007 Walker was commissioned to produce a report into the then hugely controversial private equity business. His findings on transparency were rated toothless and in the eyes of many paved the way for the excessive opacity of markets that in turn engendered the current crisis. Sir David identifies four fundamental flaws:
1. The boards of the bank failed to understand the scale and type of risk they were running
2. Non-executive directors were hopeless in holding powerful executives to account
3. Bonus schemes rewarded short term performance and therefore encouraged dangerous risk taking.
4. Institutional shareholders caught up in exuberance of skyrocketing returns failed to exercise proper stewardship.
These flaws are no different from the ones exposed in the dotcom debacle of 2000 and the raft of scandals such as ENRON, WorldCom, Tyco etc that followed. Indeed these transgressions are now enshrined as standard text in books such as "Corporate Governance" (McGraw-Hill Executive MBA Series, New York, 2003, p. 229):
1. Executive compensation grossly disproportionate to corporate results;
2. Stock promotion, such as initial public offerings (IPO), that has gone to an extreme in the creation of very questionable or unproven business concepts;
3. Misuse of corporate funds;
4. Trading on insider information, particularly by managers exercising stock options that have rewarded short-term thinking;
5. Misrepresentation of the true earnings and financial condition of too many companies; and
6. Obstruction of justice by concealing activities or destroying evidence.
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As long as business environment remains subject to lobbying and unethical influences,corporate greed and interweaving of business and politics; good governance practices will plummet and Enron, Ponzi schemes, Satyam like scams will be reappearing in one form or the other.
ReplyDeleteP R Chandna
Bernard Madoff's Ponzi Scheme
ReplyDeleteIn a blistering executive summary report posted on web site on 2nd September 2009 by US SEC’s inspector general, states that the regulators missed “numerous” red flags that had led to Madoff‘s $65 billion Ponzi scheme and never did a “thorough and competent” probe despite complaints dating to 1992. In spite of five probes and having caught Madoff in “lies and misrepresentations” SEC failed to follow up on inconsistencies. But for Madoff’s self confession of the crime in December 2009, the regulators would have never ever found out. The financial crisis has exposed many breakdowns in regulation, but none has involved such a large fraud by a single person.
The laxity of regulator in discharging duties diligently for around two decades had only encouraged the fraud perpetuator to continue the crime for such a long period. The fraud left thousands of clients, including charities, retirees and celebrities, devastated.
Is it a case of hamstrung by bureaucracy, inexperienced investigators, misjudgment, improprieties or much more to it?