Price of trust

South China Morning Post  |  Jan 31, 2009

By Sin-ming Shaw

The world's most valuable commodity is in increasingly short supply.

Sin-ming Shaw
Updated on Jan 31, 2009

A friend recently asked a seemingly naive question: "What is money? How do I know I can trust that it is worth what it says?" We learn in Economics 101 that money is a medium of exchange. But why do we accept that? Bank notes are just pieces of paper with numbers attached. We accept it because we collectively decided to believe the government when it said 100 is 100, not 10 or 20.

Money, therefore, is about trust. A society cannot function without trust. We even obey our leaders' orders to fight and die because we trust their judgment. We entrusted our careers and our money to those who run the Citicorps and Goldman Sachses of the world because we thought their leaders would be fair to their employees and clients, and honourable in their business practices. We do not grow up to work for crooks and

Once that trust is broken, bad things happen. Money ceases to have credibility. Leaders become figures of contempt, or worse. As I write, inflation in Zimbabwe is at an unimaginable level; over 500 quintillion per cent per annum. One quintillion is 1 followed by 18 zeroes. A year ago, it was "only" 100,000 per cent. This is what happens when trust is destroyed.

Zimbabwe, luckily, is not a country of consequence. But the Weimar Republic, and China more than 70 years ago, were. One went for Adolph Hitler and the other for Mao Zedong to restore trust. Need I say more?

Are we seeing an erosion of trust in America and Britain? The first warning sign surfaced in the case of the 2001 bankruptcy of Enron. Its fraudulent accounts were certified by Arthur Anderson. Now, Satyam in fraudulent accounts were certified by Arthur Anderson. Now, Satyam in India - audited by Pricewaterhouse-Coopers - has been found to be missing billions in cash. If we cannot rely on the best auditors, can we continue to trust chartered accountants?

Bond rating agencies have issued misleading ratings on companies in questionable health. Can we again trust a triple-A rating issued by, say, Moody's?

Banks have been keeping our money ever since the 14th century when the Florentines invented banking. RBS, the Royal Bank of Scotland, was founded in 1727 when laissez-faire philosopher Adam Smith was only four. It has just become a nationalised state-owned enterprise, because its incompetent leaders acquired overpriced banks filled with toxic assets. Citicorp, Bank of America, Goldman Sachs, Merrill Lynch and other symbols of "excellence" would have all collapsed but for public bailouts. We always thought these firms were managed by people smarter than you and me.

We grew up admiring leaders such as Robert Rubin, Henry Paulson and John Thain. Mr Rubin, a former US Treasury secretary and exchairman of Goldman Sachs, presided over the collapse of Citicorp while taking home US$150 million in bonuses. A reward for his "performance"? Mr Thain, now in disgrace, helped himself and his
Merrill Lynch staff to US$4 billion in cash bonus payments even after he had to sell the firm to Bank of America to save it from bankruptcy. Mr Thain was a former president of Goldman Sachs and was caught spending US$1.2 million to decorate his new office. Bank of America had to fire him to placate a growing revulsion over the out-of-control
Wall Street culture of entitlement even as the meltdown continues.

Mr Paulson, the outgoing Treasury secretary, ex-Goldman Sachs, left a loophole in his rescue package big enough to drive a lorry through. He allowed his former friends and colleagues on Wall Street to pay themselves billion-dollar bonuses while keeping those firms afloat with taxpayers' money.

Just this week, the technically bankrupt Citicorp's senior executives were about to buy a new US$50 million luxury French jet for themselves until the White House stopped the incorrigible Wall Street kleptomania. Does the word "decency" mean nothing to such people?

The universities these men attended - Harvard, Yale, MIT, Dartmouth - have been magnets for the world's finest young minds because we all thought these institutions could instil wisdom, insight and character.

It behooves parents all over the world to re-examine their often manic obsessive craving for "branded" universities, pushing their children to seek admissions at those places as if an Ivy League degree was an end in itself.

But we now know that Wall Street's titans were never all that smart. They failed the only test that counts. They took their firms to ruin, saved only by money from those who couldn't get a senior job on Wall Street or gain a place at Harvard.

These Wall Street princes were smarter, however, in one way: they managed to pocket a fortune while the rest of us are stuck with cleaning up the mess they left behind. Bernard Madoff, from the downmarket New York City neighbourhood of Queens and a graduate of Hofstra College, may well end up behind bars, but none of the titans of Wall Street with blue-chip pedigrees will be singing Jail House Rock to their inmates.

History has not been kind to societies that have lost trust in the integrity of their leaders and institutions. We need to save our capitalist system from its abusers. Or else.

Sin-ming Shaw is a private investor. Copyright: Project Syndicate

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