Financial Crisis: A History of Greed (Speech)

The following was presented as a toastmaster speech Project No 3 on 15 November 2011 at Menara Great Eastern.

Ladies & gentlemen,

In 2008, the world witnessed the collapse of financial markets around the world. Organizations like Lehman Brothers, Fannie May and Freddie Mac, previously unheard of outside the United States of America, were thrust into public consciousness in the aftermath of their disintegration.

The effect of the 2008 Global Financial Crisis, better known in this part of the world as the “GFC”, was felt throughout the entire world. In China alone, it is estimated that almost 20 million jobs were lost as a direct result of the GFC. Closer to home, Southeast Asian countries such as Malaysia suffered extreme slowdown in GDP growth and weakened currencies.

Many Malaysians were of course also impacted on a personal level. Companies introduced cost cutting measures such as salary and promotion freeze, lower bonuses and elimination of funding for non-essential activities such as sports. Some companies even resorted to retrenchment to stay afloat.

Three years on, many believed that the worst is over. Financial markets seem to have stabilized. The increase in consumer spending and the return of the stock market to pre-crisis level have raised hopes that although the United States and Europe are still mired in economic stagnation and debt crisis, the Asian countries have finally made a successful decoupling from the Western economies, and will see many better years to come.

I sincerely beg to differ.

First and foremost, let us examine the reason why crisis such as the GFC occurs.

In the years preceding the GFC, in the US Government’s attempt to encourage home ownership, banks and mortgage companies started offering cheap mortgages to people who would usually not be able to afford them. The huge influx of cheap credit led to the creation of a housing bubble, and when home prices suddenly dipped, many people realized that the amount that they owed the banks were substantially higher than what their houses are now worth, a situation known as “under-water” properties.

These sub-prime mortgages, so called because they came with a higher risk of default by the debtors, were then sliced and diced through a process called securitization and then resold to other financial institutions and investment funds. Venerable institutions such as Lehman Brothers and Bear Sterns bought truckloads of these securitized assets, deceived by the high interest returns it generates and the false safety of AAA ratings from various reputable rating agencies.

Then, when the proverbial house of cards collapsed, it brought to their knees the aforementioned two banks, and because of the pervasiveness and interconnectivity of our global financial framework, its impact was even felt in Indonesia, where renowned economist and author, Joseph Stiglitz spoke to a fund manager who felt guilty exposing her clients to the shaky American market via purchases of the securitized assets.

Ladies and gentlemen,

Let me share another cautionary tale.

On June 2009, Bernie Madoff was sentenced to 150 years in prison for running a Ponzi scheme that defrauded thousands of investors of an estimated 18 billion dollars. A Ponzi scheme is one where the monies from new investors are used to pay the returns of earlier investors, with little or no actual investment activity to generate legitimate returns.

Bernie Madoff was able to attract investors with promises of a consistent return even in times of financial market turmoil. Although red flags were raised as early as 1999, they were ignored by both the regulators and the investors as long as Bernie Madoff’s fund continued to pay the returns it promises and furnishes the required records and documents of its operations (these documents were later found to have been falsified).

Ladies and gentlemen,

Besides the loss of savings and livelihood of the victims, there is another common thread that runs through the two examples that I’ve just shared, and that is:

“Human greed”

Whether corporate greed, or individual greed, such recklessness were evident throughout the entire finance fiasco:

- The mortgage companies who earn a commission regardless of the quality of the mortgages it creates.

- The bankers who securitizes the mortgages and sells it to investors.

- The rogue investment fund managers such as Bernie Madoff who runs massive financial scams

- Even the investors who allows their own judgment to be clouded by promises of high rates of returns, no matter how unrealistic they may be.

Another prime example of greed ruining societal progress is the ongoing debt crisis in Greece which is rooted in the mismanagement of resources and excessive borrowing by their government in their attempt to sustain unsustainable public spending, which had, in years before the crisis, helped its citizens to one of the highest standards of living in the world. This included lavish bonuses for employees of its civil services (which size is highly bloated) and one of the lowest retirement age in the European Union. Corruption was rife, and there were even allegations of sweetheart deals to contractors to build infrastructure for events like the 2006 Summer Olympics.

Ladies and gentlemen,

Have we done enough to prevent another financial crisis of this magnitude?

Have we demanded that our elected policymakers and legislators enact regulations to ensure that such corporate greed is reined in?

From my personal observations, the answer is an unequivocal “NO”.

Prior to the GFC, senior executives of large banks were paying themselves handsome bonuses every year, both in cash bonuses and stock options. The Chairman and CEO of Goldman Sachs, Mr. Lloyd Blankfein, took home in 2007 nearly 68 million dollars, the largest ever bonus given to a Wall Street CEO, one year after setting the same record in 2006 for a bonus of 54 million dollars. When the crisis hit, Mr. Blankfein forfeited his bonus in 2008 (anything else would be unacceptable, as the bank had just received tax payer’s money in the form of government bailout). However, post crisis, the bank quickly reverted to its old habits, by awarding Mr. Blankfein with 9 million dollars in 2009, and doubling it the next year to 18 million dollars.

This culture of high bonuses is not isolated to just the United States, as even the UK government is having a torrid time fighting to exert control over the banks compensation and bonuses, to bring it down to a “reasonable level”.

Corporations which were deemed too big to fail, such as the aforementioned Goldman Sachs, grew even bigger after the crisis, as the bailout funds given were perceived to indicate that in the event of any future crisis, the government will step in to ensure the survival of these organizations, i.e. a blank check guarantee.

New regulations which were supposed to accompany the bailout were quickly lobbied against and forgotten, and these organizations which caused the systemic collapse of the financial markets in the first place found themselves back in a position not quite so different from before the crisis.

On the local front, Malaysia has been running a deficit for the past 15 years, with no signs of abating, and similar to Greece, has a big civil service which recently came under the scrutiny of the Opposition party. Also similar to Greece is the persistent corruption which has led to the coining of the terms “crony capitalism” and Malaysia Incorporated. The Auditor-General’s Report released last month highlighted numerous wastages and mismanagement of public funds in many government departments and ministries.

Are we being too greedy as a country? Are we so addicted to subsidies and a welfare state that we are blinded to the risks that have been illustrated by the downfall of Greece?

Ladies and gentlemen,

I wish that I would be able to offer solutions to all that are afflicting our financial markets and the real economy, but that would require a little more than the time that I’ve been allocated, as well as an expertise that I admit I do not currently possess. However, from what I’ve shared, I hope that I have made it clear that at the heart of all the mess that we find ourselves in, and the reason that I believe we are not out of the woods yet, is that human greed still dictates the way the world and the markets are managed, and our leaders do not have the political will to introduce regulations to reduce the possibility of another collapse.

To quote an often used movie line by Gordon Gecko in the 1987 movie, Wall Street, “the point is, ladies and gentlemen that greed, for lack of a better word, is good”, and although the fictional character Mr. Gecko ends up jailed, his real life counterparts are laughing all the way to the bank, and no doubt has no intention of ever renouncing the “greed is good” doctrine.

Thank you.