Greed: from Enron to Sub-prime fiasco

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(Update) I started this article a few months ago. Just as I complete it today, I heard the Elliot Spitzer’s scandal (possibly criminal prosecution) regarding his involvement in prostitution ring. How ironic. I hope people don’t discount Elliot’s relentless effort to clean up the Street, no matter what comes out of his case.

(Original) When the Enron scandal surfaced in Summer 2002, I just started to learn about US stock market. But I vaguely remember many other companies such as Worldcom, Tyco also exposed their problems later on. The CEOs of those companies are all prosecuted, and corporate governence of US companies are much improved since then. The congress scrambled to come up with the Sabane-Oxly Act, which helped to make the corporate accounting books more accurately reflect the reality of companies well-beings, and strengthen the investors confidence.

A few years ago, the famous Prosecutor Attorney of New York, Elliot Spizer, took aim at the insurance and mutal fund companies, and helped to clean up the wall street a bit.

Elliot Spitzer pic

But obviously he left some players out: namely the hedging fund and big investment banks. It may not his fault because the laws to govern the sub-prime loan, and its derivatives were not sufficient. I remember a few years ago Alan Greenspan warned about the “interest only loan”, and “ARMs”, namely adjusted rate mortgage. Looking back we realize he was correct on this one. But Mr. Greenspan still kept the interest rate low. In a way, it was his low-rate policy that encouraged housing speculation and caused bubble. So we still got the sub-prime woes. Even after Envon and mutual fund cleanup.

Sometime we will wonder, in a sophiscated financial market such as the Wallstreet, how can this happen? The problem is, the uncontrolled greed.

1) When a lender clearly knows a borrower can not afford the loan, but still go ahead and approve it because he/she can make money on this.

2) When investment banker knows an IPO is no good, but he/she still encourage people to buy it.

3) When PetroChina is touted as the most profitable company in Asia, and has a market cap as large as Exxon-Mobile (while PetroChina has about 10% of Exxon revenue).

4) When numerous technology companies issue stock options to their executives and employees like drunkmen, without much consideration to their current shareholders interest.

All these are no different from a drunken man saying “give me one more drink, I’m fine”. Because ultimately, the reality sets in.

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