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?