Is Investment Banking For The Birds?

Did you know that parrots make good investment bankers? At least, that’s what an experiment in a stock investment programme in Seoul would have us believe. A parrot took part, along with 10 other human investors, and was ranked third in the final tally…with a positive rate of return. The human average was negative!

Many have always suspected that the allegedly predictive models bandied about in research reports and lectures on stock picks – as well as the claim that this is a highly specialised ‘science’ – actually serve as fanciful methods of camouflaging what is essentially a ‘pin-the-tail-to-the-donkey’ game. Stories like this only serve to strengthen those beliefs.

One could always argue that this is just what the world financial system was looking for. One sore point with most people has been the bonuses that investment bankers (to be fair, not all of them were analysts or equity sales persons) took home despite plunging the world into the worst recession in history. And since everyone’s now wondering how best to clean the system, may I offer a suggestion?

Let the Goldmans of the world revamp…..hire parrots across the board. That should take care of the bonus problems that everyone keeps complaining about. Even if the parrots keep getting larger and fancier cages every year, and demand progressively more organically produced seeds and fruit, it’ll still save billions that can be redeployed in other businesses. So we have statistically better performance at a significantly lower cost….what’s there to argue?

Sheer genius, even if I say so myself.

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Can someone please design a similar experiment where parrots take part in the business of government?

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The Satyam Fiasco – One of Many to Come?

The Satyam fiasco has reached its conclusion. Ramalinga Raju has resigned after admitting to cooking his books for years. It seems that Satyam overstated revenues and profits financial year after financial year, and as on 30^th September 2008 showed (non-existent) cash and bank-balances of Rs. 50,400 million and did not report liabilities to the extent of Rs. 12,300 million. News channels put the extent of the fraud at Rs. 70,000 million.

While Ramalinga Raju has stated he’s ready to face the laws of the land (sporting, isn’t he?), this raises some very interesting questions. Most board members were unaware, or so they claim, of this fraud. So what exactly is the role of the board? Or do most boards still buy whatever management tells them? And what about the stat auditors, PriceWaterhouseCoopers? What have they been doing all these years? They have signed off on the accounts. What about all the institutional investors in Satyam? Fidelity, Aberdeen and the lot? What kind of due diligence was done here? Of course, PWC is going to get most of the flak here, as all the other parties are going to claim that their decisions were based on the accounts certified by PWC.

Most Indian companies excel at creative accounting. So the scary part is that there may be many more Satyams waiting to happen. The magnitude of this fraud lies in the fact that this is not some small mom-and-pop store. Satyam is an index stock, and is also listed abroad. It’s part of the top 4 Indian IT companies. How is this going to impact investment in India in these already difficult times? Look at the list of people Satyam fooled. The BSE, the NSE, PWC, Investment banks….these were not naïve retail investors relying on TV recommendations. These were specialists. And that is what makes this so petrifying. Not because corporate governance, transparency and honest reporting are problem areas in the Indian corporate sector. We know they are. But this is terrifying because the checks and balances have failed miserably. At worst, the regulators, auditors and other agencies might have been in on the scam. At best, they are a bunch of incompetent idiots.

2009 has got off to a rocking start, hasn’t it?

PS: Check out Liju’s interesting post on how Satyam kept lying about the Maytas deal.

UPDATE: Here’s what Citigroup’s research arm has to say about the possible fallout of the Satyam episode.