30.09.2008

• What is good news like? When was the last time you listened / read some good news in newspapers?
• Look at the way the banking system is crumbling like a pack of cards! Leading US commercial bank Wachovia Corp, which was looking to acquire Morgan Stanley till a few days back, has now ended up being swallowed by Citigroup.
• The US Congress rejects the $700 bn bailout package that was so desperately requested by the Bush administration. Not that the US government cannot come out with an alternative to this. But the rejection shows the deep concerns that the Congress has about the package.
• Yesterday we were reading about the UK's B&B (Brandford and Bingley) nationalization. Today Dexia (a Franco-Belgian bank) is reported to be in troubles. Hypo Real Estate, Germany's second biggest commercial property dealer is reportedly fending off insolvency by getting a 35 bn Euro loan guarantee from the government. The Belgian, Dutch and Luxembourg governments took a 49% stake in Fortis with a € 11.2 billion ($16.4 billion) injection. Iceland was also forced to take a 75% stake in its third-biggest bank Glitnir.
  
• News reports appearing about ICICI Bank here back in India are not giving any comfort to its customers. The stock was hammered to a two year low in BSE.
• It is not very often that you see a Managing Director of IMF write about issues. But Dominque Strauss Kahn was perhaps forced by circumstances to pen a piece. Out flows some good advice:
• Commenting that the past one year's efforts in putting the financial system in order have failed, he called for a 'systemic' approach to solve the 'systemic' problem that has surfaced over the last one year. The solution he says, should have three elements: liquidity provision; purchase of distressed assets; and capital injections into financial institutions.
  
• First, the central banks must prevent runs on banks and financial institutions. They can do so by reassuring depositors that their bank deposits are safe and by providing liquidity to financial institutions against good collateral. This was the first line of defence over the past year, and central banks have probably done by now most of what they could do.
  
• Second, the treasury must remove the reason why runs come in the first place, namely, the presence of distressed assets in the balance sheets of financial institutions. International experience shows that an effective way to do this is to set up a government agency to buy these assets and hold them until they can be resold or until they mature. A key issue will be the price at which these assets are acquired: high enough to induce financial institutions to sell, but also low enough that the state has a chance of making a return and keeping its own long-term finances in order. There are also other, potentially less costly, alternatives to outright purchases. For example, early this year, the IMF proposed a solution based on longer term swaps of mortgage securities for government bonds — which cleans up bank balance sheets in the near term but leaves the long-term risk with banks, not the state.
  
• Third, the financial system must be recapitalised — at this point, probably with the help of the state. At the core of this crisis is the fact that the financial system as a whole has too little capital. Even if bad assets are removed, many institutions will still be short of capital, without which they cannot safely extend fresh credit to the economy. It is possible for the state to provide capital to banks in ways that do not imply nationalisation. For example, many IMF members in a similar predicament in the past have matched private capital injections with preferential shares and forms of capital that left ownership control in private hands (albeit with due safeguards for the taxpayer).
• The systemic approach is fine; but what are the long term challenges that the global economy has to tackle?
• One, is managing the fiscal costs.
  
• Second, is smothering out the regulatory failure that has been the root cause of the current crisis.
• Third, the role of credit rating agencies has to be thoroughly re-defined and rethought with greater public scrutiny.
• Lastly, displaying vigilance, objectivity and collaboration to tackle the as yet unfolding crisis, as it would impact the developed and developing countries. While some emerging economies will escape the wrath of the current crisis, there may be others who will not be so lucky.
  
• MK Venu throws light on how the current crisis has highlighted the degeneration of the Anglo-Saxon model of market design and institutional framework
• Wonder what is this Anglo-Saxon model? It is a capitalist macroeconomic model in which levels of regulation and taxes are low, and government provides relatively fewer services. This is so called because it is supposedly practiced in English-speaking countries such as the United Kingdom, the United States, Canada, New Zealand, Australia and the Republic of Ireland.
  
• The Anglo-Saxon model of finance capitalism and market design has historically served its purpose as an engine of material progress. Like all seminal institutions, this too has shown signs of degenerating in recent decades as economic integration of the world has gained greater momentum. There have been many warnings, essentially through serious market failures (LTCM, Enron collapse) which went unheeded. Looking back, one of the key factors which led to repeated market failures, was excessive and blind faith in “empiricism”. It may sound like a contradiction in terms but the Anglo-Saxon model took empiricism to an irrational level.
  
• The empiricism that he is referring to is the mathematical models that the financial markets came to rely heavily on, for inventing and trading in derivatives.
  
• Blue Ocean strategy and red ocean strategy
  
• Rather than beating the competition, a blue ocean strategy works by making the competition irrelevant, according to Renee Mauborgne, co-author of the best-selling book, Blue Ocean Strategy. It focuses on how to link innovation to commercial value.
  
• While traditional strategy, or red ocean strategy, exploits existing demand, blue ocean strategy creates and captures new demand.
• Also in a red ocean, competing companies usually have to choose between differentiating themselves at the expense of pushing up costs, or stay lowcost and undifferentiated from rivals. In a blue ocean, companies realise both differentiation and low cost. In other words, returns from investments in blue oceans are substantially higher.
• An example of this strategy is Nintendo's Wii. What Ninentdo did was ask itself how many customers used high-definition TV compatibility, a feature that was pushing up the cost of the console. The answer was hardly any. So it decided to do away with this feature, keep the price of the Wii low and also target non-core gamers with the product.
• Don't ask me what is Wii; will you? It is the gaming console that competes with Xbox, Playstation etc. Don't know what are Xbox and Playstation? Then you are at the wrong blog. Ask your child, younger brother/sister; or better still go join a primary school.
  
• What is a Kangaroo bond?
• In today's First Principle column this is what has appeared on the subject:
• It is a foreign bond that is issued in the Australian market by non-Australian firms and is denominated in Australian dollars. Foreign bonds like these are primarily used to provide bond issuers with fund-raising opportunities in another capital market, apart from their own domestic market. Also, big corporations or investment firms who want to diversify their holdings and improve their overall currency exposures can use Kangaroo bonds to raise funds in Australian dollars. While major issuers for Kangaroo bonds have been from developed economies like the US and UK, some Indian firms are also looking at diversifying their currency exposures.
• Take a look at the population wise break-up of deposits in India
• In this graphic.
  
• $ breaches the 47 mark
• The rupee slumped to a five-year low of 47.10 against the dollar on Monday.
• You can't help but smile when you listen to English like this:
• “Give us more details about the jawan who was caught in an uncompromising position with a woman in J&K”!
• The above query was from the news-anchor of an English TV channel to the field correspondent. Who should bother about 'compromising' positions then?
• Wasn't it almost a year or so since we have had some skin on our blog? Let's try to learn something even from skin.
  
• Keeping the sensibilities of some of my serious readers in mind, I am not posting the picture here; but if you are curious, you can look at it here. It is about Australian vice-captain Michael Clarke’s fiancee Lara Bingle being officially named as Australia’s hottest WAG. The question is: Who is a WAG?
• It has two meanings:
• (business slang, US) A wild-assed guess; a rough estimate.
  One of the ‘wives and girlfriends’ of well known people, specifically of celebrity football (US: soccer) players.
• If a WAG is a lady/girl, who is her counterpart? It is a HAB. Husbands and Boyfriends. (Esp. Tennis)
  
• Language lessons can be curious and 'very' interesting; aren't they? With so much bad news flowing out of the financial world, we do need some distraction; don't we?
  

29.08.2008

• US House of Representatives passes the Indo US nuclear deal
• Called the Berman Bill HR 7081, it was passed by the required two thirds majority. But a sizeable number of Democrats voted against the deal (298-117) in an indication that the financial crisis and the November presidential elections have taken a toll. In contrast, the Hyde Act was passed by a majority of 359-68 in 2006.
• But the final clinching step remains the approval of the Senate where a senator anonymously put a ``hold’’ on consideration of the bill in a tactic aimed at delaying the vote. Sources were confident that the Senate step would be completed soon and that there could be movement in the Senate as early as Monday.
• Impact of the financial meltdown on Indian IT sector
• Look at some meaningful commentary made in today's editorial on the issue:
• The tectonic events in the US have certainly hit growth and profit outlook for the Indian IT sector but to say that its strategic positioning has taken a knock is excessive. The 30%-plus growth was anyway not sustainable in the long run. Indian IT’s core strength of high-quality manpower and lower cost of delivery are as relevant as ever. The debate is actually not about offshoring, but about IT spending. Once that takes off, Indian IT companies would be back in business. Besides, big players have also built scale, acquired understanding of global markets, and have the balance sheet strength to explore other options. Infosys and HCL Tech, for instance, are locked in a battle for acquiring UKbased Axon, which specialises in implementing SAP AG’s enterprise software. So even while organic growth slows down, the global decline in asset prices make it possible for them to buy growth. The financial turmoil would also force Indian IT companies to look beyond the US and also diversify away from financial services.
• Presidential debates on TV
• They made their debut on September 26, 1960, when Kennedy debated Nixon in the first televised debate between two US presidential candidates.
• Kennedy won one of the most closely contested US presidential elections ever, with 49.7% of the popular vote as compared to Nixon’s 49.6%. Those who heard the debate on the radio felt that Nixon had won. However, on TV, JFK, who had shaved just before the debate and applied make-up, looked cool and collected unlike Nixon whose cheeks were showing signs of what razor-manufacturers term the five o’clock shadow!
• One oft repeated question that one faces while serving in bureaucracy runs like this: "How are you able to manage the political pressures?" Many a time people feel that there is too much of interference from politicos in administration and that we, the officers are at the receiving end for the wrong reasons. Look at how Sameer Sarma articulates an excellent response for this in his article.
• It is a must read for every IAS aspirant; or for that matter anybody who ever felt that he/she is at the receiving end of political personalities. Some excerpts:
• Models of administration:
  
• Rational decision making model: It starts with goal identification based on a known singular public interest, followed by listing of all possible alternatives with their consequences, and finally selecting the alternative, most likely to lead to goal achievement.
  Politics led to the breakdown of the rational model and weaker versions of technical rationality appeared to support decision-making. Applied to the IAS, three styles of decision-making are noticeable. First is Beckman’s hands-off approach in which IAS officers operate within the latitude given by the political executive. Second is Davidoff’s advocacy model, which suggests that IAS officers lean into the political system. Administrators are not disinterested bureaucrats, but actively advocate values. Third is Lindblom’s incremental framework in which public administrators decide in small steps based on their past experience of the political processes and the local context.
  
• Besides politics, Bryson and Roering’s strategic model added citizen-participation and goal achievement to decision-making. Adopting practices from the private sector, strategic planning focuses on programme goal-setting and achievement, through analysis of external opportunities and internal strengths and weaknesses of the organisation. Finally, the “practice movement” based on Habermasian ideas led to a paradigm shift during the ’80s, and the focus shifted to conversation with citizens and investigating the practices of practitioners, leading to well-known concepts such as, community participation, mediation and consensus building.
• In the same article he succinctly puts across the view point that political engagement is necessary for bureaucracy. Look at the very fine exposition:
• Smart politics is to step away from technical rigour and come to terms with political governance — working with political leaders, combining sound administrative practices and procedures with development agendas, and delivering on goals.
  
• Second, IAS officers have to go out and find support for their ideas because “no idea is good enough to succeed on the power of the idea alone”. Ideas have to fit into ongoing development agendas and administrative responses have to be based on an understanding of what the political leaders and citizens need.
  
• Third, in this internet-era of citizen involvement, understanding and respecting the decisions of the “public” and learning to use citizen-engagement opportunities to achieve goals become important.
  
• Lastly, pursuing initiatives from launch to finish is critical — things don’t get done on their own, and flexibility in making choices during followup leads to goal-achievement.
• In "Making fiscal federalism work" NK Singh lets us in on the challenges that are there before the XIII Finance Commission.
• A must read. Do so here. Entire article is good. So no excerpts for you.
• Indian aviation sector in red
• The IATA (International Air Transport Association) forecasts that Indian carriers are expected to suffer a cumulative operational loss of $1.5 billion (Rs 6,800 crore) in 2008 while the global aviation industry losses are expected to be around $4.1 billion. The industry had reported a profit of $5.6 billion last year.
• IATA Director General and CEO: Giovanni Bisignani
• Two of the major reasons why operational costs of our airlines are high:
• Jet fuel is 58% more expensive in India as compared to Singapore.
  
• Air Traffic Control (ATC) charges are around 33% higher than other countries.
• National offset policy on the anvil
• THE government is likely to announce a National Offset Policy, under which foreign vendors of all government departments including public sector units, would have to procure at least 40% of the contract value domestically within a specified time set by the government. The threshold limit for leveraging high-value procurement through offset programme would be Rs 100 crore per project. The offset agreement is proposed to be applicable to all high-value procurements.
• At present offset policy is seen mostly in defence procurements.
• The financial contagion spreads to Britain?
• Bradford & Bingley (B&B), Britain’s ninth biggest mortgage provider is in trouble because of losses on poor quality US home loans. B&B will be nationalised and its mortgage book merged with Northern Rock, the lender taken under state ownership in February. The government this month brokered the takeover of HBOS, Britain’s biggest home lender, by rival Lloyds TSB and is stepping in again.

28.09.2008

• Black Mondays are passe. Battering weekends are in...
• US's sixth largest bank Wachovia is reported to be scouting for buyers. Its CEO Robert Steel is reported to have classified a $122 billion portfolio of option adjustable rate mortgages as “distressed.”
• The bank suffered a record $9.11 billion loss in the second quarter and some analysts have said it may need more capital after raising $8.05 billion in April.
• Here is a very good article from Mythili Bhusnurmath on what the collapse of the i-Banks means.
• A must read. Do so here.
• What will be contours of the Wall Street after the present turmoil?
• Look at this piece written by David Henry & Matthew Goldstein. It is very educative. It may look complicated for some of you. But when history is being made; you can't afford to miss living it. Some excerpts for our record:
  
• How bad things will get from here depends on how cleanly the losing firms and toxic investments can be extricated from the rest. With each passing day the task seems to grow more difficult. By the end of the credit bust, the total losses, now $500 billion, could reach $2 trillion, according to hedge fund Bridgewater Associates. What’s likely to be left when the Great Unwind is finally complete? A smaller, humbler, highly regulated Wall Street barely recognizable from its heady past, where caution reigns and wild risk-taking is taboo.
• Whereas big commercial banks like Citigroup and JPMorgan Chase rely on a steady base of deposits to finance their operations, large investment banks have come to resemble high-flying hedge funds, borrowing short term cash from other firms to invest in riskier securities. Goldman’s gross leverage ratio — one measure of borrowed money —jumped from 18.7 times assets in 2003 to 26.2 by 2007. Morgan Stanley’s topped 32 last year. See the growth in leverage levels in this graphic.
  
• This graphic shows you how badly the market valuations of these banks have shrunk.
  
• Already there are new signs of distress. At the height of the mortgage boom, scores of small to midsize banks binged on risky debt investments called trust preferreds that allowed them to collect cash from investors and gave banks the right to defer their interest payments. With mortgage loans and related investments going bad, at least 38 banks in the past 12 months have stopped making their payments. Several have been seized by regulators, including IndyMac and Silver State Bancorp. For others, like FirstBank Financial Services, CapitalSouth Bancorp, and Omni Financial Services, the decision not to pay raises a red flag. First Bank, CapitalSouth, and Omni could not be reached for comment. This means that the end of bad news is not yet sighted.
• Mobile phones to work as credit or debit cards in India?
  
• In a development that could completely liberalise mobile commerce, the department of telecommunication (DoT) is reported to be contemplating writing to the Reserve Bank of India (RBI) seeking guidance on linking telephone networks with banking services.
  
• Mobile commerce in India has been limited primarily to basic banking transactions, purchase of travel tickets and payment of some utility bills, checking your account balance and last few transactions.
• We all know that BCCI is one of the richest sports bodies in the world. But do you know its yearly income?
• It is a cool Rs. 1000 crore in 2007-08.
• In 2006-07 it was Rs. 651.81 crore.
  
• The major chunk contributing to the massive increase of Rs 348 crore in its revenue, amounting to Rs 559 crore, has come from the sale of media rights, an upward movement of Rs 245 crore. It was Rs 313 crore in the previous year. Surplus from tours brought in Rs 226 crore, an increase of Rs 12 crore, interest income Rs 76 crore (increased by Rs 25 crore) and others Rs 138 crore (increased by Rs 65 crore).
• BTW, Sharad Pawar, who is now ICC president-elect, handed over the BCCI reins to new president Shashank Manohar.
• While reading today's paper, I was struck by the phrase 'hornet's nest.'
  
• While I know what a hornet's nest is, (Kandireegala thutte in Telugu), the dictionary meaning of the phrase led me to the word 'wasp.'
  
• That in turn made me curious about knowing the difference between a hornet's nest and a honeycomb and a wasp and a bee.
• Look at this beautiful explanation. Worth a digression.
• Here is one more article that updates our knowledge of farm activities in the country and how it is safe to bet on companies and products that help farmers replace manual labour.
• Read it here.
• Farmers are spending up to 40 paise on hiring labour out of every rupee they invest in a crop. Even then, there is no guarantee of help at the right time to cope with the back-breaking task of growing food, fibre and feed. In theory, one out of every two Indians is employed on a farm. In reality, skilled labour is now so scarce and expensive, farm-owners have to either scale down operations or suffer yield and quality losses. The reasons for this shortage range from urban migration and the lack of interest in farming among youth to the Centre’s rural employment guarantee programme. As a result, farmers can no longer rely on muscle power; the available labour has lower productivity; and there are fewer hands available within the family to help on the farm.
• Today is World Heart Day
• One more day to remember. Why is this so important?
• Heart disease is the number one killer worldwide and it’s estimated that 80% of cardiovascular-related deaths occur in low and middle income nations. India is also set to see a dramatic number of working age people (35-65 years’ old) die of cardiovascular disease in the next 30 years. Therefore, we should know that Lipid profile is the test that measures cholesterol levels. Some cholesterol levels worth remembering:
• LDL should be below 130 mg/dl, triglycerides below 125 mg/dl and the HDL should not go below 35 mg/dl for a good heart health.

27.09.2008

• Today is World Tourism Day
• This year's theme is: Tourism Responding to the Challenge of Climate Change and global warming. The host country is Peru
  
• Since 1980, September 27 is celebrated by the World Tourism Organization as World Tourism Day. It was established at the Third Session of the UNWTO General Assembly in Torremolinos, Spain, in September of 1979.
  
• The purpose of this day is to display awareness that tourism is vital to the international community and to show how it affects the social, cultural, political and economic values worldwide. September 27 is important since on that day in 1970, the Statutes of the WTO were adopted. The adoption of the statutes is considered to be a milestone in global tourism.
• Want to know more about it? Read this.
  
• Washington Mutual bites the dust (Excerpted from today's ET editorial)

• Wall Street suffers fresh blow as Washington Mutual collapses; JPMorgan buys bank’s assets for $1.9 b

• The US suffered the biggest ever bank failure in its history, with Washington Mutual, better known as WaMu, collapsing on Thursday.
• WaMu, the largest savings and loan institution and fourth largest bank in the US was seized by regulators and delivered into the hands of JP Morgan Chase. Under the government-brokered deal, JPMorgan will pay $1.9 billion to the banking regulator and acquire all insured and uninsured deposits, assets and some liabilities of WaMu’s banking operations, including its mortgage portfolio. The government had no choice. Shares in WaMu, with its large exposure in home mortgages, credit cards and other retail lending products had become almost worthless in the past few months. As retail depositors’ fears grew, people began to withdraw money, forcing the Office of Thrift Supervision, WaMu’s main regulator in the US fractured regulatory system, to close it down.
• In the US, where over 600,000 jobs have been lost this year and 9.4 million people are estimated to be currently looking for employment
• JPMorgan's chief executive Jamie Dimon
  
• He is starting to look a little more like this century’s incarnation of John Pierpont Morgan. Morgan, who established the original JP Morgan in 1871, organised a rescue of the banking system in the Panic of 1907. More than 100 years later, Dimon is buying failed banks in the midst of financial chaos.
  
• The parallel is far from perfect. Dimon’s rescues are first and foremost meant to be good deals for shareholders, and not necessarily noble efforts to stabilise the financial world.
• Don't mistake my coverage of the financial crisis as our schadenfreude over US troubles. We are genuinely concerned that it will negatively impact us. More often than not we will not be able to know what negative impact is going to hurt us in such situations.
  
• Schadenfreude: delight in some other person's misfortune.
• Committees on IIMs' autonomy
• The third IIM Review Committee was constituted under the chairmanship of R C Bhargava, the earlier two being H P Nanda Committee (1979) and Dr V Kurien Committee (1991).
• The issue of autonomy of IIMs was distinctly touched upon by the Kurien Committee. The committee had stated that “IIMs need greater autonomy”. In that direction, the committee had, inter alia, recommended as follows:
  • The chairman of the board should be appointed by the government of India on the recommendation of the board.
  • The director’s appointment should be by the board and not by the government.
  
• The HP Nanda Committee had, inter alia, recommended that the chairman of the board should be one who is a successful manager with proven commitment and interest in organisations, distinguished academic with administrative experience, or an administrator with experience in educational management, who is committed to the furtherance of management education and research and has adequate time to spare.
• IIMs have been registered as societies, and per their MoAs, these are autonomous institutions governed by their respective boards, comprising chairman (invariably a corporate leader) and members including government officials and corporate representatives, but essentially all nominees of the government. You may note from the composition of the IIM boards that the character of the board will much depend on the character of the chairman. Only an independent and autonomous chairman, though appointed by the MHRD, will be able to hold the institute autonomous.
• Amendments to MNP regime
• THE department of telecom (DoT) has made significant changes in the mobile number portability (MNP) norms to allow customers move between GSM and CDMA services provided by the same operator.
  
• As per the earlier norms, customers could move to a different operator and retain their number. But following the amendment, a customer will now be allowed to shift to different technology platform offered by his own operator and still retain his mobile number.
• India sees buoyant credit growth
• EVEN as the world economy goes through the worst credit crunch in recent history, domestic lending companies have been able to buck the trend, clocking impressive growth. While the global loans volumes saw a decline of 45% on a year-on-year basis (January 1-September 24), domestic rupee-denominated loans registered a growth of 78%, attaining its highest by beating all previous full-year volumes.
• According to Thomson Reuters, while America and Europe saw a decline of 51% and 48% in their loan volumes respectively, India had only a marginal impact with the total syndicated loans dipping only 2.3%.
• You might have noticed a phrase "high cost economy" that I often use while describing our economy. Look at this figure; you will appreciate what I mean easily.
• Who is the CEO of the New Pension Scheme (NPS) Trust?
• NR Rayalu
• A bit about NPS
• NPS is a defined contribution scheme, in which the three pension fund managers — SBI Pension Fund, UTI Pension Fund and LIC Pension Fund — will manage the corpus, according to investment guidelines laid down by PFRDA.
  
• The scheme is based on defined contributions unlike the present system where the pension benefits are based on a formula linked to the last-drawn pay.
  
• NPS now covers all central government employees who joined service on or after January 1, 2004. Last month, finance minister P Chidambaram had announced that the finance ministry had advised the pension regulator to open up NPS to private citizens also.
• The corpus at present stands at Rs 1,500 crore, but this is likely to rise to as much as Rs 6,000 crore in the next six months, when 21 state governments are expected to transfer their pension funds to NPS.

26.09.2008

• Justice Nanavati report on Godhra riots
• To be submitted in two parts: The first part of the report, dealing with the fire on the ill-fated train was recently handed over to the state government by a fact-finding Commission headed by Justice G T Nanavati. The second part dealing with post-Godhra riots will be submitted in December.
• Giving a clean chit to Gujarat chief minister Narendra Modi, the Godhra train carnage report tabled on Thursday in the state assembly, described the burning of the S-6 coach of the Sabarmati Express on February 27, 2002, as a conspiracy.
• The findings of the two-member Commission, presented six years after the incident, go contrary to a probe headed by another former Supreme Court judge U C Banerjee, set up by the Lalu Prasad-headed railway ministry. Banerjee had concluded that the fire on the train, in which 58 kar sevaks returning from Ayodhya were killed, was accidental.
• The report said that 140 litres of petrol was purchased as part of the conspiracy to burn the train’s bogie. It added that the conspiracy was hatched by Moulvi Umarji at the Aman Guest House in Godhra, about 140 km from Ahmedabad, and was meant to spread terror in the area. The report states the train-burning was pre-meditated and there was also heavy stone pelting for 10 to 20 minutes at the S-6 and S-7 coaches, followed by the burning, which prevented people from coming out. It notes that Razak Kurkur and Salim Panwala had purchased 140 litres of petrol on February 26 and carried them in containers. Shaukat Lalu, Imran Sheri, Rafiq, Salim Zarda, Zabeer and Siraj Bala were also involved in burning the train.
• Language lessons: less on the ball
• I was puzzled by this sentence: "Part of the reason is many of our institutional shareholders are quasi-government entities and hence are less on the ball in many cases, while in others they tend to toe the government line."
• Wonder what is meant by less on the ball here?
• "On the ball" means competent, knowledgeable, or alert
• Less on the ball means not so competent, not so knowledgeable in the present context
• Some hard figures coming our way on the US financial turmoil; from an article by Saumitra Chauduri. Very good one. Some excerpts for us:
  
• On Wednesday September 17, 2008, the yield on three month Treasury Bills fell to three (three only) basis points (bps), i.e., 0.03%, the lowest in more than half a century.
• The total of securities issued on the back of subprime and Alt-A home loans are estimated to be $2.1 trillion, while some seven million subprime and over 3.6 million Alt-A loans exist totalling about $2.5 trillion. It appears that the $700 billion Paulson Fund is additive with the $314 billion of commitments made by the US Treasury and Federal Reserve till date, thus making for a total commitment of over $1 trillion. American and other banks and financial institutions have to date taken some $400 billion in write-downs and some troubled assets have accompanied Lehman to bankruptcy court. All of the loans underlying the $2.1 trillion of mortgages cannot go bust and it is hard to see how a cushion well in excess of $1 trillion cannot but substantially ease the pain.
• MANY centuries ago Thomas Gresham pointed out that bad money drives out the good. The subprime-based CDO market and its many creative offshoots have in a sense created bad money that is pushing out the good. The $2 trillion of suspect securities have created havoc for a US credit market of $50 trillion and an equity market of $20 trillion, as well as for the rest of the world.
• The Credit Default Swap (CDS) market has apparently grown to $53 trillion about which SEC chairman Cox said there is no regulator, by which he probably meant that nobody has a clue about it. The financial industry believes that most CDS can be netted out and the problem is tractable. If so, this ought to be carried through over the next few months, and with some urgency, for quite a bit of CDS are attached to subprime constructs and these tentacles reach far and wide.
• Google's phone is called G1
• The Google phone is a 3.5G handset with finger-friendly touch screen navigation, slide-out QWERTY keyboard with a trackball, Wi-Fi enabled and delivers rich internet browsing experience. It also provides one-touch access to Google services like Google search, Gmail, YouTube, Google Talk and Google Map.
• Priced at $180, it is scheduled to be released shortly in the US markets. By New Year, even India may be seeing this phone in its markets.
• P-Note and FII norms set for review
• India will soon undertake a comprehensive review of the regulatory regime for foreign institutional investors (FIIs). Market regulator Sebi is finalising a detailed approach paper on the proposed framework, which is expected to be taken at its board meeting on October 6.
• PNs are derivative instruments that have Indian securities as the underlying asset and are issued to foreign investors who have no direct access to the local stock market.
• We take pride in our companies joining the billion dollar club.
  
• What we mean by billion dollar club is their turnover.
  
• But look at GE! GE said its profit for the year will be about $20 billion, down 10% from 2007.
• That its profit growth is going down, is causing lot of jitters in the US markets.
  
• You know, a billion dollars means roughly about Rs. 4,500 crores. So a $20 bn profit means about Rs. 95,000 crores!
• Where does our country's budget stand in comparison? Just a couple GEs' profit is all that is required to match up with our country's budget.
• What is the $700 bn bail out package in the US about?
• Look at this graphic. It puts it in very simple terms.

25.09.2008

• Goldman Sachs gets a breather of an investment from Warren Buffet
• Goldman Sachs Group won the backing of Warren Buffett, the world’s pre-eminent stock picker, as the Wall Street firm seeks to raise cash from investors whose faith in the investment-banking business model has been shaken. For Goldman, the endorsement came at a price.
  
• Berkshire Hathaway, led by the 78-yearold billionaire, is buying $5 billion of perpetual preferred stock with a 10% dividend. Berkshire also gets warrants to buy $5 billion of common stock at $115 a share at any time in the next five years. The common stock closed on Tuesday at $125.05, providing Buffett with an instant paper profit of $437 million.
• The deal is more a confidence boosting one to Goldman than one that can really alter its fortunes in the short term.
• Buffet being what he is, can't be wrong. So we thought about the venerable i-Banks also till recently. Let's wait and watch. After all, he may be in the know of things that we are not privy to.
• India China border dispute: no deal in sight
• Unable to find a negotiated settlement through the diplomatic channels, India and China appointed special representatives in June 2003 to address the border issue from a political perspective of the overall bilateral relations.
  
• India says China is illegally occupying 43,180 sq kms of Jammu and Kashmir including 5,180 sq km illegally ceded to Beijing by Islamabad under the Sino-Pakistan boundary agreement in 1963. On the other hand, China accuses India of possessing some 90,000 sq km of Chinese territory, mostly in Arunachal Pradesh.
  
• Oscar Fernandes apologizes
• Yesterday we noted with dismay the comments made by him while justifying the violence against the CEO of a Noida based company that resulted in the latter getting killed.
• Better sense appears to have prevailed over the Minister. He apologized for the comments. Mr. Kamal Nath had set the record straight by distancing the Congress party from the comments made by Oscar Fernandes.
• Khairlanji accused get death sentence
• Putting an end to the misery of Bhayyalal Bhotmange, a poor Dalit who saw four of his family members being brutally killed at Khairlanji village nearly two years ago, a local court at Bhandara awarded the death sentence to six of the eight convicts.
  
• The incident, which put Maharashtra to shame, took place on September 29, 2006. A frenzied mob of 50 villagers attacked the house of Bhaiyyalal Bhotmange and lynched four members of his family, including his wife Surekha, daughter Priyanka and sons Sudhir and Roshan, over a land dispute.
  
• The victims were beaten to death and their bodies thrown into a canal in the village. Bhaiyyalal fled to a village nearby.
  
• Considering the political heat that the killings had generated, the state government had handed over investigations to the Central Bureau of Investigation (CBI).
  
• A chargesheet was filed only against 11 of the original 47 accused and 36 were discharged. Three of them were acquitted under the Scheduled Castes and Scheduled Tribes (Prevention of Atrocities) Act, 1989.
  
• The acquittal, under the ST/SC Act, drew strong reactions from Dalit organisations which demanded a re-trial.
• What is LIVE EARTH? Remember anything about it?
• It is the global initiative to spread awareness about the issue of global warming. It will be conducting its first Live Earth India Concert in Mumbai on December 7 this year.
  
• The initiative, spearheaded by former US vice president Al Gore and supported by many, including an Emmy Award-winning producer Kevin Wall, will raise money to fund environmental scientist Rajendra Pachauri’s ‘Light a billion lives’ campaign.
  
• The campaign aims to provide solar lamps to people in rural areas and promote the use of renewable sources of energy. Mr Pachauri estimates that his campaign would cost $20 billion.
• Some measures that the GoI has taken to ensure easy funding for infrastructure
• The government has relaxed the norms for raising debt from abroad. Private infrastructure developers can now borrow long term up to $500 million a year for rupee expenditure. Earlier, infrastructure companies could raise no more than $100 million a year.
• The policy has also relaxed the interest rate ceiling for such borrowings to 450 basis points above LIBOR.
• I have been betting that the US will not be an attractive destination for investing the surplus forex reserves that countries of the world generate in their trade with the US. The scenario as reported in ET today strengthens my bet:
• The government may need to do much more in the coming months to minimise the impact of the Wall Street meltdown on India. For one, it must seriously start looking more positively at various sovereign wealth funds (SWF) from China and West Asia which are keen to invest (both debt and equity) in Indian infrastructure. These sovereign wealth funds are flush with money (about $2.5 trillion) and are looking for good investment opportunities in Asia where returns are impressive. India must access both debt and equity from SWFs. Many stressed Wall Street banks are also tapping Asian SWFs. So the government need not be excessively suspicious of SWFs wanting to invest in infrastructure projects. India will need a lot more of debt and equity capital from abroad to drive its infrastructure projects than it gets today.
  
• When SWFs start investing in India, or for that matter in other emerging economies, it is bound to reduce the availability of investments for US. This will have an adverse impact on the value of the US dollar and it will start losing value against other currencies. I am looking at a one to two year time frame for this to happen.
• Look at our savings rate and potential it holds!
• The Indian economy’s saving rate is a little over one third of annual output. This translates into around $400 billion of investible resources.
• Households invest a part of these savings on their own and these are not available to the corporate sector for their investment. But the portion that is available is large and can meet most of corporate India’s investment needs. When domestic investment falls short of domestic savings, the gap is met through import of the rest of the world’s savings, in the form of a current account deficit on the balance of payments. Provided someone is willing to finance this current account deficit. The convulsing global financial system might make such financing difficult in the conventional fashion. The government must seek out unconventional methods.
• What an analysis coming from TK Arun! I can't agree with him more.
  
• Theft and power give-aways that have made the power sector financially unviable are to blame for the power sector’s woes, not any global crisis.
  
• State monopoly over coal mining, not global finance, is to blame for shortage of coal.
  
• Allocation of mining leases on the basis of patronage rather than transparent procedure is to blame for years of delay that would-be steel producers face when they seek iron ore.
  
• A lethargic legal system is to blame for the nation’s natural gas resources staying trapped underground, hostage to a battle between two brothers, even as gas shortage damages the economy.
  
• Let us set our own house in order, and prepare for a slower external world.
• Record mobile user addition
• India has added 9.16 mn mobile users in August .
• India is world's second-largest wireless market. The total wireless subscriber base, which includes GSM, CDMA and WLL(F), stood at 305.24 million at the end of August 2008.
  
• The total number of telephone connections added was 9.03 million (both fixed line and wireless) during August 2008, compared with 9.06 million connections added in July 2008.
  
• The total number of telephone connections reaches 343.87 million at the end of August 2008, compared with 334.84 million in July 2008.
  
• With this growth, the overall tele-density has reached 29.83% at the end of August 2008, against 29.08% in July 2008.
• While the financial world burns, we never let go an opportunity to learn about a new concept
• We look at CLNs today. Credit Linked Notes.
• CLNs are customised credit derivatives in the unregulated over the counter (OTC) market, issued by a bank or financial institution backed special purpose vehicle or trust. They are structured to allow the issuer to transfer a part of the credit risk to investors, who are willing to bear such a risk in return for higher yield. These deals are done outside the country, as OTC derivative contracts have no legal standing in India.
  
• This is how a CLN broadly works. A company borrows a certain amount from a bank or makes a convertible offering to that bank. Having loaned the funds, the bank then issues CLNs, which are subscribed to by investors looking for above average returns. The CLN-issuing bank then invests the proceeds in low-risk-papers, thereby partially mitigating risks. The coupon or rate of return of the CLN is linked to the performance or financial strength of the specified asset or the borrower. But, the investor stands the risk of incurring a loss if either of the bank or the company defaults.
• Not clear about the concept? Hope this graphic makes it very clear to you.
• Why are we learning about CLNs now?
• Lehman Brothers had subscribed to FCCBs of some Indian companies and, at the time of the issuance, issued CLNs to investors including some international banks and overseas arms of Indian banks.
• Now, with Lehman going bankrupt, investors have been left guessing as to what is in store for their investments through such credit derivatives. These investors are concerned whether they would receive even half of this invested amount. There is uncertainty over how much an investor in a CLN-referenced FCCB can claim after such bankruptcies. Some clarity will emerge after the bankruptcy court reaches upon a decision with this regard, experts say.
• Investment Deposit Ratio of banks
• Investment deposit ratio (IDR) is the ratio of investments in government bonds and other approved securities as a per cent of total time and demand deposits. Amount of bond investment for every hundred rupee worth deposits.
• For many of the Indian banks this has gone below the 30% mark for the first time in recent years in view of the huge demand for government bonds from non-bank participants like insurance companies, bond houses and provident funds.
• Know the antecedents of Henry Paulson, the US Treasury Secretary?
• He is the ex-boss of Goldman Sachs.
• He advised back in 1997-98 Asian currency crisis that some of the banks in Asia have to be allowed to go bankrupt.
• Now he had done just the opposite.
• You know China’s financial institutions were slow to buy the mortgage-related securities that triggered the US meltdown, incurring just $4.3 billion in losses and writedowns, according to data compiled Bloomberg.
  
• Globally, banks have written down more than $520 billion as the credit crisis led to the demise or makeover of Wall Street’s five biggest investment banks.
• Today Goldman says that India has more to fear from a rise in crude prices than from the ongoing financial crisis. Though I too would agree with this view, the advice coming as it does from Goldman, now rings hollow and makes me skeptical.
• Heard on the Wall Street
  
• We needed the best and the brightest to get us into this mess, and we’ll need the best and the brightest to get us out of it.
• That's the case for no drop in salaries for the i-Bankers!!

24.09.2008

• How far and wide the ramifications of the present financial crisis can go?
• Look at this statement from KKR, one of the biggest PE (Private Equity) players, while explaining its record loss of $1.1 bn for the first half year, compared with a profit made a year ago:
• “The lack of credit has materially hindered the initiation of new, large-sized transactions for our private equity segment and, together with declines in valuations of equity and debt securities, has adversely impacted our recent operating results”
• First it was housing mortgage companies, then it was banks, then insurance companies, mutual funds, hedge funds, and now PE players. Whose turn is it next?
• Did you ever come across the phrase "testifying before the Congress"?
• Had you seen yesterday's performance of Ben Bernanke and Henry Paulson before the Senate Banking Committee, you would have got a clear picture of what is meant by this phrase.
• Pleading for the passage of the bail out package they warned financial markets are in serious stress and the best chance for stabilising them is to remove illiquid assets.
• Look at the top gun CEO salaries in US
• There has always been criticism about the fat pay packets the top CEOs keep getting there. But in the wake of the financial crisis, the criticism is getting louder. Look at this graphic. Try to stay in that kind of pay bracket for at least a couple of years and then happily retire. Why appear for Civils or break your head trading stocks?
  
• Consumer finance faces tough times in India
• Rising delinquencies have taken their toll on the country’s consumer finance companies. A majority of non-banking finance companies (NBFCs) with foreign parentage are moving aggressively to close down their branch networks.
• Defaults have been on the rise, primarily due to a bout of interest rate hikes and a crackdown on collections. It is not just in consumer finance that companies are taking a hit. For instance, banks are also now facing the heat on the retail business front.
• GE Money Financial Services and HSBC are reported to be shutting down many branches and going slow on their credit card sales respectively.
• Do my stock market friends have the stomach for this advice?
• An ET column suggests that, even as the global financial turmoil sears the financial world, the time now is the best for fresh investments in stocks.
  
• After the two big financial crises of the recent past — the 1970s oil shock and early 2000s dotcom bust — investors in the US, the UK, Japan and Germany, who remained invested or entered the markets during the time of these crises, reaped supernormal profits in the year immediately after the crises abated.
  
• The Equity Risk Premium (ERP) — calculated by subtracting the average income return from a riskless asset from average stock market total return — analysis of stock market crises (pre-, during and post-1973-74 and 2000-2002) in the US, UK, Japan and Germany underlines this trend of windfall profits in the year immediately after the crises.
• Checked the article credit line; it doesn't come from George Soros. But it could have. I will surely go with it.
• I would even add that instead of staying invested, book losses if it suits your income tax purpose and buy afresh. You are bound to reap benefits a year or so later. But be warned this is freelance advice coming your way. Use your judgment; don't blame me or ET for it. It is your money; not mine or ET's. You are on your own if you get burnt.
• What a logic?
• You might remember that just a couple of days back the CEO (Lalit Kishore Chaudhury) of a NOIDA based arm of an Italian auto components company was bludgeoned to death by irate workers right in his factory.
• Look at what the Union Minister for Labour says on this episode here.
  
• Going by the same logic, all the murders that happen in the country should be justifiable. Because it is genuine distress that causes the perpetrator go to the extent of killing somebody.
• But look at some sensible comments made in this context by an ET editorial:
• Legislation for flexible hiring and retrenchment of labour must have built-in mandatory provisions for social safety nets. For that to truly materialise, workers must be envisaged as serious stakeholders in the industrialisation process. Trade unions can serve precisely that purpose. A union which is able to effectively negotiate a just distribution of surplus into wages and profits without subverting the contemporary logic of production would facilitate both vertical equity and productivity. That would not only confer on it the credibility of an effective dispute redressal mechanism but also make it into a legitimate vehicle for changing public culture at large.
• Look at this article by SSA Aiyar on the $700 bn dollar bail out package announced by the US government
• Can you come up with these many questions as he had? May be many of them will surely be there at the back of our minds as we read the contours of the package. But he is a master at putting them up all in one 'question bomb'.
• Who will decide which securities are toxic and worthy of rescue? The treasury alone? Should one authority have so much power and discretion?
  
• Will the treasury buy only mortgage securities? Or also derivatives such as credit default swaps? What about credit card defaults, which loom ahead? Or corporate bond defaults?
  
• How many companies will be allowed to go bust before the treasury saves others by declaring a new set of instruments to be toxic?
  
• What checks and balances are needed on enormous discretionary power over $700 billion, that can make or break fortunes, and can be manipulated by old-boy networks and lobbyists?
  
• At what price will the government buy toxic securities? Merrill Lynch sold some mortgage-backed securities at just 22 cents in the dollar. Will treasury offer more to others? If so why?
  
• In setting prices, the scope for fraud, collusion and suspicion is huge. Will vulture funds, which have already bought distressed securities for a song, be allowed to resell these at higher “rescue prices” to the treasury?
  
• Which fund managers will be appointed to manage the huge assets taken over? Why, they will be drawn from the very financial class that has just disgraced itself!
  
• Some titbit about the CDS market coming from the same article
• The size of the CDS market is $62 trillion, four times the GDP of the US! After netting out offsetting transactions, the balance CDS risk is around a trillion dollars.
• Commenting on why the world economy stayed resilient in the wake of the housing bubble he offers the following explanation. I don't agree with it. I don't disagree with it. I prefer to wait and watch. May be there is more to it than what meets the eye. May be, we do not even have the full information to offer explanations.
• Despite a credit crunch starting with the bursting of the US housing bubble 13 months ago, the US and world economy have remained remarkably resilient so far. GDP growth in the US was 3.3% in the last quarter on an annualised basis. The Indian and Chinese economies have slowed, but only modestly.
  
• What explains this resilience? Well, US monetary and fiscal policies have flooded the country — and the world — with dollars to try and stave off recession. The Fed has given financial markets unprecedented access to liquidity, and cut interest rates to just 2%. US Congress has legislated $140 billion in cheques mailed to consumers, just to increase purchasing power. The trade deficit remains high, and is paid for by issuing dollars to the world. This Niagara of dollars has kept purchasing power (and GDP) rising despite the credit crunch.
• What is the OTC market?
• OTC: Over the counter.
• The term OTC is used in contrast to on exchange transactions and represents bilateral contracts between parties.
• At present, OTC trading is either banned (e.g. equity) or dealt with in a fragmented way (OTC trading on interest rate derivatives is supervised by RBI while exchange-traded interest rate derivatives are supervised by Sebi).
• Microsoft gets slapped with a Rs. 128 crore tax evasion case
• Remember what we noted sometime back in our blog about this issue? Read it here.
• Today's report says that the Excise Department has finally confirmed a demand of Rs. 128 crores on alleged non-payment of service tax and another Rs. 128 crores as penalty.

23.09.2008

• Wall Street will never be the same again
• The iconic I-Banks, Goldman Sachs and Morgan Stanley have decided to become conventional banks. The Q&A briefing given in today's ET sums up the whole issue succinctly.
  
• What's the problem in being an I-Bank?
• Investment Banks did not stick to collecting fees from advising corporates, or managing other people’s books and money. With little capital, they invested their own and clients' money in high-risk, high-return and complex securities.They borrowed from banks to invest more. Later, when they needed cash, they found there were no takers for these securities
  
• How will becoming a commercial bank help?
• Compared to i-banking, old-fashioned commercial banking is less glamorous and generates less money. Commercial banks — which accept deposits from households and institutions and lend—also need more capital. But a commercial bank has access to cheaper funds through current and savings accounts; it can also borrow from the central bank regularly
  
• Did Goldman and Morgan have no other option?
• Since they could neither raise capital nor sell their investments, this was the only way out. It will mean supervision by Fed. They may consider acquiring a bank. To begin with, they will tap rich clients to get cheap funds, but will continue with i-banking and dealmaking—stuff they know best
  
• How will this change the world of finance?
  
• The market for derivatives (or off balancesheet exposures, which need less capital than a simple loan) will shrink.This is where i-banks used their proprietary books to take big bets. Smaller i-banks may have to merge with or sell their assets to bigger banks. Regulators may insist on high capital norms for derivatives.
• Read this very good editorial comment that appeared in today's ET. But my advice is this: don't be lulled into believing that the end of an era means the beginning of a new one. I feel the end is not yet over for new beginnings to make their appearance. I am awaiting more troubled times ahead -- in the coming months. Then will new beginnings be surely be made in the next one to two year time frame.
• One more snippet worth noting in this context is our banks' losses on account of this financial crisis. Nine of the country’s largest commercial banks including State Bank of India (SBI), ICICI Bank and HDFC Bank have exposure of $420 million (Rs 2,000 crore) in the US financial giants which collapsed recently. The government feels banks other than SBI would suffer losses of Rs 600 crore due to the crisis.
• Investments in India by the failed i-Banks: Goldman Sachs has invested $2 billion while Morgan Stanley has invested $750 million.
• Both Morgan Stanley — a product of the 1933 Glass-Steagall Act that separated investment and commercial banks — and Goldman will henceforth have permanent access to the Fed window and the right to raise deposits. In other words, this will allow them to rely more heavily on deposits from retail customers instead of using borrowed money.
• Crude posts biggest gains!!
• Crude oil climbed more than $24 a barrel to $128.50, the biggest single day gain ever, as the dollar weakened the most against the euro since January 2001.
  
• Credit crunch threatens nanny trade
• London, with its world financial hub, is the centre of the nanny trade in Britain, employing thousands of the surrogate mothers to care for their infants while they earn megabucks in the City.
  
• The British nanny, epitomised by the fictional but magisterial Mary Poppins, has always been in demand around the world, and that is unlikely to change despite stiff competition from Eastern Europe.
• As bankers and money dealers fall like flies to a credit crunch that has seen three major US investment banks disappear in a puff of smoke, so the nannies they have employed on salaries of up to £40,000 ($73,000) have suddenly become expensive luxuries. They are reportedly losing their jobs.
• India Pakistan to announce cross LoC trade
• When Prime Minister Manmohan Singh meets Pakistan president Asif Ali Zardari on the sidelines of the United Nation General Assembly, they will have at least one substantive announcement to make on cross LoC trade. The two leaders are likely to announce the date for the beginning of trade across the border at two crossing points—the Srinagar-Muzaffarabad route and the Poonch-Rawalkot route—when they meet in New York .
• The joint working group on cross LoC CBMs, which met in New Delhi, finalised the modalities for cross-border trade bringing to an end a negotiations that started in 2005. The initiative is aimed specifically at resurrecting trade between Kashmir and Pakistan-occupied Kashmir.
• Looks like India has been silently aggressive in so far as deriving benefits out of the just signed Indo US nuclear deal is concerned
• Reports are saying that it is likely to sign a nuclear fuel supply agreement with France soon. Even before the US Congress passes the 123 agreement. Thus giving France an early mover advantage.
• Similarly, the Russian President Dmitry Medvedev is expected to ink a similar agreement with India during his visit to India sometime in December.
• Manmohan's resume getting spruced up or not, the benefits are more appealing than the feared compromises.
• Japan to have new prime minister
• Japan’s conservative Taro Aso, who scripted a landslide victory in the Liberal Democratic Party's presidential election on Monday, is all set to succeed prime minister Yasuo Fukuda amid economic uncertainty faced by the world's second largest economy. Ruling LDP, which has the majority in the lower house, will choose Aso as Japan's new prime minister in Parliament on Wednesday.
• Government's moves to curb spurious drugs
• The Centre is planning to set up a task force to deal with counterfeit drugs. All stakeholders of the industry, including pharma companies, NGOs and the government would have representation on the committee.
  
• Legal provisions are being tightened to provide stiffer punishment to offenders and quality parameters are being made mandatory. Now no manufacturing activity can take place without the adoption of these norms which help in keeping a check on the quality of the final product.
  
• The spurious drugs market is estimated to be between Rs 2,000-6,000 crore while the domestic pharmaceutical market is pegged at $20 billion (Rs 90,000 crore) and is estimated to reach $50 billion by 2015.
• What are the types of window-dressing that you are aware of? I am talking of companies' accounting practices here.
• According to a study of BSE 500 companies, five types of creative accounting practices are most prevalent when companies want to window dress their financial performance. They are: booking revenues before they materialise, booking fictitious sales, expense manipulation, cash manipulation and invisible restatements of previous periods.

22.09.2008

• Vanishing act of Sub-PLR loans:
• Since the time the Reserve Bank of India (RBI) allowed banks to lend below PLR (Prime Lending Rate), the best-rated borrowers have availed of loans at sub-PLR rates. Top-notch corporates could borrow at rates below prime — a negotiated rate which is well below PLR by playing one bank against the other
• This is done by seeking quotes from many banks and then negotiating with them to lower lending rates. Banks relented, as they too wanted exposure to blue chip companies in their credit portfolio since the risk was lower.
• After gap of almost five years, banks have started charging benchmark prime lending rate (PLR) for loans extended to some of the top corporates
• The squeeze in liquidity and a growing aversion to risk due to recent developments in global financial markets, coupled with a domestic slowdown, has possibly marked an end to the practice
• This also means that this tightening will apply across the entire spectrum of home loans, auto loans and personal loans. Banks are planning to increase lending rates so that the net interest margin remains intact and set stringent lending norms
• Refer to this graphic for a summary
• Banks going for $ swaps for overseas businesses
• With money markets freezing in every major financial district of the world, some of the banks in India have bought dollars here to keep operations afloat in other countries
• A transaction known as ‘buy-sell’ swap in the currency market is executed where banks purchase dollars in the Mumbai spot market and simultaneously sell the dollar forward. The dollar bought in the spot market gets credited to the bank’s nostro account in New York after two days, following which the overseas branch can lend the money to its office anywhere
• Since every bank has an open position limit in foreign currency, a simultaneous spot purchase and an offsetting forward transaction ensure that this limit is not exhausted
• It is an expensive transaction aimed at providing quick, short-term liquidity in centres where inter-bank lending has come to a halt
• Nostro account: An account that a bank in India holds with a foreign bank abroad and is used to hold foreign currency balances
• $700 Billion US bailout:
• The Bush administration plan seeks unchecked power from Congress to buy $700 billion in bad mortgage investments from financial companies
• Through his plan, Treasury Secretary Henry Paulson aims to avert a credit freeze that would bring the financial system and the world’s largest economy to a standstill.
• The Bill would also prevent courts from reviewing actions taken under its authority
• Differences would be resolved soon and the bailout package is expected to pass by this week’s end.
• The proposal would raise the nation's debt ceiling to $11.315 trillion from $10.615 trillion
• DoT may set user base rider for 3G auctions:
• The Finance ministry wants tighter norms for third generation (3G) spectrum auctions. The ministry will ask the department of telecom (DoT) to allow only those Indian companies to bid for 3G which have an active subscriber base
• Current norms allow foreign telcos to participate in 3G auction only if they furnish experience certificates, but this does not apply to Indian telcos. This meant that companies like Swan, Datacom and Unitech can bid for 3G spectrum along with existing operators despite the new players having no experience in providing telecom services
• The ministry feels the current policy encouraged a newbie to buy 2G spectrum from DoT at a fixed price and auction it to a foreign player at a much higher price. This results in a loss to public exchequer which already has a large fiscal deficit
• Recently, DoT had turned down the ministry’s demand to raise the base price for pan-India 3G radio frequency to Rs 2,500 crore from Rs 2,020 crore now.
• Refer to this graphic for summary
• Reliance KG D6 Oil starts flowing; gas in 2009:
• Reliance Industries (RIL) on Sunday formally announced the commencement of production from its famous Krishna Godavari D6 upstream assets. This is the first of-its-kind production from a deepwater field in India
• RIL will produce 5,000 barrels of crude a day, which will later rise to the peak level of 5.5 lakh barrels of oil equivalent per day (boepd)
• This will increase India’s current oil and gas production by 40%. At this level, it could save the country nearly $20 billion in foreign exchange every year.
• The much-anticipated gas production from KG basin is expected to commence from the first quarter of next year. This signals RIL’s emergence as a major upstream energy player
• Look at this graphic for India’s current energy basket
• Genpact joins race for Lehman India’s captive unit
• GENPACT, the country’s largest BPO firm in terms of revenue and headcount, is in the race to acquire Lehman Brothers’ Mumbai-based captive back-office unit
• Lehman’s back-office operation, Lehman Brothers Financial Services, is based in Powai (near Mumbai). It employs between 1,500 and 2,000 people. The captive unit does back-office operations and analyses for Lehman’s India and global operations.
• It has been reported in the media that Credit Suisse, Barclays and IT services companies like Wipro Technologies and Copal have evinced an interest to acquire the captive unit
• Meanwhile, Lehman Brothers Securities — the investment banking division in India — too is looking for a buyer
• Terrorists breeding most in areas worst hit by communal riots:
• One of the questions troubling security experts and government agencies in the context of growing incidents of terror attacks is the origins of the terrorists
• This article seeks to understand the factors behind this phenomenon
• Today's notes is from Mr. Yusuf Kaydawala, our dear friend and a regular reader of our blogs. I have been personally busy for the last couple of days and couldn't do the notes. He chipped in with this work.
  

19.08.2008

• Desperate rescue act mounted by reserve banks across the world
• In a bid to contain the contagion that is fast spreading and appears to have engulfed the famed Morgan Stanley, the central bankers of the major powers have announced a $247 bn lending window.
• By infusing additional liquidity, the central banks are trying to make worldwide interbank and money markets functional once again. In the US, money market funds are reluctant to buy commercial paper. This, in turn, is forcing companies to tap lines of credit from banks to finance short-term working capital needs.
  
• Banks, in turn, are hoarding cash by either refusing to lend to each other or doing so at higher rates. Investment banks like Morgan Stanley and Goldman Sachs are in trouble because they rely on short-term loans to run their businesses. But they are finding it increasingly hard and costlier to borrow. It remains to be seen if central banks can break this vicious cycle.
• I was noting yesterday that stock markets, commodity markets etc., may collapse in the wake of the current contagion, for indirect reasons. Many of you would have wondered what could these indirect reasons be and how would they impact other unrelated sectors; right?
• Now you see one of the first such impacts unfolding right before our eyes. Lehman had invested substantially i.e., about $500 mn in some of the prestigious real estate projects in our country. As it has gone bust, these projects will suffer now. It may lead to a situation of distress sale and the real estate prices may come crashing. Or it may negatively impact a couple of the big real estate players in the country and hit their customers very badly. There could be a scenario wherein a middle class man or an upper middle class man suffering for Lehman's collapse here in India.
• An artist's record
• I am sure you would remember Damien Hirst, the artist we took note of for the first time on 07/07/07.
• Remember his specialty? He makes art out of dead animals and the like.
  
• He made history on two counts recently. On the same day that Lehman Brothers went bankrupt, he auctioned 223 of his art pieces for a record $199 mn!! This is the first ever time that a single artist's works have fetched that much money. The record so far had been held by Picasso's works auctioned way back in 1993 for $20 mn.
• The second first that he has notched up in the process is that he gave a complete go bye to the art dealers and galleries. He auctioned the works directly on his own.
  
• Language lessons: easel
• An upright tripod for displaying something (usually an artist's canvas)
• If you are asked to define development, what could your answer be?
• Will it look like this?
• Development is the expansion of human freedoms to enjoy and sustain life and environment. Development involves strengthening of the capacity of human beings to realise the full potential of human creativity for the greater common good of people, society, environment and civilisation. Human dignity and democratisation — social, economic and political — need to be the defining force in the envisioning and process of development.
• This is from John Samuel who wrote a piece in today's ET. I found it really comprehensive.
• One more noteworthy snippet from this piece:
• What is meant by empowering people?
• Empowerment of people involves the ability to ask questions, seek solutions, make strategic choices and claim human rights.
• Government's measures to encourage auto exports from India
• It is extending the Focus Market Scheme (FMS) incentives to the auto industry where export to targeted markets will get cash-incentives of up to 5%. This is aimed at increasing the competitiveness of the Indian automobile industry abroad.
  
• The Indian auto industry, which exported more than 1 million vehicles worth $2.8 billion last fiscal, to the world market is likely to get a major booster in the 83 countries covered under
  FMS. The scheme is likely to help Indian auto majors garner a larger chunk of the emerging markets in Africa, Latin America and the CIS bloc and make India a global small car hub.
• Here is an example of a very complicated loan transaction that is camouflaged as a transaction of sale/purchase in stocks and derivatives.
• This one will be loved by my stock market friends. I am sure some of them will be wondering why or how they missed an opportunity of making risk free returns.
• Read this piece. Excellent.
  
• See the developments in camera technology? I am amazed.
• There are now 24 mega pixel cameras!!
• BTW this piece tells us about what a 'full frame' camera is. Read this. It is for techno enthusiasts and photographers.