All Go Rhythmic

Did you say global warming...?

2009-07-27T03:07:00.000-07:00

Going by the satellite imagery over the last 15 years seem to show a recovery of vegetation in the Southern Sahara. Most other deserts including the Namib Desert in Namibia have shown higher than average rainfall.

Carbon caps..? to hell with it. The world leaders are robbed off an excuse to do annual rounds at Doha, Davos and even St.Kitts at U.N expense !!!!

PE model threatened

2009-03-04T01:06:00.000-08:00

Ivy League Universities and educational institutions have long been dominant investors in private equity firms. For some big ticket buyout firms like Blackstone and KKR, University endowments have been major source of funding. But now it appears that too is drying up fast.

While Yale froze salaries to employees drawing more than $75 k, Harvard froze it across the board on its Arts and Science school. Harvard with an endowment of $39.6 billion freezing wages, huh? Yes, you heard it right. The 2007 figures and allocations for the entire $43 billion portfolio are disclosed in the endowment’s 2007-2008 year-end report.

With such mainstay funding sources for PE firms fast drying up and leverage already a bad word, how long will the asset class sustain...?

Bailouts drive Chapter 11 out of fashion

2009-02-24T04:48:00.000-08:00

When Robert Reich published Supercapitalism: The Transformation of Business, Democracy, and Everyday Life in 2007, the U.S. economy was growing, the financial sector was intact, and the housing bubble had just begun to leak. Although that now seems like decades ago, the former Secretary of Labor’s core argument still has a decidedly clear ring of truth; indeed, perhaps now more than ever. Reich is currently professor of public policy at the University of California at Berkeley’s Goldman School of Public Policy.

Now I read a fantastic interview S+B's Ed Baker had with Reich... Excerpts -

"Why should Wall Street executives, shareholders, and creditors come out any better from this taxpayer-supported bailout than they would under a typical Chapter 11 reorganization, where they would get relief from a portion of their debts and bad loans, but not all of them, and they would have to restructure compensation, management, and governance procedures? Despite the bailout — and the relatively easy course that Wall Street has enjoyed — Main Street is still suffering: People are losing their homes at a faster rate than they did before. Small businesses can’t get loans, creditworthy car buyers and others are seeing credit lines shrivel and disappear. So from the standpoint of average Americans, the bailout has had no positive effect whatsoever.
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Frankly, I don’t quite understand why Lehman didn’t go into Chapter 11. Now, maybe it was too small, or it wasn’t prepared to go into Chapter 11. But in general I don’t see why Wall Street firms are in any greater danger of Chapter 7 liquidation when they can’t pay their bills than any company in the real economy. Even Citigroup: Presumably it is worth more alive than dead. Its creditors would much rather that it stay afloat to pay off its loans than disappear completely. And it has a lot of assets — not necessarily physical assets, but a very strong customer base and a lot of talent. No one would support that it would cease to exist if it chose Chapter 11.
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S+B: So you see the contours of the bailout as little more than a successful marketing effort?
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REICH: It’s a giant public relations campaign. But I’m not sure that anyone consciously regards it as such. The Treasury Department traditionally has been Wall Street’s embassy in Washington. Treasury secretaries traditionally are closely allied with Wall Street. I’m sure Hank Paulson views Citibank or Morgan Stanley or his old hunting ground, Goldman Sachs, as profoundly different from a manufacturing company or another major services company. The funny thing is, I think that Paulson would be aghast to think of what he did as industrial policy. But of course that’s exactly what he did.
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[On reviving Big Three from Detroit] - Today, the management of the Big Three seems to believe that if they can only get through the recession, they’ll be fine. They view their challenge as primarily cyclical. They may be right technically, but they’re wrong over the long haul. Their challenge is structural. They’ve been losing market share for years, they’ve been producing cars that the public doesn’t want. Few young car buyers would ever think to buy an American car anymore. The Big Three have to come up with an entirely different vision of their industry and of their operations, and I hope that that is part of any bailout.
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S+B: Why has it taken Detroit so long to get this message, when it’s so obvious to so many people?
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REICH: The culture at the Big Three is very insular, for one thing. The invasion of Japanese carmakers into the U.S. to make vehicles shook up Detroit, and in response, the Big Three have made substantial improvements in quality. But management and labor are still living in a different age. They haven’t been shaken up nearly enough. Labor understands the situation probably better than management. The new UAW contract recognizes the need for substantial changes. Young workers will be coming into the Big Three with wage and benefit packages not all that different from what American workers are getting from the Japanese automakers. But there’s still a long way to go on the management side.

Superb insights. Hope Obama and Tim Geithner read this before they push more bills to the Congress :-)

Fishing for VCs

2009-02-12T23:00:00.000-08:00

Throw a line into the Thames and likely you could net a VC.

VCs in UK warn hundreds of tech companies could shut shop if the government can’t come up with a £1bn ($1.4bn) fund of funds to support the sector.

As stock markets are in effect shut for initial public offerings, it adds pressure on venture capital firms. They must rely on trade buyers to achieve an exit from their investments, or finance them for longer. More than a third of UK venture capital groups expect to write off at least three investments this year due to lack of follow-on funding, a survey by Populus of 80 members of the BVCA found.

The survey said that 86 per cent had found it hard to raise secondary rounds of finance for their companies in the past six months. A similar number said portfolio companies still in product development stage would survive less than a year on cash reserves.

In San Francisco, earlier it just took a walk down the Sand Hill Road to land a VC. In UK, you need a boat and little fishing break is all it takes; you may not land the money though :-)

The cut runs deep

2009-02-02T01:56:00.000-08:00

So the US congress have agreed upon an economic stimulus plan. Now comes the real rocker - how to value bonds that have no takers?

Getting this right will not be easy.

The wild variations on the value of many bad bank assets can be seen by looking at one mortgage-backed bond recently analyzed by a division of S&P, the credit rating agency.

The financial institution that owns the bond calculates the value at 97 cents on the dollar but S.& P. puts it at 87 cents, based on the current loan-default rate. It could be worth 53 cents under a bleaker situation if say, the defaults double. But even that might be optimistic, because the bond traded recently for just 38 cents on the dollar, reflecting the even gloomier outlook of investors.

Both Washington and Wall Street ecognize that there are no current market prices for these toxic securities. But bond dealers say most kinds of securities can be valued and are being traded, but trading has slowed as sellers and buyers disagree about what that the price should be.

The value of these securities is based on the future cash flow they provide to investors. To determine that, traders have to make assumptions about the housing market and the economy: How high will the unemployment rate go in the coming years? How many borrowers will default? What will homes be worth?"

To them normally one would suggest go by the realizable value of underlying assets. But even that is a problem if the bond is backed by 9,000 second mortgages used by borrowers who put down little or no money to buy homes. Nearly a quarter of the loans are delinquent, and losses on defaulted mortgages are averaging 40 percent. The security once had a top rating, triple-A.

Holy Fuck !!!

Mess up bigtime and you are safe everywhere

2009-01-12T21:24:00.000-08:00

The famed American justice system is often compared by other nationals, notably Indian NRIs settled in the US to condemn the slowness of proceedings and the abysmally low rate of convictions back home. The surging nationalistic pride is swallowed by the natives (that despite recognizing the bother of having to control a population of a billion plus people by any Government) read them and even feel it is something that deserved to be condemned, while pining for some early turnaround in the Indian way of meting out justice.

But then they get to read about the travails of Mr.Bernard Madoff that made-off with his $50 billion ponzi scheme. Mr. Madoff was charged last month with securities fraud but has remained free since posting bail. Excerpts from NYT report.

"The judge’s ruling allows Mr. Madoff to remain in his Manhattan apartment, wearing an electronic monitoring device and being watched around the clock by a security team paid for by his wife.

Prosecutors had asked the court to revoke Mr. Madoff’s $10 million bail, secured by various family homes held in his wife’s name, after he violated a court-ordered asset freeze by mailing about $1 million in expensive watches and jewelry to family and friends on Christmas Eve.

In addition to the jewelry that was sent out, prosecutors said, Mr. Madoff had plans to transfer $200 million to $300 million of investors’ money to family members and friends. When authorities searched Mr. Madoff’s office desk, they found $173 million in signed checks ready to be sent."

I am sure it would make NRIs feel a lot lighter.

When risk gets taken to the extremes...

2009-01-06T17:10:00.000-08:00

I have always admired intelligent risk takers. The `intelligent' is the operative - take it to mean the faculty to figure out how much to commit to an adventure that leaves sufficient sustenance in the end if things were to go horribly wrong. And we thought high networth entrepreneurs are too good at it.

I stand corrected after reading about Adolf Merckle, the wealthy German businessman with a networth of over 9 billion euros committed suicide by hurling himself before a speeding train. The billionaire, 74, was said by his family to have been “broken” by the sight of his business empire, which ranged from pharmaceuticals to cement, crumbling. He died on Monday evening, apparently hit by a train a few hundred metres from his home in southern Germany.

What a horrible end...!

Fallout of a fallout

2008-12-29T18:42:00.000-08:00

Excerpts from a NYT news item -

"In a normal economy, couples typically build equity in their homes, then divide that equity in a divorce, either after selling the house or with one partner buying out the other’s share. But after the recent boom-and-bust cycle, more couples own houses that neither spouse can afford to maintain, and that they cannot sell for what they owe. For couples already under stress, the family home has become a toxic asset."

Who says mortgage crisis ruins families...? Stressed partners will soon feel living inside a ruptured marriage is better than getting stuck with a dead cow :-)

"Goldman Sachs, you're clearly out of touch..."

2008-12-22T04:46:00.000-08:00

Living under a communist regime comes with its own unique State-Citizen communication logistics. For instance, the Chinese cannot express their discord with administrative fiats by ballot. They take a different route. They riot.

So when Chinese workers get laid off, they take to streets. It takes a constant 8% plus GDP growth to absorb all the graduates churned out by Chinese institutions every year. If growth sputters, China is in trouble.

The urban middle-classes also have reason to be unhappy: there have been severe stock-market and property crashes in China over the past year. The government – like its western counterparts – has already made it clear that it will respond to the new downturn with a massive fiscal stimulus package.

China’s trade surplus hit a new record last week because imports are falling even faster than exports. The Obama administration is certain to want China to allow its currency to appreciate, to close the deficit. But the domestic pressures on China will point in the other direction – to allow the RMB to fall in value in an effort to boost exports and keep more factories open.

When it rains, it pours. Remember it was the same China whose economy was predicated to beat U.S economy by 2027, courtesy Goldman Sachs research. Like many other predictions (Oil to hit $200 per bbl, now quoting $40) by it, this one too is headed to go off target by a mile – all within an year of its prophecy. If you want sure bets, you know whom to ignore!!!

Scourge of the bailouts

2008-12-17T22:55:00.000-08:00

The scourge of the bailouts is that it helps an addict get deeper into the malaise. First it was the Wall Street Banks, then it’s the Big three and even Biotech companies in Britain that line up with hat in hand. John Grapper in his FT column hollers “it’s time we stop improvising our way out of trouble”.

Steven Horwitz, an economics professor at St. Lawrence University, got it right when he wrote, “There will be short-term pain if we don’t bail out these firms, but that is the hangover price we pay for 15 years or more of binge lending. The proposed bailout cannot prevent the pain of the hangover; it can only conceal it by shifting and dispersing it among the taxpayers and an economy weakened by the borrowing, taxing and/or inflation needed to pay for that $700 billion.”

I look at a basic aspect. Somebody makes a mistake, a very big mistake and everyone is made to suffer. How long can this amnesty go on? Call it moral hazard, but it’s perpetuation of the ineptitude. It’s like serving more booze to an alcoholic.

Take the big three case for bailout. Isn’t it better to float three new car companies with the money that they say they need? Doesn’t that make better sense? Buyout the assets of the existing companies in their bankruptcy proceedings (liquidation) and then rejuvenate them under a new name, minus the union commitments. The only commitment to the organized labor should be just jobs. No huge healthcare excess baggage or other perks for the wily top managements.

The only condition should be make profits and share the loot. I think that sounds more like it. Hank Paulson should be pleased.

Have no mercy, Junk'em all

2008-12-04T20:23:00.000-08:00

Eliot Spitzer in Slate magazine is close to suggesting a serious rethink on the massive US bailouts of giant financial institutions. He asks -

“The CACC story highlights the risk that current bailouts—a remarkable $7.8 trillion in equity, loans, and guarantees so far—may merely perpetuate a fundamentally flawed status quo. So far, at least, we are simply rebuilding the same edifice that just collapsed. None of the investments has even begun to address the underlying structural problems that are causing economic power to shift away from the United States, sector by sector”.
The great irony is that our new place in the global economy is a direct consequence of our grand victory over the past 60 years. We have, indeed, converted virtually the entire world into one integrated capitalist economy, and we must now bear the brunt of serious and vigorous competition. In the immediate aftermath of World War II, the United States was essentially the only nation with financial capital, intellectual capital, skilled labor, a growing middle class generating consumer demand, and a rule of law permitting safe investment. Now we are one of many nations with these critical advantages.
But even more important, from a structural perspective, our dependence on entities of this size ensured that we would fall prey to a "too big to fail" argument in favor of bailouts. In that case, vast sums now being spent on rescue packages might have been available to increase the intellectual capabilities of the next generation, or to support basic research and development that could give us true competitive advantage, or to restructure our bloated health care sector, or to build the type of physical infrastructure we need to be competitive. It is time we permitted the market to work: This means true competition with winners and losers; companies that disappear; shareholders and CEOs who can lose as well as win; and government investment in the long-range competitiveness of our nation, not in a failed business model of financial concentration and failed risk management that holds nobody accountable.”

It’s a refreshingly different take from most arguments that favor a bailout just because America needs its lenders that are too big to fail, no matter how imprudent they were. Here is Spitzer calling a spade exactly that. Have no mercy, junk’em all…

Grouping recession

2008-11-30T17:56:00.000-08:00

Can recession be grouped as good and bad? It appears so. Prof.Ray Barrell of the National Institute for Economic and Social Research, a London-based think tank, has two pieces of bad news. The first is that this is the wrong sort of recession: Because it was precipitated by a banking crisis, consumption may well fall much more dramatically. That's plausible: Consumers who want to smooth consumption can't borrow to do so. It is also what has happened during the 14 banking crises, in various high-income countries, that Barrell and his colleagues have studied.

The second piece of bad news relates to the first. Because consumers were already borrowing heavily in the good times, both credit constraints and a long-overdue realism are likely to bite all the more deeply. That, too, is a tendency Barrell finds in the data.

Of course, as the lucky sellers of herbal Viagra are alleged to be discovering, when consumer spending falls, some products do well and others do very badly. Nervous retailers looking for cues might wish to pick up research from the 1990s in an article by economists Martin Browning and Thomas Crossley called "Shocks, Stocks, and Socks." They find that when people are unemployed, they save money in a logical way by not buying "small durables" such as socks and, indeed, clothes in general. In the short term, people get by and save about 15 percent of their household budget. When they find a new job, they replace the tired old socks.

Bad news for Gold Toe, good news for sellers of needles and thread.
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Unusual suspect

2008-11-27T18:23:00.000-08:00

Normally oil rich Gulf states are immune to recession, slowdown, deflation type expressions that are often heard in less endowed geographies. Their confidence is built on the edifice of unrelenting demand for oil from all corners of the world. Though there is the occasional cacophony of cleantech, renewable energy and alternative fuels, the fossil fuel monopolised by the Arabian Gulf still remains formidable energy resource.

But there are clear signs that the leadership of Gulf economies is fast fading. Dubai, the glitziest among the GCC, is slipping into a recession. It's overheated property market bubble is about to burst.

Gone are the days when the rest of the Gulf has met Dubai’s phenomenal boom with a mixture of envy and emulation. Now there are hints of pleasure at the idea that the epicentre of bullishness may be humbled. But there are worrying questions for the others, too. Could the Dubai property slump prove contagious? Will the Gulf Co-operation Council pull together to protect the region’s economy? Should its planned monetary union be set aside as governments focus on protecting their own currency?

Is Team Obama ok...?

2008-11-25T22:41:00.000-08:00

Team Obama – does it exude confidence?

Not unless they convince they’ve learnt from their mistakes, calls out NYT editorial

“Both men, [Timothy Geithner, Mr. Obama’s choice for Treasury secretary, and Lawrence Summers, his choice for director of the National Economic Council] however, have played central roles in policies that helped provoke today’s financial crisis. Mr. Geithner, currently the president of the Federal Reserve Bank in New York, also has helped shape the Bush administration’s erratic and often inscrutable responses to the current financial meltdown, up to and including this past weekend’s multibillion-dollar bailout of Citigroup.”

Obama had better be right. If he gets it wrong, it’s ruin!

He used to be called "citigroup"

2008-11-25T01:52:00.000-08:00

We're getting used to this lately, ain't we...?

"Don't disgrace potato buyers"

2008-11-20T08:02:00.000-08:00

Nitin Desai in Business Standard talks about the market for credit.

“The market for credit is not like the market for potatoes. When I buy potatoes, I choose a vendor, select the spuds, pay the cash and that is the end of it. I do not need to know much about the vendor; nor does he need to know much about me. Once I have paid for and collected the potatoes, the relationship between us is at an end.”

I would say the metaphor is just not up. When my wife buys potatoes, she checks each spud out, rolls it in her hand and looks for any sign of decay or staleness. No she didn’t call that “due diligence”. I guess this must be the practice of every potato buyer since we don’t want to risk our health and that of the family.

But MBA’s do it differently. If there is a market for risk, then it’s not risk for them. Name of the game is slice and dice. So are the credit rating agencies. They just sniff around for a (seemingly) credible issuer (just a name) and that’s it. That’s why capital adequacy and other supervisory arrangements have failed to prevent an elaborate tower of debt, built on shaky foundations that came crashing down when the first high flyer crashed into it.

"Nitin, for God's sake, don’t bunch ordinary potato buyers with those gilt edged MBAs. They are far more caring.

Hang in there and you'll know

2008-11-13T22:31:00.001-08:00

Hank Paulson is not having it easy at all.

When the Congress passed his $700 billion bailout package, the world heaved a sigh of relief. The whole world expected it to contain in its point of origin – that is the US – itself. But it was not to be. What had begun as a mortgage crisis, loomed into a financial crisis and is now threatening to be a global economic crisis.

So what does Paulson do? He goes back to the drawing board, buries his original plan and is redrawing it. Now he doesn’t intend to buy the toxic assets but prefers to recapitalize banks and non-bank financial institutions such as financing arms of America's big car companies(though not, for now, the carmakers themselves). He also disclosed that the Treasury and the Federal Reserve are exploring the creation of a “liquidity facility” to buy top-rated securities backed by credit-card, car and student loans, and perhaps mortgages. Banks used to bundle many such loans into asset-backed securities which they then sell in the capital markets. But that market has all but disappeared. Looks like he hopes private investors to come back and recreate that market.

In the end, it is clear nobody has a clue. Financial anarchy always favor the influential and connected. What I can say for sure is that average Joe is not going to get any better. Just that if you hang in till the end, you’ll know who is going to get off with the loot!

When nations go belly up

2008-10-13T05:32:00.000-07:00

Iceland, a tiny economy with a population of just 320,000 and GDP of £14 billion ($ 23.85 billion) has liabilities in excess of $100 billion against annual GDP of just $14 billion. Clearly, a case of a nation going bankrupt. It is starting to adopt extreme measures by forcing Icelandic institutions such as pension funds to repatriate funds to bolster its reserves in defense of the collapsing currency.

As the Economist puts it –

"Iceland’s rapid rise and even faster fall has been viewed from afar as a parable of greed and hubris, in which a nation of farmers and fishermen borrowed too much and are paying the price. But that is to draw false comfort. Although Iceland represents an extreme case of a huge financial system towering over a small economy, other states suffer from similar imbalances. They differ only in scale, but not substance. Kreppa (“in a pinch”) may be an Icelandic term, but it translates."

The only avenue open to Iceland to function economically on a day to day basis i.e. so as to enable Iceland to import resources such as food and fuel is by long-term loans and guarantees from the IMF and other countries such as Russia which has loaned Iceland euros 4 billion. The net effect is that Iceland is likely to experience a severe and prolonged economic recession and will be forced to develop cash generating commercial industries such as fishing to finance the increased debt burden. The expectation is that over time governments will cancel the Icelandic bad debts in exchange for geopolitical influence.

The fact is, in the flat world in which we live in, Kreppa will more likely translate. Not all may have the EU umbrella above their heads...

What is Paulson’s Plan B, sorry X (by now?)

2008-10-06T00:52:00.000-07:00

Quoting Newsweek –

“In the best-case scenario for Paulson's plan, there is real, unrecognized value in the mortgage-backed securities sitting on financial institutions' balance sheets. He hopes that the government, by serving as a committed buyer, will be able to jump-start trading in those securities. Once it's clear to the marketplace that the disdained securities have considerable value, Paulson hopes, the uncertainty over financial institutions' net worth will be dispelled and they will be able to raise capital privately and resume normal lending.

If instead the Treasury purchase plan reveals that the securities really are as worthless as many fear, Paulson and Bernanke will need an urgent Plan B (or are we up to Plan X by now?). Super-low sales prices will force financial institutions to acknowledge they have been carrying assets on their books for more than they're worth. They'll have to write them down, which could leave many undercapitalized. At that point, the government will be forced to take them over and then close them or merge them into healthier institutions.”

Some questions just stay asked

2008-09-29T03:00:00.000-07:00

The Economist on Bank failures –

"…The money markets are a bit like the sewers of the financial system: in normal times, nobody notices them but when they get blocked up, the stench is abominable. And they are severely congested at the moment. The good news is that, unlike last week, it is possible for banks to borrow overnight at a reasonable rate. The bad news is that borrowing at longer rates is either impossible or prohibitively expensive.

…It is, indeed, unfair that banks tend to be rescued when they go wrong whereas coal mines and shoe retailers do not. But banks play a key role in oiling the system; they provide the credit that lets the rest of us do business. They also have innate risk; because they lend more money than they have cash in hand. To put it another way, they borrow short and lend long. This has made them the subject of panics throughout history, and those panics have always led to economic turbulence. The authorities can let them go bust, but the risk is depression. Or they can hold their noses and bail them out.

…And there will be more crises in future. Now that investment banks are part of commercial banks, we have returned to the risks that characterized the system before the Glass-Steagall Act of 1933—specifically, that reckless investment banks can fritter away retail depositors’ money. And what will we have to do if that happens? Bail them out again."

In short, the article says banks should be bailed out because if you don’t it leads to depression. Not because they deserve it, Ha! The banks fail because of mismatch of maturities; they borrowed short to lend long. But how do tax payers care? These banks didn’t fetch them a penny when the going was good. Now when they go belly up, why should they care?

No answers. Some questions just stay asked.
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Hank Paulson kneels; Condy Rice ducks

2008-09-27T05:24:00.000-07:00

News. Condy Rice rushing to douse the fire in the old ally’s barn even as she has her own forest fire to deal with. Makes sense. Barn fires in the neighborhood can be put off with a good sprinkling of water. Forest fires die a slow death. Henry Paulson has already knelt down before Ms.Pelosi – No go?

Condy Rice is wise. She fled the scene of the flames to help the fraternity!

Where will they find the $700 billion?

2008-09-22T03:09:00.000-07:00

I don’t really know who else read my previous post. But seems folks at NY Times certainly have. Hardly a day had passed, here they throw up an elaborate Q&A…

Read and figure !

Why just the FM twins, why not Lehman?

2008-09-20T19:58:00.000-07:00

So the US government okays a $700 billion bailout package for its distressed financial institutions.

I began to think about the nature of the lifeline. What exactly does a bailout mean? Will the US treasury buyout bad assets and refinance the failed lenders so that they can resume business? Will it float a freshly funded SPV to absorb the bad assets, clean up the muck from the rogue lenders’ books and then eventually sell them? Or will the Fed just go and print fresh notes equal to $700 billion and honor the bonds as they come back to collect?

I look up federal bailout history. The handling of the great depression of 1930’s, the savings & loan scandal of 1989 and a few other. Nothing has been this big. Even more were allowed to go under. They were just not qualified for a bailout, bit like Lehman Brothers.

So where did Lehman goof up? Why only the FM twins (Fannie Mae & Freddie Mac), Bear Stearns and Merrill Lynch? What gives?

To be eligible for a bailout, firms must also demonstrate a particular genius for screwing up. Before it went bust, Bear Stearns had a monstrous $33 of debt for every dollar of capital, and hedge funds it owned destroyed hundreds of millions of dollars of clients' cash. It got a bailout.

Financial intermediaries like Bear Stearns and the FM twins function like the heart of the global financial system. If they go into cardiac arrest, the whole body is in danger. Since Bear Stearns was a counterparty to (and guarantor of) trades and financial arrangements with the world's major financial players, its failure would have triggered a cascade of losses. In the same vein, huge quantities of the $5.4 trillion in debt issued and insured by FM twins sit on the balance sheets of central banks and financial institutions around the globe. For the U.S. government simply to let this debt — which it had been implicitly backing for decades — go bad would have meant inflicting severe damage on America's most significant diplomatic and trading partners. Fannie Mae wasn't too big to fail, it was too Chinese to fail.

So now I get it. To be eligible for a bailout it’s not enough to be just too big. Screw it up real bad that it should threaten the global financial system. So much so that the ensuing stress on financial markets should mean massive job losses, devastated retirement accounts, further erosion of asset values and absent loans – not just in your country, across the world.... New world order, period.

"Game over, guys"

2008-09-18T05:27:00.000-07:00

Humor is a great pain killer. Global investment banks fold up overnight, putting the light out of so many lives, destroying ever so many dreams – how long can one sulk?

When the going gets tough, the tough start laughing. So I mangle Winston Churchill a bit : “Never in the field of global finance was so much damage done to so many by so few.”

At a Lehman counseling center - “Ok guys, buckle up. Game over. But life still remains. There are so many opportunities on your way down as there are in the way up. Ideas?” After a brief pause, pat came a lark “Action replay?”

Can’t let go off memories of life at Lehman, huh…

Out of the woods? Not yet!

2008-09-11T23:29:00.000-07:00

David Rosenberg, an economist at Merrill Lynch who called a U.S. recession early now says low crude prices need not trend towards accelerated growth or profitability across the board. It could just mean the reverse.

In support, Rosenberg brings out an intriguing “four horsemen” theory. To quote The Economist-

“He says the recent decline in energy prices is a “symptom of demand destruction” that has dire implications for overall profitability. Mr. Rosenberg has just written a gloomy report identifying “four horsemen” that will do their worst to American corporate profits: thinner profit margins; paying down debt as tighter financial conditions take their toll; lower energy prices; and a combination of slowing growth outside America and a stronger dollar. He predicts 7% falls in profits for firms in the S&P 500 both this year and next.

The list of troubled firms has now extended far beyond the housebuilders and building-supplies firms that were the first casualties of the subprime-mortgage crisis to include retailers, casinos, publishers and cable-TV companies, points out Martin Fridson, a veteran observer of corporate bonds. Companies with distressed debt now include such household names as Delta Air Lines, Clear Channel, Toys “R” Us and Reader’s Digest. There would already have been more high-profile bankruptcies, points out Mr Fridson, except that at the peak of the credit bubble some of today’s more troubled firms managed to borrow “covenant lite” debt that makes it harder for creditors to demand their money back. But that seems likely to delay only briefly the arrival of the Grim Reaper.

All right guys… So are we in Sir John Templeton’s “moment of maximum pessimism”? Are we finally out of the woods yet? Nobody seem to have an answer, at least not for now !

What's left in Wall Street?

2008-09-09T21:31:00.000-07:00

Bear Stearns, Merril Lynch, Citicorp, UBS, Washington Mutual, Fannie May, Freddie Mac and now Lehman Bros. What’s left in Wall Street?

Waves of selling wiped out nearly half of Lehman’s value in the stock market on Tuesday, leaving the firm, one of the nation’s oldest and largest investment banks, in an all-out fight for survival.

“He [Richard S Fuld, Jr., CEO of Lehman Bros] is dealing as if he has a whole deck of cards, when as he has none” – NYT reporters quoting a banker who has had recent dealings with Lehman, representing a potential foreign buyer.

How long can they live in denial?

After bailout, comes the default

2008-09-08T19:21:00.000-07:00

If it was the massive bailout last Sunday, it seems all that prayers in the Church may not have worked. Now here is what it triggered – a massive CDS default…
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Fannie-Freddie Mae-Mac

2008-09-07T18:48:00.000-07:00

This is the third time this year that the US authorities have made a big policy announcement – seizing control of battered mortgage behemoths Freddie Mac and Fannie Mae - on a Sunday. The first, on March 16, provided emergency support by the Federal Reserve to investment banks. It generated a rally in global markets that lasted only two months before grim reality set in again.

The second, on July 13, signalled that the government’s wallet stood behind Freddie and Fannie. This yielded market relief for just a month. In both cases, the affected segments of the US economy did not have enough time to clean up the debris and start the rehabilitation and reform process.

It just means de facto government control, though the Bush administration had been careful in not using the word Nationalization – in the US they call it `bailout’. Fannie and Freddie have $5,400bn in outstanding liabilities and guarantee three-quarters of all new US mortgages.

The objective - to bring down mortgage rates and ease financial market stress by making it clear that debt securities issued by these firms are safe since the US government will not allow either of them to fail. Outright government buying of new Fannie and Freddie mortgage-backed securities, plus increased government financial support for the companies should bring down spreads on the securities they issue, reducing the cost of mortgages.

These are days like never before. Let’s see if the levees hold!!!

Why does it linger?

2008-08-29T07:54:00.000-07:00

The Economist brings out a brilliant analysis of why the liquidity crunch refuses to die down.

It’s a long article. Here is my synopsis –

The double shock of decline in house prices and the sudden slump in prices of ABS have come at a time when the global economy is also witnessing a surge in commodity prices. This limits the power of the central banks to cut interest rates as it could stoke inflation further up.

The double shock entails uncertain direction of monetary and regulatory policy. When inflation targets are revised upwards, central banks will crack down so hard on inflation pushing the economies into recession. Further the effect of investment bank rescues will let in a harsh new regulatory regime that will stifle credit and hence future growth.

Then it is the nature of the previous boom fueled by indiscriminate borrowing by people to buy houses that they couldn’t clearly afford hoping to cash in on capital gains and investors buying complex high yield debt products they hardly understood. Both the lenders and investors were beholden to banks and that former wellhead of finance has now run fairly dry. In turn, that explains the absence of bargain hunters, particularly in the debt markets.

Investment-grade debt might look attractive on a five-year view, if all you have to worry about is the risk of default. But most investors in that market have a three- or six-month view; they cannot afford for things to get worse before they get better, in case they are forced into a fire-sale of their assets.

"So the markets (and the developed economies) are waiting for a catalyst for recovery. Lower commodity prices helped for a while, and may help further if they encourage central banks to cut rates. Evidence of a bottom in the American housing market may also do the trick. But the crisis seems certain to linger into 2009, and could even make it into the following year. Successful horror movies tend, after all, to have several sequels."
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Tune in to the Shorts

2008-08-22T07:26:00.000-07:00

No more regulations. Just listen to the short sellers.

Would the ghastly global economic crisis been avoided had the regulators listened to the short sellers? Seems likely.

In July, Christopher Cox, chairman of the SEC announced a plan to curb improper (naked) short-selling to limit the activity of short-sellers. Mr Cox seems to be implicitly blaming the shorts for the unprecedented fall of bank, government-sponsored agency and brokerage stocks over the past year – even though they were the very group that warned of the dangerous credit cycle and its consequences.

Now for a little history on shorts. Perhaps the first case dates to 1609 when the Dutch trader, Isaac Le Maire, targeted the shares of the shipping company Vereenigde Oostindische Compagnie (the Dutch East India Company). VOC was the first multinational corporation in history and had broad powers. Nonetheless, Le Maire, concerned about threats of attack by English ships, sold VOC’s shares short. After learning about Le Maire’s tactics, the stock exchange governing VOC’s trading banned short-selling (although the ban was later revoked).

In the early 1630s, the Dutch economy fell into a depression following a speculative peak in the trading of tulips. Again, short-selling raised the ire of regulators, many of whom saw it as magnifying the effect on the Dutch economic downturn. As a result, England banned short-selling outright.

Hedge fund manager Douglas Kass thinks instead of more regulation, the chairman and investors should begin listening to what short-sellers have to say about our economy and credit markets.

What do you think?

Why I back Larry Summers

2008-08-10T00:19:00.000-07:00

They say a miracle is not the suspension of natural law, but the operation of a higher law. As I notice the dollar hitting a five-month high of $1.5055 against the Euro and climb 1.3 per cent to $1.9189 against the GBP (even as oil prices decline to $115 a barrel levels), I know I am witnessing miracle. Yes, I can vouch for that.

The violence of the move was testimony to the extent to which the market had been surprised by economic weakness outside the US. UK economic data has shown increasing weakness this week; officials in Japan have warned that their economy was headed for a recession; and the Reserve Bank of Australia said it was planning to cut interest rates to ward off an impending economic slowdown. And we in India were hiking rates to rein in inflation!

So there it goes. The world economy is a mixed bag with no uniform outlook – supply shocks, financial dislocations and concern about rising inflation – are present at once. The future is as uncertain as ever to all and there lies my optimism. No one knows what to do next. Everyone could be right or nobody is. Ain’t that queer enough? I think so.

That’s why I back Larry Summers views in FT. Excerpts –

“Perhaps unsurprisingly in the face of so many adverse surprises, the policy debate has become cacophonous. Some emphasise the necessity of the painful adjustments under way, while others urge their mitigation. Some focus on product price inflation, others on asset price deflation as the principal problem. Some focus on assuring that imprudent lending by financial institutions is discouraged, others on assuring that financing for investment by households and businesses remains available. Some focus on slowing market adjustments to prevent panic, others on the need for rapid adjustment of prices to true fundamental levels, even if this is painful in the short run.”

Imagine the plight of the huge bets against a strong dollar? The street’s gonna’ be littered with blood for sure.

Losing sight of human context

2008-07-31T23:35:00.000-07:00

Most things begin benign. They aim to serve a good cause. Take subprime mortgage as example. Wall Street bankers looked at the rising price of real estate and figured that it isn’t going to come down any time soon. Their net interest margins (interest collected from borrowers minus paid on deposits by banks) were so narrow and the housing market was so frothy, banks began making high-interest loans to shaky borrowers. That’s how families with annual income of $50,000 got to own million $ homes. Fairytale stuff? You bet!

Sometimes, things aren't as bad as they seem. They're worse.

But, if nothing else, this saga shows the great blind spot that still haunts many western banks. Even some Asian banks fell for it. Financiers have invented so many brilliant mathematical tools to repackage risk that the industry has slipped, almost unthinkingly, into an assumption that “credit” is a collection of abstract equations, stripped from any human context. They became so dazzled with their powers that they have ignored how they interact with the rest of society – or how the tribal aspects of their own institutions can create dangerous traps.

Meanwhile, the cult of models has become so extreme that banks have believed them even when this collides with common sense and popular social constructs like the real meaning of `credit’ - a synonym for worthiness, not wishful assumption. And bankers forget this human dimension to their cost – no matter how impressive the abstract numbers might seem.

Losing sight of human context always results in agony. Earlier we had empire building ambitions of monarchs and dictators that fueled wars and catastrophes. Now economic institutions take turn to wreak havoc. The common factor is human suffering, entirely avoidable.

Not perfect by practice - you grew

2008-07-07T00:29:00.000-07:00

Stanford psychologist Carol Dweck as reported in NYT - “People who believe in the power of talent tend not to fulfill their potential because they’re so concerned with looking smart and not making mistakes. But people who believe that talent can be developed are the ones who really push, stretch, confront their own mistakes and learn from them.”

Those who believe they were born with all the smarts and gifts they’re ever going to have approach life with what she calls a “fixed mind-set.” Those who believe that their own abilities can expand over time, however, live with a “growth mind-set.”

I’ve always been a firm believer in growth theory. To be born as a super smart is not in our hands anyway. The first whiff is when we get a handle on our intellectual well being. In learning how to cope with our strengths and weaknesses, we initiate our connection with our life goals. As we apply our limited talents more and more they develop an exponential that is insipidly termed as `practice’ – in fact it is our internal faculty expansion that puts us firmly on the road to success.

"It's a zero sum game, after all"

2008-06-27T22:54:00.000-07:00

Any shards of residual decoupling theories have been laid to rest by the draining more than $2 billion out of emerging-market funds in each of the past two weeks. The surprise, perhaps, is that emerging markets have not performed even more poorly; the MSCI emerging-markets index’s 12.4% decline so far this year is only a little worse than the return of the global market. Amongst the central bankers of the emerging markets, RBI has been the latest, raising interest rates for the second time in a month on June 24th, even though higher rates will mean slower economic growth. But central banks will be damned either way. Any country that fails to raise rates enough to keep inflation under control will scare away investors. South Africa and Vietnam have failed to keep the lid on prices and have been duly punished with a depreciating currency.

So how did the decoupling theory fail and emerging markets suddenly lose their charm?

One look at the MSCI index – that foreign investors’ favorite benchmark – gives some idea. Emerging markets benefit from the heavy weighting of commodity-related stocks in the index (more than a third, according to Merrill Lynch). The overall market is unlikely to plummet when mining and energy stocks are holding up so well. The corollary, however, is that emerging markets will be vulnerable if commodity prices tumble. Earlier in this decade, conditions were ideal for emerging markets, because commodity prices were going up and local interest rates were going down. Now interest rates are rising and there is the risk that commodity prices could at some point correct.

It’s a zero sum game after all.

Where US foreign policy slacks, Rest of the world gains

2008-06-22T22:49:00.000-07:00

I have always suspected that globalization will give Americans a brutal awakening, present them a vicious façade of inside-out economic and political reality and a fair sense of perception from outside – that will clue them in on how deviant are they from the mean and how unsustainable is their global leadership positioning.

Parag Khanna – the foreign policy strategist, Obama campaign - excerpts

“Where the Pentagon has missile programs, the European Commission has reform programs. They’ve got their boots on the ground in the form of well-heeled diplomats who are in the ministries of every country from the Baltics into the South Balkans and Albania, all the way out to Azerbaijan. They are actually inside the ministries, fixing these countries basically from the inside out. And the reason these countries become members of the European Union, and you wake up one morning and there’s yet another member and you didn’t hear a shot fired, is because that works. Europe works.

Let me give you two more quick examples, because they’re the two most important ones in the whole world: Russia and China. America talks about missile defence, [which has made] Russia feel threatened and therefore block NATO expansion. Has Russia ever been able to block EU expansion? No, because the EU isn’t doing anything threatening.”

That sure should be real enough to shatter American strategic smugness ...

"When a big tree falls....

2008-06-17T22:19:00.000-07:00

…the earth shakes." So if you are quake-o-phobic, prop it up. Never let it fall. That’s what regulators did with MBIA, the big bond insurance company, reneged on a promise to shore up a crucial unit with $900 million in capital.

MBIA has written $137 billion in swaps, which are privately traded insurance contracts that let people bet on companies’ financial health. Most of these contracts stipulate that if MBIA’s bond insurance unit becomes insolvent or is taken over by state regulators, buyers can demand payment immediately.

"But if that were to happen, MBIA would have far less money to pay policyholders and owners of municipal bonds backed by the company. So the swaps give MBIA significant leverage over Eric R. Dinallo, the commissioner of the New York State insurance department, who wanted the company to bolster its insurance unit with the $900 million in cash.

In the case of Bear Stearns, the Federal Reserve feared that credit default swaps might unleash a chain reaction of losses if the bank were allowed to collapse. Given the threat that similar swaps may pose to MBIA, Mr. Dinallo is unlikely to push for a regulatory takeover of the subsidiary even if Joseph W. Brown, MBIA’s chief executive, refuses to recapitalize the unit." [Hat tip : NYT]

Focus on direction of inflation, not the rate

2008-06-08T01:42:00.000-07:00

Alright. Inflation is high. So what do you do? Dump stocks and run?

“Don’t!” - Says Paul J Lim, in this NYT article.

Quoting some expert arguments, he concedes –

a) inflation devalues corporate earnings that drive stock prices. But the mere presence of inflation also suggests that many companies are successfully passing along price increases to customers. The returns from stocks will be far better than bonds. In the 23 calendar years between 1926 and 2007 when inflation measured more than 4 percent, stocks returned 6.9 percent on average, versus just 2.8 percent for long-term government bonds.

b) Analysis reveal during inflationary periods, most sectors outperform and are a sure long term hedge against inflation.

c) Observe the direction of inflation. High rate of inflation that heads southwards is a far better time to be in stocks than low rates of inflation that is heading northwards. In periods when the inflation rate fell, stocks soared by an average of nearly 10 percent.

d) There’s a perfect inverse relationship between core inflation and stock market valuations. Since 1960, whenever core inflation has hovered between 2 and 3 percent, the average P/E ratio of the S.& P. 500 has been 19.7, based on trailing 12-month earnings. But when core inflation jumps to between 4 and 5 percent, the average P/E falls to 14.8

So now you know what to do. Don’t dump your stocks. Just keep’em and you’ll be better off. (Because if you sell, I am not liquid enough to buy :-)
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Ka Ching drives the bus for Al Gore

2008-05-27T19:31:00.000-07:00

Ok. So there is this new buzzword “Ka-Ching” - and is meant to depict the sound of a 'cash register'.

I found that in a cheeky aside [“Al Gore and Climate Ka-Ching”] on why Al Gore is so consumed on greening the earth. Sounds like a logical observation if it is not from the anti Global Warming theorist. Some excerpts –

“So why the hype? Well, global warming is a growth industry designed to keep Earth and some bank accounts green.

Gore himself joined the venture capital group, KPCB just last September. On May 1, the firm announced a $500 million investment in maturing green technology firms called the Green Growth Fund. The group announced another $700 million to be invested over the next three years in green-tech startup firms. But if the green technology business cools down, there will be no return on that investment. There would be no need for such investments if global warming wasn't a threat. So Gore just launched, among other things, a $300 million on an ad campaign to convince us it is so.

Speaking at a conference in Monterey, Calif., on March 1, the former vice president admitted to having "a stake" in a number of green investments into which he recommended attendees put money rather than "subprime carbon assets" such as tar sands and shale oil. He also is co-founder and chairman of Generation Investment Management, which sells carbon offsets that allow rich polluters to continue polluting with a clear conscience.

We have a prediction all our own — that disastrous global warming will not occur. Then the greenies will take credit for preventing it and ask us if we're glad we spent trillions in fighting it. Al Gore will be laughing all the way to the bank.”

"Ka-Ching!" It has a nice ring to it, yeah! Go, catch it.

Responsible tourism is ok - how about responsibility to tourists?

2008-05-26T18:20:00.000-07:00

I am all for responsible tourism anywhere. Tourists are people that enjoy a place, its people, culture and tradition. They have to act responsibly and make sure that such attractions are preserved for posterity – for them to come again and for others to share the joy and beauty. So I support all public initiatives that condemn reckless destruction of the environment by callous visitors that leave waste food, plastic bags and other used stuff.

But what embarrasses me more is when a tourist is treated badly by the host country. The primary responsibility is for offering sufficient protection to tourists that are alien to the language, tradition and culture. They should enjoy their stay and go back as ambassadors to the host. But I feel horrible as I read more and more news of molestation, rape and murder of foreign tourists that betrays a gradual cultural decadence among people.

You need tourists to land before you can expect them to be responsible.

Can the Fed beat a bubble?

2008-05-21T05:38:00.000-07:00

Hardly. Says Dan Gross in Slate.

"….So how could the Fed stop bubbles? One way might be for Federal Reserve chairs and other officials to use their credibility to talk down investors from making poor bets. But even on its best days, the market doesn't listen to reason. During a bubble? Forget about it. A bespectacled jargon-dispensing economist standing astride the rails and yelling stop isn't likely to have much effect on a runaway locomotive. Alan Greenspan gave his famed irrational exuberance speech on Dec. 5, 1996. But the Dow Jones Industrial Average and the NASDAQ ran up 82 percent and 288 percent, respectively, in the three years after the speech—before popping….

…..The Federal Reserve is an organization much like any other—run by human beings with fallible judgment, driven by consensus, and less than congenial for ontrarians. In bubbles, skeptics are always marginalized while the promoters are anointed as seers. And when a bubble gets loose, it infects every institution: banks, the media, and, yes, the Federal Reserve. The Fed, in the person of Alan Greenspan, failed to diagnose the Internet bubble accurately, and it misjudged the housing bubble, too. The Fed, in the person of Ben Bernanke, failed to see the credit mess coming. And once that crisis hit, the Fed failed to accurately gauge its scope and depth. When the party really gets going, we all drink from the same punch bowl…."

Bubbles occur because no two minds think alike, yet are easily influenced. Everyone abhors herd syndrome but has it ever stopped? Accept bubbles as natural phenomenon like rain or sunshine. Perhaps it's a bit like life itself that has ups and downs. Attempts to regulate nature have only met with disaster. So the best way to deal with a bubble is to acquire stronger defenses when the storm rages. We will have casualties, but it will leave some scope for faster rehab - in preparation for the next one.

Economic Xenophobia?

2008-05-19T06:25:00.000-07:00

The French are paying through their nose. Inflation is at a 17 year high. They could do with lower prices; yet they don’t want competition. Could it be termed as an economic xenophobia?

Christine Lagarde, the finance minister, is promoting a new law to let in more competition into retailing to make it easier to build out-of-town hypermarkets, scrapping a rule stopping retailers from selling below cost. In many places, hypermarkets have de facto local monopolies, and so are protected from competing with each other or with the big discounters, which account for only 13% of food retailing, next to 30% in Germany. Nor can hypermarkets negotiate freely with suppliers, which retailers say allows big brand-names to impose high prices.
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So why are consumers not cheering on the new law? The Economist has this view.

"The Socialists say the fringes of historic towns will be destroyed. Deputies in Mr Sarkozy's own party, lobbied by food producers and small shopkeepers, want to dilute the text. Scepticism about competition has deep roots, ranging from a lingering influence of Marxism to a fear of American capitalism trampling the French way of life. Above all, voters see competition through the eyes of producers—as a menace to jobs and factories—rather than consumers."

But the French should do something about inflation soon if they don’t want to look like Zimbabwe. To me it reads like the opposition by small shop keepers in small town India that stalled the efforts of big retailers like Reliance Fresh. Flat world, it is.

Stay on cash; use it wisely.

2008-05-13T22:12:00.000-07:00

In times of turmoil in the stock markets, companies with tons of cash in their balance sheets wake up to smell the coffee. They see acquisition opportunities abound and zoom in on assets going on the cheap. HP’s acquisition of EDS for $13.9 billion yesterday is a case in point.

So do activist investors like Carl Icahn, who was instrumental in Oracle's takeover of BEA Systems, has been buying Yahoo stock since Microsoft withdrew its offer May 3. Icahn reportedly owns about 50 million Yahoo shares, or about 4 percent of the company. The news comes just weeks after negotiations between the two faltered on price, after a protracted dance between Microsoft and Yahoo that started with the Redmond software giant's unsolicited offer on Feb. 1 for $31 a share. After the deal fell through because of Yahoo CEO Jerry Yang’s tough postures, Yahoo's shares have slumped as low as $22.97. That’s when Icahn moved in with gusto.

The HP deal means that companies with strong balance sheets - HP had nearly $10 billion in cash at the end of its most recent quarter - will be able to take advantage of the market's turmoil and snap up companies trading at steep discounts. Even with the premium HP is paying for EDS, the $25 per share price tag is still 17% lower than where EDS' stock was trading at about a year ago.

I look at a rough map of cash rich companies that could stir the hornet’s nest. The list includes not just the tech giants like Google, Oracle, Microsoft, Intel, Cisco or Apple, it also has companies having tens of billions of $ of free cash such as Exxon Mobil, Royal Dutch Shell, Chevron, Pfizer, Roche, Wyeth and Novartis. So far they’ve been using the cash for dividends, stock buyback or plowing it back in business. But when current businesses are shaky or as in the case of these Pharma majors where their drugs are about to go off patent, it’s prudent for them to look at biotech acquisition ops.

Makes sense.

From 4 P’s in marketing to 3 C’s of lending

2008-05-11T22:20:00.000-07:00

A good marketing manager would be bent on having something to offer to his customers than desperately trying to get rid of what he has. When Neil H Borden published his article “the concept of marketing mix” in 1964, he may have figured future marketers to have all those ingredients in the mix – that E Jerome McCarthy later grouped into 4 categories that are known today as 4 P’s of marketing. Product, Price, Place and Promotion.

The alpha numeric model seem to have worked since most marketers start with defining their 4 P’s. Now this is being adopted by lenders that got badly mauled in the recent subprime fiasco. They are now beginning to realize some old fashioned lending values and bottling them up in alpha numeric concepts so that there will be less billion $$ write downs in future.

They call it 3 C’s of lending. They are Character, Capital and Capacity.

But I see a problem here. When you have these three traits present in you, you won’t normally go to borrow. You live within your means, preserve capital and limit your desires in tune with what you can afford. Old fashioned, indeed. Result : Banks will have fewer customers and large swathe of idling funds. Now the pressure of holding that capital will force them to follow aggressive marketing practices that recommend relaxed norms and adoption of softer lending criteria that over a period of time build bubbles.

The way forward should be a proactive lending model where banks move closely with a customer and lend him money when he needs it for genuine purposes. Not to stuff wads down his throat when all that he needs is some fresh air and force him to repay when he can hardly get by.
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PE firms after the credit crisis - chic or brawny?

2008-05-07T02:39:00.000-07:00

Whatever happened to the large $100 billion plus “club” deals that PE funds were talking about? With the credit markets drying up, the only constant is the high valuation expectation of sellers.

The consensus seems to be that rising cost of capital will reduce asset prices and the diminished role of securitized debt will influence PE buyouts. In this turmoil, there is also the dilemma that what constitutes “change in material terms” that might trigger a break-up fee (a charge on the seller if he walks away from the deal before it is closed). Could that be a 10% drop in earnings? How about reverse (a charge on the buyer) break-up fee? Well, those are some of the issues the industry (and some Courts) is now wrestling with.

So it calls for PE firms to build up in-house operating expertise besides fundraising skills. Return to fundamentals would mean facilitating exits through walking with portfolio firms during times of distress, handholding managements to weather market cycles and help consolidate market share and preserve earnings growth. Leveraged buyout / taking private financing will give way to operational financing that helps companies ride out short term liquidity imbalances.

When PE firms came to India, initially they were mostly IT/Telecom focused. Then the sector became over crowded and their focus blurred and soon they embraced sector agnosticism. Now it is the same PE firm that invests in IT, Real Estate, Aviation, Financial Services, Gems & Jewellery and Pharmaceuticals. My question - will they continue to look like lean, chic fund houses (operating from boutique hotels), with just one or two General Partners and a few analysts (sharing the fees and carry) or soon will they resemble a barrel chested, square jawed corporation from outside, sweating it out all the more?

Significantly more meaningful work than having to just spend hours shuffling management deck or reading research reports ;)
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Getting paid in Oil barrels

2008-04-29T06:10:00.000-07:00

The price of oil is touching $120 a barrel. You fume over rising gas prices. What do the rich Arabs do with all the money?

I look up this Economist story.

“The six nations of the GCC, which also includes Qatar and Oman, earned $381 billion from their exports of oil in 2007 and another $26 billion from gas, according to the Institute of International Finance (IIF). If the oil price remains at about $100 a barrel, they will reap a cumulative windfall of almost $9 trillion by 2020, reckons the McKinsey Global Institute: a vast number relative to the size of the GCC economies, which had a combined GDP of $800 billion in 2007.

Not all these riches are ingested, of course. The Gulf added $215 billion to its stock of foreign assets in 2007, the IIF calculates. This hoard is divided between the region's central banks, its sovereign-wealth funds and its wealthy sovereigns. It added up to $1.8 trillion by the end of last year, by the IIF's estimates, and more like $2.4 trillion, according to Brad Setser of the Council on Foreign Relations and Rachel Ziemba of RGE Monitor.

When an energy exporter converts its petrodollars at the central bank, its domestic spending rises. But unless the local economy has a lot of slack, it cannot magically produce more goods and services to meet this fresh demand. Their price instead rises, relative to the price of things that can come in from overseas. According to a study by three IMF economists, a doubling of the oil price results eventually in a 50% rise in the price of non-tradable goods (such as housing), relative to tradables.

This shows up as inflation. But the price rises should peter out once they have served two useful functions: diverting demand to goods from abroad, and increasing the supply of those goods and services that must be produced at home.”

Now I understand and feel more helpless. I will have to shell out more for gas at the station. Hopefully GCC economists are aware of the damage that rising export realizations do to their economies. I wait for the day when wealthy Arabs run out of options to park their wealth and cut oil price by half.

If not, I’ll seriously consider working for Abu Dhabhi’s SWF and get paid in barrels of oil !

Doctors without degrees

2008-04-28T05:30:00.000-07:00

If Dentists overcharge, in comes the therapists.

The last bastion that requires a formal degree – medicine – comes tumbling down in distant Alaska.

In places like Alaska where there is an alarming shortage for Dentists, there is a state sponsored program to train non-Dentists to do the basic dental care - filling cavity, cleaning and drilling. The Alaska program is small, with fewer than a dozen therapists practicing so far. But the early results are promising, according to dental health experts who are studying the program. Dentists are objecting because they say these “Dental therapists” as they are called, are low cost competition.

A good case for Doctors to bring down their fees, I guess. I also think such alternate options, at least with most basic features should crop up in every function so that overcharging-because-of-scarcity should end. Think of underperforming MBAs in enterprise, harebrained engineers, overrated pilots – it’s the expensive education that perches them up in society than their cerebral hierarchy or creative mind. If the same training were made available at a low cost to all those that make the cut, several kids from poor families would’ve made it and may even have done their parents and country a lot proud. Hopefully, the patients will go back just with their tooth plucked and not pockets picked.

At debates on relative importance of higher education in achieving success in life or even entrepreneurship, the education advocates buttress their argument with an example of “would you like a quack to cure your disease?” Answer may be “certainly not” – but now it seems there is a middle path. We don’t need Doctors with a degree either – at least for elementary dental care.

SEC follows reverse Robin Hood system?

2008-04-26T23:04:00.000-07:00

David Einhorn has often asserted that because the ratings agencies are paid by the issuers, they have every incentive to rate credits in such a way to encourage more business for themselves. His solution to this problem, let users pay rating agencies.

Now he’s back asking - “weren’t ratings agencies on the job to police what was going on in the canyons of Lower Manhattan?”

Mr. Einhorn runs Greenlight Capital, a successful hedge fund. He also isn’t an infallible observer of human lapses and regulatory failures — he invested in and briefly served on the board of New Century, a subprime mortgage lender that later went bust amid accounting problems.

He smirks at the relaxation made by SEC in “Alternative Net Capital Requirements for Broker-Dealers that are part of Consolidated Supervised Entities” that significantly reduced the capital back up that had to underlie assets. After the recent collapse of Bear Stearns, he now calls it “Bear Stearns Future Insolvency Act of 2004” in retrospect.

Another of his favorite moniker referring to the Congress recommended a bail out of Bear Stearns partly by tax payer – “Private profits at socialized risk” or alternatively “reverse Robin Hood system”.

So very apt.

Smart way to debt freedom

2008-04-23T01:35:00.000-07:00

The crisis in the global financial markets has raised bond yields to ridiculously high levels. Well that’s known to all. When defaults are likely, bonds quote at a significant discount to their offer price that pushes their yields up.

PE funds raise leveraged debt (on their portfolio firms) to fund their acquisition and the I-banks that lend to them will securitize that debt and issue bonds to recreate liquidity. These bonds mature at a future date and are to be retired by the future cash flows from borrower firms as they repay. This is the normal cycle.

But when you have a liquidity crisis, these bonds quote at a heavy discount owing to lack of demand and not because of credit worries. Now the original borrowers buy back these bonds at a discount and extinguish the debt. In effect, a company repays the debt that it owed to itself - an anomaly of sorts! This allows them to cut their interest bill, boost earnings and reduce their leverage, all on the cheap. Smart, isn’t it?

How does it matter to portfolio firms of PE funds? For private equity portfolio companies, buying back debt is different to the PE firms investing in debt from their own and other deals. The former is a way to retire debt cheaply; the latter is a new investment by private equity. Lender Banks are revolting.

Recently TDC, the Danish telecoms operator that was Europe’s biggest leveraged buyout when bought for €13bn ($20.8bn) by a private equity consortium in 2005, has unsettled its lenders by buying back €200m of loans at a discount of about 90-95 cents in the euro.

In particular, lenders worry that borrowers will choose to use excess cash to buy back debt at a discount rather than repay debt through formal channels at a par, as required by most standard leveraged loan agreements. The frustration of the lenders at the move by TDC, owned by Apax Partners, Blackstone, KKR, Permira and Providence Equity Partners, has caused the London-based Loan Market Association (LMA) to review its loan documentation guidelines.

Now you can’t have capitalism and fairness. Can you?

Recession, my foot! Lady luck still loves Google

2008-04-18T07:50:00.000-07:00

Lady luck may have deserted the whole world. But she still smiles at Google.

Look at the stellar results. Google’s net income for the Q1-08 grew 30 percent, to $1.31 billion, or $4.12 a share, compared with $1 billion, or $3.18 a share, in the first quarter of 2007. Revenue climbed 42 percent, to $5.19 billion, from $3.66 billion a year earlier. The stock price soared to $535.

Excluding commissions paid to advertising partners, a widely followed measure, Google’s revenue was $3.7 billion, slightly higher than analysts expected – a rare occurrence by itself. Its profit, excluding the cost of stock options, was $4.84 a share, handily beating forecasts.

That’s the power of business model. Come inflation or recession, a robust business model could insulate the even the most vulnerable of businesses.

But I like recession for something else. It makes even the smuggest of breeds – marketers – to sit up and revisit their inherent deficiencies. Courtesy Swaminathan of Cequity, I was led to this CMO council study. Quite some candid admissions there. So unusual since CMOs don’t often own up and don’t skip a beat even while flying blind. If something goes wrong, they know it’s the client’s business that crash lands.

"Honey, you blew the blog"

2008-04-16T22:42:00.000-07:00

So Social Media(SM) is the flavor of the month. Everyone and his uncle have a perspective, an opinion. Nothing wrong with that. But how many are relevant?

The venture capital community with which I schmooze is sniffing around for the next big thing. It is always. They don’t know much else. Once it was consumer internet portals, followed by search and social networks, then it was mobile content, gaming and stuff, now it is social media – blogs, wikis, podcasts and all things user generated. Their pet peeve – brands don’t spend much on online initiatives.

How will they? Cheapest computers still come at $500. Developed markets may afford that (not for long though!), but growth is in emerging markets, where millions live with annual median income of $2500. You must be nuts to ask them to spend 20% of their annual income on a computer so that they will see your ad or a mobile phone that has a TCO of $500 over 3 years.

Then there are other pitfalls in SM. B.L.Ochman says “without first-hand knowledge of social media influence building -- which, sorry to say, mainstream media still doesn't have -- blog advertising will fail no matter who's selling the ads.” She goes on bringing out some insights on optimizing blog networks.

Bottomline – SM has a lot of ground to cover. It starts with driving mass adoption of the web. Invest in hardware innovation. Make available low cost (I mean real low, cap it at $10) hardware to access the Net. Break the stranglehold of 10 second TV commercial by serving personalized digital content. Deliver curious content. Do anything that makes the user stick.

Southwest shouldn't lose lovemarks

2008-04-10T20:12:00.000-07:00

Reports NYT. Five Southwest Airlines planes grounded last month because they had not been properly inspected had precisely the kind of cracks that the inspection order was intended to detect.....

Cracks? in airplanes? Yeah, that’s right. Cracks it is!

I am sure Southwest Airlines has worked hard to earn as many fans. Fellow blogger Vinnie Mirchandani, I remember often goes ballistic about them, to the extent of invoking the Bard. I quote from one of his Lovemarks-

“The other airlines can keep saying things ...ideally they should just match Southwest's operational model. Not difficult to match ...just fairly priced, on-time, safe, cheerful.
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A thing of efficiency like that is a joy every time. And allows you to save for the other things of joy - the BMWs and the Four Seasons.”

Airline efficiency – isn’t safety the first hurdle? I want all travelers, not just loyal passengers like Vinnie to be cheerful for a loooooong time…. Airlines shouldn’t let them slip through its many cracks!

Amazing place, Wall Street!

2008-04-08T19:45:00.000-07:00

After taking a $9.4 billion write down, John Mack of Morgan Stanley feels the US financial crisis is getting close to its bottom. As a strategic measure, Mack also vowed Morgan Stanley would “keep its powder dry” and steer clear of large acquisitions to preserve capital and liquidity. He expects the turmoil to stretch thro a couple quarters ahead.

Meanwhile Citigroup is nearing a deal to sell $12bn in leveraged loans at a discount to a group of leading private equity firms, marking another step in new chief executive Vikram Pandit’s efforts to shrink the beleaguered bank’s balance sheet. Although details of the deal were still being worked out, people familiar with the matter said Apollo Management, the Blackstone group and TPG would buy the loan portfolio at a discount that could come in at about 90 cents on the dollar.

The Citi portfolio includes loans used to finance acquisitions by Apollo, Blackstone and TPG, as well as debt in their rivals’ deals. Apollo would buy about half the portfolio, with Blackstone and TPG taking the rest.

Isn’t that terrific? When times are good, PE firms go ahead and raise leveraged debt from banks. When the banks go bust, they turn around and buy distressed debt including some of their own. Wall Street is full of surprises!

Creative analyst?

2008-04-07T03:38:00.000-07:00

Say that again...?

As far as stock market technical analysis go, they are hopelessly dull. I use them as soporific tranquilizers. On nights I don’t get sleep, I read one and pass out instantly. But this one kept me awake and drew me close. It drew an allegorical reference to Bravehart, the 1995 Mel Gibson movie that won 5 Academy Awards!

Have stock analysts started getting creative? Shakti Shankar Patra of ET certainly shows symptoms.

Oh, no. Not all of them. Some nights I still need a sedative :-)

Getting the hang of FOM

2008-04-05T05:01:00.000-07:00

Fortune 500 marketer Paul Barsch asks “what is the future of marketing (FOM)?”

The open discussion format that he chose throws open the floodgates for comments to pour and pour. I am always intrigued by marketing strategies. Did read a few of those and they were terrific insights. A lot to quote and so I try mashing it up.

FOM ultimately would be something like this –

The integration of data across the entire enterprise so that marketing, finance, R&D, operations, call centers, everyone stop functioning as data silos and are using the same copy of data – could be one of the keys to corporate success in the future. The role of the CIO is changing from technologist to business strategist with IT as a driver of the business. Technology is advancing at rapid clips. CIOs must shed the "I keep the lights on" mentality and move more towards "I help this company innovate and become more efficient with technology".

The same fundamental change in mindset needs to happen for the marketing function as well. Instead of "I make the commercials and run the website" the new mindset will be "I know our customers, I know what they want today, I know what they'll need in the future and this is how we'll make it happen..."

If we want marketing to have a seat at the strategy table, then we have to step up and take ownership of the customer experience. Without this, marketing will, remain queen of the tradeshow. Customers/consumers just aren't impressed anymore with some of the initiatives companies roll out; they expect them. And often, a great service experience in one industry is expected in another--i.e. I had a great dining experience the other night, but why do I put up with the sub-par experience I usually get from the airlines?

As a Chief Relationship Builder, The CMO will need to create opportunities for dialogue with the customer so that he becomes the Voice of Customer (VOC) inside the enterprise. This goes beyond market research into the realm of building communities. [Paul paraphrases Roy Young] when he says, "sales sells, finance finances, R&D designs, what does marketing do?" Owning the VOC and taking more responsibility for the customer experience are two solid strategies for the CMO of the (near) future. Marketing is no longer getting the customers attention, it is engaging the customer. Marketing is no longer “Here’s what we do” its “How we can engage you”.

Marketing will have to embrace the "messiness" and loss of control that will come with a move to social media. If so, marketing may be able to move beyond the "sell one more Britney Spears cd" perspective to one in which marketing is seen by consumers as being honestly concerned with helping consumers solve problems via the creation of product/service solutions and doing so in a way that will create mutually beneficial experiences.

Having a platform for customers to speak to your company is just a tool. Having someone who understands the people speaking, can synthesize trends out of the conversations, and can create plans that meet both customer and business needs will make that tool a powerful part of business.

Future of marketing: A 5th P in the marketing mix. For PARTICIPATION.

Reviewing a carnage

2008-04-02T22:35:00.000-07:00

Excerpts from an excellent article on Wall Street by Shawn Tulley, CNN.

"....So what if investors only dimly understood CDOs, CLOs, and the alphabet soup of arcane instruments that dominated the business, not to mention the super-geek hedging strategies the firm's leaders kept bragging about? ....Wall Street was the black box that worked its own mysterious magic. ....Put simply, Wall Street firms used towering leverage to make lottery-like loot in a long-running bull market that blatantly underpriced risk. When investors think the world is getting safer, they demand less and less compensation for risk (and they begin to believe in magical stories, like bundles of dubious home loans can be transformed into bulletproof securities).

....Half the huge gains in Wall Street's profits from 2003 to mid-2007 could be attributed to increased leverage - otherwise known as gambling with borrowed money - that magnified earnings in a boom. ....Again, it's the curse of too much debt: If a firm's portfolio is leveraged at 33 to 1, it takes a mere drop of 3% to wipe out its entire capital.
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....As long as we have capital markets and as long as it's possible for people to make vast sums taking big risks with borrowed money, we will have the kinds of booms and busts that are a way of life on Wall Street. The big gamblers will most likely work for hedge funds, private equity firms, or some new entity that hasn't been invented yet. We won't see tumbleweeds on Wall Street. Its cowboys may not be geniuses at making money. But they're geniuses at raising it and, above all, at perpetuating Wall Street's black-box mystique."

Dimensions in BI - where does customer figure?

2008-03-31T07:42:00.001-07:00

IT innovation has done wonders to Business Intelligence (BI) utility. Once what used to be a process for increasing the competitive advantage of a business by intelligent data sourcing and analysis has now become an inevitable management tool that pervades every corner of enterprise.

The industry is rapidly moving away from thinking about BI as a set of technology tools, according to Bill Hostmann, Research V.P of Gartner Inc. While BI in 2004 focused on querying, reporting and multi-dimensional analysis on top of a data warehouse, today's dynamic and competitive business environment demands a different approach.

"It's a very dramatic shift," Hostmann said. "It's not just about building a data warehouse and putting some reporting tools on top of it. It's about putting a much larger framework together that includes a much larger piece of the organization, and delivering more of these different kinds of analysis capabilities than you've had in the past."

I am glad dimensions of BI are expanding to include every facet of enterprise. But why stop at enterprise? The real test of its utility is how it tempts companies to positively impact customer experience. The customer needs no machine fed data to realize who cheats him and who doesn’t. Look at HP gouging customers on cartridge sales, Gillette on shaving products, enterprise IT vendors on ERP/CRM software that have been depreciated over decades. The day when customer feels he got real value for money, I could say BI has scored its maiden goal.

Docking Big Four yet again!

2008-03-27T05:40:00.000-07:00

It is often noticed in business circles that no large scale fraud is possible without the connivance of auditors. But they are the first one to shirk when the ugly underbelly is exposed. We had seen it in Enron, WorldCom scandals and I seem to have had an eerie sense of timing while I posed this question on Auditors.

Then I read this NYT article based on an investigation report commissioned by the DoJ into the collapse of New Century Financial, one of the largest subprime lenders that directly accuses its auditors – KPMG. Some of its accusations echo charges that surfaced about the accounting firm Arthur Andersen after the collapse of Enron in 2001. E-mail messages showed that some KPMG auditors raised red flags about the accounting practices at New Century, but that the KPMG partners overseeing the audits rejected those concerns because they feared losing a client. It also deals with fraudulent accounting practices that masked its likely losses.

The investigator Mr. Michael J Missal, who also worked on an investigation of WorldCom’s accounting misstatements, concluded that KPMG and some former New Century executives could be legally liable for millions of dollars in damages because of their conduct.

I often argue with clients why they insist on a Big Four auditor in every JV deal. They do have a reputation as a firm, but as individual partners they have their own pet prejudices. There are auditors with great track record and reputation that will do a far better job for far lesser fee. But somehow it doesn’t register. Meanwhile Big Four carries on the Arthur Andersen legacy, winking and nodding!
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Not kids' play

2008-03-26T08:52:00.000-07:00

Jean-Paul Edwards, head of OMD Media Futures at Manning Gottlieb OMD, says it is not hard to see why brands like in-game advertising -

"What is interesting is that it demands the consumer's attention, because if they are not concentrating on the game, they will die, crash, lose or whatever. In this media-fragmented world, where it is hard to capture people's attention, that is not something that is easily sniffed at".

Before I ask about its billing format, I read this –

“Users have to see ads at a given size and angle for 10 seconds for it to register an impression. Ads are then billed on a CPM (cost per 1000 impressions) basis. Other in-game ad specialists, including Double Fusion and Microsoft's Massive, take a different approach. They also require a user to have seen an ad for 10 seconds, but allow this period to be made up of half-second units, meaning that an impression can be registered when a gamer sees an ad on one occasion for 10 seconds, or glimpses it on 20 occasions for only half a second each time.”

But it is not without its share of issues. Dave Hompe, group media director at digital network Isobar, the issue with in-game ad measurement is the same one that affects all online advertising.

“In the TV market, everything is compared to the relevant impact of a 30-second spot. We do not have those multipliers for impressions, either for gaming or for standard online advertising. That kind of insight just isn't available. A lot of brands and companies are starting to see this as a challenge. The first stage is when clients say, "Let's assess relative efficiency for $1 invested in TV versus online versus in-game advertising." This is the ultimate prize. We are probably not at the point yet where can make that assessment, but we can see there is an absolute value in using multiple channels for campaigns. The tricky part is finding the right balance.”

On-line gaming itself is innovation at best. Now devising a metric could hardly be the stand-off. I think it’s just a question of time.

Is there more than what eyes can see?

2008-03-20T05:36:00.000-07:00

Has it been a fire sale at Bear Stearns at $2 ? Could they have been in far better shape had they managed to hold on to their positions ?

Is all this forecast of a looming recession (or is it in already?) only because we don’t know anything worse than that?

Is Ben Bernanke a hero in the making?

Is controlling inflation a greater priority than cutting interest rates to boost credit markets?

Find a very interesting take by Jeremy Segal in this K@W podcast….
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Where were the auditors?

2008-03-17T22:52:00.000-07:00

For mortgage crisis that led to a credit squeeze in the global markets, we blamed lax diligence standards adopted by lenders and their bond issues favorably rated by credit rating agencies. But what about auditors, that never found a thing missing?

Fee dependence, weak laws and self-interest inevitably compromise impulses for penetrating audits. The inevitable outcome is worthless audit reports. Carlyle Capital Corporation, a hedge fund with debts of £11bn, has become the latest casualty of the deepening credit crisis - and the effects will ripple throughout the financial world.

It is disappointing to see this even though in the last 7 post-Enron, SOX driven years, shareholders have given them unprecedented power and budgets to be more invasive in their diligence and their ability to challenge managements.” But their motives don’t change much beyond fee squeeze.

Wondering about Bear Stearns? Deloitte certified their annual report on January 28.

Give us just so much BI that we need

2008-03-13T23:48:00.000-07:00

Gartner Analyst Bill Hostman says valuing Business Intelligence(BI) is not an exact science and often comes down to mindset, comparing BI to a college education:

"It's not easy to persuade someone to go to college based on a purely financial or numbers game, and the same thing goes [for] BI," Hostmann said. "You just have to believe that BI is absolutely essential for you as an organization to investment, that this is a fundamental core competency that you have to have."

Hostmann suggests this question - "Do you have the information that you need to manage your business?" – as a metric for measuring user satisfaction.

I say BI software often floods a user with too much information [he hardly ever needs but pays for] that his decisions often veer off-track. Need to twist that question a bit – “How little information you need to effectively manage your business?”

In that you get an effective metric to compute ROI from BI software. Make users pay less since they get less. Need I tell you they are staring at a recession…?

Innovation tip - Space computing

2008-03-12T00:01:00.000-07:00

Put more stuff in the cloud, you need more storage, means huge data centers that consume humongous energy. That’s what builders of monstrous data centers like Microsoft and Google have recently found out. A recent EPA report to Congress estimated that U.S. servers and data centers used about 61 billion kilowatt-hours of electricity in 2006, or 1.5 percent of the total electricity used in the country that year.

Before Congressmen get ideas and bill them for global warming, Microsoft Research gets into the act. Since cooling system accounts for about half the energy used in data centers, any attempt to conserve energy will have to tweak the cooling function. Shut down servers? Yes. But the question is which of the 5000 whirring? Energy economics should not mean functional disablement.

Traditionally, load-balancing algorithms are used to keep traffic evenly distributed over a set of servers. The Microsoft system uses load forecasting and load skewing algorithms to distribute the load and frees up servers during off-peak times so that those servers can be put into sleep mode. These are currently designed for connection servers used for services active over long sessions, such as IM services or massively multiplayer online games. They’ve also designed a sensor that monitors the servers to make sure they're not being overcooled and watches for hot spots as well, where cooling is low. This info is passed on to load skewing algorithms that processes the rest.

Sounds great. But I would like the data centers to be stationed in space and data streamed back and forth. Use solar power. The Sun ain’t gonna’ bill us. That’s also when they can really claim rights for cloud computing. Or space computing for that matter !

Just make a shell and leave all else to Google

2008-02-28T01:53:00.003-08:00

Yeah, that’s what I thought after reading Simson Garfinkel in MIT technology review.

“Android is not the "Google phone" that rumor suggested before the software was launched. Indeed, the company doesn't really want to own your phone. It just wants to be sure that no other company does. If Android succeeds, it will keep the wireless world safe for Google and whatever services it might seek to offer in the future. Today there are a billion Internet users but nearly three billion people with mobile phones. That's a lot of eyeballs, and Google is first and foremost an advertising firm. And so it is not surprising that Google may do more than build a new operating system in its effort to entrench itself in the wireless world. At press time, the company was in the process of bidding for wireless-spectrum licenses being auctioned by the Federal Communications Commission.

If Android succeeds, it will have a major impact on wireless carriers. A phone running Google's component-based operating system, after all, would treat wireless operators like Verizon and AT&T as just another way to reach data services on the Internet. Such a phone could turn today's wireless providers into commodity data communications networks that also happen to carry voice….

Just as Google's place in the wireless world is a work in progress, so too is Android, which I suspect will not be limited to cell phones. If it's successful, we're likely to see Android as the basis of other handheld devices: digital cameras, GPS receivers, or even lightweight tablet computers. If Android really works, it's going to change the face of mobile computing.”
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"Go build memories" - Jeff Hawkins

2008-02-21T17:14:00.000-08:00

The more they innovate, more they are challenged. Chip designers received an interesting challenge this month from Jeff Hawkins, the famous founder of Palm and Handspring and an expert on the human brain: If they really want to design something intelligent, they shouldn't be doing processors. They should be making memories.

At the International Solid State Circuits Conference in San Francisco, Hawkins addressed the question of "Why can't a computer be more like a brain?" He has been preoccupied with that question for decades and recently has been working on the answers for his new start-up, Numenta. Broader story here.

Hawkins said computers today are fast at solving calculations but terrible at doing things that children can do, like understanding simple stories or recognizing the difference between a cat and a dog. That's because computers are designed with Von Neumann architecture, with a processor connected to memory. The brain, by contrast, has a very different design. It is a "hierarchical memory system." At the lowest level, the brain's neural connections store memories such as the shape of an object. At the next level up, the pattern associated with a human form is stored. And at the highest level, the brain recognizes the person as Bill Clinton.

The brain operates on the same formula, or algorithm, in every region, according to Hawkins. It doesn't have one algorithm for processing vision or a different one for processing sound. Each part of the brain is also self-training. You are born with nothing and learn. Each part of the brain learns based on what information is passing through it.

A twenty something for President...?

2008-02-20T07:11:00.000-08:00

Who could be a President with experience? Hillary claims she has experience. But she has never been President before. Hell, does it really matter? Scott `Dilbert’ Adams engages a lively debate. Scott says experience is useful only in select fields – say, while undergoing a by-pass surgery, it’s vital to go with a surgeon that has held a scalpel before.

Then I read Ben Casnocha tips his hat to Jeff Nolan and poses a query – Is there a negative correlation between experience and success?

I wanted to disagree without denying the role of youthful derring-do in crafting many a success stories – especially in the world of IT startups. I suggest a peep into the Nobel hall of fame where seniors score. But before I could delve any further, I spotted this fantastic comment by Paul Freet under Jeff Nolan’s post here. I quote –

“Jeff, I think I know the fallacy of this argument. Young entrepreneurs, who have little experience, shoot for the moon. The vast majority of those efforts fail spectacularly. But, statistics demand that a few, slip through the cracks and succeed in a big way. Seasoned entrepreneurs, with their experience, make safer bets, and have a much higher success rate, but do not create world-changing products. It is he naiveté of youth that does change the world. We just don’t hear about the hordes of abject failures that accompany the few that make a difference.”

I couldn’t have put it better. Thank you, Paul.

Structured finance needs fixing

2008-02-18T04:37:00.000-08:00

John K Galbraith, like many left-wing critics of capitalism, has a keen eye for interesting facts. It is gross credit excess that is fueled the recent stock market bubble. The obverse side of credit is debt, and that is precisely where the problem rises. As credit expands, debt expands with it, especially bad debt. Eventually, the bad debt leads to a crisis; if a sizeable amount of debt cancellation occurs, you get deflation and a crisis of epic proportions.

Then I read this piece by Dr.Alok Sheel in ET. He figures amongst the rare breed of civil servants with a very sharp mind.

“Driven by complex mathematical engineering securitized structured finance is a modern financial marvel that has deepened capital markets through greater dispersal of risk, contributed to higher growth by intermediating access to large amounts of low-cost funds generated by global imbalances, and made development more inclusive by giving previously excluded groups access to assets like residential property. It has also spawned a new breed of highly paid graduates well versed in mathematics and calculus, but alas, quite divorced from the real world of old-fashioned finance with its putative sixth sense of sniffing out risk through a deep appreciation of human psychology, market sentiment and moral hazards.
In A Short History of Financial Euphoria, Galbraith advanced the rather depressing theory that finance did not lend itself easily to innovation, since at the end of the day all credit is secured on some asset, no matter how much it is repackaged and sliced. It is undoubtedly true that excessive liquidity that went beyond what would be expected based upon existing assets was a necessary condition underlying the subprime crisis.”

It’s a long article. I’d distill a few steps outlined in there –

a) Basle capital adequacy norms should limit off balance-sheet exposures. This should help confine contingent risks to the originating bank, though there could be some shrinkage in credit supply.

b) The originating bank could be required to retain a ‘fraction’ of the original portfolio (“fractional banking”). This would address the moral hazard inherent in the ‘originate and distribute’ lending model where there is little incentive for the loan originator to adhere to prudential lending and monitoring standards.

c) The Basle norms to address liquidity risks arising from maturity mismatches. This risk is presently handled through state-funded deposit insurance and central bank/ government bail outs. Universal banking also faces liquidity risks arising from positions taken in (non-money creating) investment. The subprime financial crisis was not escalated by large-scale loan defaults but because assets became illiquid as credit markets simply froze. Short-term debt raised to fund long-term investments could not be rolled over.

d) Review the banking business model. Presently the traders split a good slice of profits as commission but in case of a loss, they kick it back to the shareholder. Adopt the private equity model where the players, having a more direct stake, move nimbly to hedge their positions better.

e) Regulate the regulators.

An ad in good taste ?

2008-02-14T23:56:00.000-08:00

Next time you pick up a soggy journal at your nearby clinic, get yourself sterilized.

Talk of revolutionary marketing. Getting people to use multiple senses to process ads is a good way to build a stronger connection with consumers, ad experts say. "It's hard to forget whose brand you are licking," says Lisa Haverty, a cognitive scientist who works in the marketing field.

Welch's (grape juice) is taking out full-page print ads in People magazine this month that give readers a chance to sample its grape juice by licking the ad. The front of the advertisement shows a huge bottle of the juice, while the back has a strip that peels up and off, with text that reads: "For a TASTY fact, remove & LICK."
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Print ads present a unique challenge for marketers because they don't typically have "sound or motion," the two things that tend to make ads stand out, says Paul Caine, president of Time Inc.'s Entertainment Group, which includes People magazine. Adding taste is one way to create a new way to grab reader attention, he says. People has experimented with adding sound chips to some print ads.

Get it all here.

Life ain't easy for central bankers

2008-02-11T23:13:00.000-08:00

The primary role of a central bank in a modern advanced economy is to set the price of money – the interest rate. Large commercial banks are generally compelled to hold a certain proportion of assets at the central bank and in return receive risk-free central bank money, the equivalent of large bundles of notes and coins.

What’s the big deal…? I ask.

All the major central banks are now beset by the issue of “moral hazard” – the concern that their actions in offsetting market turmoil might prompt investors to take even bigger risks in future, with potentially catastrophic consequences.

In a crisis, central banks have enormous firepower to drown financial institutions in cash. But if they throw money at a crisis, they face two risks.

First, they send the overnight interest rate tumbling because banks have too much cash and all try to lend it out. Inflation follows. Second, they send the signal they are always ready to bail out banks and encourage riskier practices in future.

Choose your devil. Easier said.

Aircraft engineers are still birdwatchin'....

2008-02-10T20:29:00.000-08:00

University of Michigan researchers explain why aircraft engineers are still bird-watching....

A Blackbird jet flying nearly 2,000 miles per hour covers 32 body lengths per second. But a common pigeon flying at 50 miles per hour covers 75.

The roll rate of the aerobatic A-4 Skyhawk plane is about 720 degrees per second. The roll rate of a barn swallow exceeds 5,000 degrees per second.

Select military aircraft can withstand gravitational forces of 8-10 G. Many birds routinely experience positive G-forces greater than 10 G and up to 14 G.

And you wonder why brilliant financial engineers over engineered mortgage derivatives that led to a global credit crisis. Nothing to beat plain common sense and keen observation of simple things around. You agree...?

Tell me, which side are you...?

2008-01-31T06:05:00.000-08:00

Amidst the high drama and speculation surrounding the prospect of a global recession, I get to hear all kinds of theories from everyone. I just quote a couple that made me snort.

Louis Gerstner, Chairman of PE firm Carlyle Group (Ex- CEO, IBM Corp./ Amex / RJR Nabisco) –

"We are in a welcome period for private equity. Capitalism is not a steady state but goes to extremes and...after excesses have built up...we needed to see a correction. The media and government might have converted this state to a 'crisis' but it is not that."

Here he goes further -

“Carlyle had $30bn of dry powder to strike more deals and the firm was turning towards the developing world where deals were "more unleveraged" and private equity firms took minority stakes. However, there would be fewer secondary buyouts where portfolio companies are switched between private equity firms."

Now turn to famed investor Jim Rogers -

"Conceivably we could have just had recession, hard times, sliding dollar, inflation, etc., but I'm afraid it's going to be much worse".

"[Ben] Bernanke is printing huge amounts of money. He's out of control and the Fed is out of control. We are probably going to have one of the worst recessions we've had since the Second World War. It's not a good scene."

But Rogers is so hooked on China -

"Some parts of the Chinese economy are going to be untouched, however. They won't even know America's in recession. They won't care if America falls off the face of the earth."

I go we are there already... MF portfolios are down by 30%. Quarterly numbers are getting flatter. Sovereign Wealth Funds are buying out American banks on the cheap. Will it look any different than it is now...?

Rogue trader or a Rogue Bank ?

2008-01-29T20:22:00.000-08:00

Société Générale, the French Bank is quick to blame Jérôme Kerviel, the trader allegedly responsible for a €4.9 billion ($7.2 billion) loss it declared earlier this month.

Remember Nick Leeson and the Bearings bank episode? This comes pretty close. Jérôme Kerviel's unauthorized trades may have cost Société Générale €4.9 billion, but they also helped to turn the French bank's $3 billion of subprime losses into something of a sideshow.

Attempt to mask inherent inefficiencies in internal risk management by pinning it on individual traders show bank managements in poor light. May be, they expect to get less sullied by raising this smokescreen to deflect public attention away from subprime induced losses for which they own more direct responsibility. Daniel Bouton, the bank’s chairman, and Jean-Pierre Mustier, Head of SocGen’s investment-banking arm may have hoped to escape with just a smear instead of a much maligning, indefensible subprime bruised image by bringing it up now. Coming at this worst hour for bank CEOs, trading losses emerge as preferred excuses for their plight than subprime losses that nail them straightaway.

We will never know. But it is hard to digest how Mr Kerviel got away with building up such a big position unnoticed. Do banks only look at net exposure and not a trader’s outsized gross positions? Why didn’t the margin calls on Mr Kerviel’s real trades (likely to have been in the order of €2.5 billion on a €50 billion position) trigger alarms?

I am tempted to call them rogue banks. The trader just played fast and loose – when allowed.

The Aftershocks

2008-01-22T23:02:00.001-08:00

So what are your takeaways from the US mortgage crisis? When things go awry, you can’t do much more than endless finger pointing. If you are a banker, make sure you multi-layer your debt instrument so much and make it as complex as possible so that you always will have someone else to blame.

Lehman Brothers is suing at least six mortgage lenders and brokers, claiming they sold Lehman dubious loans. It claims that borrowers’ incomes were overstated, appraisals were inflated and the homes were in poor condition. In most cases, the lenders are fighting the allegations and Lehman’s demand that they buy back defaulted or otherwise problematic loans.

Meanwhile members of a New Jersey family have sued Lehman for $4.14 billion, saying the firm steered them into complex securities that have become difficult to sell. Lehman denied the accusations.

Bringing securities fraud cases has been made harder by recent Supreme Court decisions that favored Wall Street, companies and professionals like accountants. The court ruled earlier this month that two technology vendors could not be held liable for taking part in a scheme designed by a cable company to inflate its revenue. Last summer, in a ruling favoring the company, Tellabs Inc., the court said that securities cases could be dismissed if investors did not show “cogent and compelling” evidence of intent to defraud. Period.

A shocker from the Economist

2008-01-18T04:43:00.000-08:00

“Having a little bit of inflation is like being a little bit pregnant.” Says the Economist. That opener stoked my curiosity as well as the headline of the article (fears of both inflation and recession). But I was clearly not prepared for the banter. Not from the Economist.

So how can I let go of an opportunity to pick on the Economist and to blog about it? After all, it’s a magazine that I and the whole world respect the most. Here’s my stab.

It says “inflation is a monetary phenomenon and the responsibility lies with central bankers”. Is that so? What can central bankers do to rein in commodity prices that are based on demand-supply dynamics? Suck out money supply or hike interest rates? That would impact productivity across the board and deepen budget deficits.

This is my favorite – “monetary conditions have been loose in recent years, with real interest rates low and credit growth rapid, particularly in emerging economies.” But subprime fiasco had its origins in the Wall Street, bang in the middle of Manhattan - not in any emerging economy, goddammit! Look at the billion $$ write downs at American banks like Citigroup, Merrill Lynch, Bear Stearns, UBS … In fact, these banks are now being bailed out by sovereign wealth funds from Asia and the Middle East !!

“The task of central bankers has become harder as globalization has shifted from being a disinflationary phenomenon to an inflationary one.” I say that depends on who creates value and therefore wealth. Where wealth gets created, there will be increased consumption led inflation. It’s a tenet.

“The downward price pressure from cheap Chinese goods may be abating while the developing world’s rampant demand for resources may continually drive commodity prices higher.” Yeah, but the global consumer is the one asking for better economics, right? China produces cheap goods because there’s a buyer out there. You stop buying Chinese goods and they won’t produce. But how many can really afford costly stuff?

The doubt lingers whether it’s a recession or inflation that the world is staring at. (See pic). That I agree and so I lifted that picture and put it right here on top. I read a lot of humor and find a ton of banter from less venerated journals. It saddens me when the Economist joins that league.

“You’d better be careful, Economist. It takes a lot to build that reputation. Don’t lose it all in one short fling…” I caution.

Insights from street children

2008-01-04T20:17:00.000-08:00

A brief pause (or an interminable wait during peak hours) at a traffic light is a sure invitation to beggars and vendors in Indian cities. But this editorial from the Economist seem to have spun an insightful theory – how to contain the huge forex inflows into India – based on it. Excerpts -

“INDIA, it is fair to say, is not yet reconciled to the new-found strength of its currency. One poor wretch, pressed against the car window at a Delhi traffic light, tries to change a dollar bill she presumably cadged off a tourist. She wants 50 rupees for it. Alas, the dollar now fetches less than 40 rupees.

This vigour is due to a strong inflow of foreign capital, some of it enticed by India's promise, the rest disillusioned by the rich world's financial troubles. The net inflow amounted to almost $45 billion in the year to March, compared with $23.4 billion a year earlier.

The migration of capital from the rich world to the poorer one is a sign of a bleaker season to come in the world's biggest markets. This would, then, seem an inauspicious moment for India to bet its future on export-led growth. If it cannot resist the inflow of foreign capital, it should try instead to make room for it—by observing fiscal restraint—and to make the most of it—by investing it wisely. India may then have an economy worthy of a more expensive rupee; and its children may have better things to do than hang around at traffic lights trying to change a buck.”

Well said, The Economist…

Figuring out subprime for you

2007-12-25T22:39:00.000-08:00

This is friggin’ cool. Watch this short, hilarious video that describes subprime mess in layman terms. I loved it. Especially the part where they explain the thought process that goes into naming hedge funds....

Anchor to George Parr (playing investment banker) : Ok. Let’s talk about moral hazards.
GP : Sorry, I understand hazard. What’s the other part?
Anchor : Ok. Never mind. I don’t want to sound insulting. But I think you haven’t learnt anything from this crisis.
GP : On the contrary, we’ve learnt a lot.
Anchor : And what’s that…?
GP : When you know you’re going to make a cock-up, make an enormous cock-up so that the Governments will come and bail you out.

Watch it live... It's a laugh riot.

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CEO democracies

2007-12-24T04:46:00.000-08:00

So, non-industry candidates chosen to lead software companies grow. Here’s the latest from Dan Farber. When former Delta Airlines chief operating officer James Whitehurst takes over as CEO of Red Hat (vendors of Open source software/servers) on New Year’s Day he’ll face the worst kind of doubters–the quiet ones. At least, No analyst is going to question the Whitehurst move amid a great third quarter.

But Farber believes Whitehurst could very well take Red Hat to the next level. He quotes the example of Lou Gerstner. “Before we pooh pooh Whitehurst we should remember Lou Gerstner. Remember him? Oh yeah, he’s the guy that transformed IBM into a services juggernaut. The funny part of the story: Before IBM Gerstner was CEO of RJR Nabisco. Before RJR, Gerstner was at American Express. What did Gerstner know about mainframes? Probably nothing, this was the point of the hire in the first place.”

Well, that’s fine. But here’s Red Hat’s outgoing CEO Matthew J. Szulik on why he thinks Whitehurst has a geek streak - “In my first meeting with Jim Whitehurst, we discussed the four Linux distributions that he was running on his home personal network. He was running Fedora Core 6 and Fedora Core 7 at home. He was running Slackware at home and he was an experienced software developer up until the time that he was at BCG (Boston Consulting Group). So we are getting a technically savvy executive who happens to have strong operational, financial, and strategic skills and it was in my view that in comparison to his peers that were finalists for the job, that he stood head and shoulders above, in light of all of the qualities that we were looking for in my successor.”

I just hope he is right. Let Whitehurst lead Red Hat to greater glories. All the very best. Why should anyone worry?

I am just glad it’s not the other way round. Imagine Delta picking up Matt Szulik to fly its plane because he’s flown some kites during his school days…:)

IQ v. Intelligence

2007-12-13T18:15:00.000-08:00

The debate “Does IQ measure Intelligence” keeps coming back. I have never paid much attention to it, but I sometimes wonder whether IQ, a quotient abstracted from answers to a set of test questions devised by human intelligence can measure the very intelligence that created it. If so, how accurate can it be? I wasn’t convinced.

Then I find (magazine>>special features>>July-August 2007>>Psychology: Cutting Edge of innovation – Decoding Genius) that even the numbers concerning genius are temperamental. While IQ tests have traditionally been used to measure intelligence, figures don't always tell the tale. According to the Stanford Binet scale, average human IQ is between 85 and 115. A genius is someone who scores 145 to 165 on the scale and a so called high genius falls between 166 and 180. Only one percent of people have an IQ of over 135. Einstein is said to have had an IQ of 160 and renowned physicist Richard Feynman just 122. The highest IQ score ever recorded was that of Marilyn vos Savant. She scored 228 but gave the world only a question-and-answer column which she wrote for Parade magazine.

So does it tilt the scales against the fairness of IQ indices? May be, may be not, since we haven’t got another measure to upend it.

But I presume Genius is, of course, inevitably characterized by prodigious productivity. It is said that Thomas Edison assigned himself an invention quota that consisted of one minor invention every 10 days and a major one every six months. The intellectual demands he placed on himself were certainly effective for he holds the record, still unbroken, of 1,093 patents. Mozart composed more than 600 pieces of music, and Picasso and Dali both created a vast body of work.

Serendipity is often used to explain creative accidents. Yet the true genius is one whose antenna is able to pick out those fortuitous occurrences. Alexander Fleming noticed the mold formed on an exposed culture, an observation that led to the discovery of penicillin. Thomas Edison got the idea of the carbon filament when playing with a piece of putty and went on to create history.

So what do you think…? Can we use the same scales to measure scientific and artistic genius? Can Pablo Picasso and Albert Einstein be compared based on IQ levels? Mozart and Gregory Mendel? Tiger Woods and Rickie Ponting?

Beating the odds of US recession

2007-12-09T23:24:00.000-08:00

How will IT services fare in the coming US recession? Basab Pradhan asks here. He also refers to Infosys CEO Kris Gopalakrishnan’s statement at some conference as an update that I allude here. Kris says “so far the impact of the US slowdown is muted”.

Some day one of us can ask Kris Gopalakrishnan’s cardiologist about how many heart beats he may have missed while putting a brave face like that up. I am sure he hears about many fresh billion $$ write downs and CEO ejections as much as I do. All of these were kept off balance sheets (and investors) and the traffic is only getting busier. Bravo, Kris….

Points taken, Basab. But I ask - "why only IT? Can other businesses fare much better?"

Can the global economy afford to let its largest consumer slip into recession mode without committing economic hara-kiri? Is there another economy that can replace the US? I see none. Can the world business, especially IT services scale down their size of operations if US stops consuming? Europe ? No way.

That would be a catastrophe. In comparison, fixing US recession before it fully arrives seems a song. It is for global economies to be mature enough to rally around the US and get it out of trouble, if they have to stay in shape themselves. My hope is built around that (self-centered) altruism that fits very well with a flat world.

That said, IT services can certainly throw a few life boats in that ocean of US trouble, by

a) Toning down high margins (that gouge 25-30% post tax returns) to keep its US client afloat. The value it loses out in the short term will be more than made up by long term gains in brand perception and loyalty.

b) Working towards greater value adds. I would even say that bad credit appraisals that the US banks espoused that led to the current crisis were to some extent avoidable if quite a few Indian BPOs that processed the proposals blew the whistle. The workstation executive need not, but her top management certainly can build in risk-flagging protocol, in that it ensures the longevity of many a well paying client.

c) Allowing people to evolve from transactional, keep-the-lights-on activities to more challenging, innovation areas. And don’t start billing them until it’s proven.

d) Indian IT vendors can extend their relevance only if they truly partner in innovation by taking greater risks in the real sense, not just spray paint or rustle up something at the last minute by using some fit-all templates. Their R&D spends that look like rounding errors are mostly marketing efforts e.g. a lab set up to support a particular proposal or a "solution" center where small teams prototype and train on new solutions. They are usually just a training class ahead of client teams on new technologies. Can they not graduate to be rounded LOB solutions players ever?

e) Improving in areas which require deep vertical knowledge, complex program management skills, change and governance management, Data center management etc. In ERP practice, I see Indian IT vendors active only in “post-live” stage. They should deepen their spheres of influence if they have to seem relevant.

The central banks around the world can help US as follows, in their own interests.

f) Countries with artificially depressed currencies (you know who) will have to yield. Most global manufacturers that have built up huge scales counting on American consumer will choke to death if they don’t show up. For if they don’t, the global vendors – with China standing right up front - will be in trouble deep.

g) Build a central supervisory protocol to detect and control excesses in credit and money markets before they get out of hand. Today, the irony is that the huge foreign currency reserves of China are denominated in dollars and it isn’t easy to switch to a new denominator without pushing the yields further down. China is already facing criticism in its home turf for weak treasury management. Obviously it can’t dump its dollar reserves in the pacific to avoid inflation either. The trouble is, no other banking system has the appetite (or would even want) to mop up those huge reserves. So the dollar has to go up even by Chinese interests, be it at the cost of letting Yuan appreciate.

Do anything. Drive economies, value add, scale up, squeeze margins, innovate, sell cheap, offer free – help U.S.clients hold their heads above water. Relying on untested European market is like letting go the proverbial bird in hand seeing two in the bush. Europe is full of (not just linguistic) prejudices and isn’t as origin agnostic as U.S, and in between the time taken to schmooze and adapt, the fixed maintenance costs of large scale build-outs could kill you.

I go unless there is a competing market with the consumption levels close to that of US, world economies can’t put up with a moribund US markets for long. Every one feeds off it and it tastes nice. It’s impossible to conceive another market like that, not the least in IT services. Some day, others may achieve its size on the supply side(?), but demand side metrics will be hard to replicate. That sustains the imperative - Help U.S get its act together, fast. If US doesn’t survive, others won’t fare much better either.

No more googleplexes ; Google just needs data centers

2007-12-06T03:11:00.000-08:00

“Like ice gradually melting into the oceans in the Arctic regions, enterprises want to slowly migrate to the cloud, or utility, computing model, with services delivered by massive-scale data centers. But, the tech industry will have its own global warming, pushing companies to move faster to the cloud to stay competitive” - say Dan Farber and Larry Dignan.

The company is spending over several billion dollars to build data centers collectively housing hundreds of thousands of servers running massively parallel computations in power-friendly locations in Iowa, Oklahoma, Oregon and North and South Carolina, and that’s just in the U.S – to deliver fast and accurate search results besides creating entry barrier for others.

Here I wrote about Google’s data center outside US – in Siberia. You might as well spell it as “Cyberia”, now that Google has trained its guns.

Blatant cover-up

2007-12-05T06:01:00.000-08:00

Earlier this year, for example, Merrill Lynch, Citigroup and Bank of America gave almost no indication that one particularly toxic debt product -- CDOs, or collateralized debt obligations -- could be the source of billions of dollars in losses. The major banks have already reported billions in unexpected losses from complex investment vehicles known as CDOs. Now they face big risks from other corners of the debt markets -- but don't expect them to warn investors anytime soon.

One likely new trouble spot: Conduits, the opaque structures banks set up to provide debt funding to borrowers. Often, the debt issued by the conduits is collateralized with assets, like mortgages. If the borrower fails to pay up, it’s the bank’s obligation to pay the bondholder.

Conduits typically aren't consolidated on a bank's balance sheet. But banks are often on the hook to fund them if investors stop buying the debt they've issued. When that happens, a lot of risk can get moved onto the balance sheet.

How well do you know your bank, as an investor? Learn about some blatant cover-up here.

On my other blogs

2007-11-26T20:27:00.000-08:00

General Partners v Limited Partners

But they are exporting it all
It’s like yesterday once more
Who wants to change

Tech trends and business ideas

Now how do you counter that?
Looks like UN meeting
A phone is a phone is a phone
Shedding P in API

Angel 4 Angels

Get a load of “The New Normal”
Are you sure?
Early Stage Boards
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Detroit would love this

2007-11-26T20:13:00.000-08:00

You know what’s the problem if you grow big? You can’t talk straight.

Under threat from Google’s ever growing storage infrastructure, Microsoft looks as far as Siberia to set up its data centers. The pretext according to Birger Steen, head of Microsoft's Russian and CIS business unit, is that the site was attractive because of it stable power supply, but the promise of keeping 10,000 servers cool by opening a few windows also factored into the choice. Recently Microsoft placed a great accent on climate profile while choosing Chicago for its mega center.

“If local communities are hoping these giant centers will create a lot of new jobs, they'll probably be disappointed” says Nick Carr. He puts the hires between 35 to 50.

Now that’s something Detroit would love to ape…. Who knows? GM, Ford and Chrysler might even consider change in business models :)

That sinking feeling

2007-11-24T02:51:00.000-08:00

If there is one math that nobody seems to get right, it’s the quantum of losses from sub-prime mortgage fiasco. Not just that nobody knows how much, they don’t really know who should bear it. The estimates vary between $100 -$400 billion.

“What were they smoking?” asks the cover of the current issue of Fortune magazine. Underneath the headline are photos of recently deposed Wall Street titans, captioned with the staggering sums they managed to lose.

The answer, of course, is that they were high on the usual drug — greed. And they were encouraged to make socially destructive decisions by a system of executive compensation that should have been reformed after the Enron and WorldCom scandals, but wasn’t. Should the ongoing election campaign make corporate governance a central issue? It had better.

In fact, according to Fortune, Merrill Lynch made its biggest purchases of bad debt in the first half of this year — after the subprime crisis had already become public knowledge.

Now the bill is coming due, and almost everyone — that is, almost everyone except the people responsible — is having to pay.

The losses suffered by shareholders in Merrill, Citigroup, Bear Stearns and so on are the least of it. Far more important in human terms are the hundreds of thousands if not millions of American families lured into mortgage deals they didn’t understand, who now face sharp increases in their payments — and, in many cases, the loss of their houses — as their interest rates reset.

“And then there’s the collateral damage to the economy”, says Paul Krugman in NYT.

Look who's shorting the dollar...

2007-11-23T17:20:00.000-08:00

Gisele Bundchen, the world's richest model has reportedly reacted in her own way to the sliding value of the US dollar - by refusing to be paid in the currency. Ms.Bundchen is said to be keen to avoid the US currency because of uncertainty over its strength. The Brazilian, thought to have earned about $30m in the year to June, prefers to be paid in euros instead.

And we thought, it’s only the currency traders that had an "outlook" on the dollar…!

Looking the other way - it's ok, dude...

2007-11-20T10:43:00.000-08:00

Often we are forced to face bitter sides of life that we can’t wish away. We hate it, yet we’ll have to live with it. Having to put up with a foul mouthed coach, taking a long distance flight with a co-passenger having body odor or even worse, say, closer home to be around 24x7 for an aged someone that needs help even to lift a finger.

Everyone is in denial about something; just try denying it and watch friends make a list. For Freud, denial was a defense against external realities that threaten the ego, and many psychologists today would argue that it can be a protective defense in the face of unbearable news, like a cancer diagnosis.

You can look the other way for some time, alright. But you can’t live in denial forever. Eventually you’ll fess up and crash. In the modern vernacular, to say someone is “in denial” is to deliver a savage combination punch: one shot to the belly for the cheating or drinking or bad behavior, and another slap to the head for the cowardly self-deception of pretending it’s not a problem.

Yet according to Ben Carey in this NYT article, recent studies from fields as diverse as psychology and anthropology suggest that the ability to look the other way, while potentially destructive, is also critically important to forming and nourishing close relationships. The psychological tricks that people use to ignore a festering problem in their own households are the same ones that they need to live with everyday human dishonesty and betrayal, their own and others’. And it is these highly evolved abilities, research suggests, that provide the foundation for that most disarming of all human invitations, forgiveness.

In this emerging view, social scientists see denial on a broader spectrum — from benign inattention to passive acknowledgment to full-blown, willful blindness — on the part of couples, social groups and organizations, as well as individuals. Seeing denial in this way, some scientists argue, helps clarify when it is wise to manage a difficult person or personal situation, and when it threatens to become a kind of infectious silent trance that can make hypocrites of otherwise forthright people.

Do you feel a bit comfortable looking the other way now...?

Wiggle room

2007-11-18T04:40:00.000-08:00

The liquidity crisis fueled by subprime debacle and the big write downs by Investment banks have this unexpected fallout – Private equity firms reneging on deals.

For the last few months, private equity firms have repeatedly broken their word when breaking a deal, trying to place blame on big, bad investment banks that they said were holding them hostage by threatening to withdraw financing.

It was an easy narrative to follow, but it obscured the truth: Private equity firms, widely hailed as the “smart money,” made some lousy deals in the second half of this year, and some are now having a bad case of buyer’s remorse. They have been more than happy to break the deals and let the banks be the fall guys.

To be fair, the banks cut some pretty lousy deals themselves and have been applying pressure to their clients. But if you have spent time with buyout bosses, you know it’s hard to pressure them into doing something they don’t want to do in the first place.

But as Dan Primack says here, if the same deal revisits, the bankers will be bending over their back to do it if the fee on offer goes up. He says “Revenge is sweet, but an extra $100 million is sweeter”.

Yeah, aren’t bankers coin operated...? You bet.

Risk Management, er...., what...?

2007-11-15T01:22:00.000-08:00

Every time I come across the expression “Risk Management”, I crack up.

To me “Risk is Risk” – there’s no fuckin’ managing it. Either you take risk or you don’t. You can have a string of controls, accountability and reporting protocols. You can deploy whistle-blowers. But that’s not risk management. Risk begins where all control ends. It’s in the unknown where Risk lay. All you know is that the cookie can crumble either way and you can't do a thing about it.

So I go if you think you can control the unknown, you can say you are managing risk. But that leads to another question – if you can control the unknown, where’s the risk?

What got me started…? This.
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Leaderspeak

2007-11-13T21:08:00.000-08:00

Investors' appetite for U.S. assets will eventually dwindle and the United States must reduce its budget deficit to prevent major economic damage, says Alan Greenspan.

President Bush - "If people would look at the strength of our economy, they'd realize why, you know, I believe that the dollar will be stronger.

We have a strong dollar policy, and it's important for the world to know that. We also believe it's important for the market to set the value of the dollar relative to other currencies," says the President.

Will you buy the ex-fed chairman or the current president...?

Rise and fall of Stan O'Neal

2007-10-30T05:44:00.000-07:00

Speculations are rife that Stan O’Neal, CEO of Merryl Lynch, is likely to get the sack for the US brokerage’s subprime bets that turned bad.

New York-based Merrill in recent weeks has faced mounting criticism after it misjudged the severity of the subprime-mortgage crisis. The firm reported a third-quarter loss of $2.24 billion, reflecting an $8.4 billion write-down related to subprime mortgages. The firm apparently has a history of wrongdoings that almost brought it to the brink of collapse on a few occasions earlier.

O'Neal's is a classic tale. A nobody rises to the top, rules the kingdom and is ultimately brought down by the qualities that made him king in the first place. The fact that he had some famous enemies also helped hasten the downfall.

Stan had remarked once “My father told me I wasn’t cut out for farm work,” and added “I never took it as an insult.”. That composure should come to his aid when the Board of Directors of Merryl Lynch say something of the kind shortly, in equivalent Wall Street lingo.

Dick Bove of Punk Ziegel & Co. summarized expectations like this: "Pin the tail on O'Neal, blame him for all of the company's current problems, and kick him out. Then bring a white knight in and immediately resolve these problems and, possibly, in the process, merger Merrill out of existence, so that everyone will make their fortunes."

Big games. Big people. Bad world…! What do you think…?

Ironic indeed

2007-10-27T03:42:00.000-07:00

Between a rock and a hard place or devil and the deep sea...?

Ever since U.S. Marines first started deploying to Fallujah (Iraq) back in early 2004, military families in and around California's Camp Pendleton have fretted over their loved ones serving in Iraq's deadly City of Mosques. Over the last four years, hundreds of wives and parents have received unthinkably bad news from some 8,000 miles away. But this week, as a moment of peace and quiet marks life in Fallujah, the roles have reversed. A battalion of Camp Pendleton Marines in Fallujah now bears the burden of worrying about family back home, loved ones fleeing the wildfires that ravage San Diego County and parts of the huge marine base there.

"You leave home and it's safer here [in Fallujah] than it is at home"- remarks a soldier sensing the irony of the situation… Having to fight a never ending war for apparently no reason and not being able to be around when your own house is on fire…

Sad indeed…

The quant blow up behind subprime fiasco

2007-10-16T03:35:00.000-07:00

Was subprime fiasco the canary in the mine?

It is looking more and more like the answer is – well, yes. Many signs have suggested so, from job losses to a continuing credit drought to a weakening dollar, but that history has not yet been written.

And how the quants contributed to the blow up? MIT Review Part I and II, here and here.

Stick with Earth

2007-10-06T01:06:00.000-07:00

I like this expression – “Lunar Governance”

It was fun reading Padma Tata in New Scientist. She wonders what is the politically correct way to describe a group of humans who settle on the Moon or Mars? "Colonies" is the term bandied about most often . But the word evokes memories of exploitative European settlers in Asia and Africa, points out MYS Prasad, deputy director of the Indian Space Research Organisation's Space Applications Centre in Ahmedabad. Scientists from India, a former British colony, would prefer to say lunar and Mars "habitation bases".

Go a step further. When those planets are inhabited, soon we are all going to pay for everything. How do we pay? After all, if space tourism really takes off and space travel becomes commonplace, people might need to pay for things up there. Why not just use ordinary cash, you might say? Or perhaps a credit card? Those aren't any good for space, according to George Fraser of the University of Leicester, UK. None of the existing payment systems we use on Earth – like cash, credit or debit cards – could be used in space for a variety of different reasons," says Fraser, whose team of scientists has designed a new space currency. "Anything with sharp edges, like coins, would be a risk to astronauts while the chips and magnetic strips used in our cards on Earth would be damaged beyond repair by cosmic radiation."

I ask, what the hurry is. Hell, the Bull Run is not yet over !!!!:-)

Great Detroit suicide

2007-10-03T20:26:00.000-07:00

Assisting Detroit’s suicide seems to be contagious. Everyone wants to get in on it, including Toyota. Toyota, which pioneered the industry-leading, 50-miles-per-gallon Prius hybrid, has joined with the Big Three U.S. automakers in lobbying against the tougher mileage standards in the Senate version of the draft energy bill.

Michigan lawmakers year after year shield Detroit from pressure to innovate on higher mileage standards, even though Detroit’s failure to sell more energy-efficient vehicles has clearly contributed to its brush with bankruptcy, its loss of market share to Toyota and Honda — whose fleets beat all U.S. automakers in fuel economy in 2007 — and its loss of jobs. G.M. today has 73,000 working U.A.W. members, compared with 225,000 a decade ago. Last year, Toyota overtook G.M. as the world’s biggest automaker.

Thank you, Michigan delegation! The people of Japan thank you as well.

A bridge and its heritage

2007-09-30T00:42:00.000-07:00

Talking just about environmental protection or culture, and not economic realities, will not launch local communities into development. Environmentalists are often accused of being “immoral”—hearing only the desperate cries of heritage activists and ecosystems and not recognizing people’s daily struggles against poverty. But then things get a little quirky if NASA takes a few satellite pictures and publish it.

Opinion is highly divided over the Sethusamudram (Ram-Setu) issue, a chain of limestone shoals between Mannar in northwestern Sri Lanka and Rameswaram off the southeastern coast of India. The Hindus believe it’s part of their mythical folklore that goes the bridge was built for Lord Rama to cross over and rescue his wife abducted by Ravana, a Lankan demon king, as recounted in the epic Ramayana.

The 48-km-long feature connects the Gulf of Mannar to Palk Strait. The Encyclopedia Britannica says it was once the world's largest tombolo – a sandbar connecting an island to another island or the mainland – but it was destroyed several thousand years ago by a slight rise in sea level. Today, all that remains is a chain of sandbanks that severely hinders navigation.

Right now, ships trying to move between India's west and east coasts have to go around Sri Lanka. To save time, India decided to build a shipping canal between the countries. The decision to build the Sethusamudram Shipping Canal itself is fraught with controversy – with several geologists and environmentalists from India and Sri Lanka raising objections on scientific grounds.

So, what stand to take? Let’s first decide how the emissions from the longer round-about trip and their contribution to global warming compares to the damage from the construction project. A canal MAY save some fuel and time for the ships to get across. But building it in itself would burn up a million gallons of fossil fuel - for the dredgers, pavers, concrete pourers, not to mention the steel required, plus the shipping involved to get the raw materials there! Even after the canal gets built, imagine ships lining up to pass through it with engines humming, burning more oil in the process. Also I wonder what the environmental cost savings would be with fewer miles traveled. They aren't talking about solar or wind powered ships.

Precisely why I am tempted to lean towards heritage, as it saves a beautiful bit of nature. Let the ships go round.

The bug in Excel

2007-09-26T18:55:00.000-07:00

In all likelihood, Bill Gates must be using Excel spreadsheet to compute the value of his shares in Microsoft. In that case, he’d better recheck the math using- gee, the simple calculator.

Spreadsheet math has been one of those things most of us have taken for granted, but a bug newly uncovered in Microsoft's 2007 Excel program may bring some to reconsider.

According to the spreadsheet program: 77.1 x 850 = 100,000, way off from the correct answer of 65,535. Microsoft, in the final phases of testing a fix to the spreadsheet bug, says the problem occurs in only 12 very specific cases.

So how did a powerful program like Excel end up choking on a calculation that your everyday calculator can do? Says AppScout: "It all boils down to the fact that you can't represent an infinite group of non-integer numbers using a finite number of bits. In fact, Excel can store "only" about 9 quintillion distinct values. The numbers going into your calculations may be infinitesimally different from the number displayed, and for two calculations that nominally have the same answer the result may be infinitesimally different. Excel generally manages just fine in dealing with these tiny differences, but in exactly 12 instances out of the 9 quintillion possibilities it goes completely bonkers."

Wolfram offers a good, in-depth explanation of this issue, and why it's hard to get arithmetic right.

Especially in the age of energy efficiency and global warming, perhaps it's time for us to reconsider the abacus -- at least for the easy stuff.

Are you sure, Ms.Young ?

2007-09-26T04:33:00.000-07:00

This one had me in splits.

The Indian IT vendors or SWITCH companies [TCS, Infosys, Wipro, Cognizant, Satyam and HCL Technologies] has accounted for 1.9% of the total $672 billion IT services market in 2006. (Oh, what a dent!) This is an increase from 0.5% of the $554 billion IT services market in 2001, according to a study by global research and analyst firm Gartner.

“India-centric providers have perfected their respective value propositions through global delivery models (GDMs), providing high-quality yet lower-cost labour to buyers globally. These companies are making inroads in key clients, often beginning with smaller, project-based or staff augmentation work,” Allie Young, VP and analyst, Gartner said.

Are you sure, Ms.Young…?

From risk takers to risk shapers

2007-09-21T21:57:00.000-07:00

“Customer risk is the most subtle and perhaps the most widespread strategic risk that any company faces. It’s also the most unnecessary”, argues Lisa Haneberg from an article by Adrian Slywotzky, the author of the bestselling The Profit Zone (selected by BusinessWeek as one of the ten best books of 1998), Value Migration, and How to Grow When Markets Don’t..

How can you take action to prevent customer risk? You can’t force people to buy from you. As Yogi Berra once said, "If the people don’t want to come to the ballpark, you can’t stop them."

No, you can’t, but you can reduce the risk of losing customers by reducing the uncertainty that creates the risk in the first place. After all, that’s what risk is about—not knowing what’s going to happen, what your customers are thinking, what they want, what they will do, what will they respond to. If you could know those things, you could react appropriately with the kinds of pricing, marketing, and service offerings that would motivate them to stay.

This is why the first countermeasure for defeating customer risk is creating and applying continuous proprietary information about your customers. It’s about answering the question: What do we know about customers that others don’t? And then using that knowledge to make and keep profitable customers for life.

Very intuitive article. I found it a bit late though, as usual.

Grave dancer knew when to step back

2007-09-20T00:49:00.000-07:00

If you revisit the Blackstone – EOP deal today after the Housing market collapse, Sam Zell wouldn’t have timed his exit better.

In February, Zell sold his flagship Equity Office Properties (EOP) and its portfolio of 540 prime office buildings to the Blackstone Group for $39 billion. Large PE firms that benefited from absurd leverages, were offering premium prices to publicly held Real Estate firms. Later the subprime crisis followed and the resultant credit squeeze and risk aversion would never have allowed that kind of a deal to go ahead. In Zell’s own words “today, you would never be able to replicate the Blackstone deal”.

Interesting feature on the great mogul here.

Wharton Real Estate professor Peter Linneman notes that Zell is known by the nickname "the grave dancer." According to Zell, the term grew out of the headline of an article he wrote describing his strategy of profiting off distressed real estate following the inevitable bubbles of investment enthusiasm. Zell said the article shows how "I was dancing on the skeletons of other people's mistakes."

Zell, however, also pointed out that the last sentence of the article reads: "He who dances closest to the graves, always has to be careful he doesn't fall in."

Zell clearly knew when to step back. Does that leave Blackstone in the grave then? Stephen Schwarzman knew how to look for greater fools. He did the unthinkable – of taking a PE firm public - Blackstone went public in June…!

What drives the US dollar down ?

2007-09-18T03:42:00.000-07:00

If not as stressed as India’s IT vendors and exporters, I am a little hassled. What drives the US dollar down so much?

Ok. There you have a steep oil price, a weak economy and an anxious credit market - all helped dump the dollar. But America's growth prospects are not so poor and the subprime-mortgage market not so woeful—at least, not yet—that they can fully explain the dollar's recent sickliness. My basic understanding of economics tells me a currency of a country that has an adverse balance of trade will be weak.

But a closer look suggests that currency markets, rightly or wrongly, are blithe about trade imbalances. Some of the countries whose currencies have gained most at the dollar's expense, like Britain, Australia and New Zealand, have large external deficits and debts too. Australia's current-account shortfall has been more persistent than America's and, as a result, its net overseas debt last year was 60% of its GDP, compared with 19% for America. New Zealand's debt ratio is larger still at 90% of GDP. Meanwhile the currency of the world's largest creditor nation, Japan, continues to languish—even against the dollar.

If anxiety about global imbalances is not driving currency markets, perhaps the dollar might rally once America's economy is back on its feet. It has, after all, fallen a long way already: on the Fed's broad trade-weighted index, the greenback is down 22% since its peak in 2002. According to the purchasing-power parities calculated by the OECD, the dollar is undervalued by 15% against the euro, 18% against the Australian dollar and 21% against the pound. Such divergences from fair value might not prove sustainable, particularly for the countries that have external financing gaps of their own to fill.

It's a Free world, yeah...

2007-09-12T19:37:00.000-07:00

All those carriers outside US waiting to lock down iPhone users (a la AT&T in US) to their own network when Apple decides to launch it in their territory, might as well recognize that it would be a big mistake. First it just took a 17 year old to unlock the iPhone, followed by iphoneSimFree that sold its unlock software licence in bulk to resellers.

Now it turns out that the folks at iPhoneSimFree may have just set a land speed record for product launch to obsolescence. It has been reported that a software unlock has been released for FREE download for all.

It started with a rebate of $100 on iPhone. Now the hack is set free too. Apple, clearly a winner here, will certainly sell more iPhones with the unlock freely available. And everyone who waited to buy the unlock (and the iPhone) will save anywhere from $50 to $200, depending on when they bought their iPhone and at what price they bought the unlock.

There’s this lesson – Don’t hurry to buy a gadget; never try to lock it down either… It’s a Free world, yeah…