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.