INFECTIOUS GREED

I am back on my blog after a long gap of 24 days . In fact I was very much in the Mumbai but some how couldn’t able to contiue with the writing . Well Infectious greed in a great book to read, the author of the book is Frank Partnoy who has also written FIASCO : Blood in the water on Wall Street.

Infectious greed consists of grear literature on the financial engennering, financial innovation focused on structural finance and ofcourse the misuse of the derivatives over the time by the street smart bankers. The Book insist on how the Financial market was polluted by the various exotic instruments, which where introduced with the hope of making market efficient. The concept of efficient market was also challenged in the 1990’s and even in the previous market disasters.

The Book is a great read focusing on the traders like Andy Krieger, legends like John Meriwether and Paul Mozer Krieger, high profile collpases such as Barings bank (Nick Leeson) and LTCM Long term Capital Management . The book documents how each level of financial risk, loss of control and complexity obscured the sickness of companies in question and pushed individuals to ever more ingenious deceptions.

Mr Partony did offers a clear vision of how the financial market reached at epidemic stage and how the control could be regained before furher damge is done. Unfortunately the book was published before the SUBPRIME MESS which has changed the whole scenario of the financial market and the risk management control of the financial institutions.

THERE WAS NO DIFFERENCE BETWEEN BERNARD MEDOFF’S PONZI FINANCE SCAM & THE WALL STREET INVESTMENT BANKS

Was the greed limited to WALL STREET? No it was never limited there; the infecticious greed gripped the whole business community along with the Wall Street.

The Ponzi scheme which was running parallel to the Wall Street by the Bernard Madoff, a former Chairman of the Nasdaq Stock Market was arrested for allegedly running a $50 billion ponzi scheme. This was reportedly the biggest ever fraud case ever reported in America.

The scheme was running on the simple principle: The person who had invested in the first place will get the money on the basis of the person who had invested later; in this process the investors who invested in the last will never get any thing. So the concept it self was wrong.

Similarly the Wall Street investment banks took the speculative positions on the mortgages; it was more of a horse race they forget there underlying and overleveraged them, here again the concept was wrong and they knowingly bet on such huge positions resulting in the debacle and all of them failed or taken over.

The investigation for the Ponzi scheme is still on and Bernard Madoff had accepted that he has taken 10 million dollar from investors a week before his arrest.

FLASH BACK 18 MONTHS @ MASTERS OF FINANCIAL MARKET

CONGRATULATIONS TO ALL MY BATCHMATES! We all have completed our (PGP) Post Graduate Program “MASTERS IN FINANCIAL MARKET”, in the turbulent time. Things have gone pretty fast in 18 months, when we all joined the programme markets where evaporating at 18000 levels and gone beyond there fundamental valuations.
We are so fortunate that in a very short span of 18months we were able to see the complete market cycle in the month of JULY 2007 The Sensex crossed the magical figure of 15,000 to touch 15,005 points in afternoon trade. It took seven months for the Sensex to move from 14,000 to 15,000 points.
The Sensex actually crossed the 20,000-mark on October 29, 2007 during intra-day trading but closed at 19,977.67 points. However, it was on December 11, 2007 that it finally closed at a figure above 20,000 points on the back of aggressive buying by funds. The 30-share index spurted 360.21 points to fly-past the crucial level and closed at 20,290.89. The NSE Nifty closed at a record high of 6,097.25 points, up 136.65.
Every body was Gung-ho from a Paanwala at the street to the corporate honcho of Investment banking firms and forecasted market to be at 50K level at the end of 2008. But the SUBPRIME failure fiasco has another story attached to it every thing has changed in-fact profiles like investment banking has completely eroded from the financial world for the time being.
The turmoil spread like a contagion and conflagrated the whole world, our economy has also taken the beating what has happened in the west.
Expectations has gone down few of our batch mates had taken up the job, some have compromised where as the rest of us are still thriving for it.

Here is my proposal how we can be the market beaters:-

1. We must never forget our core subject corporate finance, Debt market, Derivatives, Fundamentals, Financial Management.
2. We must be proactive and be with the market, never miss any economic event be it US automobile bailout or Prime Minister Manmohan singh offering package to the Indian financial sector.
3. Focus on our key areas our strengths where we can expertise.
4. We will try to match our self with the market and see what the market demands from us rather then we demanding from the corporate world.
5. Last but not the least, have patience and faith in the God. Every body will get his/her destiny what he deserves.

Concluding my thoughts by the famous saying TOUGH TIME NEVER LAST BUT TOUGH PEOPLE LIKE US DOO…and emerge as a winner. 

VIEWS FROM MY BATCH-MATES ARE MOST WELCOME..

STRENGTHS OF FINANCIAL MARKET STUDENT

Starting with the Macro factor a student from the financial market must be aware of the world economy as a whole and inherent knowledge about the Indian economy. Any measures in relation with the Govt. Budgetary policy and the monetary policy of the RBI must be on his finger tips.

One must have a flair of Financial accounting and financial statistics in case the situation demands. The core area of competency i.e en edge one should be specialized in Investment banking/Derivatives/Mergers Acquisitions and Take overs another important aspect is Corporate Finance becoz according to Aswath Damodaran everything is corporate finance.

Some of the other areas were edge could be obtained are basically in the areas of Fundamental analysis/financial planning/Debt Market and commodities. The only area which left untouched is the delivery (communication – skills) and how professionally things should be delivered.

Versatility is the personal trait one should posses as Nassim Nicholas Taleb in his famous book “THE BLACK SWAN” quoted Black swans being unpredictable we need to adjust to their existence. There are so many things we can do if we focus on anti-knowledge, or what we do not know…

“If money is your hope for independence, you will never have it. The only real security that a man will have in this world is a reserve of knowledge, experience and ability.”

When Fortune Frowned – The Economist

This week economist covered a special report on the world economy, the present crisis have been compared with the crisis of October 1929, which took 3 years for America’s government to launch a series of dramatic efforts to end the Depression, like declaration of 4 day bank holiday in 1933.During that time thousands of Bank failed, devastation deflation tear a part the US economy and the unemployment rose to 25%.

This time again US started with nationalization of the 2 mortgage giants Fannie Mae and Freddie Mac , saved AIG the worlds largest insurance company, temporary banned short selling in over 900 mostly financial stocks and the most dramatic of them all is pledged to take up to $700 billion of the toxic mortgages on its books. Another dramatic incidence which is lately taken by US govt. is ordering Fannie and Freddie to take the toxic mortgage on there balance sheet this is an exception to that $700 billion.

The anatomy of the collapse is that IMF recons that world wide losses on debt originated in America will reach $1.4 trillion which is double from the earlier estimation of $945 billion in April. Globally the credit crunch has already arrived and IMF predicts that credit could shrink by 7.3% in USA, 6.3% in Britain and 4.5% in rest of the Europe.

The action taken by the central banks is from the history that big banking crisis are ultimately solved by throwing in large dollops of public money, and that early and decisive government action, weather to recapitalize banks or take on trouble debts can minimize the cost to tax payer and damage to the economy.

US have proposed a TARP Troubled Asset Relief Programme which is still unclear how it will progress. The trouble is that because of its large current account deficit US is heavily reliant on foreign funding. It has edge that the dollar is the world’s reserve currency and as a financial turmoil has spread the dollar has strengthened. But today’s crisis is testing many of the foundations on which foreigner’s faith in dollar is based.

What will be the long term effect of these decisions, only the time will tell once the world stabilize again to normal. 

FACT & FICTION OF WALL STREET

1) The top investment banks have vanished as a class because they were highly leveraged.

2) Short-sellers were right on Lehman, so short-selling should not be banned.

3)Goldman Sachs and Morgan Stanley were issued banking licences because they can survive only as banks.

4) The disappearance of the top investment banks shows that there is no future for investment banks.

5) Wall Street investment bankers were a talented lot whose risk-taking skills will be missed.

For More details do read today’s article in ET

FAIRY TALE OF INVESTMENT BANKING!!!WHAT WAS THAT???

There was a term called Investment banking (IB)… hefty packages, luxurious life, dream job for a financial student were some of the features of IB. Over the years evolved as a very big concept coined by the US, In India we use to call that as a merchant banking .Goldman Sachs, Bear stern, Morgan Stanly, Lehman Brothers and Merrill Lynch were the 5 icons which use to shine at the wall street over the period of time. But from now onwards none of them will be in existence as a Investment Banker. The credit goes to the subprime crisis which led to this catastrophe, First to be blown was the Bear stern it was all of a sudden in early 2008, US government came out openly, helped JP Morgan to get involved in a shotgun marriage with Bear stern. Few months after Lehman brothers busted and went bankrupt taking exposure in the exotic derivative instrument. This time the story was quite different US government did not came to bail out Lehman and the 158 years old firm went out off the Wall Street, and the world market collapse. As every body knows the famous saying “US sneezes rest of the world gets cold”. Lehman sustained the Great depression period of 1930s but subprime greed didn’t give any opportunity to survive. Guess What was Lehman‘s Debt ratio!! When it busted it was 30:1. The very same day Merrill Lynch was sold to Bank of America (BOA) which was in existence from 94 years. Here again US government indirectly funded BOA, the largest brokerage of the country taken over by the country’s largest commercial bank. The Economist edition of September 20th contains print advertisement which clearly demonstrates the condition of Merrill Lynch. Morgan Stanly started looking for partner Wachovia and Chinese bank were in competition to take over Morgan, Goldman Sachs was standing alone after its peers collapse but all of a sudden on September 22 after noon both these IB giants requested for the image makeover and wanted to turn into commercial banks. With in an hour the request was accepted, this shows that both of these IB institutions are not at all exception to there peer. With the collapse of IBs the insurance AIG (American International Group) also got into the trap of Credit derivative swaps, and yet again US fed provided liquidity of 85 million dollar in order to save it. The reasons behind saving it acted as a protection seller in the chain and its collapse might lead to greater catastrophe in the US financial market. The story could be concluded in a way that derivative exposure will be limited for the commercial banks; they are subjected to strict rules and regulations in terms of liquidity, which these institutions enjoyed being an Investment banker. Still the question remains in mind. Is the worst is over or yet to come? The bank panel already raised the questions on the bailout of these institutions…….The policy of privatize profit and socialize loss still continues..

Changing face of the Wallstreet …

Bearstern, Lehman bros, Meriyl lynch the three pillars of Wall street are gone, Morgan stanley already looking for the buyer Wachovia and some chinese firms are in line for taking over it. Gold man sachs is standing alone in this financial crisis which is already termed as bigger then the 1930’s depression period. US federal reserve has already bailed out Freddy Mac, Fannie Mae and the latest to join then is AIG (America international Group).

ALready Central Banks of the world putting money in the financial market in order to provide liquidity, the major contributor are US fed,  Bank of Japan and European Central Bank into-to will inject $247 billion thats the largest amount central banks are putting money into the financial system after the crisis of early nineties .

When we see the wall street after this series of bailouts the top 5 noshes were a Finance MBA desire to work will have to rethink there goals and priorities in life . This is a good time for India based Investment banking firms were they could attract the best talent and make India as a preferred financial destination.

Failure of Lehman step by step :::::

How can a bank like Lehman go down so fast? 
    FINANCIALmarkets can be punishing and reversal of fortunes can be dramatic. More so, if an institution is overleveraged — when loan and investment books are much, much bigger than its capital. What compounds problems are strange accounting practice and high-risk nature of the loans and investments. There are also disclosure issues: Lehman, in its last conference call with investors, gave no clue that it was actually on the brink. 
How did the crisis build up? 
    An investment bank uses its proprietary book (own money) to lend others and invest. It started with the subprime crisis. Banks like Lehman, buy mortgage loans from other banks, and then package them to sell bonds against the loan pool. Often they add cash to make the loan pool more attractive, so that the bonds can be sold at a higher price. Suppose mortgage was earning 6%, these bonds are sold at 4%. The difference is the spread which the investment bank earns. By selling these structured bonds, it raises money and frees capital. But when homebuyers started defaulting, these bonds lost their value. It all began like this, and then the virus spreads across markets. 
But don’t investment banks play advisory role? 
    They do, but slowly over the years, their prop books have multiplied. Investment banks also organise big loans for their clients for funding acquisitions. At times, investment banks take positions, only to palm off the securities to other clients and banks. In a crisis, they may not get the opportunity to down-sell such positions. This adds to the panic. 
Can’t central banks step in to stem the crisis? 
    Well, they can and they have, to an extent. It’s precisely to discourage banks and bond houses from selling securities to generate liquidity, Fed has relaxed the rules under which it lends to institutions against securities. Moreover, if there’s a financial chaos of this magnitude, banks refrain from lending each other, fearing that the money would get stuck. A liquidity window from the central bank thus comes handy. 
How does the domino effect play out? 
    Suppose Lehman faces a redemption and has to repay another bank it has borrowed from. If it sells the mortgage-backed bonds, whose prices have fallen, it will not raise as much as was earlier expected. So, it sells some of the other good assets or bonds which 
    may have nothing to do 
    with mortgages. But since 
    the bank starts dumping 
    these assets, prices of these 
    bonds also dip. This is 
    when the crisis spreads 
    from subprime to prime. 
How does it impact the balance-sheet? 
    Herein lies the strange accounting of bonds and derivatives like mortgage-backed securities. All banks are required to markto-market (MTM) their investments. So, if the price of an instrument falls, the difference between the price at which it was bought and the current market price has to be provided — meaning, it has to be deducted from the earnings. So, a drop in price leads to the MTM loss. But there’s a bigger problem which really has deepened the crisis. An MTM loss can be provided only if there’s a ‘market’. How do you provide when there is no market? 
But aren’t these instruments traded? How can the market suddenly vanish? 
    Remember, it’s very different from checking the price of a stock from a stock exchange website. Many of the instruments are over-the-counter derivatives, which are struck on a one-toone basis between two parties. Suppose, a derivative is linked to variables like the yen-dollar rate, and may be prices of other actively-traded assets, say gold price and US Treasury bill. What the bank does is construct a model, feeds the available market price of these variables in the computer, to arrive at what the market price of the derivatives could or should be. This is an artificial model-generated price. This is called the mark-to-model against mark-to-market. 
So, what’s wrong in that? 
    The trouble is when the bank actually goes out to sell the derivatives, it discovers that there are no takers. And, even if there are buyers, they are willing to pay just a fraction. In other words, there is a sea of difference between the price that is being offered in the market and the high artificially-generated price thrown up by the model. So, when the bank ends up selling the instrument or unwinding derivatives, the loss suffered is far in excess of the mark-to-model loss. Such extra losses on thousands of securities and multiple portfolios can wipe out the capital of the bank. 
What is the nature of the instruments? 
    There are collateralised debt obligation (CDOs), credit default swaps (CDSs) and all kinds of derivatives. CDOs are asset (or loan)-backed securities, while CDSs are like a guarantee. Say Bank A lends to a corporate but is unwilling to take the full credit risk. So, Bank A enters into a CDS deal with Bank B; under this, Bank B promises to pay Bank A if the corporate defaults. The money that Bank B earns for this is the CDS premium, which is similar to an insurance premium. Now, if markets turn choppy, risks go up and so does the CDS premium. So, Bank B, which is earning a lower premium has to promote a mark-to-market loss against the CDS position. 
How does one minimise such turmoil? 
    No easy answer to that. Maybe, some of the accounting norms need to be changed, so that the definition of MTM gets narrowed down. Besides, to stop banks from going overboard, capital requirement may have to be raised for derivatives position. But all this may be easier said than done.

source: The Economic times

LEHMAN GONE WHOSE NEXT ??

The 158 year old firm which had survived 1800s’ railroad bankrupticies, the Great depression of 1930s’ and the collapse of LTCM a decade ago has finally filled the Chapter 11 petition with US. Lehman bros’ the fourth largest bank of US succumed to the subprime mortgage crisis and lead to the biggest bankruptcy filing in the History. There was rumors from the last 15days that it could be taken over by the Korean Bank after it announced its no’s for the quarter and accumulated near about 4 billion loss , but due to regulation the Korean bank didn’t move further. Then the Lehman try to appoint Goldman sachs as a white knight but it failed. Yesterday according to bloomberg Barclays and Bank of America were in line with taking over Lehman, but certainly when they both abondend there plan Lehman lost 94% of its market value.

The collapse of Lehman and next on the card is Merril lynch who will be taken over by Bank of America is changing the era of financial market for the US as well as for world. Lehman was suppose to be the top recruiter for IIMS last year is bleeding like any thing and they are now bankrupt.The Indian market sharply reacted to the news and they were in deep red, the investment banking firms are sharply reducing there incentives as well as the employees.

The US market is now showing there alrming signs to the world and our markets are seriously affected the 3 days continous fall and todays’ free fall shows that markets were expecting this blood bath.