The Virus of Greed

Sars is back. Though this time, it is a different sort of pandemic; not one that thrives in the dank wet markets of Guangdong, but rather in the marble corridors of New York and Washington. The Severe Acute Respiratory Syndrome that burst out in China in 2003 spread around the world, killing 800 people in the course of a few months. Now it is the Shameful Abdication of Responsibility Syndrome that has mutated across Lower Manhattan and Washington DC, felling financial giants and forcing several million people out of their homes.

To mention greed as one of the causes of the crisis is not to join the moralistic chorus rising from politicians such as John McCain, who recently proclaimed “We’re going to put an end to the greed!” Moralising ignores the fact that greed is the mother’s milk of global commerce. The search for ever higher returns has driven traders and financiers ever since humans have learned to exchange goods or sought to grow their wealth through investments.

Huge volumes of savings sloshing about the global financial system searching for high returns had settled on the hot US real estate market. Soon the sorcerer’s apprentices on Wall Street invented instruments like subprime mortgages that hooked the unwary with low teaser rates that would become exorbitant over time. It seems everybody wanted to buy into red hot subprime mortgage-backed securities and associated derivative instruments. Even those not caught in the frenzy unknowingly came to own some of the toxic investments as Wall Street wizards sliced and diced such mortgage-backed securities into investment packages sold to the world.

Things were going well until the real estate bubble burst and millions of American homes went into foreclosure. Company after company finding its balance sheet turning red, “discovered” with a shock, that there was subprime in its soup. Massive losses incurred by the mortgage backed securities brought down Bear Stearns, Freddie Mac & Fannie Mae and Lehman Brothers. Even the insurance giant AIG, which had insured such subprime-laden investments, disclosed massive losses from its own investment in subprime mortgages. Subprime mortgage-backed securities have turned out to be greed’s latest vehicle, a worthy successor to the one-of-a-kind surefire ‘winners’ that came before it, ranging from Tulips to North Sea oil and internet start ups.

The absence of transparency that fuelled the 2003 Sars crisis was similarly apparent in the case of the subprime virus. What makes the subprime mania so much more dangerous than past financial crises is its scale and its lightning speed, reminiscent of the Sars virus that spread across the world faster than any of its pathogenic predecessors. With 24-hour financial news and electronic stock trading, the lure of making a killing with fancy instruments in the US property market was turned into a magnet for individuals and institutions from all over the world.

The analogy breaks down, however, when it comes to containing the pandemic. When the Sars crisis broke, the World Health Organization was in place to monitor the rise of the pandemic, lead worldwide research on sequencing its genome, and develop measures to stanch the spread of the pathogen. The subprime crisis has exposed the failure of such supervision and the absence of any effective regulation. As a result, these deceptive instruments, ignored by credit rating agencies, could mutate into lethal toxins, wiping out a trillion dollars of investor wealth worldwide and claiming the livelihoods of untold thousands, all in the space of one week.

All conversations, even among the ardent free marketers, is about more effectively regulating the market. The WHO brought Sars under control by imposing travel restrictions, grounding airplanes and quarantining passengers. It will take longer to contain the financial pandemic that burst forth on Wall Street; by the time this mess is cleaned up, the global economic landscape could look vastly different than it does today. In this radically different world, it will be time to think radical thoughts, such as drawing up global rules and enforcing them vigorously to prevent greed from mutating into deceptive and lethal tools.

If anything, the latest crisis stretching from New York all the way to Tokyo has proved beyond doubt that the financial world is too interconnected to be left at the care of only a few national agencies who were inept, or worse, complicit. Managing global finance needs global governance.