In the United States, Goldman Sachs, hugely profitable out of the financial crisis, still rules the roost. According to Senator Carl Levin, chair of the senate permanent sub-committee on investigations, in the report on Wall Street and the Financial Crisis, it’s a “sordid story” of a “financial snake-pit, rife with greed, conflicts of interest and wrongdoing.” Levin said he would be recommending Goldman executives be referred for criminal prosecution. But that’s barely news. Goldman have paid for their criminality before. In the UK this startling story is hidden away in a few short paragraphs on page 26 of today’s Guardian (15th April). It hardly qualifies as news. Because everybody knows.
The problem with the Securities and Exchange Commission’s long overdue pursuit of the potentially fraudulent practice in Goldman Sachs is that it is likely to take a long time to conclude, will cost an arm and a leg, and its outcome is far from certain. If and when the UK authorities follow SEC’s example, it would be likely to cost more, take longer, and be even less likely to produce convictions.
The problem is that such legal actions engage with the details of credit default swops (CDSs), collateralised debt obligations (CDOs) and the whole panoply of financial derivatives that have been deliberately invented to mislead and defraud. CDOs were invented so as to deliberately disguise the real extent of liabilities and so make a firm appear less risky and therefore capable of taking on more debt, which was done with the same deliberate intention to mislead and defraud. This is a minefield where the attribution of blame and intent is full of deliberately confusing and opaque detail.
It would be better to step back from the detailed machinations and simply take a view of the truth and fairness of a firm’s published accounts. It is not difficult to do with the benefit of hindsight. Where balance sheets have been seen not to reflect a true and fair account of a company’s position, the auditor who certified the balance sheet should be prosecuted. They are paid vast sums for their expertise and diligence in certifying company accounts. Auditors who are party to misleading accounts, are guilty of either incompetence or dishonesty. They should surely have to face the full force of the law and be struck off by their professional body. Similar treatment should be meted out to those who presented the misleading accounts. And those who gained through their deliberate misrepresentation and have taken large bonuses as a result, should be similarly treated, with their fraudulently earned bonuses being repaid.
This would be a major change in accepted custom and practice, but it is to be hoped the SEC’S action against Goldman Sachs is a first step in that direction.
It was Peter Drucker who invented the 20 to 1 ratio, suggesting top executives wouldn’t be able to manage their firms effectively if they paid themselves more than 20 times their lowest paid employees, because of the ‘hatred’ and ‘contempt’ in which they would be held. Today, top executives in both public and private sectors pay themselves vastly more than 20 times, simply because they can, authorised by compliant remuneration committees of fellow fat cats.
The phenomenon results from what Bruno Frey referred to as the “crowding out” effects of extrinsic monetary rewards, the intrinsic motivations arising from the satisfaction of doing an interesting and hugely worthwhile job, being “crowded out” by the monetary rewards being pressed upon them or placed within their grasp. (The “socially useless” financial sector is excluded from these considerations – that’s another story!)
Executives in the real economy, and the public sector, may well have started out with intrinsic motivations to leave the world a better place for their brief presence in it. But these higher aims are “crowded out” in what becomes a mindless chase for more money.
But the person inside inevitably judges what others would think if they saw an act of theft, whether it’s picking up a £10 note on the street and pocketing it, or taking a multi-million pound salary. As Adam Smith indicated, it matters what others think; they would prefer others to think well, rather than ill, of them. Only when they know others think irredeemably ill, do they no longer care how their acts impact. Then there is nothing to lose, so they themselves become lost. They surround themselves with sycophants and hangers on, who insulate them from the hatred and contempt of their fellow humans. It’s a pity the sycophants include government ministers and politicans, for example George Osborne and Peter Mandelson notoriously meeting on a fat cat’s yacht a couple of years ago.
John Lanchester, writing in last Saturday’s Guardian, explained the essence of the Repo 105 deals which Lehman Bros did to create the false impression in their accounts that the company was fit and well. And Lehman’s accountants, Ernst & Young, were happy, as Lanchester explained, to ‘sign off on the deal … It was all within the rules.’
But it wasn’t. Company accounts, in Britain and in America, are intended to reflect a true and fair picture of the company’s position – otherwise what is their point? It doesn’t matter that custom and practice has become so fraudulent in financial circles. The only reason why auditors are still required in Britain to certify the accounts as “true and fair” is to be sure that the various clever creative ways of accounting to disguise the true picture, which in themselves may be perfectly legal, are not used to deceive. At the end of the day the accounts must give a “true and fair” account. If audited accounts are not “true and fair”, then the accountants responsible, and the auditors who signed them off, should be struck off and locked up.
So it turns out the top brass at Lehman Brothers were deliberately lying about their indebtedness to the tune of $billions. Shades of Enron! So what’s new? Speculative markets are based on lies. In the old days financial institutions such as pension funds and insurance companies, served some social purposes. Today, hedge funds, sovereign funds and the like, serve no social purpose. They exist only to make money for their investors and themselves, both being in a position to take risks with ‘loadsamoney’. They have no moral compass beyond ‘making as much money as possible’ to quote the famous economic mountebank, Milton Friedman. So, of course, they are liars. The accounting profession are culpable, deliberately falsifying balance sheets so they appear less risky than they are. And firms of auditors are liars, declaring the accounts to be “true and fair” when they know perfectly well they are nothing of the kind. But very few of these parasitic liars end up behind bars.