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Save Satyam? Or Start Afresh?

Capitalism is built to reward good companies. And that necessarily punishes bad companies. When a fraud is committed, and a company is no longer solvent, it makes little or no sense to keep it afloat, regardless of the implications in the short term. This may seem very illogical to Hank Paulson and indeed, most of the US congress and Senate, but this is how it works.

When you reward or even rescue the bad guys you screw up in two ways. One, you introduce moral hazard. That is, if there’s no punishment for doing anything bad, then why not do it?

When the US government bailed out JP Morgan by ensuring it would buy Bear Stearns, it set a precedent, and later paved the way for rescues of AIG, Citi, Goldman Sachs and then, the auto majors. There’s no need to be profitable, because if you’re not, the government will come in and help.

Second, the allocation of capital is highly inefficient. That GM or Ford will continue to exist will halt the flow of capital to new, innovative entrepreneurs in the industry. That Citi exists today or that AIG not only takes capital towards them (and away from newer folks) but also ensures that no one could salvage the broken up CITI or AIG; something that may have been far better, and is likely to be even now.

This argument applies to Satyam too. We should let it die. The good folks there can go out and set up smaller companies, and execute the contracts. The rest will look for jobs anyhow. Satyam’s resources get auctioned, at prices that make the newer companies viable. A new set of companies emerge, untarnished by Raju, some of whom will become the Infosyses, Wipros and Cognizants of tomorrow.

This will mean pain in the short term, for everyone involved. But a government interference cannot have a short term goal anyhow. In a few years, it will all even out and even better opportunities will be available to those that are currently drawing their paychecks from Satyam.

But if we rescue Satyam the moral hazard of frauding a company will exist, for others who have low ethical standards; and there are enough of those. And we’ll end up sadding disgruntled employees with distrusted customers, a suspicious market and a financial industry unwilling to lend. Indeed, a better approach is to have it go bankrupt, cut it up into small pieces and auction each piece to the person that will pay the most – and we’ll encourage a better set up for tomorrow.

Piped dreams, surely. I only expect more drama. For nothing.

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