Inevitable losses

In its 2010 Regional Economic Outlook published earlier this week, the IMF notes that “[t]he collapse of the Trinidad and Tobago-based CL Financial Group sent shock waves throughout the Caribbean that are continuing to reverberate.” It also records that “[the region] has also experienced an episode of Ponzi schemes [including a] fraudulent, multibillion dollar investment scheme … at the center of the collapse of the Stanford Financial Group in Antigua and Barbuda and the intervention of the Bank of Antigua.”

The CL Financial Group’s problems have cost Trinidad an estimated “US$850 million (about 3.8 percent of GDP)”  while its insurance subsidiaries, the Colonial Life Insurance Company (CLICO) and the British American Insurance Company (BAICO) may have incurred exposure “as high as 17 percent of the Eastern Caribbean’s combined GDP.”  In a triumph of tactful bureaucratese, the report suggests that “Both experiences point to the need to improve financial regulation and crossborder cooperation.”

Financial schemes which resulted in heavy losses for thousands of unsuspecting investors have been much in the news. Last week, Goldman Sachs’ Chief Executive Officer and six other current and former employees were grilled by an angry US Senate committee. Using unparliamentary language and gambling metaphors which poorly disguised the depth of their impotent rage, the senators pressed Goldman’s staff to explain why the company had continued to sell mortgage-backed securities after it decided to take up massive, and highly lucrative, positions against the US subprime market. Goldman’s evasive replies were quietly contemptuous, as well they might be, for the reality of modern investment banking is chillingly amoral.  Aside  from bankrupted investors and aggrieved senators, who seriously believes that a modern investment bank’s primary interest is anything other than to make money for itself, even if it does so at the expense of clients who engage in foolish risks?

Goldman Sachs is also in the news for its role in helping the Greek government conceal the full extent of its debts without breaching the EU’s Maastricht deficit rules. Since 1999, these rules threaten large fines on any EU member country whose budget deficit exceeds three per cent of its GDP. With Goldman’s help, the Greeks managed to hide deficits that ran as high as 12 per cent. The results of this subterfuge may soon rival the crisis which followed the collapse of the US subprime mortgages. Greece’s financial woes have already destabilized its government and as financial panic spreads across the EU, it may endanger the Union’s common currency and trigger further crises in heavily indebted nations like Portugal, Spain and Ireland. (The next UK prime minister faces budget deficits in excess of £150 billion, and a national debt estimated to reach £1.1 trillion by 2011.)

What makes the cynical manoeuvring which Goldman appears to have facilitated even harder for small investors to bear is the knowledge that the wise men of Wall Street always seem to end up on the right side of the deals, no matter where the markets go. Speaking recently of his decision to purchase $5 billion worth of Goldman’s preferred stock, on behalf of the Berkshire Hathaway conglomerate, Warren Buffett recently told his shareholders: “We love the investment. Our preferreds are paying $15 a second, so as we sit here, ‘Tick, tick, tick, tick,’ that’s $15 every second.” Dreams of making deals like this continue to tempt all kinds of investors back to the stock markets even when they have recently felt the full force of a severe market correction. Reflecting on the déjà vu quality of Goldman’s  recent travails, The New Yorker’s financial analyst James Surowiecki points out that “Just as gamblers who are down keep returning to the casino (it’s called “chasing losses”), state pension funds and nonprofits that had lost a bundle in the tech bubble were among the most aggressive investors in the risky parts of the subprime swamp.”

The Caribbean’s recent financial troubles are neither unique nor unusual. All over the world there is ample evidence that the lure of easy profits, even in markets said to be carefully overseen by ratings agencies and other watchdogs, continues to tempt investment bankers and their clients into decisions that are ill-considered, fraudulent, or both. As we come to terms with the Stanford and Clico debacles, we should try to avoid the naïve mistake of believing that any amount of financial regulation, crossborder or otherwise, will prevent future mistakes and deceptions. Transparency and strict oversight are necessary to counterbalance the greed and fear which move markets, but without public skepticism and responsible governance they are rarely enough.

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