The first casualty of a downturn is truth
By Luke Johnson
Published: September 30 2008 19:30 | Last updated: September 30 2008 19:30
Early in every commercial career there is a moment of clarity as you learn about dishonest dealings in the business world. It is the realisation that when it comes to large sums of money, even seemingly charming fellows are capable of telling serious lies.
I lost my naivety at the age of 28. I took assurances from an audit partner that the accounts of a company I planned to invest in were accurate and prudent. I did not realise that the auditor was about to retire, and that he was far too close to the chief executive of the business – so had little to lose by misleading me.
In fact the numbers were a fiction; the company almost went bust and I lost lots of money, and became much more sceptical about who and what I believed.
I fear many of the best and most experienced investors acquire a profoundly cynical view of human nature. They have been ripped off just too often.
I know one fund manager whose faith in his fellow man was obliterated by the bursting of the dotcom bubble. A handful of directors of listed companies – people whom he regarded as his friends – were shown to have lied to him on the way up. And they were nowhere to be found when it all went wrong. He had a breakdown and has given up the profession.
It may be that those who sell things are just optimistic – but I suspect sometimes it is much more than exaggeration and rose-tinted spectacles.
This is the point in the cycle when the truth becomes rather more expendable. Be it in board meetings, annual general meetings, job interviews, contract negotiations, employment tribunals – you name it, the actualité will buckle under the pressure.
Desperation compromises the ethics. Highfalutin’ talk of moral principles from media pundits and academics means little if your company faces bankruptcy or you face the sack. As Adlai Stevenson, the American politician, said: “A lie is an abomination unto the Lord, and a very present help in times of trouble.”
We all sit transfixed by the unravelling of free market capitalism in fear and awe, while the clamour grows to find the guilty parties. Most commentators are blaming Wall Street.
Yet the heart of this wealth destruction is a collapsing subprime property market. And in that dark and catastrophic place, I suspect that there have been more lies told than by all the world’s bankers put together. It is inconceivable that the many thousands of realtors, mortgage brokers, valuers, developers, builders and other members of the great daisy chain were not in on the game.
Moreover, the homeowners themselves were also willing participants. Many lied to get mortgages and paid more for properties than they could afford, thinking they would flip them for a profit – because property only goes up in value, right?
We may be witnessing the greatest financial fraud of all time – on many levels. Western societies have been guilty of living beyond their means, and the reckoning we face is a sobering jolt. As they say: I have seen the enemy, and it is us.
The breakdown of trust in financial services is fraying the basic systems we rely on to conduct our daily lives. If citizens cannot rely upon multinational banks to safeguard their money then our way of life will grind to a halt. So many participants – executives, regulators – appear to have been negligent and some perhaps worse. In this miasma, who is delusional and who is deliberately misleading? Many of the players are themselves the losers: the staff of Lehman Brothers held $10bn worth of their own shares – now worthless.
The biggest victim in the whole shambles is not the foreclosed householder, the sacked investment banker or the devastated shareholder. It is our self-confidence and belief in the institutions that help fund almost everything. The banks do not even trust each other.
This week I must sort out a situation where a bank that turned one of our companies down a while ago as a poor credit risk is itself looking as if it might go bust – with almost £3m of our cash.
Getting angry and finding scapegoats is a waste of energy. We have all been part of the merry-go-round – and we must now grow up.
The writer is chairman of Channel 4 and runs Risk Capital Partners, a private equity firm
Copyright The Financial Times Limited 2008