“Inside every HDFC, a Satyam is dormant…”


Wells Fargo- A retail bank with a halo around it. Considered so saintly and profitable that the Oracle of Omaha owns more than ten percent of the Bank. All of a sudden, in the eye of a storm as a structured fraud is uncovered and the misplaced faith in the corporate custodians is shaken once again. Wells Fargo fraud is not the first one and will certainly not be the lost. It is all a matter of discovery.




The problems of meeting investor expectations and focusing on that makes people do things that range from grey to black. I seriously doubt if ANY company, across the globe, will be snow white, when it comes to ‘integrity’.


There are two factors that impact integrity;

  1. Promoter or management dishonesty that is intrinsic to most human beings. Very often, it is a matter of degree and rarely one of principle. Like using office stationery, office vehicle, company aircraft, club memberships etc at corporate expenses. Starting from things like this, it extends to milking the company from its operations to gold plating capital costs. This is true of at least ninety percent of companies.
  2. The second one is a corollary of trying to pump up share prices. The pressure on quarterly earnings growth makes managements do strange things. This puts inordinate pressure, set unrealistic targets, fudge books and do other wrong things. The company can be promoter owned, in which case the stock price becomes a personal wealth issue. If there is a ‘professional’ management team, share prices become important because of ESOPs.

When I invest, I presume that every company has one of the two as a fundamental attribute. The second attribute is something about which awareness is low. The ‘professional’ greed to create so called ‘shareholder value’ leads to a lot of irrational things like:


  1. Wrong capital allocation to give the impression of future earnings streams;
  2. Wrong corporate actions like mergers / acquisitions at high prices to sustain the ‘pace’ of growth;
  • Relentless pressure on employees to meet impossible targets; and
  1. Paying too much attention to stock price performance rather than remain focused on bottom line.


The Wells Fargo Bank case is summarized in this link:



Till the fraud was uncovered, this bank was a role model of a well run, profitable retail bank.

It is easy for us to dismiss this as an “American” problem. I beg to strongly disagree. We have several ‘professionally’ managed companies run by employees with ESOPs. Ownership is diffused or subdued and the professionals call the shots. For instance we have banks like ICICI/HDFC etc where it is the CEO and team that runs the business. Yes, they may have a Board of Directors, but we all know that the Board will only know what the CEO wants it to know. Meeting four or five times a year does not give the Board of Directors any insight in to the business or even a whiff of what goes on in the day to day business. So, bury the thought that having independent directors matter.

No company can pass an absolute test in integrity. Somewhere, the tax rules and the lack of punishment, make it easy for the transgressor.

As an investor, it is good to realize and understand this. TRUST NO ONE. That way, you do not leave any room for disappointment. Check the cash flows. See the employee payments, the ESOPs and the lifestyles. Wherever you can. Of course, NO ONE is immune to a structured fraud. And also worry when someone stands out like a ‘sore thumb’. If someone sounds too good to be true, there is a strong possibility of a structured fraud.

The world of stocks and bonds is one big web of deceit and cunning. You have to be alert at all times. Concentration can heighten your risk. Diversification can delay the process to some end. Be a skeptic investor. That can minimize pain, should you get hurt.

“Inside every HDFC, a Satyam is dormant…”








4 thoughts on “Stay Skeptic, Stay Happy- Invest without worries

  1. Great insights, this is absolutely real. SME companies are much more susceptible to this tactfulness. The way I look at this is, either you are part of the problem, or part of the solution. That way, no one can disappoint you.


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