The Great Indian Tamasha - Annual Budget

Everything in India has to be a big tamasha.
Which is not such a bad thing.
Provides lots of entertainment before, during and for a few days after the event.

Take the annual budget for instance.
It is not that the course of India's economy is going to turn on its head on this one single day.
What India needs huge dollops of investment in infrastructure.
And good governance.
Instead there will be some budgetary allocation (redistribution) to various economy sectors.
Lots of talk about inclusive growth.
Some more tax loads on the most easily targeted income group, the salaried class.
So what is new?

There is a lot of talk about giving impetus to the continued growth of the economy. So does it have to wait for this one day?

But if you see the hype surrounding every budget on TV, one would feel that the whole Indian Economy comes to standstill waiting for some earth-shattering announcement by the Finance Minister.
What rubbish!

It is in the execution, people; not budgeting.

Did Credit Crunch Claim Satyam?

Satyam is imploding as I type out this blog.
The chairman of Satyam Computers has resigned. In his letter to the board of directors he has confessed that the balance sheet was inflated.
Consider this ...
In the September (Q2) 2008, the balance sheet showed an operating margin of 24% as against merely 3% of the revenues. The balance sheet shows an accrued interest of Rs 376 crores, which is non-existent.
In his letter, the chairman says "it was like riding a tiger, not knowing how to get off without being eaten."
Breaking news on all channels indicate that all major clients are washing their hands off Satyam. They are terminating their services.
So, why was this disclosure made now? Is it just because "tremendous burden I am carrying on my conscience" as stated in the letter? Or do you think this is a domino effect of the aborted Maytas deal?
Actually it is nothing of that sort. And this is my understanding ... though I cannot prove it.
Scams operate well when there is plenty of cash around; when banks are more than willing to part with cash where ever they see profit coming in. But when cash is tight and the banks are less than willing to provide loans, the bottom falls off and scams are exposed. Case in point: Madoff and his Ponzi scheme.
And I bet that if every thing was fine and there was no cash crisis this would have gone for a very long time.
Watch out for this space. If the credit crisis prolongs you will see more such skeletons tumbling out.
So in a way such crisis is good. It has a purgatory effect on a system. Rotten apples are exposed and that actually helps the system overall in long run.
And if you see an expert telling you that credit crisis was the reason behind the Satyam implosion, remember you read it here first!

Question: Who are their accountants?

Note: The picture used here belongs to Tory Byrne. To see more pictures, visit her gallery.

The Financial Expert

I must have read The Financial Expert by R K Narayan ages ago. It is a delightful little novel set in Malgudi. The 'hero' of the novel Margayya is the financial expert of Malgudi. He hatches a scheme where by he accepts deposits from the town people at a huge interest and manages (for some time at least ) by paying the first set of depositors from the money he gets from the next set and so on. Till time catches up, of course.

It all came rushing back when I read about Madoff and his Ponzi scheme. Only that it is no longer funny.

I suspect more such fraudulent schemes will come tumbling out triggered by the financial crunch. So watch out!

PS: Was R K Narayan inspired by Charles Ponzi?

Amateur Investors

I had to double check the date Against The Gods was published. In the chapter, 'The Fantastic System Of Side Bets', which I missed the last time I read this book, is a small foot note that I have reproduced below:

"Most individual home mortgages are packaged with other mortgages and sold off in the open market to a wide variety of investors. In effect, the bankers have traded off the risks of prepayment to a market more willing to bear that risk; these mortgage-backed securities are complex, volatile, and much too risky for amateur investors to play around with."

I was under the impression that the present crisis was due to an instrument of a more recent origin. Evidently I was totally wrong. Against the God was published in 1996.

I wonder who Bernstein thinks are "amateur investors".

Note: The photograph used belongs to Myles Davidson. Please go here to see more such photographs

China Lectures US On Economy

When I first blogged on the communists helping out the capitalists, I was pretty amused by the idea. What will the economists come up with next.

Apparently they were not that wrong.

And although the content of the reference in the previous blog and the news in Financial Times, "China Lectures US On Economy" is quite different, one can't help getting the feeling that the world order is shifting. I won't at all be surprised if in some-not-so-distant-future the headlines scream "China Lectures US On Economics."

I wonder if we can come to the following conclusion ... Communism did not win - poor leadership broke its back. But nor did Capitalism - greed of a few broke its back. Today US is the biggest socialist country in the world. Meanwhile, tens of thousands of families will suffer because of greed of a few.

Ultimately the winner will be the Middle Path - a judicious mix of capitalism with sufficient safeguards to prevent runaway greed. The Buddha smiles.

Note: The photograph used belongs to Ilker. Please visit here to see more such photographs.

PS: Did you enjoy this post? Then why don;t you stay a bit longer and see other related posts here.

Present Financial Crisis Is For the Wimps

The following passage from Against The Gods by Peter L. Bernstein. (The beginning almost reads like Harry Potter)

"This was a dark time, one marked by a series of ominous events: Watergate, skyrocketing oil prices, the emergence of persistence inflationary forces, the breakdown of the Bretton Woods Agreements, and an assault on dollar so fierce that its foreign exchange value fell by 50%.

The destruction of wealth in the bear markets of 1973-1974 was awesome ... After adjustment for inflation, the loss in equity values from peak to trough amounted to 50%, the worst performance in history other than the decline from 1929 to 1931. Worse, while bond-holders in the 1930s actually gained in wealth, long-term Treasury bonds lost 28% in price from 1972 to the bottom in 1974 while inflation was running at 11% a year."

The effects of the 1973-1974 crash was felt world-wide and the impact lasted some 20 years. See here.

Why is everyone panicking now? It is not as if the world has not seen this before.

What do we have now?
Oil prices are down ... dollar is holding (actually going up - see here) ... The World Bank and the IMF are going strong ... inflation is actually falling (oh I see! deflation!)

Or are we condemned to repeat history for ever?

Note: the picture used here belongs to "duchesssa". To see more of her photographs visit her gallery.

High Bank Interest Rates

Either I have not understood economics - which is more likely - or nobody has paid attention to this.
Every public sector bank in India is offering 11% - 11.5% interest rate on long term deposit (starting from 1 year). This, of course, makes sense for the banks, given the volatility of the markets and reduced confidence in multinational banks. More funds are likely to flow into the bank coffers.
But doesn't this also result in money getting siphoned off from the market? Now that deflationary conditions hover around our collective heads? Besides, how are banks going to show any profits? Banks are not lending money to the common man.
Ok! I get it. They are perhaps lending money at a very high rate to the businesses citing the current financial crisis and the banks can afford a high interest on term-loans.
A puzzle then: RBI has been announcing various monetary measures to release funds in the market. I haven't see much of that benefit being passed to the common man.

A Look At Chapter 11 Bankruptcy in America And Its Equivalent In India

With so much talk of companies going bankrupt in USA, I decided to dig into the details. To a common man, like myself, if a company has gone bankrupt, the company is history. Ceases to exist. Dead. Apparently not.

First some definitions ... ( I am not insulting your intelligence. I am trying to make it clear for myself).
A debtor is the one who owes some money (or debts) to others.
The 'others', mentioned in the statement above, are the creditors.
Thus, if I am a company and I have taken a huge loan from a bank, I am debtor and the bank is the creditor. I need to pay off the debt I owe to the bank.

But if I am a shareholder, I am not a creditor of the company. I own the company, you see. Just a tiny bit of the company, But still an owner and hence a debtor.

However, if I have a fixed deposit with the company, then the company owes me my money. So, I am a creditor.

Now, when a company cannot repay its debts, the company can voluntarily file for bankruptcy under chapter 7 or chapter 11.

If the company files for bankruptcy under chapter 7, then the assets of that company is sold off and the debts repaid to the creditors. So, the company is now actually dead. Liquidated. (I like the word liquidated. Very graphic. You can actually see in your mind, the fixed assets of the company being squeezed into liquid cash and flowing from the company to the creditors).

However, bankruptcy filed under chapter 11, means the company is still alive but not kicking as hard. The control remains with the existing management (which is kind of funny! If these guys could manage, why would a company go bankrupt in the first place?) What makes it a little more baffling is that initially the same jokers who brought the company to this state have the exclusive right to propose the restructuring. Of course, the creditors have to agree to it. This is ensured by a bankruptcy court. If there is no agreement, the court can move the bankruptcy from chapter 11 to 7. Sometimes, when it is determined that the management is utterly useless, a trustee is appointed by the bank to take care of the restructuring.

Chapter 11 bankruptcies are politically more expedient. Since the company doesn't close down completely, people have jobs, the suppliers can still operate. (Remember the unpaid amount to a supplier is also a debt.)

So, do companies recover from a chapter 11 bankruptcy? In recent memory, as far as I remember, post 9/11, Delta and Northwest Airlines filed for Chapter 11 bankruptcy. Both emerged after restructuring and subsequently they merged to form the biggest airlines in the USA.

That is all in USA. Wikipedia has lot of material on this.

What about India? Not so good news, I am afraid.

First, getting information on Indian Laws is a task by itself. A paper by one Mr. N. S. Tomar (then a 5th year student in a law college) - I think this paper is written in 2002 (see here) - concludes:

"Indian insolvency law failed to keep pace with the domestic and international developments. Both, the Companies Act, 1956 under which winding up of companies is carried out and SICA which deals with revival of companies fail to capture the true relevance of the insolvency law besides not meeting the dynamics of the modern economic system. The two laws were enacted to cater to meet the expectations of industries thriving in a protectionist environment unexposed to competition in a closed economy. Both the laws do not provide for engagement of professionals and their skills in the insolvency system."

I got hold of a book called Wadhwa's Corporate Law. This is a 2001 edition. The Sick Industrial Companies (Special Provisions) Act 1985 is covered in Part IX. It states in the introduction: "An act to make in the public interest, special provisions with a view to securing the timely detection of sick and potentially sick companies ...".

The word bankruptcy doesn't seem to occur. A "sick industrial company" is defined as "an industrial company ... which has at the end of any financial year accumulated losses equal to or exceeding its net worth." So, this is it.

More information is available here

This piece of editorial in the Economic Times concludes:

"It took barely 72 hours for Lehman Brothers to be acquired after it declared its bankruptcy in the United States. In India, a bankrupt company would have had to go to a court, which in turn, would have taken its own time to appoint a liquidator for the sale of assets. Why can’t we execute the sale of companies declared bankrupt within 72 hours? This is the crux of the issue."

Only a professional will be able to wade his way through. So, if this blog is being read by a person who deals with insolvency and bankruptcy, please add value.

Financial Mess Explained

Economists and Financial gurus still trying to understand the financial meltdown phenomenon. That way they could offer solutions that hopefully make them as famous as Keynes, post-1929 depression. Come on! I would do the same if I were one. This kind of opportunity does not come every other day, does it?

Ok now seriously, A very good analysis of the financial mess and a solution is offered in a blog here. This was published as recently as 14th November.

This blog used the term "CDO" very liberally, assuming that everyone would understand it. In case you do not, please go here for clarification.

Pictures speak a thousand words. Very true. Take a walk down the 'bank street' in this interactive feature in the Financial Times website (here). Very interesting.

Staying with the theme of pictures-speaking-a-thousand-words, visit another interactive at FT, here, and launch the interactive to see pictorially what happened. It is brilliant.

Did you like this post? Why don't you visit my other posts here.

News That Make Headlines And Those That Don't

Citibanks' axing of 52,000 odd jobs have made headlines. And so has the Dunlop's closing of its unit for an indefinite period. But there are so many more stories that do not make headlines. Here are a few ...

1) A paint manufacturer in Bangalore is in trouble because there are no new orders. He says that most of the constructions are stopped. There no new projects launched.

2) A fork-lift company that used to sell 20-25 units a month sold only 3 last month.

3) The textile mills in Mumbai and Coimbatore that saw a huge spike last year are on verge of closing down or have already closed down. There are no new orders.

4) It is now "buy one; get one free" if you buy appartments in Mumbai.

5) In Mumbai, the banks are no longer issuing credit cards.

6) A dear friend told me that if you have money in bank, go to a house constructor, open your check book and offer cash. You will get an appartment at the price you name.

These will not make the headlines. These have been told to me by people I meet and talk to. So when Infosys declares that they will recruit 25,000 this year, I am filled with hope. But then my eyes fall on Ratan Tata's suggestion of an US like injection and I am all confused.

Stock Brokers Are Still Making Money - An Analysis of BSE Sensex Data

And in short term too. You don't believe me?
Just check out the BSE Sensex prices over the past few days (rounded off).

2008
------

Date--------------High--------------Low---------------Difference
12-Nov---------9,929--------------9,377----------------552
11-Nov---------10,397-------------9,801---------------596
10-Nov---------10,571------------10,096---------------475
07-Nov---------10,065------------9,632----------------433
06-Nov---------10,109------------9,635----------------474
04-Nov---------10,668------------10,116--------------552

You would see a remarkable consistency.

Ok. Now let us now check out what happened a year ago:

2007
-----

Date--------------High----------------Low---------------Difference
13-Nov----------19,210--------------18,636------------574
12-Nov----------18,815--------------18,333------------482
09-Nov----------19,330--------------18,737------------593
08-Nov----------19,210--------------18,917------------293
07-Nov----------19,679--------------19,249------------430
06-Nov----------19,919--------------19,337------------580
05-Nov----------20,009--------------19,502------------507
02-Nov----------20,026--------------19,256------------770
01-Nov----------20,204--------------19,634------------570

Zapped?

Did you expect the inter-day high and low in the BSE Sensex of Nov 2007 and 2008 to be similar? Except for 08-Nov-2007, when the fluctuation was the lowest (and hence less money was made) and 02-Nov-2007 when the fluctuation was the highest (when more money was made) the variation is largely confined within 430 to 596 in both the set of data. This is remarkable.

Now are you convinced that the stock-brokers are still making money?

Agreed that the analysis does not indicate if the inter-day high came before the inter-day low in the day or vice-versa, but one can make money the normal buy-low-sell-high way or by short-selling. Please understand that stock-brokers make money everyday.

But what of the ordinary investor? Surely, the average matters? The average of Nov-2007 is way above that today. So, someone who has invested money in Nov 2007 has lost out in Nov 2008. There is subtle difference between sensex falling and making profit/loss. One does not make loss just because sensex falls. One makes profit or loss only when you buy and sell. As long as you don't sell, you are fine. One just needs to ride out this wave. See here.

You are still not convinced? You are a tough nut ... I must say.
Ok this data is extracted from Against The Gods by Peter L. Bernstein.

In early 1930, right after the Great Crash, price of shares fell about 50% of their previous highs. Prices proceeded to fall another 80% before they finally hit the bottom in the fall of 1932. In 1955, the Dow Jones regained their old 1929 prices. Just nine years later, in 1964, the prices were double that of 1929 highs.

Now are you convinced?

Please note that the above analysis was done as this blog was typed out. I took November because this is November. So, it is possible that the conclusion arrived at is purely coincidental. Heck of a coincidence, I must say.

Note: The photograph used belongs to Myles Davidson. Please go here to see more such photographs

Surely The Pledge By Wall Street Is a Joke

It is reported in the FT, that "Wall Street firms will pledge not to use the recent $125bn cash infusion from the US government to pay bankers’ bonuses in an effort to defuse the mounting political furore over compensation at battered financial groups."

Instead, "Wall Street executives say that banks will pay bonuses from earnings and existing cash resources, like in previous years, and use the government capital for acquisitions and to replenish their depleted balance sheets."

The news report says, "The nine institutions which sold preferred shares to the government in exchange for $125bn, have set aside an estimated $108bn for employee compensation and bonuses in the first nine months of the year."

Question: Any reason why bonuses are being paid at all? After all these guys have messed it up. Why shouldn't the "earnings and existing cash resources" be used to "replenish their depleted balance sheets"? What am I missing here?

Who Moved Their Cheese?

One of the most enjoyable management parables I have read till date happens to be 'Who Moved My Cheese by Dr. Spenser Johnson. I find it better than all others I have read, including The One Minute Manager, Our Iceberg Is Melting, and even better than the delightful oldie 'High Five! The Magic of Working Together,. The characters are so believable. It is a story of 2 'small' people, Hem and Haw and two mice, Scurry and Sniff. And how they react to a life altering change. The change comes abruptly but the signs were there for all to see.

The four lessons that comes out of the book are:

Anticipate change
Adapt to change quickly
Enjoy change
Be ready to change quickly, again and again

This is a best seller and I bet, one out of every two corporate manager must have read this. It sold a few million copies. The lesson does not seem to have sunk in though.

To make my point let me take only the first two lesson and one fact.

The sub-prime crisis began more than a year ago. So, Lehman and AIG and the US government had one year to react. Do you see them anticipating change and adapting to the change quickly? And were the other countries, UK, Germany, India waiting for the problem to reach their shores before pressing the panic button?
Point made.

It takes about 15 minutes to read this book. I would recommend this to all the politicians/managers to read in TODAY - before they go about their daily work.

Note: The picture used belongs to 'Sardinelly'. Please visit the gallery to see more of such photographs.

Market Is A Chaotic System

I had read this many years ago. The inventor of CFC (the coolant that was used in refrigerator) put his head into a chamber o CFC and breathed it in to show that it is absolutely harmless. CFC is odourless, colourless and harmless. It was wonder-gas. And yet years later it was found to endanger our very existence by creating holes in earth's atmosphere.

Why am I narrating this? Because impact on chaotic systems is difficult to predict. Earth's atmosphere and weather system is a chaotic system. And so is the market.

The market as practiced in free societies evolved over many decades. It is extremely complex not because it is difficult to understand but because it is chaotic by nature. There are just too many variables. A well designed system should have corrective mechanisms. In some case the corrective action appears as deterioration. At least on the surface. But it need not be bad.

Take the human body as a system. Fever need not really mean bad. It just means the body is trying to fight the infection. What happens if we take a dose of a over the counter medicine. It has side effects. In some cases may lead to complications.

The down swing of market may not necessarily be bad. It just means it is going through a correction. Companies that make bad decisions die out. Other smarter companies take their place. Yes, a severe pathological case will require intervention. But as long as we are not merely treating the symptoms, we should be fine.

Besides, treatment should not change the very nature of the system being treated. Let us consider the actions that have been taken in the past few weeks. Banning short selling, desire to take over toxic investments, nationalisation. These are changing the very nature of a free market. These actions may help in the short term but are most likely to have impact long term in some form or other as these are un-natural.

Governments control monetary policies. Use that to stimulate demand and improve confidence. I am sticking my neck out here but one day we will look back and with the advantage of hind sight we would say we did wrong.

Market, being a chaotic system should be allowed to recover on its own. If it is a robust system it will recover. If it doesn't, it was never meant to be.

Note: The picture used here belongs to Andres Virviescas. Please visit here for more such photographs.

G7 Governments Do Not Understand Market Dynamics

The western governments and the G7 are doing it all wrong.

Instead of breaking the downward spiral they are actually reinforcing it.
This is common with all reinforcing feedback cycles that have a delay. Each action reinforces the other. The actionee does not realize that they are feeding each others action. The only way out is to break the cycle.

The root cause is lack of confidence. Liquidity crunch is a symptom.

Everytime the US and European Governments make big announcements of how they are taking the necessary action to stem the rot and describe the grand actions they add to the fear of the ordinary investor. The ordinary man on street sees these actions as the proof that things are going bad. So there is more panic selling in the market as investors try to extract whatever they can. That is then taken as evidence of what the finacial wizards were saying in the first place - that things are going bad to worse. So the government takes the next action and so and so forth ... you get the picture.

It is not that fianancial institute after financial institute is failing. The rotten ones have dropped off or will drop off. It is not that all banks have zero cash in reserve. And what is this liquidity problem all about? The banks are afraid to lend to each other and the businesses are not getting short term money.

So what should the governments do? The governments of the G7 should get the CEO's of their banks together in a closed door and let each bank state their current position - bad debt, solvency and all. The banks can then see exactly where each stand. This data can be shared with the G7. Once the banks get confidence in each other, the liquidity problem should disappear. Nationalisation of banks is not the solution.

Too simplistic?

Sometimes what is required is a simple solution aimed at the root cause.

Note: The picture used in this post belongs to Lena Povrzenic. Please go here to see more such photographs.

So, do we get cheaper petrol ... diesel?

The price of crude oil has fallen below $80 per barrel. See here.

Many of us have forgotten what the oil prices were when the prices were hiked in June 2008. Oil was hovering around $130 per barrel. See here if you don't believe me.

In February 2008, the price of crude oil was $67 per barrel.

So, are we going to see a price cut? Or is government going to make up for all the years of loss due to subsidy?

Ok ...here is a suggestion for the UPA government. This is election year. A cut in the price of petrol, diesel and cooking oil will guarantee you a return to power. Besides, this will prompt a recovery in the economy.

Remember we have a (technical) industrial recession staring at us. See here

Note: The picture used here belongs to Mike Johnson. Please go here to see more such photographs.

Lending Directly To The Firms

It is a nice feeling when I read the news item "US Fed ups the ante, to lend directly to firms" in the Economic Times of 8th October, 2008. See the first paragraph of this news item here. They must have read my blog entry of 26th September, 2008. See here and share my happiness.

Communists Come To Aid of the Capitalists

Ok! It is not the same as the cold war years. But you would agree that the title of this blog is catching - the newspapers and the magazines do this all the time.

But am I wrong? See for yourself:

First, Russia helps out Iceland with cpital injection - read here.

And now leading economic thinkers are actually toying with the idea that China could save US. Read here.

Looks like Indira Gandhi had all the right ideas when she nationalised all the banks in India way back in the 70's. Poor service but at least the hard earned depositor's money is safe. Today, the people of India believe that even if all the private banks and institution crash, SBI and LIC will survive. (This could be illusion too - remember UTI and US64).

Note: The photograph used belongs to Ilker. Please visit here to see more such photgraphs.

Will anyone tell me why is the dollar appreciating?

Wall Street is in a state of turmoil.
Unemployment rates in US are on the rise (HP has today announced a downsizing of 25,000 odd employees).
And if the value of currency is determined in open market, will someone tell me who is upbeat about the US economy? And why?

PS: I did get the answer to this one. See Why is Dollar Appreciating?
Later on, the main stream media caught up. What fun!