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Mainstream, Vol XLVI No 40

Crisis of Capitalism

Tuesday 23 September 2008, by Olga Tellis

The Wall Street crisis which has seen the mightiest investment banks bite the dust and an insurance giant pleading for time to sets its finances straight seems more like the crisis of capitalism than just the crisis of a few financial institutions.

Barack Obama, the United States presidential hopeful, has blamed it on US President George Bush’s policies but that would be too simplistic. It is capitalism, which feeds on itself, and there is no end to the greed.

The stock market, it is said, is fed by greed and pain. This is capitalism. But what is strange is that the US Government is turning socialist! It is bailing out the dregs of capitalism with the taxpayer’s money, which goes against the grain of capitalism where it is all about laissez faire and the survival of the fittest, a synonym for competition.

Manufacturing Profits

COMPANIES have to keep seeing that their share prices rise and have to show profits or they don’t get their bonuses. The result is that they have to run faster and faster to stay in the same place. And the market is ruthless.

There is no end to profit-making quarter after quarter, there is all kind of financial jugglery known as financial engineering practices.

What’s worse is that in recent times companies have taken to putting their losses out of the balance-sheet. That was the bane of Enron, the once- upon-a-time energy giant, that went belly up in a huge financial scandal.

Regulators Alert

THE financial crisis in the US and Europe should send our regulators like the Reserve Bank of India the Securities and Exchange Board of India and even the Insurance Regulatory and Development Authority into a huddle to see how they can strengthen the financial system here.

For instance, there is a fear in the market that there is a spooky concentration of the whole broking and public offerings business in the hands of a few broking houses.

Each big broking house has thousands of branches or franchisees as they are called, and it is these franchisees that are responsible to the investor and not the big broker or brokerage house. This can be very hazardous and when there is a crisis it will be the investors who suffer.

A way out of this could be for SEBI to restrict the number of badges that one broker can have. In the earlier times, each broker could have just seven badges so it would limit his trading capacity. Also when there was badla the upper limit was Rs 50 crores.

The upper limit for the number of BOLT terminals that a broker can operate should be restricted to 100 and there should be a cap on the volume that he can trade in the futures and options sector. This way there can be a larger number of players in the market against the handful that account for nearly 80 per cent of the trade.

Due Diligence

THERE is an interesting side development to the losses suffered by Lehman Brothers and Merill Lynch India.

For instance, the lists that are out, about where their investments are, reveal that they have invested in companies like Resurgent Mining. Thus the stock which saw an IPO and the listing price of nearly 600 is down to nearly one-sixth of its price in less than ten or 12 days. So one wonders what kind of due diligence these firms do in a small market like India. Or are they misled by the big names that bring such issues to the market?

(Courtesy : The Asian Age)

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