Our guest blogger Lune (who in one of his past lives worked on the Hill) was just in India and gives us his take on the Satyam Computers case, which has gotten scant coverage in the US. The Indian government’s reaction to its biggest corporate scandal ever makes for a useful object lesson.
From Lune:
We Americans have typically prided ourselves on having the most reliable, transparent, and well regulated financial markets in the world. That reputation has taken quite a beating in the past couple of years, arguably starting with Enron and accelerating in the past year; so much so that we have begun looking at such countries as Sweden, Japan, and the UK for possible examples of how to deal with our current financial troubles. Perhaps another good example might be India.
While much of the world’s attention has been consumed by the drama in the US and Europe, India has been rocked with what is being called the biggest corporate fraud in its history, something akin to America’s Enron and Lehman.
Satyam Computers, one of the largest IT firms in India, has been embroiled in an accounting scandal. To summarize briefly, this autumn, Satyam’s founder and (now former) chairman, B. Ramalinga Raju, proposed to Satyam’s board that the company buy two unrelated firms substantially owned and run by his family members.
In December, the board agreed and announced its decision, only to be greeted by a massive investor revolt over this non-arms-length deal. Within a few days, the deal was scuttled. Soon afterward, several board members resigned, and the company became the focus of closer scrutiny by investors and the press. On Jan. 7th, Ramalinga Raju resigned as chairman of Satyam and admitted that the company inflated its earnings for the past several years and engaged in accounting fraud to the tune of ~Rs. 7,000 crore (Rs. 70 bil or $1.4 bil). A more detailed account and timeline can be found here.
While the details of exactly what happened will take some time to figure out, the government’s response has been swift:
From the WSJ: Within a week of Ramalinga’s resignation, he, his brother, and Satyam’s CFO have been arrested and are currently in jail awaiting trial on criminal charges of conspiracy, cheating and falsification of records.
The entire board of the company has been dismissed by the government, and a new board has been constituted with members nominated by the central government including one former member of SEBI, the Securities and Exchange Board of India (India’s version of the SEC). This new board will hire a new CEO, and other key executives, with the stated goals being “to restore the company’s credibility, customer confidence and employees’ morale and to safeguard the interest of investors and other stakeholders.”
From the Business Standard and The Hindu: SEBI has announced that it will conduct a “peer review” of the financial statements of every company in the Nifty and Sensex indices (indices consisting of the 80 largest and most actively traded Indian companies, akin to the US DJIA or S&P 500) for both the 3rd quarter and for the past year. A peer review is to consist of an analysis of the statements along with the working papers used by the company’s auditor to certify the statements. This peer review will be done by an auditor unrelated to the company’s current accounting firm, selected from a panel of independent auditors to be named by the government.
From The Economic Times: In addition, SEBI is developing criteria for additional companies to be peer reviewed, targeting companies with the highest likelihood of having engaged in similar fraudulent practices. For example, it is looking at including companies with multiple subsidiaries or companies whose shares have risen abnormally just before the announcement of results.
Certainly, we will need to see whether all these initial efforts are followed through, and India’s extensive government corruption is well documented, so this may all still come to nothing.
That said, the Indian government’s rapid and comprehensive response, including the arrest and criminal charges for the perpetrators of the fraud, the sacking and reconstitution of the company’s board with truly independent and activist members (despite Satyam being a fully private company), and the investigation of the largest companies and those that might be most suspicious in the eyes of investors will do a great deal to restore the Indian people’s confidence in their private markets. Furthermore, it stands in stark contrast to the kid gloves with which we have treated our own fraudsters
Why is Dick Fuld still roaming the streets after making false statements about Lehman’s health right up until its implosion? How about Angelo Mozilo? And why haven’t the incompetent boards of such companies as Citi been dismissed? And would things have been better if after the implosion of Bear Sterns, the SEC ordered a “peer review” of all major investment and commercial banks so that it could deal with problems before they blew up into Lehman and Citi sized disasters?
While skeptics often dismiss “socialist” countries like India for confiscatory taxation and state-sponsored market manipulation, it is ironic to note that India at least, appears to be taking comprehensive steps to ensure the integrity of its free markets while not (yet) spending a dime of public money bailing out its bad apples. The U.S., in contrast appears to be doing the exact opposite…
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Having been for work in India and having experienced how chaotic (and sometimes corrupt) it is, I have to bow in front of the authorities in this case. (Of course, assuming they are not settling some other scores in the Satyam case…) Nevertheless your suggestions for accountability for US execs is right on the money.
Lune, your lead sentence says …
“We Americans have typically prided ourselves on having the most reliable, transparent, and well regulated financial markets in the world.”
Readers eyes glaze over as they wonder to selves … “What the fuck planet is this guy from?”
India and the US are a ‘no compare’ … they are both on different evolutionary places of the crumbunism trail and therefore have vastly differing amounts of aggregate generational corruption. The Indians are at this point in time less brainwashed and still have a little more revolutionary fighting spirit.
Give India (and the now enveloping full spectrum dominance team), time and most Indians will be writing lead sentences such as yours …
You ask in the close of your post; “Why is Dick Fuld still roaming the streets after making false statements about Lehman’s health right up until its implosion? How about Angelo Mozilo? And why haven’t the incompetent boards of such companies as Citi been dismissed?”
They are free because you believe your lead sentence.
Deception is the strongest political force on the planet.
No balls. No brains. No freedom.
i on the ball patriot
Yves: Indian govt. gives a hoot about private property…why is the govt reconstituting the board? What happened to the shareholders?
Wherever the US is along our 'path', one thing is certain: the response needed to sooth the current crisis is to do everything possible to instill confidence that investors, creditors and especially taxpayers are not being ripped off even more. I think a lot of the turmoil in credit markets would begin to settle down IF the US & Europe took some very public and very tough action against the Banksters, the assorted boards of Directors and the incompetent boobs sitting in Congress who facilitated much of this nonsense.Instead, what we are seeing is the same bozos that started it pouring fuel on the fire. Sheeshhhh…
I’m not completely certain, but isn’t the legal protection offered and the corporate legal structure in the US such that it would not allow for the actions that India has taken? Don’t get me wrong, I’m not saying the US way is right by any means. But an enormous legal mess would ensue from any such government action as walking into a corporate board room and giving the boot to everyone. That would have it own abusive challenges as well in the hands of corrupt government officials. That said, the Mozilos, Fulds, Noels, Nadels, Madoffs, Thains of this world should most certainly not be roaming the streets or even under house arrest. The whole lot of them are just thieves, liars, cheats, just plain ol’crooks! Stop stealing other peoples money!
The reality is there is NO system that will entirely address the challenge that the recent global collapse has exposed. The basis to a functional system is people doing the right thing for the right reasons, collectively, cooperatively, and collaboratively. Predictable ethics, applied with honesty and integrity will bring trust and confidence back to human nature. There has to be a wholesale change in how we think and treat each other and ourselves. The opportunity for such change has been presented, will we the world grasp it?
Yves,
This post is misleading on the actual facts behind the arrest.
I hail from India and the home city of Satyam.
Satyam’s CEO was not arrested for three days even after his open email declaring the scandal.
The state govt arrested Ramalingam Raju only after the SEBI’s investigation team arrived in Hyderabad to question him and investigate the scam. To keep Raju out of the hands of SEBI, the state govt arrested him and until now, SEBI had three hearing in the court to seek permission to question Raju.
The actual scandal behind Satyam’s scandal is the 12Billion USD real estate / infrastructure scam that was executed with the involvement of the state govt. There is another firm Nagarjuna Group worth 3-4 Billion USD involved in this scam. The CEO of Nagarjuna group, another Raju surrendered to the state govt days before Satyam’s Raju. The state govt awarded all the real estate and infrastrucutre projects to these two firms worth 12Billion USD taking massive kick backs and siphooing off the money through Maurituis. Most of the firms and politicians in India use Mauritius to steal billions of USD of citizens and investors.
over 80% of the 12Billionb USD projects awarded to these two firms in the last 5yrs are still in documentation stage and they are incompetent to even deliver these high end projects.
The major difference between India and east asia or middle east is that all are corrupt places but unlike India, there is real work achieved with the corruption. In India, there is no practical implementation but keeping projects on only paper and make billions out of it.
Both Raju’s were given thousands of acres of land at throw away prices. A 300 prime real estate plot which is worth over a million USD acre was given for 20,000 USD per acre as compensation for the work they are doing for the state.
Ramalingam Raju has over 60 companies floated with various family members as the holders. One such firm which is fully family owned has over 6800 acres of land. Most of it awarded by the state and bought from the money he stole from Satyam’s accounts.
This is a major cover up excercise being exectued by the state govt with the belssings of the central government.
The real investigation should involve the state awarded projects, Nagarjuna Group, Maytas infrastructure and Maytas properties owned by Raju’s sons. It should also involve the money siphooned off to Mauritius based banks.
Indian political system is very lawless and you see people getting jailed only when the state govt needs to cover up.
In the USA we:
Award the head of one of the largest issuers of fraudulently rated MBS’ with the Secretary of the US Treasury position.
Use billions of taxpayer dollars to payoff CDS speculators many of whom created and sold the underlying toxic garbage CDO’s that they insured.
Tolerate the acceptance of bribes in the form of below market mortgage interest rates to US senators without even a censure by the Senate.
Select another Wall Street insider who gave billions of taxpayer dollars to Wall Street CDS speculators, who is responsible for the lack of transparency of the TARP funds, and who did nothing while Wall Street was engaging in massive fraud.
For a real nauseating eye-opener, read the Senate Finance Committee’s “interview” of Hank Paulson during his nomination process (June 27, 2006). I would swear that Schumer is doing the guy. Nauseating.
You get the gubberment you deserve
The classic Indian response to any crisis is to put someone in jail for a few days or weeks and then all is forgotten.
When there is damage due to a flood or cyclone (hurricane), a local civil servant is usually hauled off to jail for mishandling relief supplies or for not warning locals about the intensity of the storm.
Train crashes are frequent and typically a railway official at the preceeding stop is nabbed.
That said, who can forget the ‘perp walks’ forced on innoncents by St. Rudy of Guliani?
Whether skeptics are evaluating for the presence of confiscatory taxation, state-sponsored market manipulation, state-sponsored propaganda, etc., they might want to consider that apparent ironies often tend to reflect imperfections in information and experience.
If skeptics attend to evaluating the integrity of “free market” practices and the distribution of national and international power independently of the alleged political differences between nations, perceived incongruities between national responses to systemic threats might be reduced.
Anonymous from India is spot on. The author of the original post has a not very well informed reading of what is happening in India. As someone who has done considerable business in India I can tell you that the corruption is staggering and trickles down to every level of the business. In India we would have two salaries for every employee – one we reported to the government and one we actually paid the employees… This was for relatively well paid professionals. This scandal is MUCH larger than just Satyam and the “governments bold action” is nothing more than an attempt to cover up the epic scale of their corruption.
Dick Fuld is an honorable man compared to the parties in the India train wreck.
This so called notion that India is the worlds largest democaracy is a big SHAM. The ruling party knows that they have at most a 5yr term guaranteed and this is the life time oppurtunity for the top brass of the govt to make bilions.
This is a big reason why you find India backward in infrastrucutre, power, clean water, pollution when compared with the rest of Asia.
We would be better served by a chinese like model where corruption is mixed with exectued public projects.
Over 60% of the population and two third of the country still doesnt gets 24hr electricity and clean water. Electricity is supplied only for 12-18hrs a day and water for few hours a day. You cant drive in cities without having to breathe dust and soot from the pollution.
We are yet to have one fully executed national highway. We have the worlds worse airports. We have major train accidents every few months.
People in the west create hype about India for their own vested interests. We still struggle to get 24hrs electricity and clean water and this is because of the massive political and business corruption.
Sam
why don’t you move to Beijing? Or ask the Tibetans how life is Lhasa? Perhaps Dacca or Karachi would afford you more democracy.
I remember sitting at a meeting in Wshington DC where one of these ‘Sam’ types were lecturing a visiting Indian political delegation about the fantastic success the commie Chinese had with their ‘barefoot doctor’ programs.
The senior member of the Indian delegation, an actor turned politician, listened to the translator to make he understood what was heard. The Indian politician then politely asked the ‘Sam’ type, how often he would go to a ‘barefoot doctor’ or how likely would he send his wife to a ‘barefoot doctor’ for medical treatment. He then walked out.
Tallindian – why don’t you move to Beijing?
Its the world of investors and major players that are rushing to China. China is a fact and India a myth unless changes are made at the political and corporate level to break the corruption nexus.
Over 80K farmers commit suicide each year because of the type loans they are given without any infrastructure, power or water supply. Farmers end up loosing land to the banks due to one bad monsoon and commit suicide by drinking pesticide.
Its a fact that most of the educated people leave India to settle in other countries. You dont need a bigger fact than this to get to the truth.
FYI..people need food, water, jobs, health to surive and not a sham democracy which is managed by the government-corporate nexus. Its a painful fact that India has more people below the poverty line than the entire continent of Africa. It is mainly due to this sham democracy and rule of 5yrs than other factors.
China’s success is a miracle compared to India. China has successfully created world class infrastructure, power plants, airports, raods and 20 million jobs a year for the last 15-20yrs.
In the present format, India can never get close to China. The worlds major corporations have moved to China to capitalise on China’s success.
India on Hold – Investment Forum 2009
India, with more than one billion people and rapid growth in its middle class, should be high on anyone’s list for investing, but Zell and other Forum participants noted some drawbacks — specifically, widespread corruption and arcane formal processes that hamper any real progress. “[In India,] there’s bureaucracy beyond belief,” Zell said. “We tried to go down that road several times, but we never got anywhere.” For the time being, he said, the potential for investment in India may not be realized. Moreover, it’s not clear what an outside developer could bring to the market, he added. “You need to look for opportunities that need servicing” in order to add value in any market.
For all development projects, the participants generally agreed it is critical to have a local partner and a team on the ground — although that need is perhaps even more acute in India and other markets where a lack of infrastructure impedes easy access to construction sites for foreigners. In those cases, it’s imperative to make the effort to visit any project sites in person. “You’ve got to see the assets [in India],” said Richard Johnson, CEO of Standard Chartered-Istithmar Real Estate Fund Management in Singapore. “You need to see what they’ve built.” Follow-through isn’t always up to Western standards, he noted. “I’ve been to apartments [where] the three steps leading to the front door aren’t there
India is more like the U.S. that most people realize. It’s libertarianism in action. A lazy electorate chooses its leaders by their star power, and a famous name is a powerful incumbency (although maybe not as much as it is in the States).
When a powerful Indian criminal is thrown into jail, it’s because a politician wins. Perp walks are more about theatre than substance. At the extreme, Mumbai mobsters are frequently gunned down in police “encounters,” Chicago-style. This is hardly a model for justice.
It’s ridiculous to claim that the government actions in India are any better than elsewhere. Fortune has a commentary speculating that, unfortunately, little progress is being made. Scandals like this should clean up the system but it will take a long time. India is going nowhere until corruption, as well as other issues like sexism and discrimination, are cleaned up. I’m hopeful that the free market will clean up the corruption that no one else has been able to but it will take a long time.
The fact that Dick Fuld is free or how the Citigroup executives are still around, or whatever, is not a bad thing. There is little reason to suspect anything illegal was done in these cases. In fact, to a distant observer like me, who is just a small newbie investor and not a legal expert, what the government is doing in India is quite troubling. Consider this:
We somehow had the government barge in and replace the board of directors of Satyam without shareholder approval. Needless to say, the government ends up picking the board (likely their own favoured individuals) without any input from shareholders (correct me if my impression is incorrect.) Now, I don’t know what to read from the situation other than the fact that the government can seize private property rights with little cause. If they can do this to Satyam, I wonder what they can do to firms without any problems. The reason the US government (or others) cannot barge into, say, Bank of America and replace the board with its picks is because shareholders actually own the company. The actions in India seems as if shareholders are bystanders–almost like in Japan, where companies are not shareholder-friendly at all.
(Having said all that, I am sure that Satyam shareholders will be happy with what the government is doing. The stock market certainly thinks so, and is bidding up the stock price. It is still a gross abuse of private property rights but this is a special case. Satyam is likely insolvent and shares are likely worth zero. So shareholders will be happy with the government seizing their worthless shares, which actually may gain value with such severe actions. In the grand scheme of things though, this is very bad for shareholders.)
TAHOE: “I’m not completely certain, but isn’t the legal protection offered and the corporate legal structure in the US such that it would not allow for the actions that India has taken? Don’t get me wrong, I’m not saying the US way is right by any means. But an enormous legal mess would ensue from any such government action as walking into a corporate board room and giving the boot to everyone. That would have it own abusive challenges as well in the hands of corrupt government officials. “
Exactly… a lot of people on bearish sites like Naked Capitalism–great site Yves so take this as a diss of your work–don’t realize what they are proposing. In seeking revenge and vengence, likely because of their own dumb mistakes investing in companies without considering the risk, somehow want everyone in the financial sector sent off to jail or some such thing.
The actions of the Indian government are a gross abuse of property rights. It would be ridiculous for the government–any government!–to replace the board of directors of a public company, and hence essentially take control of the company, without shareholder approval.
TAHOE: “That said, the Mozilos, Fulds, Noels, Nadels, Madoffs, Thains of this world should most certainly not be roaming the streets or even under house arrest. The whole lot of them are just thieves, liars, cheats, just plain ol’crooks! Stop stealing other peoples money!”
I completely disagree! It's amazing that you guys & gals don't want to take responsibility for your own losses. I am not a fan of some of those that you quoted, and don't hold them in high regard, but I don't think they did anything illegal. Do you seriously think these individuals should end up in jail? What for? Because of shareholder greed? Shareholders could have replaced these executives if they wanted to. If you are a small shareholder you could have chosen not to invest in them or do business with them. Unless someone can show me that something illegal was done (like making up financials statments like Madoff,) all this talk of jail and penalties is just dumb.
The unfortunate thing is how investors, along with policymakers, won't accept their culpability in this whole mess. To make matters worse, we have people sititng on the sidelines, who may or may not have invested a dollar, calling for property rights to be stripped and for the inefficient government to use its strong arms…
There are major differences in Satyam scandal and the other scams listed in the post.
Mr B. Ramalinga Raju, kin and friends may have floated as many as 275 COMPANIES
The Rs 7,136-crore financial fraud of Satyam Computer Services is assuming much larger proportions than initially thought, with the sleuths investigating the scam suspecting that Mr B. Ramalinga Raju, kin and friends may have floated as many as 275 companies.
Of them, nearly 220 firms carry the tag Agro-Farms, Biotech and Greenlands. About 40 entities carry the Maytas tag.
An honest investigation would lead to the fall of the state government.
Raju and his team bought a lot of firms in the last 10yrs paying a price multiple times than the actual value of the firms. This money would later be transfered to their personal accounts. One such firm is http://www.samachar.com for which he paid 125 million USD in 2002-03. The actual value of the firm wasnt more than single digit in millions.
Raju used fake companies like http://www.lakeview.com based in mauritius to generate invoices and transfer millions of USD. He even fudged the number of employees by 13000.
He used this money to buy lands and invest in the state infrastructure projects by bribing the govt to float real estate firms and cash on the IPO craze.
This is a case of stealing cash from a profitable company using fake companies, invoices and not just infalting accounts/profits to cash on big bonus and 4.4 crore stock sales in the last 8yrs.
In seeking revenge and vengence, likely because of their own dumb mistakes investing in companies without considering the risk, somehow want everyone in the financial sector sent off to jail or some such thing.
You are way off the mark. I suspect that Yves has suffered minimal losses from the financial crisis, as have many of the people who frequent this blog. Yet we firmly believe that Fuld, Mozillo, etc. are criminals… perpetrators of fraud on a massive scale. Certainly Countrywide perpetrated mortgage fraud on a massive scale, and mortage fraud is a crime.
Yves,
Totally agree with Anon: 10.46. While I would certainly like the banksters in the USA to be delivered justice, I certainly would not look at India for direction. The scale of corruption in India is difficult to understand for Americans, even after what has happened here during the last few years. Yes, I spent the first 27 years of my life in India, and still maintain contact with friends and family in India.
“Do you seriously think these individuals should end up in jail? What for? Because of shareholder greed?”
It seems you haven’t been following the news. These individuals lied to their shareholders and the public about the stability of their companies, while voting themselves massive bonuses that were frequently greater than the entire real value of their company. They committed fraud and financial malfeasance and a host of other felonies, and as a result should and must go to jail.
I’m a little baffled at how your reasoning goes at all. If you hired a manager for your store and then discovered he’d been cooking the books and putting money in his pocket, you have every right to call the cops. You might have aggressively been pushing your manager to make more money – how does that excuse fraud and theft?
I agree with the previous poster. People on “bearish” sites (at least the older ones) should be mostly neutral. Now, this is more of an econ site. Hardly any investment advise to be found anywhere.
What I want, is for the employees of financial companies to stop dipping their dirty hands into the financial flows that run through their companies. It is not their money, it flows there as a service to irrigate the real economy. Too much power has been taken from investors to allocators with very short term interests. But this has been the recurring topic on this site, which Sivaram seems to have missed somehow.
One more: I am pleasantly surprise to see Indians to be so openly critical of the situation at home. Maybe it is because of self-selection (of the readers here). But I hope this is a good sign for India. It is hard to stress how much I would like to see an improvement in the quality of life in the lower half of the population. It would require unimaginable effort and resources. Something that can only happen with honesty.
Suggested reading on India:
===================
WIRED MAGAZINE: 16.11
The Godfather of Bangalore
http://www.wired.com/techbiz/people/magazine/16-11/mf_mobgalore
Excerpt:
But there’s a dark side to Bangalore’s rocket ride. City officials–at least those who aren’t taking bribes–struggle to reconcile the gleaming promise of the information economy with the gritty reality of systemic corruption, a Byzantine justice system, and a criminal underworld more than willing to maim and murder its way into control of the city’s real estate market. As tech companies gobble up acreage, demand has pushed prices into the stratosphere. In 2001, office space near the center of town sold for $1 a square foot. Now it can go for $400 a square foot. Janwani bought his 6-acre plot in 1992 for $13,000. Today, even undeveloped, it’s worth $3 million.
A guard carrying a short-barrel shotgun patrols the area around Muthappa Rai’s home.
Photograph: Scott Carney
But high prices are only part of the problem for businesses looking for space in the city. It’s nearly impossible to determine who actually owns any given piece of Bangalorean real estate. Some 85 percent of citizens occupy land illegally, according to Solomon Benjamin, a University of Toronto urban studies professor who specializes in Bangalore’s real estate market. Most land in the city, as in the rest of India, is bound by ancestral ties that go back hundreds of years. Little undisputed documentation exists. Moreover, as families mingle and fracture over generations, ownership becomes diluted along with the bloodline. A buyer who wants to acquire a large parcel may have to negotiate with dozens of owners. Disputes are inevitable.
That’s where Bangalore’s land mafia comes in. With the courts tied up in knots, gangsters offer to secure deeds in days rather than years. “Businesspeople like to do their business, but many times the system does not permit them to do it,” says Gopal Hosur, the city’s joint police commissioner. “Because of escalating land values, unscrupulous elements get involved. They use muscle power to take control of the land.” Some 40 percent of land transactions occur on the black market, according to Arun Kumar, an economist at Jawaharlal Nehru University. Often the local authorities facilitate these deals. A World Bank report rated the Bangalore Development Authority, which oversees urban planning, as one of the most corrupt and inefficient institutions in India.
Hi Sam,
The difference between India is China is very easy to understand. One is a stable functional anarchy and the other is a unstable tightly controlled system. Which one will fall harder?
I am going to get out my popcorn bowl when I see millions or maybe hundreds of millions die in china when instability overwhelms control. India is already anarchic and since there is no real control- things are as bad as they can be! Falling out of your bed is not as bad as falling from a 10 story building.
Tell me one thing.. after hundreds of millions of chinese are dead and your country is in ruins (self-inflicted), will you still believe that your color, ‘han’ ancestry and wise philosophy is worth the paper it is written on? Just curious..
Satan –
This talk of instability and collapse of China is decades old. Over the years, China has become the model of success.
What you are talking is an assumption and not a fact. Investors and big corporations are not stupid to rush to China and throw capital and plants in harms way. The way, the world has been flocking to China gives a different picture and i would follow the long term money flow to read the direction than isolated thoughts of the few. China has been the largest FDI recipient and most of it led by westerners.
China has problems but is also far more successful than other nations. Its nothing short of a miracle of what they have achieved. Given their record so far, they can be trusted to handle the affairs better than other nations. This is what is needed to get this kind of success as its a gigantic process of creating millions of jobs and moving people to cities from villages.
Its not just China but any other east asian nation or most of the middle east is far more developed than India even though most of these nations are run by dictators.
China is a rising power and the world acknowledges it and this is a fact.
In seeking revenge and vengence, likely because of their own dumb mistakes investing in companies without considering the risk, somehow want everyone in the financial sector sent off to jail or some such thing.
*********************
Well, it is fraud to collude with rating agencies to issue fradudlent ratings for the securities you pawn off on suckers.
And is beyond disingenuous to claim that investors in these AAA rated junk bonds should have done better due diligence, when your own lack of due diligence on the inability of AIG to pay out on credit default swaps means that the taxpayer must payout.
Sam said “China is a rising power and the world acknowledges it and this is a fact.”
I think you are a bit late to the party with the above statement.
China WAS a rising power building success on the basis of being able to manufacture cheap junk that credit rich 1st world countries were willing to buy en masse. But the market for their manufacturing services has been decimated by the worldwide consumer spending crash and doesn’t look like this market will come back strong for many years in the future.
The average monthly wage in China is about US$200. The country has little concern for the environment or the health of its citizens, where many drink polluted water, breath polluted air and don’t get enough to eat. Many in China live desperate lives (as many in the USA will become this year and next). They will work in dangerous, low paid conditions to put food on the table. But if there is no work, then you have a lot of people footloose and fancy free as they say, a volatile mix that could lead to riots and bloodshed.
Without cheap manufacturing, what does China have to offer the world at this point? Admittedly, they are great copier’s but can they innovate? Can they be creative, create new technologies, transition from a manufacturing based country to a technology based one? What new technologies has China has brought to the world? Their capability to be anything more than good copycats is open to question.
Some suggested links to read:
In China, out-of-work migrants destabilizing
http://sfgate.com/cgi-bin/article.cgi?f=/c/a/2009/01/23/MN2L15697J.DTL
Science Blog
Many of China’s 140 million old people find crowd to be lonely
http://www.scienceblog.com/cms/many-chinas-140-million-old-people-find-crowd-be-lonely-18316.html
Following The Trail Of Toxic E-Waste
Nov. 9, 2008
——————————————————————————–
(CBS) 60 Minutes is going to take you to one of the most toxic places on Earth – a place government officials and gangsters don’t want you to see. It’s a town in China where you can’t breathe the air or drink the water, a town where the blood of the children is laced with lead.
http://www.cbsnews.com/video/watch/?id=4586903n
Businessweek
Dangerous Fakes
How counterfeit, defective computer components from China are getting into U.S. warplanes and ships
http://www.businessweek.com/magazine/content/08_41/b4103034193886.htm
China’s Water Problems Reach Olympian Proportions
http://www.wired.com/print/science/planetearth/news/2008/06/portfolio_0618
Also type in China here on Yves blog in the search box. You’ll get a lot of stories about China all in one place.
Was Yevs Smith renditiond by O’Bama
“While skeptics often dismiss “socialist” countries like India for confiscatory taxation and state-sponsored market manipulation, it is ironic to note that India at least, appears to be taking comprehensive steps to ensure the integrity of its free markets “
Socialist countries are very good at taking comprehensive steps. I am not so sure about integrity part. If you have recently been there and talked to people, the problems are not far below the surface.
Looking backward through the eyes of history
to the events of past generations, we observe that
—while man has always tried to put the best face
upon the social condition of his day, and has
always given the most favourable account of his
times—nevertheless, failure has been ever the
record of the human race.Nations rise and fall
;
and whenever another fair experiment in government
is attempted, under new conditions and with
all past experience for a guide, it is only a matter
of time before the very ends sought for—increase
of wealth and power—show that they are but
agents of destruction.
What can explain all this so clearly as the fact
that the god and prince of this world, with all his
transcendent abilities, lacks the power and wisdom
of the Infinite?
As we write these lines, the attention of the
public is being drawn to surprising revelations of
dishonesty in the management of large insurance
companies, revelations which would certainly
shock the moral sense of the community if the
community had any residuum of moral sense to
be shocked. One who looks at all beneath the
surface of these shameful disclosures cannot fail
to realize that they are but indications, surface
eruptions, of diseased conditions which lie deep in
human nature and human society. Once again,
as in the days before the Flood, the Lord God,
looking down from heaven, sees that ” all flesh
“As in the Days of Noah” has corrupted its way upon tlie earth.” Is it
not so?
And is it not also true that the very worst and
most significant feature of these revelations is
that they produce little or no expression of deep
or widespread public indignation? A few caustic
editorials appear in the newspapers, and a few
denunciations are heard from the pulpit ; but the
people, as a whole, are indifferent, unmoved, or
what is even worse, are merely entertained.
Meanwhile, the blind and fatuous leaders of the
enterprises of the age and the exponents of the
much-lauded “spirit of the age” continue to prate
of progress and improvement, of the conquests of
civilization and of the great strides of science
!
Only the few who have sought and obtained
wisdom from the sole Source of wisdom recognize
that the state of things around us now is “as it
was in the days of Noah.”
And this is the outcome of the free application
of human genius and intelligence, backed
up by the amplest natural resources and aided
by every factor which is supposed to make for
progress !
What conclusion is to be drawn from it, and
what remedy is to be applied ? We hear ” enticing
words of men’s wisdom,” such as ” legislation,”
“education,” “culture,” “publicity,” “honest
enforcement of laws,” etc. But who is so shallow
and ignorant as not to know that these have all
been tried, have done their utmost, and have
failed!. The corruption now appearing in the
“highest circles,” where education and culture
have done their utmost, where every experiment
of legislation has been attempted, and where every
natural incentive to honest dealing exists, has its
source in the heart of man. It flows from that
fountain of sin which sprang from the transgression
of the first Adam, and which can be
purified only by the fountain of life which springs
from the blood of the last Adam.
What sane conclusion, then, is possible but this,
that man’s experiment has been tried out to the
very end? And what remedy remains, but that
which the arrogant and unbelieving heart has
always sought to avoid, but which God has always
urged in such words as these : ” Look unto Me
and be ye saved, all the ends of the earth ; for I
am God, and there is none else ” (Isa, xlv. 22)
And do we not see written large and clear upon
the events of our day that but little time remains
wherein to learn wisdom, to heed the oft-repeated
warnings, and to turn unto Him before He leaves
His mediatorial throne, before the day of grace
is ended, and He comes again to shake terribly
the earth ?
Philip Mauro/The World and its God/June 1907
JoJo –
China is not free of problems amid this global crash.
China is better placed than any other nation inculding the US to handle this crisis. Its the creditor nation to the bankrupt US. Begars cant be choosers. Instead of questioning the technology of China, its far more wise to ask what does the US makes except flooding the world with junk paper.
China today is like the US in 1908. It is the central bank to the world with a 2+ trillion reserve. China has a better record of handling crisis than most of the other nations.
I can also qoute investors like Jim Rogers who have moved to Asia from NY.
US is failing miserably in handling this crisis and is effectively bankrupt by turning the printing press on. China is more capitalistic than the US. Each morning, reading the news headlines, US increasingly looks like a socialist country.
China proved in 1997-98 Asia metldown and has a track record of handling the crisis well.
Read credible people like in the region Jim Rogers, Stephen Roach on China who have been consistently right than this media propoganda. Everyone accepts China has problems like other nations but is also better placed with a huge surplus to handle the crisis than bankrupt nations running prnting presses. China has a manufacturing base that is shrinking but nothing like Detroit.
China today is like the US in 1908.
Now it’s time to emigrate to China, says investment guru
http://www.independent.co.uk/news/business/news/now-its-time-to-emigrate-says-investment-guru-1488629.html
As the original author of this post, I’d like to respond to some of the criticisms posted, and to take full responsibility for any inaccuracies in my post. Yves pretty much posted my article word-for-word so any errors are mine, not hers.
1) There is absolutely more to this story than I posted. Indeed, there are several angles to this story, not just on the Satyam front, nor the Maytas front, but the huge amount of corruption in the form of government designations of “special economic zones” (SEZs) and other govt tools that have allowed corrupt politicians and their close cronies to seize huge parcels of private land at far-below market prices. It appears that Ramalinga Raju, through his family’s numerous companies, probably engaged in such practices.
I apologize for leaving out the details, but my goal was to focus on the government actions taken so far rather than to create an exhaustive account of the Satyam scandal itself. The facts that I’ve included in the article are true. That there are other scandals or misdeeds in this situation is also true but I chose to focus on the parts that the govt has so far taken action on, as I believe these parts may be useful examples for Americans trying to deal with our own financial mess. As for the other scandals? Well, govt inaction in India is hardly newsworthy enough to post about :-) Anyone who wishes to add more details to the story, please do so, as several commentators have graciously done.
2) Anon 10:46. There has indeed been speculation in the newspapers that Ramalinga Raju turned himself in to the state authorities to prevent himself from being questioned by SEBI. And it’s true that the SEBI has so far been unable to question Ramalinga Raju as it works through the legal system of determining who’s investigation supersedes the other. But again, the fact is that Ramalinga Raju and his co-executives have been arrested, and are ostensibly going to face the charges I mentioned. Whether SEBI adds to that investigation or not (and I think they should), even the state charges are more damaging than anything brought against the American executives I mentioned. I’m no apologist for India’s vast and lumbering bureaucracy. And they may indeed still snatch defeat from the jaws of victory. But credit is due for at least making a good start, something that the American govt has yet to do. Now this being India, perhaps in a month once the uproar dies down, the executives will be quietly released with no further investigation, perhaps with a little “donation” to the chief minister’s upcoming election efforts. We’ll have to wait and see.
3) WRT property rights and India. India does indeed show less deference to property rights and places other rights ahead of it, certainly in comparison to the U.S. which views property rights as near sacred even to the detriment of other rights that citizens may possess. But even as an American, I’m not sure India’s govt is in the wrong in dismissing a board that grossly failed its duties as in the Satyam case. Agreeing to buy Ramalinga Raju’s other companies may be seen as mere incompetence. But not noticing a massive accounting scandal involving cooked books spanning numerous years is a dereliction of their fiduciary duty to the shareholders. Why shouldn’t they be dismissed when they fail to uphold the duties assigned to them by corporate governance laws?
In essence, I view it as similar to SEC actions against stock traders. If a trader is found to breach the fiduciary duty he has to his clients as defined by law (e.g. front-running orders), then he can be barred from trading regardless of his clients’ wishes. One could ostensibly argue that that should be left up to the client, that if he doesn’t like his trader he could choose another one. But it’s not. The SEC has a stake in ensuring the public trust that the markets require to function, and that supersedes a client’s desire to continue using a disbarred trader.
A similar govt interest I believe holds in the Satyam case. Satyam, while a private company, is publicly traded, not privately held, and directors of publicly traded companies have similar fiduciary duties that they must fulfill.
Regardless, if India is guilty of violating shareholder rights by dismissing the board of a private company, America is surely guilty of the opposite sin, that of doling out taxpayer money without safeguards. Citi, BofA, JPM, etc. all have received tens of billions of dollars of public money. They are essentially national companies, as nationalized as any public sector bank in India. Not replacing their boards with people who would best safeguard the taxpayer’s interest is a dereliction of the Treasury’s obligations to its “shareholders” i.e. we taxpayers.
Anyway, I hope this discussion continues, and I look forward to your further replies.
Lune
It’s almost pointless to argue against some posters on “bearish” sites like this because all of you are set in your ways. It’s almost like trying to argue against a goldbug who thinks the the price is set by government. But anyway…
BLURTMAN: “Well, it is fraud to collude with rating agencies to issue fradudlent ratings for the securities you pawn off on suckers.”
I probably have been hurt more by these mistaken ratings than most of you here (since I’m a shareholder in Ambac, one of the bond insurers, who ended up pricing them incorrectly.) But have you considered the possibility that a MISTAKE–yes, a mistake–might have been made. Has it ever occurred to you that it is not some grand fraud that you are witnessing but, instead, is the MISPRICING of risk? Or will you only accept, like the goldbugs, that everything is some fraudulent scheme or some conspiracy of various parties?
BLURTMAN: “And is beyond disingenuous to claim that investors in these AAA rated junk bonds should have done better due diligence, when your own lack of due diligence on the inability of AIG to pay out on credit default swaps means that the taxpayer must payout.”
Taxpayers don’t have to pay out anything if they didn’t want to. The decision to rescue AIG laid with the government agencies and elected officials (the president has ultimate decision so you are basically accusing President Bush.) The decision wasn’t in the hands of AIG–if anything, AIG was begging the government. In any case…
You either believe in the free market or you don’t! If investors can’t or are unwilling to analyze, and hence be exposed to, risk, they shouldn’t be investing in those assets. No one forced anyone to invest in those toxic mortgages. Similarly, no one forced anyone to buy equities at overvalued prices.
It’s clear that many–but I’m not accusing BLURTMAN of this–talk with both sides of their mouth. On the one hand it’s all the evil executives and/or government officials; but on the other it’s never the investor’s fault for mispricing risk.
One other point: it’s not bad mortgage assets that’s the problem. Rather, almost every asset has been mispriced over the years. Wealth has been destroyed in emerging market government bonds, for example. Art assets, from what I understand, have resulted in losses.
as of Friday I’m off approx. 18%. I certainly do not hold anyone else accountable or responsible for my loss. Or for the disastrous performance of the market. A correction it is. Repricing. Devaluing. Deleveraging. Wealth redistribution. Call it whatever you will. The framework for the pricing, the analysis of the risk are mathematical models. These models were flawed and performed poorly. They were based on erroneous assumptions. There are people who knew that the assumptions were bogus. Not acting responsibly and ina timely manner is failing to meet your fiduciary duty as a corporate officer. When John Thain came in to rescue Merrill in 2007 he certainly didn’t have to spend over a million bucks remodeling his office to help Merrill improve its performance. He certainly did not have to issue over $15B in comp/bonuses from the US taxpayers pockets at the same time that Ken Lewis was before Congress begging for more money to stay afloat. That is irresponsible behaviour and NOT in the best interest of the shareholder. Those are fraudulent acts. And for that they should be held accountable and responsible.
Yep, because stability in china has been never tested since the early 70s. There was always some growth, now we will find out the validity of that assumption.
Systems are tested in adversity, not in prosperity. BTW, How many chinese died because of the cultural revolution.. 40 million or 60 million.. You guys have to break the old record!
“This talk of instability and collapse of China is decades old. Over the years, China has become the model of success.What you are talking is an assumption and not a fact.”
Yes, the same investors and bankers who have destroyed the economies, productive companies and pension funds of the western world. We are soon going to find out the validity of their assumptions.
“Investors and big corporations are not stupid to rush to China and throw capital and plants in harms way. The way, the world has been flocking to China gives a different picture and i would follow the long term money flow to read the direction than isolated thoughts of the few. China has been the largest FDI recipient and most of it led by westerners.
I have a slightly different understanding of the FDI numbers, lots of money recycling..
Well, as I said.. we are going to find out whether that was real. The consequences of failure are going to be monumental.
“China has problems but is also far more successful than other nations. Its nothing short of a miracle of what they have achieved. Given their record so far, they can be trusted to handle the affairs better than other nations. This is what is needed to get this kind of success as its a gigantic process of creating millions of jobs and moving people to cities from villages.”
Yes, practising mercantilism makes you money, but does not create wealth. But hey… you know better.. right?
“Its not just China but any other east asian nation or most of the middle east is far more developed than India even though most of these nations are run by dictators.”
The rise of china is not the problem! The problem is the rise of chinese exports without a proprtional increase in internal consumption.
Chinese have not learned capitalism. You are still practicing mercantilism.
“The rising power and the world acknowledges it and this is a fact.”
Sam,
I have a few suggestions-
1] Start being capitalists! Velocity and distribution of money is more important than quantity in a system.
Our current crisis is caused by the western bankers playing neo-feudalism, not capitalism.
2] No large country has ever prospered without a large increase in internal consumption.
Create social programs to support your poor, so that they will consume more freely than save money for a rainy day.
3] Encourage dissent and create systems to channel dissent away from destroying the country.
Innovation comes through properly channelled dissent.
4] Understand the effects of playing “prisoners dilemma” in the modern world. This is the single biggest weakness of chinese mind. Unless you can play this game properly you will never be a stable power of any significance.
Sivaram Velauthapillai …
“It’s almost pointless to argue against some posters on “bearish” sites like this because all of you are set in your ways. It’s almost like trying to argue against a goldbug who thinks the the price is set by government. But anyway…”
Siviram,
your posts have added a lot to the debate, and I have gained from reading them. It is fair to point out that this blog has attracted bears, but I don’t think either of your implied points are true (or maybe I am misreading you) that we are bearish by temperment or unwilling to debate with an open mind.
I used to have the nickname the bull, and with my Chinese connections the obvious China shop metaphor was used. My recent bearish inclinations have proved correct, but like many others on this site am hungry for perspective.
Again thanks for your thoughts.
Satan-
China has a much longer and rich history than any western nation.
Your Government has failed you with wars, political and corporate corruption.
The Moody’s, investment bankers, Federal reserve failed becaues you have some of the most corrupt people leading your nation. Your govt failed you at all levels and these were only tools in that operation.
The collapsed institutions were the same ones that helped the US become a super power.
China wont allow them get away like the US govt.
China is still in a transition stage and with time will overcome the weakness. In a short period of time, it has achieved a great success.
“China has a much longer and rich history than any western nation.
Your Government has failed you with wars, political and corporate corruption.”
I believe western history starting in the fertile crestent outdates the Yellow river cities by about 500 years. As for chinese government continuity, you would be able to say Europe is an older country, because that is how liberal you would need to be on your definition of government to age it.
As for wars, corruption and irony, China is lucky it has had neither.
Lune –
And it’s true that the SEBI has so far been unable to question Ramalinga Raju as it works through the legal system of determining who’s investigation supersedes the other. But again, the fact is that Ramalinga Raju and his co-executives have been arrested, and are ostensibly going to face the charges I mentioned
The state govt acted and arrested Raju only after his lawyer declared that Raju would appear before the SEBI’s team. The only reason he has been denied any bail and is still in jail is to make it Satyam only scandal and cover up the actual fraud behind this scam without giving access of Raju to any investigation other than govt controlled.
By keeping him and others under the govt custody, this is being covered up very well. It has nothing to do with justice but to protect the state government. If not for the depth of the involvement of politicians in this scam, Raju would free on bail immediately like many others. In fact, Ramalingam Raju had made a deal with the Chief Minister before blowing the whistle for a kind treatment like the Nagarjuna group CEO who surrendered only after getting a deal from the state govt in a similar and connected scam.
This is not a good start but if left outside jail can cause a much bigger political – corporate scam in India.
Sivaram-
My implied expectation that Fuld and Mozilo should be in jail is not because they lost so much money and destroyed their firms. As you’ve pointed out, making poor business decisions and decimating your shareholder’s capital isn’t a crime. It’s because they violated SEC rules regarding proper disclosure of the financial data of their publicly traded companies.
As this blog noted in the months leading upto Lehman’s collapse, (read about it here, here, here, and here), Lehman’s officials engaged in an extensive campaign to convince the public that its finances were far better than they actually were. I’m not a securities lawyer, but even to a layperson like me, they seem to be a violation of disclosure rules that should end up with Fuld and other responsible executives in jail.
Similarly, it seems that Countrywide Financial has likely violated numerous laws including securities, mortgage, and consumer protection laws. It is facing numerous lawsuits and investigations from states, the SEC, FBI, and the FTC, not to mention shareholders and employees. Yet Mozilo paid himself a bonus in 2008 (just before the company was bailed out by BofA) and is still enjoying the comforts of his own home rather than a prison cell.
Just in:
==============
January 25, 2009
College-Educated Chinese Feel Job Pinch
By EDWARD WONG
BEIJING — Oakley Qiao had every reason to feel confident when he began his job hunt last September. He was a student at one of China’s top graduate business schools. He already had a few years of work experience. Students applying for jobs at the same time the previous year had gotten two or three offers by the winter, sometimes for a starting salary 20 times the average Chinese annual income.
But on Tuesday, Mr. Qiao walked away empty-handed from the campus of Peking University to take a train northeast to his frigid hometown.
Most of his 100 classmates are in the same straits on the eve of the Lunar New Year holiday, which begins Monday, even though the school had invited recruiters to the campus every week since the fall. Mr. Qiao said he had handed out résumés to more than 50 companies.
“Everyone’s anxious,” he said as he sat in a campus cafe the day before leaving. “The companies who come to the job fairs, they just come to give presentations, not to offer jobs.”
As this country lumbers into the Year of the Ox, a frisson of anxiety is rippling through a generation of Chinese who had grown up thinking that economic prosperity was guaranteed them. The great boom in urban middle-class wealth over the past decade and a half is slowing because of the global financial crisis, and the job market for college-educated Chinese, even those with degrees from top universities here and abroad, has tightened.
…
http://www.nytimes.com/2009/01/25/world/asia/25china.html
There are obviously multiple facets to the stories of Satyam in India and Lehman bankruptcy in the US. It also is true to state that the reactions of the govts. in the respective countries are obviously both extreme such as superseding property rights (in India’s case) and total inaction (in the US case).
I clearly fail to see how Sivaram could be so blind as to see that bears would be the ones sitting pretty in the current situation. Anyway, in response to the other poster about being pleasantly surprised about Indians voicing concerns (presumably free-market), I would like to point out that, while they may not have any impact on actual outcomes, India has a more vociferous and opinionated public and a forum of discourse, compared to which the US pales.
Sorry for rambling, but having spent nearly 6 months in India and 6 months in the US in the past year, I keep getting frustrated
with both.
For example, I had the misfortune of watching the Sunday talk shows – This Week had 5 blithering idiots and Paul Krugman (I understand I could be in shaky ground here), but they at least had a token expert – who didn’t get to speak much.
Compared to that, Meet the Press was almost completely populated by idiots who seemed to be under strict instructions to speak purely in cliches. The mind boggles – we had a change in govt., when is the “liberal” media going to develop a spine?
Lastly, I spent some time watching BBC world and they had 2 professors from UK and guess who they had from over here – Woodward – who quoted Obama “set aside childish things” – the two prof’s promptly jumped in with “set aside” and it was a sight to behold to see Woodward going “huh”!!
My point: We have put aside the experts for far too long. Time to bring them back. F..k the journalists – their job is to report, not to act as clearinghouse for opinions. We have too many opinion brokers and too few reporters – digging into facts – instead of blindly looking at two sides – of – the dumb and mind-numbingly dumb.
Well, there endeth the lesson. Sorry again.
— r
Well – the prof’s jumped in with “put aside childish things” not set aside – and Woodward was like “whatever” as my teenage daughter is wont to do when I correct her on an important distinction (only because she wants to be a writer) and she goes “whatever” just like Woodward did. Oh crap… what a reporter!!
— r