The United States is supposed to have not just great markets and great enterprises, but also great regulators. The Federal Reserve and the Securities and Exchange Commission are respected and feared the world over. Those great markets also rely on institutional mechanisms, like the rating agencies — all of which are now American-owned. The amazing thing about this entire pack is that the financial crisis has shown all of them to be as naked as the emperor who strutted out in what he thought were his new clothesWhat, for instance, was the SEC doing when the great investment banks (Bear Stearns, Lehman Brothers, et al) were leveraging their equity 30 and even 40 times? If a company runs $600 billion worth of assets on an equity base of just $26 billion, then if those assets drop in value by just 5 per cent, the company goes bankrupt — which is what has happened. If the SEC wasn’t looking at the problem, what were the rating agencies doing when they gave these firms the best ratings in the book? If the risks are blindingly obvious today, why could the Fed not see them and ask for corrective action from the lawmakers or by the SEC?
It seems obvious now that the whole investment banking model is simply not viable. They made fat profits because they ran risky, over-leveraged businesses; and they were not regulated in the way that traditional banks are, so they did not have any defences in place for when things go wrong. That explains why it is banks like Bank of America which are now gobbling up the investment banks, and why Morgan Stanley is running for cover to Wachovia and others.
When Enron went bust, it was run by a bunch of Harvard MBAs, advised by McKinsey, and its accounts audited by one of the big accounting firms (which imploded). It turned out that the accounting firms were busy getting money from their clients for doing consulting work — which created a conflict of interest when it came to proper auditing. That same problem now affects the rating agencies, which were getting a lot of work and therefore revenue from the investment banks. So did they go soft in their ratings of the investment banks — and mislead the markets? In any case, did the people in the rating agencies actually read and digest the thousands of pages of legalese associated with every complex financial instrument before they gave a rating, for which the fee was relatively modest? You can guess.
In other words, it is not just the investment banking model that is broken, it is the entire system of complex financial instruments that no one fully understood, so that risk was not properly measured — and that is lethal when things start unraveling. The trading practice that makes things unravel even faster in such a situation is called ‘going short’ — a practice long frowned on by Indian regulators for being destructive of value, but advocated by market fundamentalists as being an inalienable part of an efficient market. Now, surprise, the SEC is talking of banning ‘shorting’ because that is causing the selling stampede behind the bankruptcies!
Someone said the other day that the worst is over. Don’t bet on it. All the assets owned by the firms that have gone bust (trillions of dollars worth) have to be sold, and it will be a fire sale at knocked down prices. That means enormous destruction of asset value, and someone has to feel the pain. AIG, for instance, has been given two years to sell down, so it is going to last a while.
Closing thought: It isn’t funny any more to say that the Indian financial regulatory system shines because of its innate caution.
Friday, September 26, 2008
Wednesday, September 10, 2008
Saturday, August 30, 2008
Friday, August 29, 2008
The communists: the Rajas and the carrots !!
Is the gods own country ( Kerala , India) slipping down the drain ? Perhaps the answer is a resounding yes..infact there is no point inviting the industrialists and investors to the state speaking English and usual clay-traps at New Delhi or making jaunts abroad ...this will not help the cause of attracting investment .
On the flip side, watching our comrades ideological partner- china; in action during the recent Olympic performance and also showcasing to the world the developments that they have made in every sphere , they have shown what is achievable even after eulogising socialism..in its ever evolving and dynamic format. Our guys are stuck in the quicksand of disaster, their thinking cliched with clear lack of vision. They still boast that "Hartals and strikes are a fundamental right" Are the Chinese not aware of it, they are more hard-working and disciplined lot ? Right to work and live is a more definitive and an ultimate fundamental right �should not the Government protect that at the first place before mooring about right to strike ?
It is time these pigeonholed ideas of the communists ( including their bearded intellectuals) are sent to the gallows; to ensure that the state has a word called development in its dictionary
A vision less: “ Gods own Country”
It was great to read through the discussion on what people dream of kerala state and the colloquium organised by the paper " Indian Express" . For me the malady starts with a clear lack of vision for the state. I fear vision cannot be set by consultants or mere technical experts who would give a mundane texts and documents. It has to be set by learned visionaries with wisdom, who can better contextualise and set realistic visions viewing the strengths and the socio-cultural settings. But, in the state I find, we are sunk in the past with archaic ideas from kadhi-clad politicians who are tried leaders and tired persons. The very fact that many self proclaimed VIP leaders sitting on the dais ( in 3-4 rows) for every trifle function (god knows what was the size of the audience is !! ) to preach, shows the psyche and folly of the mind set. It is time we found a VIP solution to the issue “ the kerala that I dream off” will have to have -a Vision, a good Infrastructure and a Positive mind set of the people.
“What the state needs is a leader with Vision and a political and administrative class which can translate this Vision into Action”. As Dr Kalam stated, we need a vision (an intelligent foresight) to ignite minds. There is a clear lack of it, the present crop of politicians are too narrow minded, self centered, misguiding public with fossilised and pigeon holed ideas. The infrastructure levels in the state is horrendous,….. a reflection of lack of vision...look at very mundane things ..... They still construct 2 lane roads and bridges ( when they know even the 4 lane roads are choking )...constructing a 4 lane bridge could cost the exchequer about 25% more than a 2 lane bridge)
There is also a need to cultivate positive mindsets from the present entrenched ones. It is the positive mindset that provokes positive actions. The 90/10 principle of Stephan Covey is true ie; 10% of life is made up of what happens to you on which you have no control and 90% of life is decided by how you react. It is time we reacted and voted out these politicians, but there is hardly good ones in sight also!! . They I feel is the cause for all this malady. If we cannot find such leaders, it is better to wait, or perhaps have a Governor’s rule (as Karnataka has shown, we can even have balanced budgets) with good accountability at the bureaucratic levels. Alternatively, limit the number of terms to two; for all politicians. Perhaps development needs to precede democracy…. I am not suggesting a la Deng Xiaoping !! .However, the argument “ economic growth produces an educated and entrepreneurial class that, sooner or later, begins to demand control over its own fate. Eventually, even repressive or inactive governments are forced to give in”. Hope the wait is sweet enough for us too….
“What the state needs is a leader with Vision and a political and administrative class which can translate this Vision into Action”. As Dr Kalam stated, we need a vision (an intelligent foresight) to ignite minds. There is a clear lack of it, the present crop of politicians are too narrow minded, self centered, misguiding public with fossilised and pigeon holed ideas. The infrastructure levels in the state is horrendous,….. a reflection of lack of vision...look at very mundane things ..... They still construct 2 lane roads and bridges ( when they know even the 4 lane roads are choking )...constructing a 4 lane bridge could cost the exchequer about 25% more than a 2 lane bridge)
There is also a need to cultivate positive mindsets from the present entrenched ones. It is the positive mindset that provokes positive actions. The 90/10 principle of Stephan Covey is true ie; 10% of life is made up of what happens to you on which you have no control and 90% of life is decided by how you react. It is time we reacted and voted out these politicians, but there is hardly good ones in sight also!! . They I feel is the cause for all this malady. If we cannot find such leaders, it is better to wait, or perhaps have a Governor’s rule (as Karnataka has shown, we can even have balanced budgets) with good accountability at the bureaucratic levels. Alternatively, limit the number of terms to two; for all politicians. Perhaps development needs to precede democracy…. I am not suggesting a la Deng Xiaoping !! .However, the argument “ economic growth produces an educated and entrepreneurial class that, sooner or later, begins to demand control over its own fate. Eventually, even repressive or inactive governments are forced to give in”. Hope the wait is sweet enough for us too….
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