meek-investor

Tragedies are usually associated with Greece - a tribute to the richness of its theatre in the 5th Century BC. Over the weekend, you could be forgiven if you changed your tastes to a Cypriot tragedy. For that's exactly what has happened - albeit in the more prosaic world of economics.   These are the facts. Cyprus is another Eurozone country in deep trouble. It needed a bailout. So far, nothing unusual. A bailout was duly announced over the weekend. It was the terms of the bailout that sent a jolt reverberating through the world of economics. The EU is bailing them by about €13 bn (chickenfeed by the standards of bailout). But the conditions of the bailout are that all bank depositors would be levied a tax of between 6.75% and 9.9%. That means on Tuesday when banks opened, all depositors would lose that amount instantaneously.   The genesis of the problem is, alas, not new. Cyprus is a very small country. In boom times, it went berserk pushing its financial industry, positioni...

OK - the title is pure hyperbole. The New York Stock Exchange (NYSE) is going nowhere. But the company that owns NYSE is just being bought over. The curious part of the story is that the acquirer does not really want the NYSE, but it comes as part of the package- so he has to take it ! Here's the deal. NYSE is part of a conglomerate called NYSE Euronext. The conglomerate consists of NYSE itself, Euronext, which is a combination of three European stock exchanges and Liffe which is a London based derivatives exchange. NYSE and Euronext are ugly spinsters nobody wants. The beauty amongst the beasts is Liffe. For it is the sexy new hottie - a derivatives exchange. And therein lies the story. In the modern day casino , that is finance , equity exchanges like NYSE are worthless as businesses. Margins are supposedly low. Stock exchanges are the places where almost all companies that require capital list and that's where investors channel their savings into productive investment. One w...

Remember Jérôme Kerviel  ?  OK, very excusable if you have forgotten who he is. He was the rogue trader who almost brought Société Générale ( a reputed French bank) to its knees. This happened in 2008. Kerviel was a trader who punted like crazy in the casino, that is euphemistically called financial markets - he was making gigantic bets that involved European stock index futures. The whole thing unraveled, he was fired, Société Générale tottered and ultimately lost € 4.9 bn.   Criminal proceedings were launched against Jérôme Kerviel  and he was sentenced to prison and a fine. He appealed, and, on Friday, lost his appeal. What caught me was the quantum of the fine. He was fined € 4.9 bn, the quantum of the loss that Société Générale incurred.  A fine of € 4.9 bn ???? Kerviel has no money and is unemployed and probably unemployable. How on earth is he expected to pay  € 4.9 bn ?   This is outright crazy. The judges have fallen hook line and sinker ...

There is economic cataclysm going on in Iran. What guns and rhetoric have failed to do might be achieved by grubby old economics - the downfall of the nut cases who have been ruling Iran for sometime. The Iranian rial has plunged into free fall. It declined by 25% in one week in October against the US dollar. Since the beginning of 2011 it has fallen by 70+%. It was some 10,000 rial to the US $ in 2011. Its now around 30,000 rials to the US $. The rial is now virtually worthless. Inflation by official estimates is some 25%, in reality more like 70%. There is economic chaos. Why is this important ? You only have to look towards  the street protests that have sprung up in Iran to see how this is affecting everybody in Iran - the rich, the poor, and yes, even the mullahs. But, wait a minute. Iran is oil rich, right ? It should be rolling around in wealth. And yet, the country  is in deep crisis and the population is suffering.  Why ? If ever there was an example of how a rot...

Somebody has to say this. Like the kid from the proverbial Hans Christian Andersen's tale , who exclaims that the emperor is actually naked, I will go ahead and say it. Stock markets have become a weapon of mass destruction. The original purpose of stock markets was to become efficient allocators of capital. Capital was always scarce and economics needed a mechanism where capital would be pooled from investors and allocated to the most efficient users of capital. Voila, the stock market was born. It is important to remember why this mechanism was created in the first place. One of the most important benefits that stock markets provided was liquidity. Investors needed liquidity to be able to withdraw their investment without affecting the company that they invested in. Contrast this with property markets which are not very liquid - try selling a property, especially in India. Liquidity was , and is, provided in stock markets by speculators. They performed the useful function of ensu...

Can a whole industry be rotten ? Definitely not. As in any field, you should expect the good, the bad and the ugly. But increasingly it is difficult to spot anything good with the financial services industry. Consider the latest scandal to hit the headlines - the manipulation of LIBOR by Barclays and 20 other banks. LIBOR (which stands for London inter bank offer rate) is one of the prime interest rate benchmarks in the world. Many interest rates are fixed at LIBOR plus a premium. LIBOR should therefore be an impartial market rate based on which a whole lot of other transactions revolve. But it now comes out that Barclays has been manipulating this rate for a while. A fine of $450m has been imposed on Barclays and a probe is on with 20 other banks. I know greed is a universal vice and an industry that directly deals with money is especially vulnerable to an overdose of greed. Yet it would be difficult to find an industry that has so allowed its core to rot . One after another, example...

"Company X crushes estimates; Shares Soar" screams the headlines in Forbes ,  a respected business magazine. "Company X profits slip 35% as spending continues"  proclaims the equally loud headlines of The Wall Street Journal , a respectable business newspaper. Both refer to the same company - Amazon - and the same piece of news, the first quarter results of the company. Flummoxed ?? Read on. Can both headlines be right ?? Surely they can't.  Only in the rarified world of finance , especially the even more ionospheric world of stock markets can both statements be true. Yes. You see, company performance and movement of share prices is based on "expectations" and not on reality. Expectations of whom, you may ask ?  Of a unique sub species of the human race called homo sapiens analystensis (hereinafter referred to as HSA). Cut to business school. Some of the best brains in the land want to "go into finance" after they graduate. Their ambition is ...

Immortal words from an immortal movie. If you don't know where this quotation is from, click here (excusable because this was before you were born) I am however writing about more prosaic things. Like the American nomination of Jim Yong Kim for the Presidency of the World Bank. Readers of this blog may recall that I had railed about the practice of nominating an American for the head of the World Bank and an European for the Head of the IMF here . The IMF vacancy came rather suddenly after the antics of Dominique Strauss Kahn. After some pious sermonising about how it wasn't an European stitch up, the post went to Christine Lagarde, another French person ! Now there is a vacancy coming at the top of the World Bank as Robert Zoellick is completing his term. The Americans are now wanting to stitch this up. But its the American they have nominated which is raising eyebrows. Kim who ?? Jim Yong Kim is an eminent American, no doubt. But he is an anthropologist and physician by prof...

Arise Sir Fred, the Queen of England said in 2004 after tapping the kneeling Fred Goodwin lightly on the shoulder with her sword. This archaic ceremony is the conferring of knighthood by the Queen of England. If you are a citizen of the UK or one of its dominions then you can call yourself  "Sir". Fred Goodwin was the CEO of the Royal Bank of Scotland in its boom years. An unknown, middling bank in Scotland (where's that for Gods sake), he took it to become one of the largest banks in the world. First the acquisition of Natwest, a big British bank much bigger than RBS. And then the mega takeover of ABN Amro, just as the financial crisis was unfolding. The bank was growing wildly through mega acquisitions and was cheered on by all and sundry - the shareholders, the market and even the government, including Gordon Brown, the then Prime Minister of the UK. Hence the knighthood. Sir Fred could do no wrong. Of course the party couldn't last. It came crashing down with the ...

Brilliant article in the Financial Times today. Dripping with sarcasm and wit. Alas its a bit technical and you'll enjoy it immensely if you have a bit of background in finance, but even otherwise its a good read.  For those not in touch with American politics or high finance - John Corzine is a former head of Goldman Sachs. He was deposed by Henk Paulson.  Corzine then became a Senator from New Jersey and then Governor. He got defeated in the election in 2010, by Chris Christie who is the current Governor of New Jersey. After his defeat in the election, Corzine became Chairman of MF Global which has just declared Chapter 11 bankruptcy.

Yet another rogue trader has emerged. This morning is ablaze with the news that UBS (a Swiss bank) could have lost some $2bn on account of the actions of one trader - Kweku Adoboli at its London office. Adoboli has been arrested last night and the details are only slowly emerging.  Nothing is proven as yet , but Adoboli might very well join his illustrious predecessors - Nick Leeson of Barings, Jerome Kerviel of Societe Generale, et al in the hall of Notoriety. Apparently the losses stemmed from the trader placing bets, using the banks'own money on something called Delta One - trading in financial instruments linked to exchange traded funds. To lose $2bn, the trader must have been trading staggering sums of money. Clearly UBS has egg on its face. Quite apart from the massive loss, questions will be asked about risk management in the bank. How could they let such a big loss build up. The question to be asked is what on earth banks are doing even indulging in such activities. They ar...

As stock markets fell on Monday there was the predictable response from governments. Take for example the Indian Finance Minister. He says "we are prepared to address any concern that may arise on account of the present situation".  He should do no such thing. Stock markets should not drive government policy. Have you noticed that the bleating and braying is all one sided. When markets are rising, nobody wants the government within one million miles of their trying to fill their pockets as fast as possible. When markets are falling , governments should come and "help them". Nonsense. Just as stock markets fell, you see the price of gold skyrocketing. I am yet to hear anybody express concern on where that market is heading. For that matter, why be only concerned about stock markets ? Why not debt markets. Or, as above, gold markets. Or platinum markets. Or whatever. Governments should simply adopt the right economic policy for the long term. Of course, they have to r...

Unless you have a visceral hatred of the IMF, you could not have missed all the media coverage of Dominique Strauss Kahn, its boss. The affair has exploded like a nuclear bomb on a number of fronts. Firstly there is the IMF itself, currently deeply involved in the European bailout situation. Secondly it has blown open the French Presidential race - he was the front runner and it was quite possible that Sarkozy would have lost to him in the elections next year. It has called into question Continental European tolerance for sexual profligacy of its leaders - surely the Italian Prime Minister Silvio Berlusconi is at least a bit worried. But this blog must remain a strictly non political one. This post is about the appointment of the new IMF chief - DSK has just resigned today and even if he is acquitted, is unlikely to get his job back. It has been an utterly shameful arrangement that a cosy understanding exists that the World Bank chief is an American and that the IMF chief is an Europea...

Madoff and Raju. Both guilty of gross financial impropriety. On a scale that boggles the mind. Both confessed readily to the wrong they have done. In fact both the cases came to light because the protagonist confessed to it. The heat became too much and they had virtually no choice but to come clean. But therein ends the similarity. In the case of Madoff, the date was 10 December 2008. He was immediately arrested, but released on bail. His case came to court on 12 March 2009 wherein Madoff pleased guilty. He was sentenced on June 29 to 150 years in jail. So off he went to jail. End of story. Raju's famous letter of confession came on 7 January 2009. After a few days of drama, he was arrested and sent to jail. But then ..... . Nothing. There is still no conviction in a court of law. In fact, there is no sign of a conviction in a court of law. The company, meanwhile, has bee n resurrected in a text book case of brilliant government and management action. They have even settled the ...

Of course, there is no such thing as too much money. One man's dream is another man's basic necessity. But then sometimes there are those who don't know what to do with their money. The damn thing is burning a hole in the pocket (or the bank account, or wherever). They've already bought into houses, gold, shares, mutual funds, whatever. Now what ? They invent instruments like catastrophe bonds . I read about them with my jaw dropping - hadn't known that such esoteric stuff existed. Well compared to other even more esoteric species of investments, this might more resemble "plain vanilla". That only underscores my point. Insurance companies issue these catastrophe bonds. They carry a higher rate of interest and investors invest in them. The condition is that the investor loses his investment if the catastrophe occurs. So he is essentially betting that the catastrophe does not occur. For the insurance company, this is a form of reinsurance. If the catastroph...

Is Facebook really worth $50 bn ?? Yes, billion that is, not million. Or are we seeing the second incarnation of the mindless hype that we saw at the dawn of the century which made the word dot com a household name ? Judge for yourself. What happened yesterday was that Facebook raised the first tranche of $500m funding from Goldman Sachs and a Russian investor. Goldman Sachs is putting $375m of its own money . Extrapolation is always a dangerous thing, but if you take the licence of using the same valuation per share to determine the value of Facebook as a whole, it somewhere close to $50 bn. Facebook is not a listed company; so we should be careful. But still such a stratospheric valuation ?? Facebook's revenues are reputed to be some $ 2 bn. This all seems to be old style internet ads - very few media companies have succeeded in that space. Google is different - its advertising model is such that a fair proportion of the searches actually lead to a commercial transaction. Clicks...

Painting with a broad brush is not always the right thing to do. In the United States, virtually anybody who's in the finance sector has been branded a villain. They of the billion dollar bailouts and the million dollar bonuses. Near the top of the pecking order of rogues, in the public mind, is AIG - the insurance company that had to be bailed out at the peak of the crisis. But consider what's happened to AIG in the last one year and you may change your mind. AIG's stock has risen 97% in 2010 - the fourth best performer in the S&P index. AIG was a solid company brought down by the antics of one department. But that didn't detract from the soundness of the rest of its business. When confronted with the crisis, it had a number of valuable assets it could sell. Top of the pile was AIA, its Asian subsidiary, which was a jewel. It has disposed of other businesses as well. It brought in a new CEO - Bob Benmosche, a rather colourful personality, out of retirement. Lots...

They say all that glitters is not gold. But today, that might be a slightly misplaced sentiment. Gold is glittering so much that everything seems to pale into significance. I mean the price of gold. If you haven't noticed, it has skyrocketed. And the cause of it is coming from an unlikely direction. Gold hit an all time high price of $1424 a troy ounce in Nov. It seems to be zooming northward. I haven't done the math, (after all this is a Sunday post !), but gold might have performed as well as equities as an investment vehicle in the recent past. That's a little funny given the significant difference in risk profiles. Cut, to a completely different angle. One of the fundamental cultural differences between Indians and Chinese comes in the area of addiction to the yellow metal. Indians simply love gold and can't resist hoarding it. Gold jewelery, that is. It is passed from generation to generation; safely stored in bank lockers. They are taken out only for weddings, whe...

Imagine a company which was for decades a byword in inefficiency. It pollutes like hell. It has 400,000 workers, none of whom can be sacked, although it needs far fewer. Most of the places it operates in are rife with insurgency, where the government's writ doesn't run very deep. Corruption is endemic. Technology is antiquated. There's a mafia which operates almost exclusively thanks to its presence. It struggles to transport its production to its customers. Governments set prices, allocate stocks and fix wages - not the market. You get the drift ? Now this company wants to sell its stock to you. You would run a million miles. Right?? Wrong ! You actually fall over yourself in trying to invest in its stock. Welcome to the crazy world of stock markets. The company, is Coal India. It is a government owned monopoly that has been around for decades and for most of that period was of dubious financial capability. And yet, for the last few days, everybody around me seems to be ...

Remember Jerome Kerviel - the trader who almost brought down Societe Generale ? The French banking giant ? He was convicted by a French court this week , sentenced to jail and ordered to pay back the € 4.9 bn loss the bank suffered as a fine - largely symbolic as he would just become bankrupt. No doubt at all that he was guilty. He had built an open position of some € 50 bn . He violated trading policies of the bank. His actions almost brought the bank to its knees. He was guilty; and he's been found so in court. But what is amazing about the judgment is that it completely exonerated Societe Generale . They have been found to be not guilty at all. That completely gobsmacks me. The bank admits lax controls, but said it did not know. You want to believe that the bank did not know that the guy was taking an open position of € 50 bn ? Really ?? Of course they must have known. They just turned a blind eye as long as he was raking in the money. When the retreating tide reveal...