The Stockholm Syndrome

Why Goldman Sachs and the IPL’s suspended boss may end up getting sympathy despite their excesses

How the powerful have been humbled! In the US, the top brass of the mighty investment bank, Goldman Sachs, was subjected to intense grilling by a Senate subcommittee in the full glare of TV cameras. In India, the ruling dispensation came down with all its might by leaks to media to force out Indian Premier League commissioner Lalit Modi for taking on a Union minister. Both the episodes had all the ingredients necessary to make for compelling drama: big money, tattered aura of invincibility, hints of fraud, complex transactions, and unrepentant protagonists. The defiant performance of the main players was a chilling reminder that what is good for businesses need not be good for their markets. The investment bank marketed derivates that offered insurance against fall in mortgage-based securities. Cricket’s newest czar invited private ownership of teams by auctioning players to the highest bidders. Profiting from opportunities presented by the market is as legitimate an exercise as is the ego-massaging desire of a group of moneyed individuals to possess a sports team. What is not is when the investment bank allows for contra bets on its own product and the real owners of the franchise are not upfront about their identity. The insatiable appetite of Goldman Sachs and IPL for big money is neither surprising nor shocking. Investment banks in India are bringing out highly priced IPOs to compensate for the finer fees they have to contend with due to rising competition. At the start of the last decade, it was mobile telephony that proved to be a magnet for business houses. Now the latest fad is to own a cricket team for its capacity to generate eyeballs and, hence, revenue.

As has been seen from the IPO boom of the early 90s, the prospect of making a quick buck inevitably attracts hot money, resulting in controversies over allotment, be they bids for 2G spectrum or IPL franchises. What are the lessons learnt from these two blowouts? First, a simple idea can end up causing disservice to the cause. Savvy investors go long and short on a stock or the index to protect from downside risk. Still Goldman Sachs’s double role rankled as it was known to follow high standards of ethical behaviour. The IPL head’s desire to discourage opaque shareholding was selective rather than encompassing: many more teams have tangled equity structure. Second, business should not only operate in a fair manner but appear to be doing so to earn credibility. Goldman Sachs’ defense that what it did was simply a business strategy has failed to arouse sympathy as the slide in US home prices has been blamed for the global financial crisis. Lalit Modi’s tweet about the suspicious composition of the Kochi team would have seemed like a genuine concern were the holding pattern of other teams too was transparent. The third lesson is conflict of interest invariably leads to bust. Goldman Sachs was creating a product that was supposed to insure subscribers against declining mortgage bond prices but benefited others who were bearish on them. Though Modi was IPL’s regulator, he was accused of cronyism. The fourth lesson is that even one indiscretion is enough to unite foes.

Goldman Sachs’ transgression has been the trigger for US lawmakers on both sides of the aisle to pass the financial regulation bill, which will the change the shape of the financial services industry from a risk taker to a money processor. The government’s displeasure at the IPL helmsman taking on a cabinet minister provided ammunition to his detractors outside and inside the IPL. The fifth lesson is that success leads to complacency. Goldman Sachs was among the few investment banks to have withstood the financial market meltdown. The security of its leadership role perhaps led it take on risks that it should not have. The IPL owes its success largely to its organiser’s vision and execution, apparently emboldening him to assume that he is the first among equals. Goldman Sachs and Lalit Modi are not the only losers following the unravelling of their misdeeds. Turning over into a new leaf by investment banks may come at the cost of innovations, depriving investors of opportunities to make profit. The IPL money-making machine is too lucrative to be dismantled. The show will go on but will it get bigger and better? The ringside participants — investors and spectators — may suffer from the Stockholm Syndrome just like kidnapped heiress Patty Hearst, who started identifying with her captors. Fatigued by the recent tales of greed, they may ignore the failure of investment banks in protecting their clients as excesses by governments pull down the markets and conclude that the IPL boss was a victim of a witch- hunt rather than the casuality of a clean-up.