Mistrust in financial markets, professional cycling and cricket

Antonio Fatas in his super blog has a nice post. He points to this article by Luigi Zingales who laments on the way the whole the insider-trading trial of Raj Rajaratnam has come up.

If you thought that America’s financial sector had gotten enough of bad publicity, think again. The insider-trading trial of Raj Rajaratnam, a billionaire hedge-fund manager, has now begun. It is likely to provide an especially lurid exposé of the corrupt underbelly of the financial world.

Rajaratnam’s trial is remarkable in many ways. First, it is one of the few insider-trading cases ever to be brought against a professional hedge-fund manager. Historically, both state and federal attorney generals have preferred to prosecute “occasional” traders, who stick out like a sore thumb.

But the most remarkable aspect of this case is the level of the people involved. Past insider-trading prosecutions of people other than occasional traders usually involved rogue financiers, like Ivan Boesky in the 1980’s.

This time, we are talking about the very heart of corporate America. A managing director of McKinsey, Anil Kumar, has already pled guilty to providing inside information to Rajaratnam in exchange for cash payments of at least $1.75 million. Raja Gupta, McKinsey’s worldwide managing director for nine years, is accused of being one of the conspirators, as is Rajiv Goel, a managing director of Intel.

It is so difficult to imagine that successful executives would jeopardize their careers and reputations in this way that many of us probably hope that the accusations turn out to be without merit. But recent academic research – by Lauren Cohen, Andrea Frazzini, and Christopher Malloy – shows that it is not far-fetched that university friends like Kumar, Goel, and Rajaratnam would get together to share confidential information.

Zingales says this trial will make people believe that most of hedge fund managers are rogue traders. This is not true as it is a case of few rotten apples making the whole basket rotten.

Fatas draws parallels with cycling world:

This debate reminds me of what has happened in the sport of professional cycling (apologies to those who are not familiar with the sport and might not understand the analogy). In recent years, there have been a large number of cases of professional cyclists testing positive for performance-enhancing drugs. When the first cases came out there were two reactions:
1. Those who assumed that this was a generalized phenomenon and concluded that most cyclists were guilty.
2. Those who had the belief that this was just a few riders violating the rules but, overall, this was a clean sport. Their logic was that if doping was so generalized, how is it that we have not heard about it before?
Over the last years, we have witnessed an increasing number of scandals in this sport and what is worse is that the riders accused were some of those who had won the major races in the world (Tour de France, Giro d’Italia or Vuelta de España). The fact that most of the riders who finished in the top spots of these races in the last years have been associated to these scandals has shifted public opinion towards the belief that doping was (and might still be) a generalized practice in this sport.
I see a parallel with what we are seeing in financial markets as a result of the more recent scandals. Yes our prior is to believe that generalized corruption will be eliminated by market forces and regulation. But when we think about all the evidence that has surfaced during the last years regarding the behavior of financial institutions and those who lead them, our beliefs start shifting and at some point it is not simply a matter of questioning individuals. We start questioning the whole system, the incentives and the ways in which some become winners in this very competitive market (as competitive as the world of professional cycling).
Well, this surely helps me relate to cricket as well. Ever since the match fixing scam broke in 2000 with one of the most respected cricketers being involved, cricket has never remained the same. The game suddenly lost its charm and people started suspecting any major upsets and wayward innings/dismissals.
Whenever the memories tried to fade away came spate of fresh such episodes. Match fixing gave way to Spot fixing where small events in the match were fixed. So now, people are suspicious of even small events/moments in the cricket field. The governing body has not been successful in stopping these events just like the other sports bodies which have not been able to prevent sportsmen from taking drugs.
So much so, even small children which see cricket often end up saying the match must have been fixed etc.. I don’t think cricket will ever be able to come out of this huge crisis. Despite some great cricketers and some astonishing display of sill since 2000, this mistrust is unlikely to go away.
Fatas in the end says:
The difference between cycling and finance is that while we can choose not to watch the next Tour de France but we cannot choose to live in a world where the behavior of financial institutions does not affect our society.
Well people can choose not to watch Tour De France..But how do Indians stop watching cricket? It is  a national passion. Moreover, the commercial aspect of cricket is dependent on India, so others cannot afford t let Indians become disinterested in the sport.  We will have to live with this problem and hope our players do not get into any such business in future..

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