Refco's trickle down effect

There is a litany of names in the financial world, which, when uttered in a single list, inevitably conjures thoughts of several deadly sins – namely envy, greed and pride.
Depending on your longevity in the market, it might start with BCCI, Blue Arrow, Barlow Clowes or even Ivan Boesky. To that unholy gang you would have to add Barings, Maxwell, LTCM, and, more recently, Enron Worldcom and Parmalat.
The latest name in the hall of shame is Refco, the futures broker whose chief executive has been accused of fraud, putting in sequence a chain of events which is making world markets, regulators and accountants edgy in the extreme. Story: Sunday Herald UK


Corporations were, not so long back, considered to be private organisations. Given the huge influence of many corporations now, and the apparent culture of corruption, this view is changing.But what to do with them, how to ensure oversight and transparency, is the difficult part. Money buys the power to insulate many of these big players from the laws of normal people.
The real problem seems to be that these sprawling groups often know no national borders. They are able to move their activities around to obscure malfeasance or even ‘legalise’ it under some national laws.
Corporations have their own problems with this dynamic. As hard as it might be for governments to monitor a company’s activities, the corporation faces the same problem with its own people.
The current Refco  scandal is a case in point. Former chief executive of the major futures broker, Phillip Bennett was able to shift money from hiding place to hiding place.  Big money, which at last count was $430 million, given reports from Refco and US federal.
Bennett is said to have slipped the debt off Refco's books into a New Jersey hedge fund, Liberty Corner Capital Strategy, and then into a company he controlled.
The loan was passed around so that when it came time to report Refco's finances, the debt was nowhere to be found.
Bennett says he isn't guilty, and it will take all the dishonest guile of his colleagues to work out the complex moves and trace the money. We do not yet know where, if any, blame lies, nor who might join Bennett in the dock.
The auditors involved maintain ‘we were tricked.’ They are the ones who are there to ensure this kind of thing can’t happen. They have failed again, failed because this is business and they are part of the whole game.
So where are these so called protectors? According to Harry First, New York University law professor and expert in business crime, they are lined up filing suits to regain their own money.
“You have all of these gatekeepers -- the auditors and the underwriters -- who are supposed to be there for us watching these transactions”

So who does it hurt, thieving from the corporate thieves? Refco has 2,390 employees, about 1,168 in the United States. It goes deeper into the economies of a number of countries. “The best way to think of the Refco meltdown is as a modern-day bank run,” says our former banker and Capital and Crisis’ editor, Chris Mayer.
This is where the much touted ‘trickle down effect’, beloved of economic conservatives, really makes itself shown. Only there are no benefits to trickle down, just more plunder of ordinary pockets while these high flyers protect their own accumulated wealth.
Mechanisms, and political will, must be found to control the excesses of corporations. Obviously commercial auditors, essentially self-regulation, are not the answer. There is too much at stake to trust these people to control their greed.
Perhaps it is time for organizations such as the World Bank to stop plundering developing economies and begin moderating the behaviour of corporate pirates. But that still seems a little like putting the fox in charge of the hen house.