Opinion I-banks’ IPL moment

But we must also recognise that right now investment banking,like IPL,deserves to be subjected to some populist demands for bloodletting. Populist anger against Wall Street’s establishment,like against our cricket establishment,is in part being informed by the fact that key information has been withheld and key stakeholders have been seemingly duped. These violations should be deemed unacceptable by those of us who value an aggressively entrepreneurial culture. The populist and the so-called elitist are on the same page here.

The other binding factor: the rules,regulations and laws governing both I-banks and IPL are important in the current developments. But as important is one simple fact: no half-decent person can find a moral case for certain goings-on in Indian cricket and American finance. Whether or not America’s SEC wins the case against Goldman or India’s Enforcement Directorate tracks down dodgy money trails in Dubai or Virgin Islands,the correct judgment has been passed in the court of public opinion.

Shashi Tharoor said,and continues to say,there’s nothing more important than personal integrity to him. Yet,as a minister,he was comfortable with not disclosing that a close friend was getting a sweetheart deal in an IPL venture he “mentored”. Simple moral case,no? If there are other people in public office and their close associates in positions similar to Tharoor,then the case is equally simple. If private individuals like Lalit Modi perpetrated the fiction that IPL ownerships and deals were only about blue chip companies and Bollywood stars turned entrepreneurs,it’s an equally simple case. Key information was and in some case may prove to have been withheld and key stakeholders — sponsors,paying public,contracted players — taken for a ride for profits that otherwise would not have existed.

Goldman Sachs’ business principles state that nothing is more important to it than its reputation. Strange then,like in the case of Tharoor,it didn’t tell some of its clients that some of the investment products it was asking them to bet on were products that the bank knew (a) were cherry-picked to be vulnerable against an opposite bet and (b) were going to be betted against by another client of the bank who paid a fee to get this deal.

This is the simple summary of US Securities and Exchange Commission’s complex case against Goldman and no matter which way you cut it,there’s a simple moral case against the bank. Clients were deliberately taken to the cleaners. Key information was withheld from them. Banks that produce crazy financial engineering and pose systemic threats — the financial crisis,in other words — are a big problem. But banks that set out to act against the interests of their own clients for making money it shouldn’t have are a big blot. The first calls for policy response. The second justifies calls that some heads are seen to roll.

Yes,there are less than simple political motivations in the current targeting of I-banks and IPL in,respectively,America and India. Barack Obama’s administration needs a smoking gun as it prepares for financial sector reform. The Congress needs a counter-balancing bad guy after its government was forced to sack Tharoor. But the fact that I-banks and IPL have provided smoking guns for ruling political establishments does not make those smoking guns any less real and it does not mitigate the simple moral case against them.

This,the intersection of political incentives and public anger,brings up the second reason why the Goldman fraud case is relevant for India — it may set the course for future reform in Indian finance.

A very short summary of Indian finance now is this. Look at American finance,and be thankful you (Indians) have Indian finance. This,of course,is dead wrong. The solution to a big financial sector running amok is not a small financial sector that hobbles. But what has been called the Indian financial orthodoxy gets political traction in part because bailed-out American finance seems to have been arguing against changes in how it fundamentally functions. The stench of a discredited ancien régime has been strong.

The Goldman investigation should severely weaken banks’ status quoist argument because the simple moral case leads to fundamental questions about investment banks. One,should a set-up where banks can so easily sell junk to its own clients be allowed? Two,isn’t that set-up directly linked to the bigger set-up that allows banks to prioritise trading over raising money and lending and giving advice? Three,isn’t that in turn linked to huge trading profits promised by financial instruments that seem to be nothing more than pure play speculative bets? Four,does not all of this boil down to the argument that American financial reform that does not fundamentally change the way Wall Street works will not be much of a reform?

These questions are being asked with a lot more force in America now than before the Goldman morality tale came to be known. The chances for fundamental reform are brighter. And if fundamental reform in American finance happens,the Indian financial orthodoxy will lose much of its sheen. Chances of fundamental reform in Indian finance will brighten.

Here’s hoping we can say the same thing about Indian cricket.

saubhik.chakrabarti@expressindia.com

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