Satyam: Just Another Scam, Tide Going Out

“It's only when the tide goes out that you learn who's been swimming naked.” –Warren Buffett

Oh man is the tide ever going out. Turns out one helluva lot more people were naked this time around than expected.

This latest scam is truly amusing. Allow me to highlight some of the funnier elements…

Satyam Chairman Resigns After Falsifying Accounts (Update4): “Satyam Computer Services Ltd. Chairman Ramalinga Raju resigned after saying he falsified earnings and assets, prompting a collapse in the stock of India’s fourth- largest software-services provider.”

Lets start with the company name: Satyam.

“Satyam, which means “truth” in Sanskrit, plunged in New York trading, after earlier dragging down India’s benchmark index, in a scandal described as “horrifying” by markets regulator C.B. Bhave. Raju’s reign unraveled in the past month as a shareholder revolt blocked the asset purchases, a World Bank ban kept Satyam from bidding for orders and four directors quit.”

Interesting. Already hilarious. But wait, it gets better…

“Of Satyam’s reported cash and bank balances of 53.61 billion rupees on Sept. 30, 50.4 billion rupees was non-existent, Raju said in the letter sent to the Bombay Stock Exchange.

Operating margin in the quarter ended Sept. 30 was 3 percent of revenue, instead of the reported 24 percent, Raju said. The company’s revenue was 21 billion rupees, 22 percent less than the inflated figure of 27 billion rupees that had been reported.

Raju arranged 12.3 billion rupees “to keep operations going” at Satyam over the last two years by pledging the founders’ shares and raising funds from other sources, he said.”

So basically almost all the ‘cash’ didn’t actually exist and neither did the profit margins. Since none of these assets and none of the earnings powers is real it is devilishly clever to pledge what amounts to being worthless shares as collateral to get real cash.

How classic is it that the banks get left holding the bag? Worthless shares for a loan that can’t be paid back. Excellent risk management! Again!

“What started as a marginal gap between actual operating profit and the one reflected in the books of accounts continued to grow over the years. It was like riding a tiger, not knowing how to get off without being eaten.”

Ah yes. Once the ponzi scheme gets rolling the magic of compounding really becomes a bitch. Damn those exponential functions straight to hell!

“Raju, who won the Ernst & Young Entrepreneur of the Year award in 2007, has an MBA from Ohio University and is an alumnus of Harvard Business School, according to Satyam’s Web site.

Satyam in September was awarded the Golden Peacock Global Award for Excellence in Corporate Governance by the London-based World Council for Corporate Governance. The council today withdrew the award.”

Haha! They even won an award for excellent corporate governance. I’m guessing they hand those out over a quick coffee and a handshake. I mean to expect serious due diligence tests before placing such an award would be just ridiculous. Right?

“This company had a five-star independent board and it had a leading auditor and still it managed the con. So the question is why only Satyam, why not every other company.”

Awesome! I can actually almost see the confidence imploding! You don’t even have to be an economic masochist to see that this sucks for India. This can’t be good for all the Angry Jobless Indians and the Social Contract.

NOTE: Astute readers may have recognized former Iraqi Information Minister Muhammed Saeed al-Sahaf from the picture at the top of the post. I humbly refer you to his Treasury of Deathless Quotes. The sheer audacity of his lies seems appropriate during these dark economic times.