Thursday, November 13, 2008

Greed

“There is a sufficiency in the world for man's need but not for man's greed.”

Mahatma Gandhi

The Goose with the Golden Eggs

Once upon a time there was a poultry farmer who had a goose which laid golden eggs. This provided a comfortable existence for the farmer. However one day the farmer decided to take out all the golden eggs and so cut the goose. Alas, the farmer lost his steady earning.

The Global world order is dominated by Capitalism. Capitalism has in its root, greed, or the desire for accumulation of wealth. An excess of greed can be catastrophic.

The SEC or the Securities and Exchange Commission was created by the Securities Exchange Act of 1934 as an independent agency of the US Government for enforcing the federal securities laws and regulating the securities, stock and options exchanges, and other electronic securities markets.

The Net Capital Rule, of the SEC mandated the maintenance of a ratio of indebtedness and liquid assets. The objective was to ensure that in the event of a large bad debt brokers/dealers would be able to maintain operations.

The Net Capital Rule was done away with for large investment banks in April 2004

http://www.sec.gov/news/press/2004-58.htm

In their desire to expand all prudence was lost. Over-leveraging no longer regulated by the SEC; saw caution being thrown to the winds. In the period of four years from april 2004 to October 2008, all the large Investment Banks have either collapsed, or converted their operations from Investment banking to commercial Banking.

“Greed is a bottomless pit which exhausts the person in an endless effort to satisfy the need without ever reaching satisfaction.”

Erich Fromm
So the question arises: Is greed a bottomless pit? How much is enough? When does greed become narcotic?

7 comments:

Larry said...

Hi Sunil,

What an interesting question. I guess I'll begin by suggesting the there isn't a bottomless pit to greed, if only because, like any vice, it eventually destroys you. There's always "MORE" to get and want to get. You just may not be able to before you get destroyed (hence our financial system difficulties).

Why would a "rational" individual or institution continue on a path of greed until destruction? There could be a couple of answers, but I'll suggest fear of being destroyed by not getting more. In order to maintain market share in the face on new market participants, you search for new and creative ways to do business and move down the risk spectruum.

Ist it a high? Excessive Greed? Maybe. But maybe a heard mentality or even survival instinct.

Of course, for some it's just a game. Once you have enough, it's fun to try to get more. Just like a game of monopoly. Only using real money and affecting real lives.

Larry

Anonymous said...

Hi Sunil,

I think we have to distinguish between "greed" and "expected return for an activity". We all try to earn a living with our different activities (at least most of us...). Some want less, some want more, and that is where risk aversion comes into play. I think there is nothing wrong with taking big risks in order to be able to receive big returns. The problem with the financial crisis however is that the ones who would win big (and man, they did!) are not the ones who clean up the mess now. With this "heads I win, tail you loose", the risks that have been taken went through the roof. The gains were accordingly, and the damage now is, too.

Ralf

Unknown said...

Hi Sunil.
The market goes through cycles, as we all now, and in my opinion so does open greed. I say 'open greed' because greed always exists, but to my mind 'open greed' is when greed is openly paraded, and even celebrated, by the media. Soon after, there is always a fall.
I believe greed is a bottomless pit, because it is always present to drive the next boom (and bust).
Greed is an extreme emotion, and my perception is that the market is currently driven far more by media reports (emotion) than by economic or company data. Arguably it has been this way for a while, but in particular over the past year. When the market starts to take more notice of company announcements over media announcements its volatility will diminish.

- Craig Pickering

Unknown said...

Comment orignally posted on LinkedIn:

Well, "greed" might not be the right adjective. When one investment bank invents a new method of getting higher returns its competitors had little choice but to copy it, even if the new method bent the existing "cautious" guidelines all out of proportion.

Institutional investors have gotten incredibly return-sensitive, since so many of them have made promises to their clients that are actuarially impossible to keep. If a chance to earn an extra hundred basis points appears, they'll dump you in an instant and jump the fence for your competitor's fund, even you have had a long-standing relationship and provided them outstanding service. Investment banks and asset managers have found themselves forced to play a dangerous game just to hold onto their existing client bases - those who stuck to their guns and refused have shrunk dramatically.

So perhaps a few "greedy" investment banks bent the rules and forced more honest firms to play along, but the heart of the problem is still that American consumers have insisted upon consuming more than they produce. Had they not, the investment banks would have found little demand for their risky products.

Anonymous said...

Greed is never narcotic; it is a stimulus of massive power.

What we are experienceing is human nature. We know rationally that " if it seems too good to be true it IS too good to be true." But we don't really BELIEVE it. We all think we can beat the system. When the bubble bursts - as it has done now - those still in the game get hurt.

Martin Thomas

Anonymous said...

Certainly greed is an enabling emotion but not all the time. Likewise hope.

Working in parallel to the emotions are certain personality traits which can negate or enhance emotions.

In my case for example I am inately lazy and this often overcomes any element of greed. I may greedily want the outcome - more money, more property inter alia, but I'm too lazy to make the effort. And similarly o a situation where there is 'hope' ...

So in essence I think that many emotions are enabling or disabling by your definition but are balanced by other personality traits and whether action takes place or not depends on thenet balance.

Martin Thomas

SUPREET BAKSHI said...

Hi Sunil
I believe that greed is a bottomless pit which drains the person in an inexhaustible endeavor to satisfy the need without ever reaching satisfaction.
Greed is devastating, it obliges, cripples man to be immoral, selfish and cruel. Wish, want, will, desires are the elements of greed. From which man can never be free.
Greed is a vicious circle of life. The other side to it is also without entrance of greed in lives man cannot survive

Sunila(Supreet)