The Satyam Shall Set You Free

Satyam means "truth" in Sanskrit. Today, the founder and CEO of Satyam (NYSE:SAY) announced that he had unfortunately misrepresented company assets by about $1 billion, and that its cash balance was not $1 billion, but more like $16 million. The company, which is listed on three international exchanges, used Price Waterhouse Coopers as its external auditors.

The company had illustrious academics on its board of directors, and their resumes bristled with institutional affiliations like the Harvard Business School, the Kennedy School of Government, and the Indian School of Business. It's incomprehensible how any kind of financial oversight, internal auditing process, and external auditor reviews could not have surfaced an issue of this magnitude.

Remember as you consider your emerging markets mutual fund that, in most cases, you are dealing with "drive by" analysts who cover companies that are nowhere near as open and communicative as US companies, exchanges that are not efficient or liquid, and which exert minimal control over their listed companies. And, the fees for these funds are outrageous. This risk-reward ratio is not attractive going forward.

We may be in the middle-to-late innings of the flight to Treasuries. Then some aggressive institutional bond investors have staked out big bets on U.S.corporate bonds from the bigger issuers, where prices are purported to be factoring in 25% default rates. Finally, there are equities, and within equities, there are emerging markets stocks. It is really hard to make any case for being in these kinds of company investments. To some extent, companies in India, China, and Russia (to name a few markets) have taken on the trappings of attractive investments: good PR work, big agency IR, corporate governance mantras. However, few of the principles underlying good governance are in their DNA yet. It may be quite a while.