Clamoring is quite high after the Dubai debt crisis has put a halt on the six-year boom in the Emirates real estate sector. In recent times, Dubai almost became a conglomerate of real estate companies; it refused to accept the harsh reality and uninterruptedly pronounced its ambition to become the world financial centre with lot of funds pouring into real estate, including housing.
There was infact a madding rush among the rich peoples to brought some property in Dubai, a huge proportion of them was from India who had an inflated dream to be a part of that potential growth story. Dubai which is synonymous with the super creations has high stake of artificiality and illusionary stuffs within its core foundation.
Its position is of one among the seven small Emirates that’s form the United Arab of Emirates (UAE) and known for its huge oil resources, so, obviously Dubai’s economy was also originally built on oil revenue like other Emirates; but now its oil reserves have drastically diminished and expected to be very obscure in next two decade.
So, the authorities of Dubai had came out with diversification of economy towards service oriented trade, tourism and finance; state’s hyper incentives like ninety-nine year visa plan had fuelled that sentiments although very soon promises of such liberal visa programme have been scrapped and now being offered to only six months which creating huge impasse among the reality investors from across the world and especially from developing Asian economies.
In the early phases of global financial crisis, emergence of Dubai as top-notch financial centre were taken as an unprecedented opportunity in the gulf region and also conceived as potentiality to escape from the problematic Wall Street failure. So, Dubai initially gained from Wall Street crisis and blindly inspired for global integration; today more than eighty percent of its population are constituted through the expatriates, among half of them are from India.
India, fortunately despite accounting around forty percent of Dubai’s population, its financial exposure is relatively too small; the Indian banks and real estate companies that operate there haven’t reported major outstanding debt albeit, Indian migrants be would share significantly in upcoming job losses.
The State Bank of India has an exposure of about Rs1, 700 crore and the Bank of Baroda has let Rs4, 000 crore; private sector banks have far larger exposures but not so much to see its impacts on macro scale.
Although India’s large real estate companies have bit of more exposure than banks but the hope persists that they are not in danger of loosing their shirts in Dubai. However, what the country does need to worry about is inbound investment from Dubai, especially in ports; Dubai World’s subsidiary, DP World is an important player in India and its $500 million investment plan for the country might be affected.
The crux of Dubai’s debt crisis left a lesson for India relates to the risk of opening up its financial markets with reckless speed and without building in proper regulatory safeguards, what India needs presently to de-link the further exposure from Dubai and must stop scouting for fresh opportunities till crisis halted.
Amazingly, in the end October, Federation of Indian Chambers of Commerce and Industry (FICCI) has organized a day long seminar in New Delhi with the Dubai International Financial Centre (DIFC) to trace the new avenues of trades, Prime Minister of India also attended this programme nevertheless, at least for the time being, such initiatives must be checked and any further investment endeavor also restrained with this crisis ridden economy otherwise our sharing may be strikingly rise to the danger level…a tepid response from our side is an appropriate answer to this greed driven crisis.
Dubai World, the investment conglomerate of the Sheikhdom at the centre of the crisis, has a debt of $59 billion- a major component of Dubai’s total debt of $80 billion. Further its announcement of delay of debt payment for at least six months tumbled the world stock markets, following which business confidence around the world deteriorated.
The U.S.dollar also strengthened against a basket of global currencies in the last couple of fortnights, this trend is likely to continue in the short term and in turn, put pressure on equity market. Trend is going to be some how reversal from immediate past when both accounted and unaccounted global money started chasing real estate lending to even “day trading” in real estate, there was even cases of buying in the morning and selling in evening, but eventually things were fall apart as excesses of anything has a limit.
Recklessness was all around the corner, DP World; subsidiary of state owned Dubai World purchased the British Ports operator P&O in 2005 and became the fourth largest Ports operator in the world. Later it also brought the department store group Barneys New York in 2007 and has since invested heavily in construction project in Las Vegas (U.S.A); following the same path property developers Nakheel had infused billion of dollars on creation of an artificial island – Palm Jumeriah.
So, naturally things had to burst out as these all moves were flowing out of stream and capacity with huge amount of unaccounted black monetary sources, that’s now going to create worrisome situation for lakhs of entangled investors.
The basic things which worth of anticipating is now, Dubai would be bail out from current mess but demands of unparalleled luxury would remain a grave constraint; from the investor’s point of view, sluggish trade movement and low return on their investment will be a haunting reality in near future. Anyway, Abu Dhabi with its reserve of $700 billion Sovereign Wealth Funds (SWFs) could be a safest bailer for Dubai in present circumstances but any other experiment of options like credit default swaps or other derivative instruments can hardly attain the goal now.
For the time being, Dubai must approach for regional co-operation with its other six Emirates and especially with the Abu Dhabi can earn some solace for remaining world as they have already suffered a lot from policy misadventurism. Eventually, luxury has its own spaces but austerity can makes humankind happier with less worries and mind without fears.
Atul Kumar Thakur
November 6th2009, New Delhi
atul_mdb@rediffmail.com
Showing posts with label Financial Meltdown. Show all posts
Showing posts with label Financial Meltdown. Show all posts
Tuesday, December 8, 2009
Friday, September 25, 2009
Lessons from Lehmen Brothers Failure
Lehmen Brothers is no more ….Alas, September2008 was truly a black month that grasped such iconic financial giant from scene, even more such financial crisis that only occurred in a generation finally amounts the toll of institutional banking failures up to sixty-nine until now.
Impact of current financial crisis could be judged in retrospect as the most financially devastating after the Second World War; no regulators (including IMF) could timely foresee the actuality of potential situation despite possessing the thousands of economists battalion. Crisis broke out with the continuing fall in U.S home prices that relentlessly faded the price of Mortgage Backed Securities (MBSs); it had also hit those who insured MBSs against default through Credit Default Swaps (CDSs).
Consequently unrealistic returns that equity investors have expected to earn by taking the additional risk simply failed to materialize. If we got back to the actual causes of such large-scale failure, it becomes essential to distinct it between practice related causes and the causes emerged through institutional tempering in some core regulation.
Like former Federal Reserve chief Alan Greenspan had kept interest rate too low for too long time which led to negative sentiments; in1999 the Glass-Steagall Act of1933, which had prevented commercial banks from tying up with risky bets on securities had been repealed, further it curtailed the checks from any irregular financial practices. Even more, Securities Exchange Commission in 2004 relaxed the limits on top investment banks to leverage; so policy makers grossly exhibit the oblivious attitudes towards mushrooming of complex derivatives.
In extreme sycophancy financial regulators couldn’t became able to assess risks and also the inherent interest of financial market participant towards multiple market transaction which finally leads to excess volatility and state of chaos in financial sector across the integrated economies.
During that period of volatility, some regulators resorted to a ban on short sales to alter the movement of market, at least for time being. Albeit, that idea could not succeed as subsequent events and studies shows us in later course.Unlike initial observation of 2008, our engagement with western market is quite deep, so it was unlikely that we would have been completely saved from a financial crisis of mammoth proportion.
Liquidity arises as major problems of Indian financial sector especially the Mutual funds industry that were handled efficiently by RBI and SEBI. So, matter siege to growing in worse direction, although the Indian financial sector particularly Mutual fund industry keep witnessing the sluggish response of its business until the bad developments are halted at Dalal Street.
Despite relieve from slowdown it’s imperative for us to keep eagle watch on the development in the crisis strife markets to assess its actual impact in Indian market; the second wish list could be to bring as many as viable product to exchange traded markets, so the regulations will have better say on unrestrained myopic financial roots of investment.
Those who cannot learn from history doomed to repeal it that shows their failure ness to rationalize the unduly persisting greed’s; U.S.A Banks in large fails to learn such exercise. U.S economy roughly account for quarter proportion of world economy when its population only accounts for five percent.
It would be worthwhile to note that despite having such superb statistics America remains the largest borrower even from developing countries like India that shows the rampant artificiality in U.S core strategy; so bubble had to burst, so it has burst.
Bubbles followed by crashes are actually a recurrent theme in financial history (Tulip mania 1634-37, South sea bubble1711-20, the long Depression1873-96, Great Depression& Stock Market crisis 1929-32, Asia/ Russia/ LTCM crisis 1996-98, Dotcom Burst2000-02 and current crisis 2007…?); the impact of the present crisis was exacerbated due to a vicious circle of defaults and liquidation…and indeed also through bandwagon mania.
Innovations is always desirable in financial domain only a distinction is must between innovations like technological up gradation and complex derivatives because the ability to use derivatives to speculate, create off balance sheet positions, increase leverage, arbitrage regulatory and tax rules… and manufacture exotic risk cocktails will continue to a major factor in derivative activity.
Tectonic shift that we need in financial market should come as meticulously crafted process instead through push-button methods that would require clarity on the goal of financial sector reform. For the time being, it is quite essential to reduce the unintended consequences of financial meltdown like spiraling inflation and increase in western government’s debt & budget deficits.
Escalation of top-notch officials in American financial circle is not a right step forward instead; a utility-based pay scheme should be approached in banks and other financial institutions that would lessen the hassles from exchequer. Keynes came back in fashion…so government should ensure employment first; like NREGS (India) was implemented much before the downturn of economies.
Now it would be quite blissful for nations to appropriate fine mix of socialism and capitalism as it was conceived by the India’s first Prime Minister J.L Nehru for India’s planned development.
Also essentially we should carry on the teaching of our grand mothers on practical financial behaviors, so we become able to avoid gaining $613 billion dollar debt on iconic bank like Lehmen Brothers( Whom we commemorate our adieu presently) as policy makers. Ultimately quotation of Charles Dickens, (Literary protagonist of Great depression era, from his magnum opus work” Great Expectations”); that “we have every thing before us and we have nothing before us “…it’s up to us how we visualized the things.
Atul Kumar Thakur
22nd September2009, New Delhi
atul_mdb@rediffmail.com
Impact of current financial crisis could be judged in retrospect as the most financially devastating after the Second World War; no regulators (including IMF) could timely foresee the actuality of potential situation despite possessing the thousands of economists battalion. Crisis broke out with the continuing fall in U.S home prices that relentlessly faded the price of Mortgage Backed Securities (MBSs); it had also hit those who insured MBSs against default through Credit Default Swaps (CDSs).
Consequently unrealistic returns that equity investors have expected to earn by taking the additional risk simply failed to materialize. If we got back to the actual causes of such large-scale failure, it becomes essential to distinct it between practice related causes and the causes emerged through institutional tempering in some core regulation.
Like former Federal Reserve chief Alan Greenspan had kept interest rate too low for too long time which led to negative sentiments; in1999 the Glass-Steagall Act of1933, which had prevented commercial banks from tying up with risky bets on securities had been repealed, further it curtailed the checks from any irregular financial practices. Even more, Securities Exchange Commission in 2004 relaxed the limits on top investment banks to leverage; so policy makers grossly exhibit the oblivious attitudes towards mushrooming of complex derivatives.
In extreme sycophancy financial regulators couldn’t became able to assess risks and also the inherent interest of financial market participant towards multiple market transaction which finally leads to excess volatility and state of chaos in financial sector across the integrated economies.
During that period of volatility, some regulators resorted to a ban on short sales to alter the movement of market, at least for time being. Albeit, that idea could not succeed as subsequent events and studies shows us in later course.Unlike initial observation of 2008, our engagement with western market is quite deep, so it was unlikely that we would have been completely saved from a financial crisis of mammoth proportion.
Liquidity arises as major problems of Indian financial sector especially the Mutual funds industry that were handled efficiently by RBI and SEBI. So, matter siege to growing in worse direction, although the Indian financial sector particularly Mutual fund industry keep witnessing the sluggish response of its business until the bad developments are halted at Dalal Street.
Despite relieve from slowdown it’s imperative for us to keep eagle watch on the development in the crisis strife markets to assess its actual impact in Indian market; the second wish list could be to bring as many as viable product to exchange traded markets, so the regulations will have better say on unrestrained myopic financial roots of investment.
Those who cannot learn from history doomed to repeal it that shows their failure ness to rationalize the unduly persisting greed’s; U.S.A Banks in large fails to learn such exercise. U.S economy roughly account for quarter proportion of world economy when its population only accounts for five percent.
It would be worthwhile to note that despite having such superb statistics America remains the largest borrower even from developing countries like India that shows the rampant artificiality in U.S core strategy; so bubble had to burst, so it has burst.
Bubbles followed by crashes are actually a recurrent theme in financial history (Tulip mania 1634-37, South sea bubble1711-20, the long Depression1873-96, Great Depression& Stock Market crisis 1929-32, Asia/ Russia/ LTCM crisis 1996-98, Dotcom Burst2000-02 and current crisis 2007…?); the impact of the present crisis was exacerbated due to a vicious circle of defaults and liquidation…and indeed also through bandwagon mania.
Innovations is always desirable in financial domain only a distinction is must between innovations like technological up gradation and complex derivatives because the ability to use derivatives to speculate, create off balance sheet positions, increase leverage, arbitrage regulatory and tax rules… and manufacture exotic risk cocktails will continue to a major factor in derivative activity.
Tectonic shift that we need in financial market should come as meticulously crafted process instead through push-button methods that would require clarity on the goal of financial sector reform. For the time being, it is quite essential to reduce the unintended consequences of financial meltdown like spiraling inflation and increase in western government’s debt & budget deficits.
Escalation of top-notch officials in American financial circle is not a right step forward instead; a utility-based pay scheme should be approached in banks and other financial institutions that would lessen the hassles from exchequer. Keynes came back in fashion…so government should ensure employment first; like NREGS (India) was implemented much before the downturn of economies.
Now it would be quite blissful for nations to appropriate fine mix of socialism and capitalism as it was conceived by the India’s first Prime Minister J.L Nehru for India’s planned development.
Also essentially we should carry on the teaching of our grand mothers on practical financial behaviors, so we become able to avoid gaining $613 billion dollar debt on iconic bank like Lehmen Brothers( Whom we commemorate our adieu presently) as policy makers. Ultimately quotation of Charles Dickens, (Literary protagonist of Great depression era, from his magnum opus work” Great Expectations”); that “we have every thing before us and we have nothing before us “…it’s up to us how we visualized the things.
Atul Kumar Thakur
22nd September2009, New Delhi
atul_mdb@rediffmail.com
Thursday, March 12, 2009
Myopic Routes of Finance (Sovereign Wealth Funds& Participatory Notes)
Amidst the ongoing crisis; it will be quite interesting to see and visualize the scale of losses…what we have actually lost in recent months, which have been in our possession through a considerable time. A lot of debate and writing has been stuffed about the potential causes of financial failure and diminishing market sentiments in past few months.
There could be many reasons behind the present financial chaos; among them, inflated treatment of stock markets best be attributed because the unprecedented growth till the crisis broke out largely caused by the unrestricted financial routes which don’t even canopied under the regulation of SEBI. So, no one can exactly traced the investors as their business dealt through intermediaries, even those middlemen’s never required to follow Know Your Customers (KYC) Norms.
These myopic investment roots may be considered to progenitor and nurturer of speculative finance. Two most prolific among them are: -
Sovereign Wealth Funds (SWF): -
Some SWF own by the State Governments of countries to handle with its idle assets for its maximization of value. SWF is not a fresh concept since its genesis can be traced back to 1950’s, then their size worldwide was $300billion.The current level now reached to $2 trillion to $3 trillion, the size may be cross $10trillion by 2010.
At present more than twenty countries have set up these funds. A dozen more have expressed willingness in establishing them. More than half of assets are possessed by oil exporting countries. Ranging from Norway to Trinidad, including Australia, China and Singapore. Still the holding are mostly concentrated with the top five funds, accounting for more than 70% of total assets under management.
Like hedge funds, SWF are also not governed by any single authority except the Singapore. SWF also operates through hedge funds, Private Equity for high return. So,it requires great care in fund management.SWF have a positive tendency to go long on securities that means to say, they buy and hold it invested for longer periods. This creates some establishing influence on stock markets.
But this establishing factor of SWF is highly disproportionate with its destablishing factor. Since it creates more place for irresponsible transaction. Overall SWF are immensely surrounded with chances of risk and failures, so neither it’s a meticulous route of investments nor it is good for just and equitable society.
Participatory Notes (PN): -
PN is an investment root by Foreign Institutional Investor (FII), through Offshore Derivatives Instrument (ODI); Such as Equity linked Notes and Participatory Return Notes have created storm in stock markets.
Basically FII issues PN to funds for companies whose identity is not known to the authorities. The PN is discriminatory as it promotes unethical investments; further it creates harmful effects on domestic companies. PN having very firm presence in India, as its proportion lies around 15-20% of stock of the top 1,000 companies. They have almost ruling influence on the market.PN outstanding by middle of 2007 was 3,53,484crores(51.6% of Asset under custody of all FII Sub Accounts). The value of outstanding ODI with underlying derivatives currently stands at Rs.1, 17,071crores, which is approx to 30% of total PN outstanding.
Users Of PN Route: -
1.Regular funds whose twin objectives are returns and more returns
2.Prodigal money returning
3.Foreign Governments/Entities who would like to acquire/control Indian entities by tracking them over.
PN investors channelizes their investment through the FII, but despite playing the role of intermediary, FII are not required to reveal their face. This situation further become more mysterious when regulators like SEBI simply let PN to escape from registration, which set them free from any regulation. Such allowances, promotes Indian financiers to enter in Indian Financials to enter in Indian Financial Markets.
Overall producers of PN transaction violates know Your Customers Norms, lastly, National Security Advisor cautioned against terror financing through stock market channels. Rising concerns of Indian authorities are very genuine, because unprecedented rise as well as fall are misleading the Indian growth story.
Two major constraints, which can lessen the impacts, are: -
1.A Special Purpose Vehicle (SPV), can be created which would be dollar dominated to hold these funds at attractive rates and which are countered over a period of time to minimize the followed impacts.
2.Generally these are two types of PN- Spot based and Derivatives/Future based (ODI). The latter accounts for around 32-33 percent of all PN. FII and their sub accounts shall not issue/renew ODI with underlying as derivatives with immediate effect .It should also mean that the hedge funds ,which has been fairly responsible for the steep rise in the markets, might exit the market because SEBI will never let them register as FII.
On such proposals, due consideration was given by SEBI to cope with threats of PN. Ultimately SEBI allowed 18 months to wind up outstanding PN in late 2007, now the proposed ceiling is near end, which means ends of the unauthorized PN.Decision taken by the SEBI was in very right directions. Since its timely implementation optimized and lessen many future losses. Some such more measure are imperative to check irregularities in financial markets.
Authorities have to play catalyst role in such initiatives. Investors should have also rationalize their paramounting expectations from financial markets and now must start to keep faiths in realistic rewards.
Atul Kumar Thakur
New Delhi
March12,2009
atul_mdb@rediffmail.com
There could be many reasons behind the present financial chaos; among them, inflated treatment of stock markets best be attributed because the unprecedented growth till the crisis broke out largely caused by the unrestricted financial routes which don’t even canopied under the regulation of SEBI. So, no one can exactly traced the investors as their business dealt through intermediaries, even those middlemen’s never required to follow Know Your Customers (KYC) Norms.
These myopic investment roots may be considered to progenitor and nurturer of speculative finance. Two most prolific among them are: -
Sovereign Wealth Funds (SWF): -
Some SWF own by the State Governments of countries to handle with its idle assets for its maximization of value. SWF is not a fresh concept since its genesis can be traced back to 1950’s, then their size worldwide was $300billion.The current level now reached to $2 trillion to $3 trillion, the size may be cross $10trillion by 2010.
At present more than twenty countries have set up these funds. A dozen more have expressed willingness in establishing them. More than half of assets are possessed by oil exporting countries. Ranging from Norway to Trinidad, including Australia, China and Singapore. Still the holding are mostly concentrated with the top five funds, accounting for more than 70% of total assets under management.
Like hedge funds, SWF are also not governed by any single authority except the Singapore. SWF also operates through hedge funds, Private Equity for high return. So,it requires great care in fund management.SWF have a positive tendency to go long on securities that means to say, they buy and hold it invested for longer periods. This creates some establishing influence on stock markets.
But this establishing factor of SWF is highly disproportionate with its destablishing factor. Since it creates more place for irresponsible transaction. Overall SWF are immensely surrounded with chances of risk and failures, so neither it’s a meticulous route of investments nor it is good for just and equitable society.
Participatory Notes (PN): -
PN is an investment root by Foreign Institutional Investor (FII), through Offshore Derivatives Instrument (ODI); Such as Equity linked Notes and Participatory Return Notes have created storm in stock markets.
Basically FII issues PN to funds for companies whose identity is not known to the authorities. The PN is discriminatory as it promotes unethical investments; further it creates harmful effects on domestic companies. PN having very firm presence in India, as its proportion lies around 15-20% of stock of the top 1,000 companies. They have almost ruling influence on the market.PN outstanding by middle of 2007 was 3,53,484crores(51.6% of Asset under custody of all FII Sub Accounts). The value of outstanding ODI with underlying derivatives currently stands at Rs.1, 17,071crores, which is approx to 30% of total PN outstanding.
Users Of PN Route: -
1.Regular funds whose twin objectives are returns and more returns
2.Prodigal money returning
3.Foreign Governments/Entities who would like to acquire/control Indian entities by tracking them over.
PN investors channelizes their investment through the FII, but despite playing the role of intermediary, FII are not required to reveal their face. This situation further become more mysterious when regulators like SEBI simply let PN to escape from registration, which set them free from any regulation. Such allowances, promotes Indian financiers to enter in Indian Financials to enter in Indian Financial Markets.
Overall producers of PN transaction violates know Your Customers Norms, lastly, National Security Advisor cautioned against terror financing through stock market channels. Rising concerns of Indian authorities are very genuine, because unprecedented rise as well as fall are misleading the Indian growth story.
Two major constraints, which can lessen the impacts, are: -
1.A Special Purpose Vehicle (SPV), can be created which would be dollar dominated to hold these funds at attractive rates and which are countered over a period of time to minimize the followed impacts.
2.Generally these are two types of PN- Spot based and Derivatives/Future based (ODI). The latter accounts for around 32-33 percent of all PN. FII and their sub accounts shall not issue/renew ODI with underlying as derivatives with immediate effect .It should also mean that the hedge funds ,which has been fairly responsible for the steep rise in the markets, might exit the market because SEBI will never let them register as FII.
On such proposals, due consideration was given by SEBI to cope with threats of PN. Ultimately SEBI allowed 18 months to wind up outstanding PN in late 2007, now the proposed ceiling is near end, which means ends of the unauthorized PN.Decision taken by the SEBI was in very right directions. Since its timely implementation optimized and lessen many future losses. Some such more measure are imperative to check irregularities in financial markets.
Authorities have to play catalyst role in such initiatives. Investors should have also rationalize their paramounting expectations from financial markets and now must start to keep faiths in realistic rewards.
Atul Kumar Thakur
New Delhi
March12,2009
atul_mdb@rediffmail.com
Monday, March 2, 2009
From Wall Street to Main Street(On Financial Meltdown)
The year 2008 must be remembered as watershed year in the financial history as it shattered the confident tone of financial management which has generated through the
recent successes especially from the credit bubble of post 2003-04.Since the year 1987 crash, there have been many financial upsets –the 1997 –98 Asian financial crises, failure of the hedge funds long term capital management in 1998,the puffing Of the stock bubble in 2000,and now the sub prime ‘Mortgage debacle ‘.None has turned into a full-fledged panic, So all three mishappening formed a temptation that we have got mastership over these occurring problems .
Unfortunately situation this time is much grave than initial speculation…gravity of problems recognized very late which deepens the fear of loss and insecurity among both the participant and regulators. The main reasons for the financial mess seem to be the allocation of large funds with U.S Banks and the structural products developed to pass on the risk to investors.
Through January the United State saw on average the loss of over 800 jobs every hour, or 17000 every day since the meltdown began in September ; Off course here in India, too things are shipping but the lessons remain unlearnt .Even in such gloomious atmosphere ,corporate kleptocracy kept very profoundly as Citi group spent $50million on a corporate jet. Now the disgraced CEO of Merrill Lynch, John Thain, spent $1.22million on redecorating his office in early 2008,All that was happening when he prepared to cut thousands of jobs. The amount included purchase of an antique “Commode on legs”.
Even more top bankers from wall street didn’t felt even a bit of reluctance to acquire the hefty amount of perks and bonuses until the U.S President curb such extravagant practices in present troubled phase ,he also barred the maximum compensation to $50,000.No such initiative made from the top notch professional circle except the Citi group chief Mr. Vikram Pandit who voluntary abandoned any fees for his service till the recovery of reputation of his banks .No doubt ,it is suffice to acknowledge the lacking of corporate ethics, among the professional especially who possessed top notch authority.
DID IVY LEAGUE KILL WALL STREET?
When wall street was run by individuals without exotic degrees from Ivy Leagues, they had proper skepticism towards fancy models and managed their risk with a great deal of humility and caution.Indeed they create conducive atmosphere for the practice of “Charuvaka Economics (From the epic MAHABHARATA)”, Which expected from people to borrow, spend and live happily without bothering of repayment of debt and not feel guilty if unable to pay it back .
In same manner, the US financial system consciously pushed sub-prime loans to put cash in the hands of gullible and not creditworthy borrowers and make them splurge at shopping malls, so that wealth shifted from Individuals to corporates; And when things fall apart it was also at the cost of the global community.All credit crises having the same origins. They are spotted in buoyant economic growth that promotes over-optimism, excessive risk taking and extreme demands on liquidity. Some of the typical cases are:-
#.1907:BANKERS PANIC-Run on U.S banks and trust companies what J P Morgan did in 1907?At quarter five on a November morning, Mr Morgan presented assembled bankers a documents telling them what they showed through the kitty to restore confidence. The bankers meekly signed, and the crises was over.
#.1909:WALL STREET CRASH-Stock prices plummet for there years following rampant speculation taking almost twenty five years – Until 1954 to regain pre 1929 value.
#.1973: OIL CRISES-Oil embargo and international withdrawal from Breton Woods agreement trigger stock crash.
#.1987:BLACK MONDAY-Panic leads to 22%drop in single day.
#.2000:DOTCOM CRASH-Teach stock bubble bursts.
#.2008:CREDIT CRUNCH-Defaulters on Sub prime mortgage leads to liquidity problems for financial institution worldwide.
ANATOMY OF A MELTDOWN-
#.Collateral Debt Obligations (CDO)-Late1970’s:-Mortgage were packaged together and sold to investors as CDO’s.
#.Mortgaged-Backed Security (MBS): -1983;Larry fink pioneers MBS market while leading bond department at first Boston Corporation .MBS divides package at Mortgages into different tranches of risk. Softest investment grade bonds receive interest rate while riskiest tier-so called toxic dept-is paid 2-3%higher. Investor is now induced for accepting risk, not for lending money.
#.Sub-Prime Mortgages:-In 1990’s demands for MBS results in lenders lowering interest rates and offering 100% Sub prime Mortgage to individuals with questionable ability to pay. Rising house prices protect these borrowers from defaulting.
#.Credit Default Swaps (1997):-Invented by Blythe Masters at Investment Bank J.P Morgan Chase. CD’S or credit swaps are Insurance like contracts intended to remove risk from companies balance sheets. Presently International Swap and Derivative Association regulate Swaps.
#.Shadow Banking System (Late1990’s):-Swaps now used to package everything from Mortgages ,business card, credit card debt, and even education loans are brought by unregulated speculators and hedge funds on behalf of insurance companies and pension funds worldwide value for global CDs market rose from $1trillion in 2001 to $62.1trillion in 2007 and lastly fall to $28trillion in January 2009.
#.Credit Crunch(2006):-Interest rate rises to 5.25%;Housing market begins to confront defaulter –one in five U.S borrowers falls behind on mortgage payments.
#.2007-08:-Banks worldwide suffer huge losses and stop lending despite massive bailouts by taxpayers.
BAD ASSETS:-
Even before the Bernard Madoff’s scam may other Ponzi scam –In August 2007;the process of price discovery began a long time back when Bear Sterns declares that investment in one of its hedge funds set up to invest in mortgage tracked securities had lost all its value and there is a second such fund were valued at nine cents for every dollar of original investments. Being an interconnected institution holding assets valued at $395.4 billion dollar in November 2007 on an equity base of just $11.8billion,despite having such portfolio, its came under the severe pressure which concluded only with the life support from J.P Morgan Chase at huge loss of share prices.
Normally banking sector considered as the core of financial sector; The equity base of more banks are relatively small even when they follow Basel norms with regard to capital adequacy. Despite such allocation of trenches Banks having considerable derivative exposure.
Citi Group and Bank of New York Mellon estimated to have an exposure to the institution (Derivatives) that was placed at upward of staggering $155billion.In same manner fourth largest bank of Wall street Lehman Brothers came under the severe losses through the Derivative exposure and bad lending, ultimately came to the table with request for support, but it was refused the same. The refusal of the state sends out a strong message.
In a surprise move Bank Of America that was being spoken to as a potential buyer of Lehman Brothers was persuaded to acquire Merrill Lynch instead. But even that deal was not taken place properly and before any move from Bank of America, Black Rock acquired major arms of Merrill Lynch, consequently bringing down two of the iconic and major independent investment bank on Wall street.
In its update to the Financial Stability Report for 2008,issued on January 28,2009,the IMF has estimated the losses incurred by U.S and European Banks from bad assets that originated in the U.S at $2.2trillion.Barely two months back it had placed the figure at $1.4 trillion. So scale of severity can be easily measured since the late 1940s.U.S. has suffered to recessions, joblessness, 6.1% in September, would have to rise spectacularly to match post second world war highs .
The great depression, that followed the stock market collapse in october1929 was a different beast. By the low point in July 1932,Stock was dropped almost 90% from their peak .The accompanying devastation. Bankruptcies, foreclosures, breadlessness lasted a decade. Even in 1940s unemployment was almost 15%,it was the onset of second world war that boosted spending and bailed out the economy.
The deregulation of Banking was crucial for this transaction that was made possible by the process of deregulation that began in the 1980s and culminated in the Gramm-Leach-Billey Financial Modernization Act of 1999,which completely dismantled the regulation structure and the restriction on cross-sector activity put in place by Glass-Steagall in the 1930s.It is noteworthy that Glass-Steagalll’s own conception that there is less profitability In regulatory regime itself bounded with a deep inner contradiction in the system which set up pressure for deregulation .
Those pressure gained strength during the inflationary years in the 1970s when right monetary policies pushed up interest rates elsewhere but not in the banks .But such any claim deregulation is not justifiable in present circumstances, even the policy maker’s like Allan Greenspan who even facing a staunch liberalist, stressed on need for temporary regulation .This is need of hour, even U.S newly president elect Barack Obama ,not stop to saying that U.S should have the privately held banking system regulated by government.
Bank of Ireland and Allied Irish Banks and in the U.K whose Royal Bank of Scotland and Lloyds group are now under dominant public control, and others are expected to follow. The U.S and the U.K now have what India called the social control of banks. While in India bankers and policy makers are not stopping to encourage riskier loans by banks, In the U.S and U.K, the objectives are exactly opposite .In present circumstances India and rest economy of the world can learn a lot of tracts from Latin America where the first time in a century ,Latin America has managed to atleast partially “cushioned” itself from the seismic waves of economic turmoil in the U.S and Europe.
Even this partial success comes through the balanced monetary policies which undertaken to boost peoples development instead of fascinating merely towards numerical growth.
According to Hayek ,if monetary tightening is undertaken after the upper turning point of inflationary cycle is passed ,the downturn is accelerated. This useful concept is however anathema to Indian policy makers, who’s main focus now is on spurring higher growth. But such measures will add to the suffering of the poor. Now it is quite imperative to think about the falling purchasing capacity at mass level while prices at staple goods are reached at record high up 50%,in the last six months ,global food stocks are reached to historic lows. So, the poor can’t afford the food in present mechanism.
In present circumstances, if there is one enduring idea from Friedman, that central bankers in China and India would be well advised to heed, it is the” Monetarist Paradox” that almost every rate cut leads one time to a higher interest rate. And tightening moves such as raising the CRR do not necessarily ensure that policy has tightened, Reading Friedman tends to be a revelation .
It may interesting to note that popular rhetoric exaggerates damage done by recessions; but recessions have often overlooked benefits too. They moderate inflationary tendencies and punish reckless financial speculation and poor corporate practices like bad instruments, irresponsible lending etc. These effects contribute to an economy’s long term strength .
So, it is imperative to take some very impeccable measures to heed from ongoing downward movement of financial world, International Monetary Fund (IMF)s Global Financial Stability Report (April2008),suggested some very vital policy options to sub-prime crises:-
#IN SHORT TERM:-
1.Disclosure
2.Bank balance sheet repair
3. Management of compensation structure
4. Consistency of treatment
5.More intense supervision
6.Early action to resolved institutional maladies
7. Public plans for impaired assets.
#IN THE MEDIUM TERM:-
1.Standardization of some components of structured finance products.
2.Transparency at origination & subsequently.
3.Reform of rating system.
4.Transparency & disclosure.
5.Paying greater attention to applying fair value accounting results.
6.Reexamining incentives to set up Special Investment Vehicles{SIV} and its conducts.
7.Tightening oversight of mortgage originators.
Some of these recommendation are really very close to the solution, its judicious formulation may heed the problem to an extent. Apart from this, countries must understand what was lost in 1944 (Bretton Woods Conference) one of the reasons for financial crises is the imbalance of trade between nations. Countries accumulate debt partly as a result of sustaining a trade deficit.
They can easily destined to trapped in vicious circle; the bigger their debt, the harder it is to generate a trade surplus. International debt wracks peoples development, trashes the environment and threatens the global system with periodic crises. There have been more than a dozen financial crises since the beginning of 20th century. The aftermath of each was transitory, and markets rebounded rather quickly.
The current may be different, it will usher in profound and lasting structural behaviour and regulatory changes .In present troubled time a fresh approach is needed on overall policy matters and its implementation to curb occurring such mishappening. For restoration of confidence in financial markets a new look on corporate governance is quite imperative, this is the measure area where a lot of work have to be done in near future, personally I think governance is a biggest determinant in shaping of an administrative order, whatever we have seen in back times may be termed as failure of governance ðical work style.
It would be quite nice to see a new financial world free from such wrong practices, but before this, indeed we have to pass through a long wait…. like the Samuel Backetts Waiting For Godot….
Atul Kr Thakur
New Delhi,March 2,2009
atul_mdb@rediffmail.com
recent successes especially from the credit bubble of post 2003-04.Since the year 1987 crash, there have been many financial upsets –the 1997 –98 Asian financial crises, failure of the hedge funds long term capital management in 1998,the puffing Of the stock bubble in 2000,and now the sub prime ‘Mortgage debacle ‘.None has turned into a full-fledged panic, So all three mishappening formed a temptation that we have got mastership over these occurring problems .
Unfortunately situation this time is much grave than initial speculation…gravity of problems recognized very late which deepens the fear of loss and insecurity among both the participant and regulators. The main reasons for the financial mess seem to be the allocation of large funds with U.S Banks and the structural products developed to pass on the risk to investors.
Through January the United State saw on average the loss of over 800 jobs every hour, or 17000 every day since the meltdown began in September ; Off course here in India, too things are shipping but the lessons remain unlearnt .Even in such gloomious atmosphere ,corporate kleptocracy kept very profoundly as Citi group spent $50million on a corporate jet. Now the disgraced CEO of Merrill Lynch, John Thain, spent $1.22million on redecorating his office in early 2008,All that was happening when he prepared to cut thousands of jobs. The amount included purchase of an antique “Commode on legs”.
Even more top bankers from wall street didn’t felt even a bit of reluctance to acquire the hefty amount of perks and bonuses until the U.S President curb such extravagant practices in present troubled phase ,he also barred the maximum compensation to $50,000.No such initiative made from the top notch professional circle except the Citi group chief Mr. Vikram Pandit who voluntary abandoned any fees for his service till the recovery of reputation of his banks .No doubt ,it is suffice to acknowledge the lacking of corporate ethics, among the professional especially who possessed top notch authority.
DID IVY LEAGUE KILL WALL STREET?
When wall street was run by individuals without exotic degrees from Ivy Leagues, they had proper skepticism towards fancy models and managed their risk with a great deal of humility and caution.Indeed they create conducive atmosphere for the practice of “Charuvaka Economics (From the epic MAHABHARATA)”, Which expected from people to borrow, spend and live happily without bothering of repayment of debt and not feel guilty if unable to pay it back .
In same manner, the US financial system consciously pushed sub-prime loans to put cash in the hands of gullible and not creditworthy borrowers and make them splurge at shopping malls, so that wealth shifted from Individuals to corporates; And when things fall apart it was also at the cost of the global community.All credit crises having the same origins. They are spotted in buoyant economic growth that promotes over-optimism, excessive risk taking and extreme demands on liquidity. Some of the typical cases are:-
#.1907:BANKERS PANIC-Run on U.S banks and trust companies what J P Morgan did in 1907?At quarter five on a November morning, Mr Morgan presented assembled bankers a documents telling them what they showed through the kitty to restore confidence. The bankers meekly signed, and the crises was over.
#.1909:WALL STREET CRASH-Stock prices plummet for there years following rampant speculation taking almost twenty five years – Until 1954 to regain pre 1929 value.
#.1973: OIL CRISES-Oil embargo and international withdrawal from Breton Woods agreement trigger stock crash.
#.1987:BLACK MONDAY-Panic leads to 22%drop in single day.
#.2000:DOTCOM CRASH-Teach stock bubble bursts.
#.2008:CREDIT CRUNCH-Defaulters on Sub prime mortgage leads to liquidity problems for financial institution worldwide.
ANATOMY OF A MELTDOWN-
#.Collateral Debt Obligations (CDO)-Late1970’s:-Mortgage were packaged together and sold to investors as CDO’s.
#.Mortgaged-Backed Security (MBS): -1983;Larry fink pioneers MBS market while leading bond department at first Boston Corporation .MBS divides package at Mortgages into different tranches of risk. Softest investment grade bonds receive interest rate while riskiest tier-so called toxic dept-is paid 2-3%higher. Investor is now induced for accepting risk, not for lending money.
#.Sub-Prime Mortgages:-In 1990’s demands for MBS results in lenders lowering interest rates and offering 100% Sub prime Mortgage to individuals with questionable ability to pay. Rising house prices protect these borrowers from defaulting.
#.Credit Default Swaps (1997):-Invented by Blythe Masters at Investment Bank J.P Morgan Chase. CD’S or credit swaps are Insurance like contracts intended to remove risk from companies balance sheets. Presently International Swap and Derivative Association regulate Swaps.
#.Shadow Banking System (Late1990’s):-Swaps now used to package everything from Mortgages ,business card, credit card debt, and even education loans are brought by unregulated speculators and hedge funds on behalf of insurance companies and pension funds worldwide value for global CDs market rose from $1trillion in 2001 to $62.1trillion in 2007 and lastly fall to $28trillion in January 2009.
#.Credit Crunch(2006):-Interest rate rises to 5.25%;Housing market begins to confront defaulter –one in five U.S borrowers falls behind on mortgage payments.
#.2007-08:-Banks worldwide suffer huge losses and stop lending despite massive bailouts by taxpayers.
BAD ASSETS:-
Even before the Bernard Madoff’s scam may other Ponzi scam –In August 2007;the process of price discovery began a long time back when Bear Sterns declares that investment in one of its hedge funds set up to invest in mortgage tracked securities had lost all its value and there is a second such fund were valued at nine cents for every dollar of original investments. Being an interconnected institution holding assets valued at $395.4 billion dollar in November 2007 on an equity base of just $11.8billion,despite having such portfolio, its came under the severe pressure which concluded only with the life support from J.P Morgan Chase at huge loss of share prices.
Normally banking sector considered as the core of financial sector; The equity base of more banks are relatively small even when they follow Basel norms with regard to capital adequacy. Despite such allocation of trenches Banks having considerable derivative exposure.
Citi Group and Bank of New York Mellon estimated to have an exposure to the institution (Derivatives) that was placed at upward of staggering $155billion.In same manner fourth largest bank of Wall street Lehman Brothers came under the severe losses through the Derivative exposure and bad lending, ultimately came to the table with request for support, but it was refused the same. The refusal of the state sends out a strong message.
In a surprise move Bank Of America that was being spoken to as a potential buyer of Lehman Brothers was persuaded to acquire Merrill Lynch instead. But even that deal was not taken place properly and before any move from Bank of America, Black Rock acquired major arms of Merrill Lynch, consequently bringing down two of the iconic and major independent investment bank on Wall street.
In its update to the Financial Stability Report for 2008,issued on January 28,2009,the IMF has estimated the losses incurred by U.S and European Banks from bad assets that originated in the U.S at $2.2trillion.Barely two months back it had placed the figure at $1.4 trillion. So scale of severity can be easily measured since the late 1940s.U.S. has suffered to recessions, joblessness, 6.1% in September, would have to rise spectacularly to match post second world war highs .
The great depression, that followed the stock market collapse in october1929 was a different beast. By the low point in July 1932,Stock was dropped almost 90% from their peak .The accompanying devastation. Bankruptcies, foreclosures, breadlessness lasted a decade. Even in 1940s unemployment was almost 15%,it was the onset of second world war that boosted spending and bailed out the economy.
The deregulation of Banking was crucial for this transaction that was made possible by the process of deregulation that began in the 1980s and culminated in the Gramm-Leach-Billey Financial Modernization Act of 1999,which completely dismantled the regulation structure and the restriction on cross-sector activity put in place by Glass-Steagall in the 1930s.It is noteworthy that Glass-Steagalll’s own conception that there is less profitability In regulatory regime itself bounded with a deep inner contradiction in the system which set up pressure for deregulation .
Those pressure gained strength during the inflationary years in the 1970s when right monetary policies pushed up interest rates elsewhere but not in the banks .But such any claim deregulation is not justifiable in present circumstances, even the policy maker’s like Allan Greenspan who even facing a staunch liberalist, stressed on need for temporary regulation .This is need of hour, even U.S newly president elect Barack Obama ,not stop to saying that U.S should have the privately held banking system regulated by government.
Bank of Ireland and Allied Irish Banks and in the U.K whose Royal Bank of Scotland and Lloyds group are now under dominant public control, and others are expected to follow. The U.S and the U.K now have what India called the social control of banks. While in India bankers and policy makers are not stopping to encourage riskier loans by banks, In the U.S and U.K, the objectives are exactly opposite .In present circumstances India and rest economy of the world can learn a lot of tracts from Latin America where the first time in a century ,Latin America has managed to atleast partially “cushioned” itself from the seismic waves of economic turmoil in the U.S and Europe.
Even this partial success comes through the balanced monetary policies which undertaken to boost peoples development instead of fascinating merely towards numerical growth.
According to Hayek ,if monetary tightening is undertaken after the upper turning point of inflationary cycle is passed ,the downturn is accelerated. This useful concept is however anathema to Indian policy makers, who’s main focus now is on spurring higher growth. But such measures will add to the suffering of the poor. Now it is quite imperative to think about the falling purchasing capacity at mass level while prices at staple goods are reached at record high up 50%,in the last six months ,global food stocks are reached to historic lows. So, the poor can’t afford the food in present mechanism.
In present circumstances, if there is one enduring idea from Friedman, that central bankers in China and India would be well advised to heed, it is the” Monetarist Paradox” that almost every rate cut leads one time to a higher interest rate. And tightening moves such as raising the CRR do not necessarily ensure that policy has tightened, Reading Friedman tends to be a revelation .
It may interesting to note that popular rhetoric exaggerates damage done by recessions; but recessions have often overlooked benefits too. They moderate inflationary tendencies and punish reckless financial speculation and poor corporate practices like bad instruments, irresponsible lending etc. These effects contribute to an economy’s long term strength .
So, it is imperative to take some very impeccable measures to heed from ongoing downward movement of financial world, International Monetary Fund (IMF)s Global Financial Stability Report (April2008),suggested some very vital policy options to sub-prime crises:-
#IN SHORT TERM:-
1.Disclosure
2.Bank balance sheet repair
3. Management of compensation structure
4. Consistency of treatment
5.More intense supervision
6.Early action to resolved institutional maladies
7. Public plans for impaired assets.
#IN THE MEDIUM TERM:-
1.Standardization of some components of structured finance products.
2.Transparency at origination & subsequently.
3.Reform of rating system.
4.Transparency & disclosure.
5.Paying greater attention to applying fair value accounting results.
6.Reexamining incentives to set up Special Investment Vehicles{SIV} and its conducts.
7.Tightening oversight of mortgage originators.
Some of these recommendation are really very close to the solution, its judicious formulation may heed the problem to an extent. Apart from this, countries must understand what was lost in 1944 (Bretton Woods Conference) one of the reasons for financial crises is the imbalance of trade between nations. Countries accumulate debt partly as a result of sustaining a trade deficit.
They can easily destined to trapped in vicious circle; the bigger their debt, the harder it is to generate a trade surplus. International debt wracks peoples development, trashes the environment and threatens the global system with periodic crises. There have been more than a dozen financial crises since the beginning of 20th century. The aftermath of each was transitory, and markets rebounded rather quickly.
The current may be different, it will usher in profound and lasting structural behaviour and regulatory changes .In present troubled time a fresh approach is needed on overall policy matters and its implementation to curb occurring such mishappening. For restoration of confidence in financial markets a new look on corporate governance is quite imperative, this is the measure area where a lot of work have to be done in near future, personally I think governance is a biggest determinant in shaping of an administrative order, whatever we have seen in back times may be termed as failure of governance ðical work style.
It would be quite nice to see a new financial world free from such wrong practices, but before this, indeed we have to pass through a long wait…. like the Samuel Backetts Waiting For Godot….
Atul Kr Thakur
New Delhi,March 2,2009
atul_mdb@rediffmail.com
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