RTC-The way forward or the sovereign fund that will make US the boss of everyone

Three of America’s top five investment banks have disappeared over the past six months, two of them this month. Bear Stearns went last March. Now, Lehman Brothers and Merrill Lynch have followed.

At least Bear and Merrill found buyers, the former with support from the Fed. Lehman has suffered the ignominy of having to file for bankruptcy. Only Goldman Sachs and Morgan Stanley are left standing and now they are becoming banks!!!
Billions of dollars and thousands of jobs have been lost.
The demise of three top investment banks has several implications. First, it calls into question the standalone model of investment banking. For most capital market activities, a stable base of funds makes sense. Banks, with their access to deposits, are better placed to succeed. That is what the acquisitions of Bear and Merrily Lynch by J P Morgan Chase and Bank of America respectively signal. In other words, ‘financial intermediation’, on the wane for many years, is back with a bang.
Secondly, leverage in banking itself may have to fall from the present levels. Thirdly, when investment banks come to be part of banks, investment banking too comes under the purview of central bank regulation.
Now US congress is finally acting to save US and world economy.It has proposed to create a RTC (Resolution Trust Corporation) that would buy bad assets from banks at an appropriate price.It would auction those assets later once markets have stabilised.How will this help the economy?It helps stabilise the value of assets of financial firms and prevents the collapse of highly leveraged institutions. Hopefully, the RTC will make a profit later; if not, the government incurs a cost equivalent to the losses on sale of assets the RTC has bought.
So far so good,but does not it end up rewarding the worst performer?
Will this model address the basic problem which is lack of capital at financial institutions.Whatever,US FED is hell bound to save these financial institutions and will do whatever possible to buy them.
AIG is already under US with 80% stakes and Freddie & Fannie now too belongs to US govt.
US is planning to pump at much as $1 trillion to save these corp.But the question is- can US afford this?
A trillion dollars is under 8% of US GDP. That is big but still falls in the lower end of bank recapitalisation costs consequent to economic crises- the range is 5-45% of GDP.US public debt, at $ 4.4 trillion, is 32% of GDP, pretty much on the low side considering that the limit for EU economies under the Maastricht Treaty is 60% of GDP (India has over 70% of GDP in debt). That means there is room for another $4 trillion of US debt. So, even if the bail-outs were to amount to $1 trillion, the US and the world economy can take that cost in their stride.

But now comes the tricky question, How will this nationalization of big financial firms going to affect the world.
This is something very few people are really looking into.This $1 trillion RTC will own the assets of these companies(like AIG,Freddie & Fannie).Now look at this scenario: AIG thru its JV with TATA,i.e TATA-AIG holds good percentage of equity in the companies like Reliance industries, RCOM, ONGC, BHARTI, BHEL, MINDTREE, INFY, MMTC, MTNL, NTPC, DLF, SBI, ICICI et al.
In short,most of the companies in India will have US govt. as its direct owner in some percent of equity.This is the data available with the SEBI, we still dont know the exact extend of investment of these US companies.This data is only for India.Extrapolate it to the whole world and you would see the US is probably creating the largest sovereign wealth fund (SWF) of this world.It will soon hold a sizable amount of equity in companies throughout the world.
Be it it India, China, Russia, Brazil or Argentina, US govt. may soon have a direct ownership of their companies(in small proportion though)
Imagine US holding stakes in China mobile and NTPC.It can then directly gain from the growth of both India and china's infrastructure.So the next time world bank sponsors a NTPC plant, we would know where its real profits are going?
The worst case would be, US starting to manipulate the working of these companies.
The sub prime crisis might end up being the blessing which will ensure a US supremacy over the world in this century too.But before that a lot of mess has to be cleaned otherwise before we can see a US diplomat in the board meeting of DLF we might see US borrowing from IMF and world bank to clean up its roads!!!!!!!

I just got this cartoon on net,i think the blog's idea can be captured in it

Why Lehman is no more and why Sanjay in Delhi is losing money due to Shaun's mistakes in Dallas

It was 8:30 in the morning, when i was waiting for my flight on the chennai airport on 15th sep'08 when my cell rang.It was msg from my dear frnd Deepak,who had just dropped me at the airport an hour ago.It was plain text msg of one line "Lehman bros files for bankruptcy".......
I was stunt, Lehman is gone,158 yrs of history,the company that survived two world wars,1929 depression,1987 crash and dot com bubble has finally given up to sub-prime..
The day before that i was watching a documentary on Enron and here also there was this big company losing its shirt.
By the time my flight landed,the news was everywhere.........The first words coming out of my dad(who had come to receive me) mouth was"Lehman is gone".
At this point i was more worried about my friend who had recently joined Lehman(An update from his side is:He is preparing for CAT and XAT).Thankfully he still has options.

Coming back to Lehman bros
The Lehman Brothers opened for business in 1850, even before the civil war (1861–65). Now, after 158 years, the illustrious financial powerhouse is gone and the founders must be turning in their graves.

We can easily conclude that the careful and methodical practices of the founders were lost by its current management team that strayed from sound business practices when they indulged in risky lending adventures and extremely high leverage.

From the company's web site:

The history of Lehman Brothers parallels the growth of the United States and its energetic drive toward prosperity and international prominence. What would evolve into a global financial entity began as a general store in the American South. Henry Lehman, an immigrant from Germany, opened his small shop in the city of Montgomery, Alabama in 1844. Six years later, he was joined by brothers Emanuel and Mayer, and they named the business Lehman Brothers.

Cotton was the cash crop of the time, and the Lehmans accepted it from the local farmers as currency to settle accounts. The brothers traded the cotton for cash or merchandise, becoming brokers for buyers and sellers of the crop. In 1858, they opened an office in New York, which was the commodity trading center of the country.

This company trading in cotton, soon became a financial giant following the WWII and then it never looked back.
Having funded most of the American companies and helping them become world leaders,it became a symbol of American capitalism and financial supremacy.Lehman Brothers advised companies such as Chrysler, American Motors, General Foods, Philip Morris and Hoffman-LaRoche on expanding domestic and international operations.In the mean while it expanded its operations throughout the world by acquiring seats in London and Tokyo stock exchange.In the mean while it became a fortune 100 company and last year it jumped to fortune 50.In 2007,it was voted as the best company to work for
Emanuel and Mayer Lehman's dream of making their company one of the every best in this world was coming true and at the same time it was turning dreams of thousands of bright minds into reality.
Wall st. has been the mecca of investing throughout the world. It was a dream to work there and Lehman was providing them the platform to do just that.The white collar jobs at Lehman was one of the most sought after careers in US and around the world.It had its hunting grounds(as we MBA wallas say) in the corridors of different universities like IIMs, IITs, Harvard and Princeton. Six figure salary was not a dream in Lehman.Bonuses were huge and middle level staff used to look forward to these bonuses to buy a Porsche. Such was the life at Lehman(please extrapolate it to other four giants too)

All was well,great depression was fended off,so was the 1987 crash and dot com bubble burst brought new opportunities for Lehman.But in middle of 90s something started to happen. US economy was doing very good and ppl had good disposable income.And they did what every financial consultant would say you to do.......Invest either in equity,bonds,gilt or REALITY.The interest rate were down to about 2.5% and getting assets on debt became a fashion of sorts.
In 1998,the "Asian Economic Miracle" came to an abrupt end and all the Asian Tigers went with it.There was a sudden decline in production from these countries.It had a domino effect on the world economy.The demand of fuel went down and the price of crude went to $8/bbl(Yep it was this low).This led to acute shortage of liquidity in the OPEC nations.This reduction in oil revenue contributed to the Russian financial crisis in 1998, which in turn caused Long-Term Capital Management in the United States to collapse after losing $4.6 billion in 4 months. A wider collapse in the financial markets was avoided when Alan Greenspan and the Federal Reserve Bank of New York organized a $3.625 billion bail-out. Major emerging economies Brazil and Argentina also fell into crisis in the late 1990s.Equity as an asset was battered and indexes all over the world suffered.Investors lost millions and Institution fund houses lost billions.The option of investing in foreign equity took a back seat for next fives yrs as the dot com bubble started to grow.All the money that was made during this time,went into bullion and real estate.The industry for housing grew on the gains of dot com and prices began to rise throughout the US.Economist termed it as the most secular asset growth in the history of US.
This way enough money was made and with past success people thought future will too be bright.Real asset continued to outperform all the other assets classes and the greater fool theory in mind Americans continued to flourish.They borrowed and bought more of real estate.Again interest rates were low which prompted people to buy more and Bush helped it by promising "No extra tax,no extra interest"

The banks gave loans to all most all kinds of seekers,even if he was a NINJA(No income,no job and no assets).They then refinanced their loans from the other big houses like Lehman ,Merrill lynch,AIG or other in the market through a instrument called as Special purpose vehicle.With the money refinanced from the big company they(banks) gave more loans and so on.This way they gave more loan than what they had actually owned.But there was no trouble as people continued to pay their EMIs

Then 9/11 happened followed by dot com bubble burst followed by Afghan war.Again equity suffered and indexes all over the world went southward.New taxes had to be introduced and interest rates had to be increased.There was increase in outsourcing which led to more job losses in the western world.Americans started to default on their EMIs which made banks take possession of their houses.The banks in turn auctioned them to recover the balance amount(known as foreclosure).But this defaulting and auctioning led to massive downgrading of real estate and prices of houses crashed everywhere.People caught with costly houses simply refused to pay the EMI instead allowing banks to take possession of the house.This way the bank got a huge assets which no one was ready to buy.The banks had to underwrite these assets and their balance sheets suffered huge losses.
Although this effect was clear,yet no accountant was able to see it bcoz of securitization ,simple meaning of the securitization is giving loans out of balance sheet and have more cash to give more loan by transferring the mortgaged loans to special purpose vehicle (SPY) prepared for this purpose by the big houses(read banks and investment firms). After securitization of mortgage assets ,Loan given will not shown in balance sheet and after that they have good capital adequacy ratio and solvency margins, so they can give more loan ,but servicing/default risk of all loan remains with the institute and does not transfer to the SPV.
This way the whole lending system collapsed and all the parties involved i.e banks, investment firms and consumers suffered.
Now came the difficult part, getting cash for all the underwriting.The banks and investment firms started to pull money out of emerging market .Markets all around the world crashed and in September 2007, even the Dowjones had to suffer.Slowly China lost 55% of in market cap,India lost 40% and Russia has lost 45%.People like you and me suffered because someone in Alabama or North Dakota did not pay his EMI.
The write offs continued and bad assets continued to grow.First one to bow out was Bear stearns and then it was Lehman which was unable to find a buyer.ML was lucky to have Bank of America buying it at what some people are calling a steal price of $50 billion.AIG had to be bailed out for $80billion and the last word on this is yet to be written.

A simple mistake on part of Banks and consumers have led to global turmoil which has just started to take in its victims.We are suffering because Americans can't repay their loans.
This default has taken taken just few firms with it but the after effects is gonna be huge.Already companies with large holding with these investment banks are suffering and so are the investors in these companies.It might just take more than the bailing out of AIG and freddie & fennie to solve this problem.The next US president has his task cut out.It will take a policy change like "New deal" to get this world out of this financial mess.

Taxing the farmer

Associated Chambers of Commerce and Industry in India (ASSOCHAM) is planning to raise the issue of introducing income tax for farmers with finance ministry. This is based on the survey conducted by our great industry body ASSOCHAM. Surprisingly, the participants/respondents in the survey are 300 CEOs. The results of the survey indicate that about 80% of the CEOs (respondents) are in favor of bringing the farmers under the tax net. It is also reported that the industry body will highlight the results of the survey during their pre-budget consultations with the Ministry of Finance.

We need to appreciate the efforts of ASSOCHAM and the CEOs participated in the survey for their ‘concern on the revenues of government’.

Unfortunately, Government of India’s published reports indicate that at least 1.5 lakh farmers have committed suicide from 1997 to 2006 in the country. These suicides are reportedly higher in ‘richer, prosperous and industrialized’ states. NSSO survey on indebtedness of farmers during January to December 2003 reported that 43.42 million (48.6%) farmer households are indebted. Another report of NSSO reported that average expenses and receipts for cultivation per farmer household, during July 02 - June 03 for which the data is available, was Rs.20,315 and Rs.8,791 respectively. This means an average income of Rs.11,524 per annum which turns out to be Rs.960 per month per household. This income may be less than your ‘pocket-money’. This income will not increase significantly even if we assume that farmers are involved in other activities for income generation in villages.

Imagine a household (family of a farmer) managing all his needs and of his family in less than Rs.1000 per month. These average figures are for one agriculture year. If we consider the situation over the years the income may turns out to be negative (loss) in some years due to droughts, floods, crop loss due to pest and insect attack or price fall. Farmer has to save the income earned in one year to protect his family, if possible, against the possible crop loss in the subsequent year. We have insurance guarantee for many things in the country but not for agriculture. Government has introduced insurance against rainfall, recently, which is dependent more on political conditions rather than rainfall conditions. My father is still waiting for the rainfall insurance for the year 2003. Agriculture is one of the toughest and riskiest professions where farmer has to play with nature and unethical market forces.

Our great industry association and CEOs want to impose income tax on these farmers. Great concern!!! What prevented these CEOs and ASSOCHAM from raising the issue of farmers’ suicides with government if they are really concerned? How many of these CEOs and businessmen who earn lakhs and crores are paying the tax honestly? How many hi-tech companies are paying the salaries honestly without diverting the salary in the name of bonus to avoid income tax?

What was the logic of involving only CEOs as respondents in the survey? Why not farmers and others? That too the sample size of the survey was only 300. How representative is the sample?

When more than 1.5 lakh farmers committed suicide in the last few years what action did the association and CEOs took apart from conducting surveys for agri-business companies? What moral right do they have to ask farmers to pay tax? At least, let them clarify who the farmer is in this country. Is it Amitab Bachhan or Deve Gowda or a poor man who has dependent on agriculture for his livelihood? In fact, businessmen, politicians and people like Amitab are evading the tax by showing their income in the name of agriculture and these are the real culprits.

It is to be mentioned that the aggregate measures of support (AMS) offered to farmers in our country is negative. This means that farmers are cross-subsidizing consumers. This trend is not seen in any other sector. These CEOs demand the government to provide tax incentives for export if the Dollar value is falling to maintain their profits. When farmers are cross-subsidizing and committing suicides what prevented these CEOs from raising the issue with government? At least let them pay the right price for the farmers’ produce and stop exploitation.

Why our government is not holding any pre-budget consultations with farmers’ groups? Why only with industry bodies? Even god cannot save the poor farmers from the bias of government and the so called ‘CEOs’.

How Nobel is Nobel Prize

Noble prize is the ultimate recognition of Human mind.Its a vindication of the fact that Humans are there to support humans and it motivates us to achieve the impossible.Alfred Nobel in his will said "it should be annually distributed in the form of prizes to those who, during the preceding year, shall have conferred the greatest benefit on mankind".And so begun the quest of humans for that coveted prize.

But the selection for Nobel Memorial Prize in Economic Sciences over the years has left me baffled.Noble prize has had its share of criticism over the year but of late a disturbing trend is coming up.The Noble bouquet(committee that selects the winner each year) is probably committing the greatest error of all time,which in many ways is belittling the prestige associated with it.

For last 10 years the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel(as its official called) has being going to the people whose theories are just theories and are not applicable in real world.Just going through the citation of few winners,I can quote the contributions as "for having laid the foundations of mechanism design theory ", " having enhanced our understanding of conflict and cooperation through game theory analysis" or "for having established laboratory experiments as a tool in empirical economic analysis, especially in the study of alternative market mechanisms".

Well it doesn't take us time to see that most of the theories are either very complicated or practically impossible to implement.Moreover a general trend that has occurred is that most of the winners either supports capitalist model or gives more evidence to prove that its the best model.Here I will like to give a disclaimer that I m one the biggest supports of capitalism and firmly believes that its the best model for a society.But this doesn't make me a blind supporter of capitalism,as there are examples of countries that have done very good under different forms of economic order.USSR was the only country to survive in the great crash of 1929.Cuba has better and cheaper medical facility than USA.Even India is doing well under a mixed economy.China is the next super power.Then why there is such a obsession over capitalism .The answer lies in the new world order.An unipolar world where USA is always correct because it pays our bills.Most of the international organization get their majority funding from USA and thus are held on ransom by it.

Its this fear that does not allow the Noble bouquet to give Mohd. Yunus the Nobel prize for economics and give it to Robert C. Merton who devised new methods of determining the value of derivatives.Ok getting the value of derivatives is important for a trader on the floors of wall street but is it in any way solving the problems of millions of poor across the globe.Is it in any way bringing a smile on their faces?Is this theory giving them a bread for a day?The answer is a pale NO.

Now let us see what Mohd. Yunus has done,he pioneered the micro-finance system in Bangladesh.These Micro-finance or Microcredits are small loans given to entrepreneur who are too poor to qualify for loans from a traditional bank.In a country like Bangladesh where poverty is a way of life,his initiative has changed the life of millions.It all began with a loan of $27 given to 42 women who made around $ 0.2 profit each and repayed the loan to him in 1 year.Thus began the revolution known as Grameen bank which todays caters to over 10 million people.More than 94% of Grameen loans have gone to women, who suffer disproportionately from poverty and who are more likely than men to devote their earnings to their families.The Non Performing Assets of the Grameen bank stands at just 1%(Bear strean once a symbol of USA economy collapsed under these NPAs and Lehmann Bros. have a NPA of over 22%.Our own ICICI has 18% NPAs).The microcredit has brought a sea change in rural Bangladesh,where small entrepreneurs are mushrooming and is helping millions to get a decent and respectable life.Grameen Phone,another non-profit venture of Mohd. Yunus has provided cell-phone ownership to 260,000 rural poor in over 50,000 villages since the beginning of the project(polli phone) in March 1997.Its has changed the way rural Bangladesh used to communicate with their loved ones all over the world.It was these contribution that made him famous all over the world.

But the Nobel bouquet seems to live in another world where poverty is just another incorrigible word,where begin poor is align and bring smiles and joys on the face of poor is just a normal thing or is it the fear of new economic order which replaces big multi-nationals banks and huge financing with a smaller,non-profitable banks or is it the fear of showing the richness and goodness of a different economic approach which a capitalist US economy is so devoid of.For them "having established laboratory experiments as a tool in empirical economic analysis, especially in the study of alternative market mechanisms" is an important achievement which according to Alfred Nobel's will of greatest benefit on mankind, deserves a Nobel prize for economics.If it hadn't been for the people like Bill Clinton,the achievement of Mohd. Yunus might have been forgotten in the pages of history.

It still amazes me how can the Nobel Bouquet think of giving him Nobel peace prize when he has been the greatest economist of 20th century.Is this not an insult of this great man or more importantly is it not the insult of the coveted prize itself,which has not been given the privilege to honor the greatest social-economist mankind has ever seen.

Rising Prices-blame it to the Hawk,theTiger and the Dragon

Every Friday as Indians prepare for their weekends,something happens at around 12pm.The government comes out with inflation number.Last week it was 7.82 %,a marginal decline from 7.83% the previous week.Economist all over the globe signaled danger as many believed that it would be revised to 9.5% as many items were not taken into account.But for a average Indian it is this just a number.For those IT engineers who spent their election holidays enjoying in PVR cinema instead of standing in queues to cast their votes(pardon me for being cynical),I believe for them its just a number.
To get you how this number affects you,let me first give you an scenario where inflation is at 7%.
This 7% means that what you brought last year at 100 bucks will cost you 107 bucks this year.In short your will lose 7% value on your money.But many of us invests in stocks,mutual funds,FDs and various other schemes to grow our money.We want our money to work harder than us,to grow faster than us and support us when we require it.But now at 7% inflation what we getting out of our investments.The saving account gives us 2.5% return,a FD today gives us 9-10% return and a avg. return of sensex over the past years has been 15-17%.And one more thing except Sensex everything else gave you a simple interest.Also as I was talking about inflation at 7%,the return of your money from a saving account is -4.5%,FD is 2% and from sensex its 10%.In three years time,we could lose all our investments,our parents future(retirement) could become painful and we could also lose our jobs.
But hey,why is there is so much of a fuss over inflation this time around.India has seen inflation of over 15% for two decades.Anything under 10% should be good.My answer to that thought is India has changed and the world has gone Flat.Todays inflation is not triggered because there was a weak monsoon and the crop production went down.It is also not due to the fact that the the imports have been delayed and there is shortage of goods.Its because we don't care about rising food prices.The privileged class is ready to roll out Rs.395 for a bucket full of chicken at KFC,so how can you expect them to raise their voices when petrol becomes 3 rupees dearer or when onion sells Rs.25 to a kilo.For them its still cheaper than the parking fee that their car has to pay for a show at PVRs.But I m in no way asking these people to stop or change their lifestyle,they are the backbone of the Indian economy.They spend,they enjoy but they also create jobs,these jobs supports more people and the country prosperous .
But how these people are encouraging inflation ?Well when I was a kid,for me a perfect way to enjoy was to be at park playing cricket with my friends.But for todays kids,it about play station,theme parks,a 3D movie at a multiplex and a trip to pizza hut.My cricket costed my parents around 2000 bucks spread over 10 years.All I needed was a bat,ball and six stumps.But nowadays a week end costs over Rs.2000.Initially a budget of 2500 was enough for my mom to run the house and today the total budget allocated to my mom is around 10K.Then also my mom complains how difficult its to run the house.
What the hell has happened to us.Why can't we just be satisfied with what ever we have?Well the answer to it is,we have become globalised.We want nothing but the very best for us.Its no more aloo paratha at breakfast but its cornflakes,its no more Bata sandal but a Nike shoe,its no more CRT TV but an LCD or plasma for us.We want more and more and more and think that getting the best for us is our birth right.There is nothing wrong in asking for the best,but have we thought what it is doing to the world.
Indian economy is growing at 8% per annum and china is at 11%,we together hv 35% of world population.Now imagine the fact that 35% of world population is wanting more and more from the world,the axis of demand is shifting from West towards the East.We want wheat,we want Rice,we want Steel,we want energy and we want OIL.
I once read an economist saying China and India are like a champagne bottle which is being shaken for past 2oo years and now they are bursting out.But are we bursting out the right way?Are we not destroying the world instead changing it for good.We are the worst culprit of environmental damage.NTPC is third largest contributor of CO2 in the world,China has destroyed forest area equivalent to the size of Sri lanka to prepare for Olympics.For common wealth games in 2010 and Olympics in 2008,India and China will need steel that would be enough to make a four lane road to the moon.At current rate we would require 250 billion barrels a year by 2030.We want more and better and for that we are ready to pay any price,be it economical or human.

The great press in India often forgets to bring important news to the focus,its not until you look into a TIME magazine or Economist,you realize the tensions between India and China over Africa's resources.Many countries in Africa are under civil wars,initially these were started by USA and USSR.But now the backing power is India and China.Both of them want maximum control on the resource rich Africa.And yes don't forget,USA is also there.They are even ready to sacrifice human lives for it.Millions have lost their lives in Uganda and Congo,because the nations like USA,China and India wants their control over it,whether directly or indirectly.All this because we, sitting at our homes want the very best for ourselves.

So next time when you hear or read that inflation number on a Friday afternoon do think of the Hawk,the Tiger and the Dragon.