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Taibbi On Crony Capitalism, And Me on How It’s All Familiar to us Indians

In one of his last pieces for Rolling Stone, the brilliant Matt Taibbi writes about a piece of legislation in the US that has probably equalled and even surpassed India in cronyism: The Gramm-Leach-Bailey act, or the Financial Services Modernization Act of 1999.

The key was repealing – or "modifying," as bill proponents put it – the famed Glass-Steagall Act separating bankers and brokers, which had been passed in 1933 to prevent conflicts of interest within the finance sector that had led to the Great Depression. Now, commercial banks would be allowed to merge with investment banks and insurance companies, creating financial megafirms potentially far more powerful than had ever existed in America.

All of this was big enough news in itself. But it would take half a generation – till now, basically – to understand the most explosive part of the bill, which additionally legalized new forms of monopoly, allowing banks to merge with heavy industry. A tiny provision in the bill also permitted commercial banks to delve into any activity that is "complementary to a financial activity and does not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally."

Complementary to a financial activity. What the hell did that mean?

The piece is incredible. It’s in five parts, so don’t miss the little links at the bottom.

Matt writes about how large entities like Goldman and Morgan Stanley have become huge banks, but also exert tremendous control on the commodities markets. Goldman reportedly controls a lot of the warehouses that store the metal that’s traded on commodities exchanges, and in order to charge higher rents, just kept moving them between warehouses. And they get away because, well because.

The banks have colluded time and time over to screw the rest of the US and the world, and they repeatedly get away.

This isn’t unfamiliar to us in India. We hear of the big guys – be it Lanco or Reliance or Praful Patel or whoever – allegedly twisting the system to their advantage. And we’re used to it. The government, it does things to its own advantage, like bailing out Air India with taxpayer money and then abusing it to help themselves. The big guys have the power, and we’re outraged when we hear of it, and when some "party” decides to fix things all they do is forgive a hundred defaulters their electricity bills and run off into the distance.

It is a shame, a disgrace, that we allow this to happen. That we will not debate our laws, like we didn’t debate the internet law that allows any random joker to take down anything because he’s frikking offended, the maker of which should have been fed to the wolves. That we stand by when the supreme court says it can’t decriminalize gay behaviour because the lawmakers have to remove that law – and the lawmakers are the elected doofuses who won’t. That we let those deaths of the RTI-using whistleblowers just go by. That we refuse to jail the bankers who lent those bad loans to Vijay Mallya, but want Mallya to go to jail. That we believe the government should subsidize fuel even though the leakage through those subsidies lines the pockets of those people we call corrupt. That we rail against black money, but won’t dream of selling our houses without “black”. We allow these big people to manipulate the system because we are manipulating the system ourselves, in our small little ways.

We don’t give a rats ass about our own behaviour, or for fighting against a wrong, and we fully deserve what we get. And it seems like America, it’s going down the same way if it doesn’t protest. The banks, they will rule that country if they do not do so already.

  • vamsy says:

    +1 to your article

  • kuriakose.bekxy says:

    good one!

  • Rajiv Ahuja says:

    Interesting read. Unfortunatly true.

  • Amit says:

    While personally I do not like providing incentives to ‘defaulters’ this is not the only thing that the new “party” has done. They have brought the issue of crony capitalism on centre stage. The CAG report on how Electricity companies are manipulating their balance sheets will arrive just before Lok Sabha elections which will ensure that this becomes an election issue. Secondly, this HUGE scam by reliance, where RIL takes out gas from *OUR* own gas fields and sells it back to us at market rate has been exposed.
    Let us hope that the issue of differentiating capitalism from crony capitalism is taken up by other parties as well.

    • No they haven’t. All they’ve done is free water and defaulted electricity subsidy. The crony pieces are well known – the CAG has done it for ages, we have seen the CWG damage, the 2G Scam (which was more swamy than others) and all those other scams even before this. Electricity companies manipulating balance sheets would’ve happened, but it’s fairly obvious that the cost per unit in the grid system itself is high enough compared to Delhi prices.
      The reliance scandal is not just well known, it has been documented extensively before this silly party came to power. They bring exactly ZERO evidence to the table, and it’s all just allegations and accusations without real backing evidence. The CAG has done a way better job, and it has been covered. The expose has already happened, just that they stoked some outrage.
      Crony capitalism needs to be stopped even if it means killing some of the larger players. And by cutting the power of the government (by privatizing many PSUs so that they don’t become monopolies like Coal India)

  • Amit says:

    stoking outrage has its importance. without outrage, the non-binding CAG reports are just pieces of paper. Also mere outrage is not enough (e.g. one on CWG). It should matter in elections.
    As you aptly put it, in most of the cases, the problems in our system are very well known to many. knowing a problem: does that help?
    Bringing these problems to center stage, and making these count in elections – that in my opinion is the most difficult task. maybe, this ‘silly party’ is trying to do just that.

    • They should, but they aren’t. This is just stupid politics. They will come, do some naatak and then go away. Nothing changes because these people simply don’t have the will to actually change things and take responsibility. They just want to point fingers and accuse.
      When they had the chance to change things, they did NOTHING. They could have stayed in power and really pushed out corrupt practices within the government. They could have fixed both government and private parties from the inside. But no, they chose to resign on a flimsy cause – they should have pushed through that bill and other bills into voting. They didn’t even try hard, just acted like babies and said, if you don’t let me present this bill I’ll resign. This is our politicians? Who do dharnas when they are in government? What can I call them if not silly?
      While we need outrage, we need to channel it appropriately. This is not how you do that. You strengthen institutions, not add layers like a Lok Pal (who will just be another corrupt person in the list). You make proper laws. You enforce those laws. Even if they are your friends like a certain Mr. Bharti. You ensure fairness, even for ugandans who weren’t guilty of anything. But I don’t see that of that AAAAAAAA party, which is what it sounds like- lots of noise.
      Too much politics. Should move this to a different blog 🙂

    • DJ says:

      The problem with demonizing individuals and companies is that it shifts the blame away from policy, govt and institutions and leads to jingoism and mob mentality. That kind of outrage is pointless.
      I am all for demonizing Reliance if it leads to better policy and free market capitalism. But, I very much doubt that. It could just as likely lead to socialistic, govt control (as it has in the past). AAP and their supporters seem to desire strong govt control. I’m pretty sure that they would be inclined towards permits and such for business if they had their way. I would prefer a corrupt Reliance over Indira Gandhi type state control and permit raj any day. Because, corruption in the private sector is eventually stamped out, if nothing by simply poor management by the next generation of the business family or competition with other business groups. But, corruption in the govt is a perpetual motion machine, that never stops and is never brought to book or uncovered. Just look at Air India, it has wasted lots more resources than any other private airline could have and they won’t be held accountable. Similarly, PSU banks vs private banks – PSU banks have scams every year but they keep getting taxpayer money. If a private bank has a scam, there is at least some possibility that they will have to pay the price.
      Similarly with Lok Pal. The better solution is simply to rationalize resource allocation policies proactively rather than have a reactive ombudsman. Sure, one still needs an ombudsman for conflicts and frauds but it is not the central solution as it is made out to be. The solution is better resource allocation policy using free markets (rather than deal making and deal approval at cabinet level which has a lot of room for discretion and hence quid pro quo).
      AK talked about gas prices being too high and crony capitalism. The flip side of crony profit are subsidies, which are actually worse as they discourage production, which leads to higher prices in the long term. In both cases, free market pricing (with transparent regulation) is the answer.
      Crony-ism cannot exist without govt collusion, which comes about (to a large extent) with govt discretion in micromanaging policy. AK hardly seems to be interested in the harder solution of cleaning up policies. To be fair, he did say this, for the very first time in a CII conference last week. But, then one must ask why he hasn’t been saying this before and why is this not his central solution and why hasn’t he worked on this in Delhi?

  • gaun says:

    The recent spate of people joining politics after they have retired from their companies or quit. It is worrying as it looks like they would just want to pass time. On top of that the ego’s of these individuals who think they know how to do good governance and their daily sound bite in the media. Sigh! The emphasis on going back to basics and make the foundation strong by enforcing laws is lost on these people. There is only witch hunt going on. “You block my way, I will destroy you” seems the mantra these days. Bunch of thugs and nothing else.

  • Murty says:

    It seems there is strong support for Cronyism here rather than Capitalism! If we say anything about anything, people are getting annoyed, irked!
    Just because we ask questions?
    AAP is a small baby. You can’t expect a overnight success story in this Pseudo Democratic Country. Either we should bear the burden or call it GREAT.
    A great Governement which tramples societies and call it a BOLD DEcision!
    I think Mr. Kiran Reddy of AP is a better choice for Deepak, compared to Kejriwal. Mr. Kejriwal resigned by standing ground. Mr. Reddy continued in power for three more days, and within three days, he signed more than 500 files. Kudo’s to capitalism!
    WHom do you support Deepak?
    Even after putting forward the facts of Gas Pricing, you seem to be supporting RIL

    • I think you should re-evaluate your position on AAP, Mr. Murty 🙂 The point is: it’s easy to call stuff Crony because you don’t like Reliance, but cronyism has to be (and can be) proved with evidence. The CAG has done an interesting job there.
      AAP isn’t about “expecting overnight success”, it’s about rapid overnight about turns and lack of clarity of thought. This is exactly the kind of people who should not run a country! Let them get some clarity, think things through, and then return – right now, they are just disappointing, and increasingly they move towards making their position a drama rather than a well through out effort.
      Kejriwal didn’t “stand ground”, he decided to resign for any flimsy reason he could find. Resigning is not the solution, politics requires action and they should have pushed the bill again and again, by which time people would be furious at Cong/BJP and they would have to acquiesce. No, AAP can’t handle responsibility, that’s what it really is.
      I don’t know about the Kiran Reddy situation and it’s not a bad idea.
      I think I’ve put my position on the gas pricing fairly clear. Most of the detractors think this is RIL’s doing, but it really is about lack of good work in the government! Our NELP never envisaged fixing prices, why? Because we wanted market prices because we could share the gains (govt gets part of all revenue). Now they are higher and we complain. The expense recovery funda is faulty; it should not be front ended, and revenue share should be fixed, regardless of investment costs; why did we not do that? (It was proposed) Possibly because then no one would be interested, and we would still have no gas; but at least it should have been tried once.
      The oil ministry should actively disallow (and in recent time has done) expenses that aren’t deductible. Of course, it is always subjective about whether they SHOULD have drilled one extra well there to check or added one extra beam here etc.
      What I’m sad about is that the blame is on RIL = it is not RIL’s fault, it is the government’s and you should put those bureaucrats in jail that did not price it. Even the LOI for NTPC was left at the LOI level, never converted to a contract. If it was a contract, RIL could be held to it! LOIs are not enforceable per se.
      Anyhow having gone through enough of this I know the situation is murky. Surely Reliance has to have a hand. But without proper evidence you can’t convict anyone. And just circumstantial evidence like “why did oil min not put a price? RIL must have bribed them” is not acceptable, and should not be acceptable to anyone in this country. Bring proper proof or this is just a soap-opera made only for getting people to watch.

    • DJ says:

      @Murty: That’s odd. I was thinking the opposite that AAP supporters get annoyed when others ask them questions!! If anyone asks them a simple question, instead of arguing their point, they are automatically labeled corrupt. That’s very child-like indeed as you said. It would be better for the country (and AAP and all parties) if we can all debate policies and systems objectively rather than reducing everything to good or bad intentions, and resorting to individual blame game or individual glorification.

  • Murty says:

    Please do not mis-understand my anger. It is neither directed to Capitalism or your idea. First of all, thank you for providing a nice platform for sharing such thoughts, and next I will be indebited, for allowing me to express my views. I may fall short of your expectations, but I am not worried.
    Your admitting the murkiness of the deal is highly appreciated. It is unfortunate that issues like this of national importance were not made public for the past 60 years of independence. What AAP is trying to question is the very nature of the SYSTEM called Democracy.(I am not a politician, nor from AAP).
    Hey, all my intention was to get back to that dropping production curve which was a inside manipulation of RIL, and yes, the government is hand in glove with the Corporate World.
    See what Ex InFY person in AAP said today and how MOILY is trying to defend him. Now it is interesting that Mr. Moily is blaming BJP for making the prices(GAS) market related.

    • Thanks for that. Anyone can freely express their thoughts on this forum, and it’s great to see you participate!
      The thing about this kind of outrage is that it focusses on the wrong entity – RIL. It should focus on the governance and fix that governance. Not sure how democracy is being questioned here but you can’t have everything done as a vote of the majority. For instance the majority can’t decide if, for instance, people named Deepak should pay 2x electricity bills. Even if the majority supported it, it is wrong and that is a higher tenet than democracy (Equality, Liberty, Fraternity are higher tenets than rule of the majority)
      Dropping production is probably manipulation but it has to be proved. Heck, they even have given a bank guarantee saying if you prove it you can take the money. But people will now say that the government won’t be allowed to prove it because RIL controls the government – that is simply not true. CAG and lot of Oil Min folks have stood against RIL, and most politicians hate the company. If we need things proved, we need investigations – if the CAG finds no hanky panky in Delhi electricity companies, will we accept it or say that someone has bribed CAG? YOu see where this is going? Basically we have a point of view and we stick to it no matter how much evidence there is against it.
      BJP did a great thing making gas prices market linked, and I support market linked pricing. If you don’t do that you distort economics and production “failures” happen.

      • Murty says:

        Investigations? Hmmmm!
        CBI JD LakshmiNarayana?
        How about Mr. DesiRaju, IAS who was shunted out of Health Ministry?(Forget the fact that he is the grandson of S RadhaKrishnan)……
        DurgaShakti Nagpal, Vinod Rai………
        Deepak, inpite of many proofs, these issues will never be proved in the court of law, because we have a very lenghty process, Local, District Court, High Court, Supreme Court………. A life time process to prove someone either right or wrong!
        But meanwhile, Subrato Roys, Vijay Mallyas….. Vadras….. many others would enjoy life! Good Life!
        Majority opinion is never true representation of the fact. I agree. That is why I call it Pseudo -Democracy.

  • Murty says:

    It is really OILY MOILY!
    All he says that the contract can not be terminted! The statement is on behalf of Government or RIL?

  • Murty says:

    If the contract is terminated, RIL Will have to be paid 30000Cr. If not, 6000Cr. per annum.
    So, Reliance do not want to lose the contract. Neither do the Bribe takers! Wow!

  • Murty says:

    The contract can not be terminted because of pending arbitration case of dropping production, but the price can be doubled , during the same process!

  • Murty says:

    R Jagannadhan on Firstpost vehemently criticized AK yesterday, but now generalizes this issue.
    Thanks to Taibbi and Deepak, he is the second person after ex-infy current AAP person, GopalaKrishnan who used the word “Crony Capitalism”.