Last week, there was this news that an investment manager in the US had, over time, made off with about 50 billion dollars belonging to his clients. The man had been running a sort of a pyramid scheme where he was paying off older clients with newer ones' money. This enabled him to pretend to generate excellent, steady returns which was what kept attracting investors. Fifty billion dollars is a great deal of money. This swindle, if it really did involve such a sum, is very likely the biggest financial scam ever. In rupees, this is Rs 250,000 crore, which is about five of India's GDP. To put this is in perspective, this sum is larger than the individual GDPs of 110 of the 190 or so countries in the world.
I may be wrong, but outside the US, this event has not produced a reaction on the scale that it should have. Perhaps the rest of the world has reached some sort of a fatigued state as far as reacting to financial bad news from America is concerned. News of some problem regarding a few tens billions of dollars in the US is decidedly ho-hum stuff, hardly worth the paper it is printed upon--we're into trillions now. In terms of regulation, the United States is now officially the financial banana republic of the world, a country where apparently, anyone can steal anything from anyone. Not that Bernie Madoff was just anyone. He was a pillar of society, a member of the best clubs, former chairman of the NASDAQ stock exchange and so on.
Clearly, the rest of the world now thinks of a 50-billion dollar swindle in the United States in the same way as it does of massacres and mass starvation in the Congo or Rwanda or some such place. You cluck your tongue and say how terrible, but then what can you do, that's the way things are in those parts of the world. Interestingly, I've recently noticed some decidedly self-flagellatory articles on this subject in the US media. Just yesterday, the New York Times had this piece about why Indian banks didn't face the kind of bubble-related problems that US ones did. The article concludes that it was the Reserve Bank's?specifically former Governor YV Reddy's?iron hand that held back India's banks from rushing headlong into the kind of mess that banks elsewhere in the world find themselves in. There's nothing remarkable about this conclusion, it's one of those things that a lot of people in India have now realised. What is more remarkable is that an article in a major American publication saying, "The next time we're moving into bubble territory, perhaps we can take a page from Mr. Reddy's book."
However, none of this means that financial scams are not possible in India, or that even that a Madoff-style swindle cannot take place. The remarkable fact about the Madoff affair is how simple it was. Financial regulators around the world are more focussed on sophisticated fraud. A stock broker who pockets clients' money and simply starts printing out fake account statements in order to use the money 'temporarily' is much harder to guard against. Given trusting clients and rising markets, this sort of a thing is not difficult to get away with.
As an individual, the best way to guard against this kind of fraud is to approach all financial intermediaries with a healthy distrust and make sure that you have third-party proof of all transactions.
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