Sucheta Dalal :Mis-selling: How savers are misled
Sucheta Dalal

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Mis-selling: How savers are misled   

March 19, 2012

Goldman Sachs whistleblower’s tale should also draw attention to Indian practices which are no different

Sucheta Dalal

On 12th March, Greg Smith made a dramatic exit from Goldman Sachs, the world’s most powerful, profitable and reviled investment bank. His letter explaining why he was quitting after 12 years was published as a column by The New York Times (NYT) and quickly went viral on the Internet as well as media around the world. Mr Smith’s letter had no specific revelations of dubious deals or cheating by Goldman Sachs.

In fact, compared to Matt Taibbi’s description (in Rolling Stone) of Goldman Sachs, which has caught on around the world, what Mr Smith says is mild stuff. Mr Taibbi had said, “The world’s most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.”

Greg Smith’s column, which skilfully uses the NYT to showcase his bio-data, laments the deteriorating culture of Goldman Sachs and how he now sees the environment as ‘toxic and destructive’. Many commentators are correctly asking why Mr Smith didn’t quit after 2008, when Matt Taibbi and many others were expressing their outrage about Goldman Sachs in far stronger words, or why his conscience didn’t provoke him when Goldman executives gave themselves fat bonuses out of dubiously procured bailout funds, while the world was still grappling with the financial crisis in which it had played a big part.

Of course, one must commend his courage in blowing the whistle and going public about the ‘degeneration’ in the culture at Goldman Sachs. In doing so, he has clearly burnt his boats as far as a Wall Street job with million-dollar bonuses is concerned. On the other hand, he has become an instant folk hero with the potential to earn from speaking fees and book deals.  

Nothing that Greg Smith says is new; it made waves only because an insider was going public with it, even if it was in relatively mild words. As junior reporters, many of us had read with awe the brilliant exposé of Salomon Brothers by Michael Lewis in Liar’s Poker. But nothing much happened to Salomon Brothers. (Even Goldman Sachs, which had $2 billion dollars wiped off its market capitalisation when the report appeared, has bounced back.)
Worse, Wall Street continued to dominate policy-making and, finally, managed to dismantle protective statutes such as the Glass-Steagall Act which had kept investment banking and commercial banking separate. Greg Smith’s article has provoked instant comparisons with Michael Lewis, but my concern is more about regulatory inaction.

Mr Smith describes three growth paths at Goldman Sachs —first, execute the firm’s ‘axes’ which he says is Goldman-speak for persuading clients to invest in stocks that it is trying to get rid of. (If you refer to our Cover Story, this is exactly what happened at a former Goldman affiliate in India). Second, ‘hunt elephants’ which is to get clients to trade products that bring the biggest profits to Goldman Sachs and not what is good for them. And, third, trade an ‘illiquid, opaque product with a three-letter acronym’. He talks about how the entire discussion at meetings is about callously ripping off clients and how senior management referred to clients as ‘muppets’ and how much money they made off them.

Indian Regulators
Are Indian regulators unaware that the same, or worse, is happening here? The examples in our Cover Story clearly suggest that relationship managers at banks may also be talking gleefully about ‘ripping the eyeballs’ off their clients. How else would you explain the branch head of an insurance company committing daylight robbery by getting a customer to buy multiple insurance policies for himself and his family? Or, the teller of a private bank who got a 70-year old to invest in a 10-year ULIP which is surreptitiously issued in his wife’s name to meet the age requirement?

These examples are multiplied tens of thousand times all over India, but our regulators and policy-makers are unconcerned. Instead, for two-decades after liberalisation, we have held up the US financial system as a merit-based ideal for us to follow. Yet, anyone who has ever worked with a Wall Street firm will tell you that million-dollar bonuses are earned by giving up on scruples about ‘ripping the eyeballs’ off customers. In fact, the process is now institutionalised in the form of ‘relationship managers’ and is so widespread that one has to repeatedly tell savers that paying more for an Apple or Toyota brand may guarantee quality (or come with a warranty) but the same does not apply to financial markets. Does anyone doubt that Goldman Sachs will continue to remain powerful and won’t change the way it works?

In India, savers come with an additional handicap. Used to buying insurance from nationalised companies, it comes as a shock for people to hear that their bank manager or insurance agent does not recommend products that are good for them—but those that earn them the highest commissions.

If this were not enough, advertising of financial products is also extremely misleading. Insurance products, endorsed by mega stars, such as Amitabh Bachchan or Sachin Tendulkar or brilliant actors like Irfan Khan, all seem to suggest that a few minutes is all that is needed to choose the right product (which they are backing) and safety is guaranteed. Unlike mutual funds, no risk factors are highlighted in insurance ads.

Consequently, people are buying products that carry high costs and commissions under the impression that they have secured the future of their children or families. I have raised this issue repeatedly at public meetings hosted by the ministry of corporate affairs and the ministry of consumer affairs, over the past couple of months. While they agree privately, there is no move to change regulations.

The effects of mis-selling and poor literacy are most apparent in equity markets where the investor population has shrunk from 20 million to 8 million over 20 years of liberalisation. Regulators pump money into financial literacy advertisements and seminars; but what is their message? TV Mohandas Pai, chairman of SEBI’s primary market advisory committee, recently asked me, “Do you have any ideas on how to have more retail participation? Pricing is a very big issue and there are no clear answers to this apart from disclosure about track record of bankers and promoters.” Obviously, he is seeking answers to this from many others. But is it really about pricing alone? That doesn’t explain the exodus from the secondary market and mutual funds.

Similarly, insurance companies are closing branches to trim losses, since the market isn’t growing. Will they accept that selling wrong products will drive people away, even though Indians are hugely under-insured? And now, there are new lures to trade in gold derivatives and e-gold on the false claim that these are safe bets.

Do we see any effort to ensure uniform rules, clear messages and, most importantly, a serious attempt to stop toxic products from being offered to savers? Do send us your response.

Sucheta Dalal is the managing editor of Moneylife. Subscribers get free help in resolving their problems with select providers of financial services. She can be reached at
[email protected]

 


-- Sucheta Dalal



 



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