Economic Highlights

New Delhi, 18 December 2008

Stock Or Scam Market?

WALL ST. FRAUD OPENS PANDORA’S BOX

By Shivaji Sarkar

Is the stock-- a market of scams? It is a harsh question but in reality the answer is a yes. The very nature of this market appears to be based on deception, dishonesty and duping. The latest New York scam proves it. Major banks in at least six countries have lost billions. The next obvious question is: Why are public institutions forced to invest in such tainted operations?

India, for one has a fairly long experience-- since 1992 of how to pull wool over someone’s eyes and swindle billions of rupees. Now it is documented that the Wall Street is the leader, if not the mother of such scams. The arrest of Bernard L Madoff, 70-year-old New York trader, has opened a can of worms – a $ 50 billion (Rs 2.5 lakh crore) fraud on the investors.

The figures are provisional and are expected to go many times over. One thing, however, is amply clear—this is certainly not a sudden operation, but has been going on for years. How long is another question? Not even the Securities and Exchange Commission (SEC) is able to provide an answer. Its director Linda Chatman Thomsen says, “We are alleging a massive fraud – both in scope and duration”. But, it is being said that the SEC was in the know of Madoff’s insidious ways at least since 1999.

Clearly, this is certainly not the first such case. Cases of fraud on the Wall Street, though less talked about, have not been uncommon. The Great Depression of 1929 had started from it --- New York Stock Exchange. And, the SEC was set up with the sole purpose of preventing such swindling of public money. Incidentally, the Security and Exchange Board of India (SEBI) is modeled on the SEC. Well, it is evident now that neither the SEC nor the SEBI have the capability to outdo scamsters. The statement of Andrew M Calamari, associate director for enforcement in SEC’s New York office, is one such indication, wherein he says: “The case involved a stunning fraud that appears to be of epic proportion”.

As for India, in the past 15 years, it has lost Rs 236,000 crore ($ 47 billion) in various stock market scams:  Rs 40,000 crore in the recent mutual fund scam, Rs 90,000 crore in the Harshad Mehta scam, Rs 30,000 crore in Ketan Parekh scam and Rs 64,000 crore in the UTI scam. All these are documented losses. However, many more thousands of crore are feared to have been lost in the nexus between banks, financial institutions, stockbrokers and various officials.

Interestingly, a strange commonality is seen in these scams. The losses are of almost equal proportion - $ 50 billion in developed US and $ 47 billion in developing India. Nobody can, however, vouch that these figures are final. In addition, there is another strange similarity, this time in the functioning of the SEC and the SEBI --both are unable to spell out the exact nature and extent of the damages.

During the past decade, the collapse of Enron, Worldcom, Arthur & Anderson and CRB Bank   are indicators to the extent of conspiracies that large corporate houses can indulge in. Worse, these incidents have reportedly shaken the faith in chartered accountants (CAs), as they would have provided crucial clues, if not masterminded such operations.

Let’s understand that equity was conceived as an instrument for easy transfer and liquidity purposes. Conceptually it is linked to the performance of a company. Equity prices on a share certificate of Rs 10 or Rs 100 are supposed to reflect the health of the company and its capacity to share profits – dividend. That decides the value of equity scrip and worth of the company.

In reality, it is all manipulated since it is also linked to a corporate house’s capacity to raise funds from the public. Technically, a corporate house has the responsibility of being answerable to its shareholders during the annual general body meeting (AGM). However, it is public knowledge that AGMs by and large are not open forums. Instead, dissenting voices are curbed ruthlessly and the functioning and minutes are manipulated. Managers of financial institutions and banks more often are willing players as they term such funding as investments, which actually these are not.

Thus, it is precisely here that a fraud starts germinating. What Madoff did was to put all these malfunctions together to fob off the SEC. And, this is what the likes of Harshad Mehta do in Dalal Street and the SEBI barely gets a wiff of it.   

It is through such manipulations that the scrip at the stock market becomes an unreal instrument like the sub-prime real estate prices. Both are far over-rated than their intrinsic prices leading to an inflated credit market. And, in turn high credit is given on low-value instruments. It adds to the artificial money circulation, whereas actually there is no money. In simple words, an instrument is created to legally fund an unviable operation. This then opens the floodgate through which good money flows into the pockets of swindlers. This happened in Dalal Street and is now happening at the Wall Street.

The crucial question is: can an end be put to this? It can.  But not many have the will to do it. Why? Because, powerful lobbies and the mafia managing the stock market are not only control market instrumentalities but so also the policy makers and politicians. Sadly, it is a wide unholy nexus.

But if there was a will there is a way. A simple operational strategy is all what is required. A ban needs to be imposed on all public funded institutions from funding any stock operation. Additionally, they should be prevented from accepting stock papers as hypothecation. Importantly, a law needs to be enacted to penalise a bank or Financial Institution officials if they give any such funding.

The stock market can be allowed operations if any private person wants to play on it. But it should be equated and considered similar to gambling and dealt with strictly. It is no wonder that French President Nicolai Sarkozi, in his comment on the global meltdown, said: “The idea that market was always right was a mad idea”. It should be treated as a call to delink the world economy from the stock market-led “boom”.

Losses at the stock market are manipulated and are made good by forcing governments to give bail-out packages. Only that it is yet another way to deprive the honest taxpayer of his/her hard-earned money and dump them with losses, even when the market is “good”.---INFA

(Copyright, India News and Feature Alliance)