Paper on Liquidity Crisis: submitted by me

Introduction

This is not the first time the liquidity crisis has impacted the world there has been a series of events after the World War II system of centered economic clout has failed to provide international financial stability (Thorvald, Solheim and Vale 44). Globalization is an another phenomena which has impacted deep and it was a one way street started from US and Europe and later on Japan which has now transform to developing economies which have large population along with low wage rates which are either producing or buying the product, and exporting again to the developed market so this is the scenario indicating the one way street.

According to the Bloomberg the damage was unimaginable and the bench marks indexed extended earlier declined and spurred when the Wachovia had joined three European banks in the government requiring the rescues at a very high level. Sovereign Bancorp second larges U.S savings and loan was deeply plunged in to $6.06 to $2.33. The biggest bank of Ohio’s National City lost almost half of its value from $2.35 to $1.36 (Bernanke 258).

In the recent period with the rise of developing economies China, India, and Brazil have created a two Way Street, Eastern Europe and Russia are also the major contributor in that. There has been a common trend that only the western companies go and invest in these economies but in the course of past 7 years the situation has reversed, the companies situated in these developing economies are not only operating in these economies but they have taken there place at a global level.

So it is very visible that how the globalization has increased the inter dependency and a failure in one market lead to the repercussions in the other. This totally depicts the present situation of the liquidity crisis in US and the Non- US economies and also to the financial markets operating internationally.

Referring to a paper from IMF the current market crisis and other such as the stock market crash of 1978, Crisis of the Junk bond in 1990, Mexican Crisis 1994, Asian equity and currency crisis 1997, Russian Default 1998, LTCM collapse 1998, Dot com bubble 2000 have been repeated warnings calling for a coordinated action in the technologically integrated world financial markets. (Olivier 7-9) But the recent Sub prime fiasco is suppose to be the mother of all it has lead to conflagration and contagion because of the globalised world and the liquidity has been dried up because of the excess leveraging from exotic derivatives.

The ongoing liquidity crisis in the global market was started with the failure of Subprime mortgages in the United States. The whole world financial firms had been directly impacted because there is a significant decline on the public confidence in these financial institutions. One of the leading examples of this fiasco is the failure of Northern Rock the giant mortgage bank of United Kingdom which was heavily exposed to the mortgage sector and it has no liquidity when then retail depositors withdrawn there money from the bank and the bank suffered from huge liquidity problem before it was nationalized by the UK government.

The US Federal reserve has reduced the rates almost at 0 levels which could lead to low interest rates for longer term maturities. The other impact would be when fed has already announced that it will directly buy those non traditional assets resulting in reduction in the interest rates for the whole economy. These are part of the unorthodox measures taken by the US to bring back the economy in track. These unusual steps taken by Fed have dented its balance sheet from $900 billion up to $2 trillion and chances are there it could grow further. The whole financial system has collapsed that’s why fed is reaching out to the economy directly going over the head of financiers.

The paper has been divided into the 5 parts the first part quoted above lead with the introduction followed by section II where the emphasis provided on the origination of the problem (subprime – crisis). Section III focuses on the impact of the crisis on non US economies and in the International Market. Section IV includes the regulatory aspects which failed to deliver there duties and V section concludes the paper followed by bibliography.

Origination of the Crisis in US

The sub-prime crisis that began in August 2007 has been regarded as the worst financial crisis since the great depression this is according to the International Monetary fund, Joseph Stieglitz and George Soros. It all began in the year 2000 after the 9/11 were the US fed Chairman Alan Greenspan thought that after the terror attack the US economy is going to slow down in the near future so the fed reduced rates on the continuous basis in-order to boost the economy and to save from the free fall . In the mean while US president made an important decision and that was every one in US should have a house. This lead to huge borrowings from the banks by the common man and the borrowings were made on the underlying hypothesis that in future the US houses will not fall and incase the borrower default the property could be sold out and banks will certainly retain there money .

Here I would like to emphasize on the two models of lending the basic model and the advanced model which adopted after these policies. Below is the picture indicating the models.

In case of the traditional model if a home buyer wanted to grab a loan for the home in the form of mortgages, the homebuyer need to go through a heavy paper work including the due diligence from the bank.  The underwriter of the bank did all the risk valuation in this model and the credit worthiness of the borrower was analyzed with strong conduct of Know your customer norms. So there was very few incidence of default as the repayments made by the borrower were on time and loan disclosed by the banks was fully amortized after the loan period.

(Zettelmeyer 30)

In case of the advanced or Subprime model there was entry of mediators in between the mortgage broker, home appraiser and rating agencies. So in this process even the person who is less credit worthiness got the loan. In subprime model the home borrower did not need to approach the bank rather the mortgage broker sell the mortgages and earn a commission on them, In case of prime loan the commission was limited but if a mortgage broker sell subprime loan which is below standard and not approved by any of the government agencies was provided a high commission. In this process borrower which are not capable of buying a house got the loan through these mortgage brokers and the third part home appraisal. These loans are typically called as NINJA loans No income, No Job and No Assets for collateral. Further banks in-order to safeguard themselves passes these loans by forming a SPE Special purpose entity in Candy Man Island and pooling these loans the process is called securitization.  

There after through approval of the rating agencies and involvement of the investment banker these pools of assets divided in to tranches and sold to the bond investors. Those who invested in these bonds use to get a series of cash flow based upon the risk appetite of the investors. The securitization was done and the securities were OTC over the counter in nature commonly called as MBS (Mortgage backed securities) securities backed by the mortgages, ABS (Asset backed securities) securities backed by other assets like credit cards, student loan, CDOs (Collateral debt obligations) and CMOs (Collateral Mortgage obligations).

This whole model was based on the underlying assumption that the house prices in US will never collapse and the no. of default borrowers will not rise as they have risen tremendously over the year and foreclosures have increased at rampant speed. And the leveraging done on the underlying assets was tremendously huge. But all was put up on the task when the housing prices in the US collapsed in the year 2005. When the foreclosure started increasing after the 2005 the exotic derivatives which were leveraged on these basic poor subprime mortgages and when they started defaulting the ripple effect turned into a dominos effect or effectively called as the systemic risk. A few foreclosure of houses lead to a huge amount of losses on these derivatives which were OTC in nature and the parties engaged involve in the Credit Default Swaps.

Credit default swaps are the third party product where the two parties involved in a contract and on the monthly basis the party who is insured against the credit event will continuously pay premium to the insurer or the party who will pay the insured amount in case the credit event happening. The market for the credit default swaps before the collapse stood at round $62 trillion which provided night mare to the regulators after the loss of the Bear- Stearns (Moir 26). The subprime crisis which started in US took the contagious shape and lead to the fall of the Investment banks in US, the impact didn’t only retained in US but spread in the whole world leading to the failure of the financial system and the contraction in the liquidity. The next part of the paper deals with the contagious affects how the liquidity affected in the non- US financial market.  

Impact of the crisis on non US economies and in the International Market

The turmoil of finance originated with the collapse of the subprime mortgage market in the US and spread in the world and the losses claimed to be around US$ 600 bn. In the process the crisis spread to Europe and the UK based Northern Rock was first mortgage bank which had a huge exposure in the US subprime mortgages experienced a bank run on September 14^th 2007, and the government nationalized the bank. The fiasco of the Northern rock reflected the weakness in the framework of the UK. After the Northern bank the next bank which was shut down was Indi Mac. (“The Fairness Issue: How to Cope with the Flood of Foreclosures”)

This started the series of the collapse of the banks in US and Europe and it affected the other countries Japan, Russia, Brazil, China and India. The emerging economies came under the stress of the financial deleveraging in the developed nations which led to interruptions in the capital and reversals.

The markets which were highly liquid which use to be benefitted in their past carried large trade positions have been taken upon the task and been hit very hard and the rate movement of the exchange have registered a sharp decline in those emerging economies. The foreign investor with the appetite of reducing exposure from these emerging economies just because of the measures  which were placed in advanced economies majority of these economies are suffering from the abrupt capital flow or sudden stops. These strains in the liquidity transformed ultimately into solvency crises easing and swiftly. According to the working paper of International Monetary fund by Olivier Blanchard states that “Emerging economies need to be able to respond quickly to liquidity shortages since funding markets are quickly drying up. For countries with flexible exchange rate regimes, the exchange rate should be allowed to absorb some of the pressures arising from capital outflows. And countries with large reserve buffers should be willing to provide foreign currency liquidity as needed, including to maintain firms’ ability to trade and operate and to counter disorderly market conditions. At the same time, however, reserve currency countries should be willing to provide liquidity support to emerging economies with sound fundamentals facing large pressures in their external accounts (Blanchards 5).”

The other supports such as credit lines or the swap with the central banks, as it has been done that among advanced economies could be an important step and could be extended.

In the same way the regional pooling of the international reserves, such as in Asia through swaps of bilateral, further backstop for the countries which are facing significant pressure.

Analyzing the scenario of the crisis the countries like Iceland and Pakistan were on the verge of bankruptcy and IMF bailed them out in order to save there economy IMF provided the liquidity. The world stock market had crashed and touched the new bottom in-fact the scenario is such worse that even the Chinese economy which was supposed to be a closed economy also suffered from the crisis. (Blanchard 1-9)

The world’s government had employed broad range of policies to deal with the financial crisis. The next part of the paper deals with the crises control by the regulations how they failed to regulate the system. The weakness aggravates the crisis and complicated the resolution of the crisis, lead to the bankruptcy as they were deficient to control. Another aspect which was a week point disclosure and accounting rules of the financial institutions and corporations were week.

When the crisis put on the global level the cross country analysis shows that policy measures such as substantial liquidity support, government providing guarantee on financial institutions resulted out to be costly at the fiscal level and these particular measures will not bring back the economy on track as better institutions which did not leverage could lead to faster recovery (Shin and Adrian 3).

Analyzing it with a single bank it was clearly impossible to describe the two major sources of systemic risk co-related portfolio positions in the banking system and the dominos effect and the consequences of the exposure to the interbank.

The impact on the overall risk of the bank crucially depends upon how the proceeds are to be reinvested and the resulted effect is not obvious but depends upon the range of possibilities. This process leads to balance sheet mismatch of the bank which is leveraged either by distributing the proceeds to the shareholders junior trench.

Looking at the core problem in every banking crisis is that all the financial systems throughout the history has based only on the trick of confidence (Laeven and Valencia 33). None of the bank ever in the history had enough money immediately available to the customers who are basically the depositors. So once that confidence fluctuates or falters the damage for the banking system is huge which the whole world is witnessing now. When this situation arrives there is only one way the bank could be saved is government guarantee for all the banks. Only government could do it because they have the liability to print money and bring back in circulation without paying its debt.

Going back to the crisis it started in the America then rumbled on to Britain and Western Europe and the Britain government started bailing out the banks, the basic structure of these economies will remain intact because they have been through severe crisis. The other countries which had been adversely affected by the turmoil were Hungary, Ukraine, Russia, Argentina and many other countries on the periphery of the global financial system.

The unhappy nations where the government support for the banks had aggravated financial panic have been divided into 3 types.

1. These are the big trade deficits or large scale borrowings in foreign currencies example Hungary. The trade deficit of Hungary is more than 5 percent of the national income and where almost 60 percent of consumer and business borrowings is not just provided by foreign sources but is also owed in foreign currencies basically in Euro or Swiss Francs. These nations are totally dependent on inflow of foreign capital government support for their banks are unlikely to work.
2. Government support could also destabilize the banks in small nations with disproportionately large banking system: The best example of such nation is Iceland, It differs from the rock solid Switzerland is the tiny size of the economy and the big deficit on its current account. Unlike Swiss Federation, Government of Iceland does not have credibility as an international borrower in its own right these problems could also arise in the small nations like Liechtenstein, Andorra and the Cyprus if the domestic banks overextended.
3.  These are the countries with trade surpluses and strong positions in its reserve; they have bad records of past monetary mismanagement. The prime example here is Russia and other nations which fall into this group are Argentina and several other Latin American countries. If Russia’s trade moves into the modest deficit the oil prices stay at $70 this could be a problem in the next five years because the country had recoded trade surpluses even bigger then Japan and China in the context of the GDP (Bernanke 258).

 

There has been a mass fight between the asset liability mismanagement in the economies but about Latin America and Eastern Europe there has been questions not only on the banking systems but on the nation as a whole about uncertainty of the future.

The financial market of the world has seen 2008 as one of the worst year in terms of investment it has been a night mare for the investors. The major Indices of the world has lost almost 60-70% of there value. Japan, Germany, UK and US has officially declared that there economies has went into recession  day in and day out some bailout package is ready for the one or the other corporation in these economies and the emerging economies which had been adversely effected .

The liquidity in the world has dried up and the confidence level between the two financial institutions, Banks has been at a all time low with the fear of parties getting default on the pertaining to there obligations. The rates of the all the countries has been revised and been reduced from time to time because the countries fearing the inflation.

Regulators Failure

When looking in to the deep of this liquidity crisis there has been a serious issues that is the regulator failed to perform there due diligence while performing there duties, they allowed over leveraging for the firms which where not capable of managing such a huge debt. The firms like Lehman brothers went into the credit default swaps and leveraged themselves 40 times more then there actual balance sheet. Confidence was sole reason behind such kind of leveraging the regulators never inspected the books that what is the debt which has been of such a huge size. When the off balance sheet practice was in its full swing the firms started defaulting because of the mortgage failure and lead to collapse of the system as a whole. Here are the basic regulatory aspects which could be looked upon

1. Mortgage Bank:  In the traditional banking the mortgage banks always used to check there client worthiness and the home loan was processed which use to take substantial amount of time and chances of home borrower were minimal because the mortgage was provided only to the home borrower who has good credit worthiness. This whole process was put up on the task when banks become greedy and didn’t able to perform there basic due diligence they started appointing Mortgage broker and the appraiser. So bank didn’t even bother to look into the credit history of the borrower as mortgage banker use to get commission for selling the loans which are of low credit worthiness basically called the subprime loans. The mortgage broker sold the loans just like candies didn’t bother to tell the home owner that in future the rate will rise and they have to pay more. They were providing loans at a teaser rate. When bank realized that the loans they possessed in future could default went for securitization through off balance sheet and making a special purpose entity in Cay Man Island. This way the bank transferred there risk to the next entity who will be investing in these distress assets.
2. Credit Rating Agencies: In order to retain there market share and business the credit rating agencies ranked these distress asset with good ratings. They were paid a huge amount in performing the tasks of ratings by the Investment Bankers who were the major seller and investor of these distress assets traded in the OTC market termed as the exotic derivatives.  The Investment baker purchased the pool of distress assets from the mortgage banks special purpose entities and then divided them into three tranches :

a)      Mezzanine

b)      Subordinate 

c)      Equity

Mezzanine tranches are the AAA rated tranches by the credit rating agencies, these are good quality assets backed by the prime loans, but the returns on these investment were very low because the risk was also at low level.

Subordinate tranches are AA rated tranches which were less worthiness then AAA and the chances of default from the borrower of the loan could be more and they were provided more returns.

Equity tranches were unrated or below rated mostly comprises of the subprime loans and backed by distress securities they were provided the maximum return and they are the investor use to take the maximum risk.

But as a whole when the scenario became grim even the so called good assets defaulted and the market collapse for the exotic OTC products lead to a severe liquidity crunch in the economy. (Bernanke and Lown 230)

1. Central Regulators: The central or the head regulators of the US and Europe never awakened when this off balance sheet process was on the full peek and nobody bothered to check upon these derivatives which are to be marked upon daily basis.  Once they collided all were on the there toes and trying to save the economies by funding and bailing out the organizations.

The regulatory aspect of the world was revised in the Basel II committee especially for the banks in terms of the risk management. But they were overlooked by the organizations and they were heavily involved with the process of involving in the mark to market which has been put up on task by fore closures and the prices of the house going down in the US impacting the whole world directly as well as indirectly. As US is the worlds biggest consumer the spending has been slowed down the Job less data has been on the spree affecting the economies like China & India who are the exporter to the US.

We can’t ignore the current credit crisis without blaming the failure of the regularity and the supervising authorities. The main work of these regulators was to ensure that the financial institutions should remain in their limits and boundaries balancing the loans and savings parts. The current crisis basically explains the modus operandi with in the financial sector in the most developed economies of the world and it’s a matter of concern that were the regulators doing except simply leveraging on the tax payers money.

There has been questions and doubt on the models used by the investment banks and the insurance companies. The task ahead is gaining insight daily operational activities with in the financial institutions and the enforcement of the business ethics.

Here are the few cases showcasing the failure of the regulators:

a)      The law suit was accused to the world wide by forging the documents.

b)      World wide the customer destroying checks and an additional charges adherence to the legal cost.

c)      All the insurance companies ultimately find themselves forging the collateral.

d)     The rating agencies could not able to do there due diligence and could not able to manage conflicts of interest.

e)      The selling practices of the mortgages were tantamount and void from the beginning.

The regulators and the banking supervision rules have been put forth in the recently concluded G-20 meeting at Washington. The world leaders discussed about the bailing out the economies and bringing back the economies on track which has been seriously impacted by leveraging there balance sheets.

The consensus which the world leaders arrived that the regulators must be strict in there functioning. The working of credit rating agencies has been put on the task again there regulations have been started tightened.

Bailouts are very common in today’s scenario majority of the banks in the world have been bailed out by these regulators, liquidity support has been provided to the financial institutions in-order to save the economies.

Conclusion

Crisis has been the part of the financial market, time and again when the valuations go beyond controls there is always chances of the failure. The world economy has seen the failures from the Great depression, Asian economic crisis, dot com bubble but time has shown that the economy bounces back so it is a part of economic cycle.

If the banks could forced to reveal their losses based on the current prices, they will be even bigger then expected, it was estimated that ultimately losses suffered by the financial institutions could be estimated to around between $220bn and $450bn (Bernanke 258).

An early warning system needed to be implemented which leads to better understanding and forecasting the future cash flows, crises like the current one are suppose to be un-predictable. If they can be predicted hedge funds and other money managers should not have lost such huge amount of money.

Policy makers of the world need to do better then solely relied upon the consensus judgment of experts, the fact is not very meaningful, the diversity of opinion at any point of time will always looks like right ex post.

Some of the key questions still remains to be answered the key to regulators reform is not to predict the future with more and more accuracy instead of making the system as more robust so that in future the economy must function better when the unpredictable that is the black  swam according to Nassim Taleb generally occurs. In the other words it can be said that it’s better to see what’s going on rather then predicting the future.    

The term confidence need to be redefined as once the trust is lost in the banking system the whole system collapse because a bank on a particular day leverage of the banks is huge. The lessons could be taken from the failure is the rawer capitalism where they have been regulated appropriately abstaining from involvement in the market.

Before concluding the paper the future of the developed market i.e. US, UK, Europe and the emerging economies looks grim and actions have been taken by the major government funding the economies through special bailout packages.  The economy of the world seems to on the verge of slow down and the next financial year seems to be on the task. Already the IMF and the major research firms had already downgraded the next year growth of the emerging economies as well as the whole world. By concluding the paper quoting Adam Smith the invisible hand did not create mess. That honor belongs to ham- fisted politicians.

 

 

Work Cited

“The Fairness Issue: How to Cope with the Flood of Foreclosures” Knowledge@Wharton. 9 Dec. 2008 <http://knowledge.wharton.upenn.edu/article.cfm?articleid=2104>.

Adrian, Tobias and Shin, Hyun S. “Liquidity and Financial Contagion,” Banque de France Financial Stability Review 11: (2008a): pp.1-7.

Bernanke, Ben S. “Nonmonetary Effects of the Financial Crisis in Propagation of the Great Depression.” American Economic Review, 73(3): (1983): pp. 257–76.

Bernanke, Ben S., and Lown, Cara S. “The Credit Crunch,” Brookings Papers on Economic Activity, 1991(2), 205–39.

Blanchard, Olivier. “The tasks ahead” Journal of IMF. (2008): 9. 9 Dec. 2008 <http://www.imf.org/external/pubs/ft/wp/2008/wp08262.pdf>.

Laeven, Luc, and Valencia, Fabian. “The use of Blanket Guarantees in Banking Crisis.” Journal of IMF. (2008): pp. 80. 9 Dec. 2008 <http://www.imf.org/external/pubs/ft/wp/2008/wp08250.pdf>.

Moir, Lance. Managing Corporate Liquidity. New York: Global Professional Publishing, 2000.

Olivier, Jeanne et al. “A theory of International Crisis Lending and IMF conditionality.” Journal of IMF. (2008): 30. 9 Dec. 2008 <http://www.imf.org/external/pubs/ft/wp/2008/wp08236.pdf>.

Thorvald, Moe, Solheim, Jon A. and B. Vale, Bent. “The Norwegian Banking Crisis”. Norges Bank Occasional Paper No. 33, 2004.

Zettelmeyer, Jeromin, 2000, “Can Official Crisis Lending be Counterproductive in the Short Run?” Economic Notes: 29(1): 2003: pp. 13-29.

Book Review PANIC by MICHAEL LEWIS

This is the next book by Michel lewis after the famous Liar’s Poker .

The book is a commentary on the various crisis that occurred in the history of financial Markets.

From Black Monday to the Asian financial crisis, including the internet bubble and the recent Mortgage meltdown. 

In the Asian financial crisis the emerging economies attracted the developed world and they invested blindly in the THAI Bath, which collapsed in the nineteen nineties.

The internet bubble where every company even not related with IT was in a race to have its name with inc. Where the valuation of the companies is done on the basis of no. of hits to the particular website, Broking firms hired IT analyst the basis of valuations was forged.

The mother of all the mortgage meltdown, which came from Wall Street to the common street, and the whole economy of the developed world went for a toss. More than 150 banks closed down and famous names like Northern Rock, Bear stern, Lehman collapsed. 

The book used Contemporary accounts commentators Prof Joseph Stiglitz, Jeffrey Sachs and Paul Krugman. Lewis conveyed the mood before each catastrophe, what it was like in the heat of the moment, how afterwards.

Panic!! Provides an insight how markets really operate  & who really knows what they are talking about.

GALLEON INSIDER TRADING CASE

GALLEON one of the America’s leading hedge fund’s co founder Raj Rajaratnam found guilty of insider trading. Raj is one of the wealthiest men at Wall Street. More than $25 million profit generated through insider trading by Galleon.

There is a series of people from leading business houses including an IT firm, rating agency and Investment banks who were involved with Raj Rajaratnam.

The Hedge fund size is more than $7million dollar and it did insider trading in a list of IT firms including Google, Intel etc, before the IT bubble burst in 2001.

There are several questions raised out of this case. Do hedge funds need to be regulated? If yes! than they will come under constraints.  The case should cause financial professionals considering insider trades in the future to wonder whether law enforcement is listening.

But the laws in our country are enforceable to handle cases like this ?

INTEREST RATE FUTURES ARE BACK AGAIN IN INDIA

The derivative instrument Interest rate future IRF is back in India after a period of 6 years .IRF was launched in the year 2003 for the first time in India, it did not took off as there was lack of liquidity and various complexities including the delivery of the product.

Last Saturday I attended the seminar at NSE, again introduction of IRFs in the Indian market. Came across various things and still could not able to digest few things because of the complexities.

The best part of IRFs is that they are deliverable at the end of maturity and the catch is IRFs will be functioning on the basis of underlying 7% Notional Government bond having a maturity of 10years.

The committee has recommended 11 Government of India Bonds having maturity not more than 10 years any of these could be delivered by the seller at the end of maturity depends upon the seller option.

At a time four contracts would be available to trade with the expiry of March, June, September and December so far only two are available they are of September and December.

The concept of Cheapest to Deliver CTD has been introduced (keeping in mind the lack of liquidity in the Indian bond market). Out of 11 bond chosen by the exchange the bond having less CTD will be delivered by the seller in the normal circumstances. Quoting the example:

 An Upward sloping yield curve and having a long maturity will be delivered by the seller (keeping in mind the reinvestment risk so it would be CTD contact)

It’s a great move in reforming the India’s Bond market having lot of potentials to outperform in the world market. In India generally the IRF are traded by the Banks, Primary dealers, financial institutions and Mutual fund. Earlier IRF where only used for the balance sheet management and Mutual funds were allowed only to hedge their risk. Thankfully they will be allowed to trade now.

The market for the derivatives on Bond world wide is much bigger comparing to the size of equities market world over. The CBOT allow to trade spreads between the two different bonds. (Say a 10 year note and 30 year bond), means we can long on one and short on the other. The product attracts lot of volume and volatility.

In India calendar spread can be traded current month and the far month. The response in the last 10 days reported by the business newspaper is not that great. Hopefully the volume will pick up but the delivery part complexities will be there so IRFs could prove out to be great Trading, Arbitrage and hedging product.

Book Review: Fooled by Randomness

Every body wants to be succesful in his/her life. But what are the reasons that some of us more succesful then our counterparts? Is it really down to skill, knowledge and stratergy or some thing altogether unpredictable? Black Swan the name give by the author Nassim Nicholas Taleb. After reading Black Swan I found fooled my randomness is also worth a read for the people who are associated with markets.

The book will definately challange the way you think about business and the world.More precisely its the factor called luck, how we percieve luck in our personal and proffesional experiences. Its more obvious in the markets we hear an enterpreneur has ‘vision’ or a trader is ‘talented’. but all too often thier performances is down to chance rather than skill, its becoz we fail to understand probability that we continue to believe events are non-random, finding reasons where none exits.

As a trader I loved the way the chapers are constructed in the book.

REFORMING THE COMMODITIES MARKET IN INDIA

The newly elected government seems to be going in the right direction. Indicating that this is the most literate cabinet India ever have. Last year Mr Chiddambaram proposed a CTT on all commodities contract, that could have been disaster for the commodities market if the same has been introduced. The exchange traded commodity market is still in its juvenile stage .

Commodities market in India need to develop a lot comparing to the other markets of the world. Current FM has shown indications that he will not introduce the CTT in the budget, this will cherish all the commodities traders and encourage the investors to focus on the commodities too as a investment destination.

Even the most developed country of the world have not imposed commodity tax.

Man who saved India from the Global Crisis..

Nassimm Nicolas taleb described the current global crisis worst then the 1930 recession. This is because of the financial system and economies are co related.

But India is in better state considering the world economy.Thanks to the vision of former RBI governor Y.V. Reddy conservative policies. He never allowed the Indian banks to write any securitization and turning them to toxic derivatives, that’s why of the whole trillion dollar exotic products India’s exposure is only 50 crores.  Mr Reddy predicted the real estate bubble in India and tightened the policy rates on continues basis.

Although he created a lot of critics for him self because of his conservative policy but if he didn’t acted on time the situation could have been worse.
After completing his tenure at RBI he has never seen in the media nor at his home town because he has been delivering lectures how to come out of this crisis at World bank, Banking Institutes and to many global financial systems.
In one of the interview prof Joshep Stiglz said that the only way US could have been saved from the subprime crisis if YV Reddy was handling US Fed reserve ins ted of Alan’s Greenspan.

Thanks to the vision of YV Reddy man who saved Indian financial system from entring in to the global fiasco.

ARE THE BULLS REALLY BACK

The decoupling theory which was introduced by some one before the sub-prime crisis in 2008 was went for the toss, when the Indian economy also suffered by the global recession. Now the Indian markets are ending in green from the last week and showing consistency but the European and the US stock markets are not showing such a great chance of revival.Is the decoupling theory persisting ? or the common views of analysts saying that its a election rally in the Indian market.

Global events are directly linked to the economy each and every major news do discount the market today or tomorrow. Be it the G20 sub mitt or the major chapter 11 bankruptcy filing by the MNCs. The Indian markets are up and when a finance guy want to know why they are up no body has the answer for the rally. Analyst has given a name to it saying its a election rally. Being in the market I always have a appetite to know the reason behind rise and fall of the market.

My friends are ringing me up and asking me Is it the correct time to enter in to the market ? I told them there is no correct and no wrong time to enter in to the market , its the script which you are buying has more importance rather then going gungho about the market. I still believe that the Indian capital market are very much in efficient they could be moved up and down by cartelisation. In the end Its the retail individual who is the sufferer . I don’t know where will be market after the elections or in the coming 1 year. I only remember one thing said my professor that to enter in to the market the loss born by you is the fees charged by the market . In market no body lose money neither the other one gain, Its only the transfer of wealth from one individual to another.

THE TALE OF TWO CENTRAL BANKERS

Economy always passes in different phases could be classified as the boom phase, the downside or the burst  phase . Central bankers are the key players in the economy with limited power in their hand.

Alans Greenspan and YV Reddy are credited with far greater power then they ever had and with responsibility for outcomes largely beyond their control. Central bankers actually have  very limited tools and hence limited powers.

Reddy in India understood the risk of bubble better than Greenspan .In the era of Greenspan the major collapse where the tech bubble, Long term Capital Management. and now the biggest ever financial crisis of all times. His successor Ben Bernanke along with US treasury Tim Giothner rebuilding by pooling finances in the US economy .

Reddy made several efforts to squash the bubble in the year 2004-2007 by raising the repo rate from 6% to 9%  which stopped banks from lending for urban purchase and increased the risk weightage to real estate.

Comparing the two economy US investor could buy $100 worth of shares with only $33. The Sensex gained 700% for the period 2003-08 and US housing prices rose 55%.

Mr Reddy deserved all praised for calibrated opening up rather then resisting to liberalization. Even after bubble recognisation central bank can’t do much.

BRISK OUTLOOK

Well India’s rating has been downgraded by S&P from stable BBB to -BBB, making situation more worse for the economy. Several measures on the fiscal side has been announced by the government reducing the excise duty by 2% and service tax by 2%. Concerns have been raised that the domestic firms will face problems while raising the money from abroad with the downgrading but I feel the affect will be negligible or 50/50. because looking at the current situation across the glob its equally difficult to raise the money from abroad because money has become a scarce commodity in the world. Several stimulus packages have been announced by the various governments bailing out the sectors.The situation has been conflagration from financial sector to the manufacturering sector which is said to be the growth engine for the economy.Lay offs and stocks lying in the go-down are common seen every where. Its time to better watch the things and then react because every day is a event day for economies.