Getting sued for doing 'God's Work'

Apr 17, 2010

In this issue:
» Goldman Sachs sued for fraud
» Inflation has peaked feels the Finance ministry
» India to grow at 8% in FY11
» Monsoons this year are likely to be normal
» ...and more!

Investment banks were at the heart of the global financial meltdown. Many large, well-known banks got wiped out during the crisis. But those that survived never quite learnt the lesson. The biggest of them all Goldman Sachs managed to survive. So did its arrogance. Last November, its CEO Lloyd Blankfein said he's doing 'God's work'. "We are very important," he added. By helping companies raise capital, investment banks helped businesses grow and generate jobs. Fair enough!

In our view, the problem arises when they toss the rule book out of the window while raising this capital. That happened before the crisis and apparently continues even after it. Yesterday, the US market regulator SEC sued Goldman Sachs for selling a mortgage investment that was secretly intended to fail. An investment instrument called Abacus 2007-AC1 was sold to investors who eventually lost more that US$ 1 bn. A prominent hedge fund manager bet against the instrument and profited. Turns out, he helped create the instrument in the first place. We wonder what Warren Buffett thinks about the development. He holds Goldman warrants of about US$ 5 bn. Although the instrument is still profitable, would he still want to be associated with them given his reputation for integrity?

Let us see what happens to the SEC suit. In any case, it is a bit too late. In our view, the regulator should have clamped down on dodgy investment banking practices a long time ago. It would have saved the entire world a lot of grief.

What do you think of Goldman Sachs being sued? Share with us.

 Chart of the day
When Japanese workers have a grievance, they overproduce. True or not, it is a cliche often used to highlight India's long history of strikes and lockouts. As the chart of the day shows, India lost about 17 m man days of work to agitations in 2008. Gujarat, Andhra Pradesh, Kerala and Rajasthan are among the worst affected states. In terms of industries, the financial sector records the maximum number of strikes and lockouts. Thankfully, the situation is getting better. The trend, especially for lockouts, is downwards. In fact, the numbers for 2009 are expected to be substantially lower. In our view, while such agitations often get the attention of managements, they come at a considerable cost to the nation.

Source: Labour Bureau, Shimla

The RBI, India's central bank, is scheduled to do its monetary policy review next week. And this is keeping the Finance Ministry on its toes. Thanks in part due to the differing views these two bodies have on inflation. The RBI seems to be rather hawkish on the issue whereas the finance ministry is understandably dovish.

In fact, officials in the finance ministry have gone to the extent of saying that the inflation has perhaps peaked. And it is going to be all downhill from here. It remains to be seen whether the RBI is convinced. There seems to be no doubt in anyone's mind that the central bank will indeed resort to hiking rates. What is in question is the magnitude of the same. Reuters says that RBI may want to hike rates by 0.5% whereas the finance ministry will be comfortable with 0.25%. We feel that 0.5% would be a slightly stronger step. It could threaten economic growth. Hence, the central bank would most likely go in for a 0.25%. And it could well be followed by another hike somewhere down the line as there are far more factors at play that could cause a higher inflation, than the ones that would bring it down.

Higher interest rates alright, but India could still notch up growth in the region of 8%. No, it isn't us who are saying this. Mr. Kaushik Basu, Chief Economic Advisor to the Finance Ministry raised this possibility. Mr. Basu spoke at a recent conference and opined that India's GDP could grow at the upper end of 8% in FY11. This is not all. He also added that India could remain on a high growth path provided a three pronged strategy is put in place.

This involved laying mega exports thrust, increase share of total trade and increase savings rate by making India a hub for higher education. We don't know about the execution. But at least the Government's intentions seem to be in the right place. We are indeed way behind other Asian nations like China and South Korea when it comes to external trade. Hence, this remains a vastly untapped territory and one that holds great potential. Also, if we are able to impart greater skills to our populace through better education, then incomes will rise and so will savings rate. Hence, all this put together could set us on a higher growth path. As usual, a big question mark looms over execution.

The Chinese economy grew by whopping 11.9% in the first quarter of 2010. This has again brought to light the fact that China's property market is in a bubble. Even its central bank thinks so. This is why it is looking at implementing new lending rules to cool real-estate speculation. In fact, one of China's central bankers has said that the Chinese realty market is having its 'last madness'. Also, economists in the dragon nation believe that asset-price bubbles inflated by a credit boom could derail the country's economic recovery.

As far as India is concerned, the RBI is also moving to curb the bubble that's building up in the realty market. While our situation isn't as grave as China's, a stitch in time always saves nine!

Some call it 'reverse outsourcing'. What was seen as a one-off movement 2-3 years back is gaining importance now. We are talking about Indian companies outsourcing their non-core tasks to international vendors. Bharti Airtel is one prominent example of this. The company recently gave a US$ 1.3 bn contract to Ericsson to upgrade its mobile network. This was the Swedish company's third billion-dollar deal with Bharti. Another recent instance of this was Jet Airway's recent US$ 750 m contract to a Singapore firm. The contract is for engine maintenance and engineering support.

This is an important trend. It talks a lot about the Indian corporate sector coming of age. The idea behind outsourcing non-core tasks is to improve productivity. And if Indian companies are doing this on a wider scale, it just explains the greater focus that productivity now plays for them.

With the poorest monsoons rains in 37 years being recorded last year, the entire country is hoping for a normal monsoon this year. This brings us to some good news. The India Meteorological Department has indicated that the monsoons this year are likely to be normal with more rainfall expected July onwards. With half the working population employed in agriculture and 60% of farmland rain-fed, the country is highly sensitive to monsoons. In fact agriculture accounted for 15.7% of the country's GDP last year. If we are to maintain a long term sustainable GDP growth, and improve rural prosperity, agriculture will have to keep up its contribution. We are keeping our fingers crossed that the rain gods are more merciful this year.

The past week was largely negative for the Asian and the European markets with only the Singapore markets (up 1.2%) closing the week meaningfully higher. European markets continue to suffer due to the Greek debt crisis. US markets lost almost all of their gains on Friday with news of SEC charging Goldman Sachs with fraud. The US markets closed the week with a marginal gain of 0.2%. India closed the week down 1.9%.

Data Source: Yahoo Finance, Kitco

 Weekend investing mantra
"Accounting numbers are the language of business and as such are of enormous help to anyone evaluating the worth of a business and tracking its progress…Managers and owners need to remember, however, that accounting is but an aid to business thinking, never a substitute for it." - Warren Buffett

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40 Responses to "Getting sued for doing 'God's Work'"


Jun 28, 2010

A stern action should be taken against Wrong-doer/treacherer.

Like (1)

Radhakdrishna Rao

Apr 22, 2010

Mal intention of Individual as well as Institutions shall be punished . Appropriate regulatory mechanism needs to be installed. Financial Product like Credit Cards are like double edged sword needs to be used properly.

Like (1)


Apr 22, 2010

Financial statements are only proxies.

Like (1)

Raghvinder Joshi

Apr 20, 2010

Dear Sir, there is a popular saying that money goes to the greedy and not to the needy.American banks used this principle to crank up their own greed and that of their customers and rest is history...It was certainly not God's work that they were doing. Satan's work? Maybe.
I will like to believe that integrity and honesty will survive many such devilish acts in the banking and financial sector.

Raghvinder Joshi

Like (1)


Apr 19, 2010

5 Minute Wrap Up Is A Wonderful Snopsis for the day,well Just wondering Which Sector Will zoom up If We Get a Anormal Rain fall Please Do Answer,Dont Mind Being Stock Specific,Thanks

Like (1)

ramzan shaikh

Apr 19, 2010

Suing is not the most appropriate penalty for the lack of integrity by the world' foremost IBank.
The regulators need to go a step ahead and lay the cornerstone. They need to take a bold step such as banning such institutions for a specific period in addition to financial penalty. Nothing should be compromised when it comes to integrity.

Like (1)


Apr 19, 2010

The company-Goldman Sachs should be penalised and all the people involved in that scandal should be dismissed from service. The CEO and other top officials, if they are directly involved should be prosecuted in a Court of Law.
The US government should think of making future working of companies more honest and ethical and not let Goldman Sachs escape fearing any "collapse of Economy" and anticipating more such skeletons to tumble out of the cupboard.

Organizations, Chief Executives, Senior officials running an enterprise should employ ethical Means in running an enterprise and not focus on "short term ends.

Like (1)

Husein Moloobhoy

Apr 19, 2010

Hello, I find your analysis a useful resource. The eleventh commandment is 'Don't get caught'. Goldman Sachs and others are a symptom of a corrupt system. Lobbying is big business in the US, done by big business in the US. This has only come to the fore because of the credit debacle. It ran rampant under the tutelage of George Bush, Dick Cheney + cronies. Whilst they had American's mesmerized by their phoney 'War on Terror' - remember WMD in Iraq 'Words of Mass Deception', they were busy stealing their 401k's. Need I say anymore - only the skin is white, the deeds are all dark.

Like (1)


Apr 19, 2010

I think goldman should be banned for lifetime......

Like (1)


Apr 19, 2010

This action was overdue and very correct.

Like (1)
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