In the last few days it has been reported that Goldman Sachs (golden child of the financial industry) has allegedly been involved in fraud.
The SEC claims that GS knowingly marketed a CDO (collateralised debt obligation) that was comprised of sub-prime assets handpicked by hedge-fund manager John Paulson, who then insured himself against the failure of the fund. The fund did fail, and he pocketed $1 billion – the amount lost by investors. Goldman Sachs was paid $15 million to market the fund.
I won’t go into the full details, but the story makes for interesting reading.
I raise it here because it highlights continued problems with the financial system, and is the latest in a long line of financial scandals, including Enron, WorldCom, Lehman Brothers and other large companies. It also underscores the less than robust regulatory controls over the financial and business sectors, and the high degree of corrupt (or at least questionable) activities that take place in this area.
I specifically bring it up in this forum because corruption is a central issue within the topic of development, particularly in relation to aid and financial assistance, with much being made of the weak regulatory controls within developing countries.
While there is no question that governance issues pose a serious problem within the development sphere, as the current case being brought again Goldman Sachs (not to mention the wider debacle surrounding sub-prime markets, derivatives, hedge-funds and the financial crisis) highlights, we in the developing world are hardly immune to corruption. Nor are our own regulatory and governance controls beyond reproach.
The impact of recent events has not only brought ruin on banks and investment houses, but thousands of individuals, businesses and in some cases entire countries (take for instance Greece or Iceland). The cost of bad financial dealings has been colossal, and it has principally originated in developed countries.
The idea that citizens in these countries should be deprived of basic social and welfare services as a result of these failings however, is unthinkable. The mistakes made by governing bodies is, after all, not the fault of the general public and the cost needs to be borne elsewhere. As such every effort is being made to bail out those impacted.
Yet this logic does not seem to apply to the developing world. Aid and financing is regularly held back from countries on the basis of regulatory weaknesses, and ultimately it is the individuals within these countries who pay the price.
While this is no way a clear cut issue, and the problems with corruption in developing countries extend far beyond regulatory failings, developed countries are not immune to significant financial failings either. It therefore appears incredibly hypocritical to withhold financial assistance for populations whose leaders have failed them.