Why are we here?????

Source: Article by Wayne Mulligan

Prescript: This article is generally a "wrapper" article that will explain the current primitive scenario well...

Financial Crises - A simplified version

So let's go through it step-by-step, from the beginning until this weekend when the Government announced a $700 billion bailout of the financial services industry.

I. It all started in the housing and mortgage market:

Basically, lenders were loaning money to whoever wanted to buy a home. Credit score, income and assets became irrelevant terms as brokers and local lenders rushed to issue new mortgages.


It seemed like a relatively "low risk" strategy at the time to many banks. Reason being, they figured that even if people stopped paying their mortgages, the housing market was doing so well that folks could just sell the house for a profit and pay back the remainder of the mortgage.


And that's really where the trouble started.


II. Then the Investment Banks Got Involved:

Mortgage Backed Securities (MBS) are nothing new on Wall Street. They're sort of like bonds, meaning there's a "principle amount" (the amount being loaned) and interest coupons (or payments) that would be paid monthly on the loan. However, MBS's aren't single loans.


Instead, these loans were really thousands of individual mortgages all pooled together to create a single, tradable security.

This is another reason why many lenders were happy to keep giving out mortgages to folks (even if they didn't qualify). Local lenders knew that they'd be able to package up all those mortgages and just sell them right to the big investment banks and not have to worry.


The banks then turned around and would trade these Mortgage Backed Securities like they would a stock or a bond - trying to pocket profits in between each trade.

III. Bubbles

The basic assumption in this whole mess was that housing prices would continue to rise each year.

In fact, that assumption turned out to be pretty accurate. According to the S&P Case-Schiller Index, home prices nearly doubled across the country from 2001 - 2006.


That's because it was so easy to get a mortgage, everybody wanted to buy a home. Thus spurring demand and in turn driving up prices further. It sort of became a self fulfilling prophecy, which in turn became a full-fledged housing bubble.

And just like any good bubble, it eventually had to pop!

IV. The "After-Pop"
So after the housing market finally started to tumble, the financial services industry went into a year-long death spiral. Here's the basic sequence of events:

People couldn't afford their mortgages anymore.

They couldn't sell their homes for more than they paid due to falling prices

So they defaulted on their loans - this happened to millions of people!

The big investment banks which now owned all the mortgages suddenly realized that these "assets" were virtually becoming worthless in a very short period of time.

So the banks had to take massive write-downs on these loans. The way this works is the banks were considering these baskets of mortgages as assets on their balance sheets. Once the assets went from being worth $100 to $1, the banks basically lost 99% of their value.

When that happened it made it very difficult for the banks to get loans themselves (imagine applying for a loan when all you have is a pack of bubble gum and the clothes on your back - it's not likely to happen).

When the banks couldn't get their own loans they were either going to be forced into bankruptcy (Lehman Brothers) or had to be swallowed up by healthier firms (Bear Stearns, Merrill Lynch, etc.)



V. How the Government Got Involved

Ever since Bear Stearns went under the government has played a fairly prominent role in this whole mess.

But it wasn't until we almost saw the implosion of Fannie Mae and Freddie Mac that the government really made its presence felt.

Fannie Mae and Freddie Mac are sort of like "buyers of last resort" in the mortgage market. They were established to maintain liquidity in these markets in the event of the large banks being unable to trade their Mortgage Backed Securities.

So in the end, Freddie and Fannie were sitting on trillions of dollars in bad home loans.

And while these companies were private organizations they were however government sponsored organizations. So if the government had let either one of these companies fail then it might've made it very difficult for the United States to keep selling debt to big foreign buyers, like China. Remember, it's US's ability to sell their debt to other countries that has been funding its operations (e.g. wars, etc.) for the last several years.


VI. How AIG and Insurance Fit In

AIG came into the picture when it began selling "insurance" to the big banks.

This technically wasn't insurance, but that was mainly due to clever wording on the part of AIG management. Because for all intents and purposes, they were basically insuring the mortgages held by the banks - this type of insurance was called a "Credit Default Swap", or a CDS.


Basically, the banks would pay AIG a monthly fee and in turn AIG would promise to make the bank whole on any mortgages that defaulted (sure sounds like insurance to me).


At the time I'm sure this sounded like a good idea because everybody assumed housing prices would continue to rise.


Well we all know how that turned out and that's why in the end AIG was left holding the bag for billions of dollars in bad loans.

VII. The Bailout


So that brings us to where we are today: On the eve of the largest government bailout of the private sector in the history of this country.

The implications for these actions are vast and complex.
On the one hand, the government has to do this; the alternatives are too disastrous to even comprehend. On the other hand, what type of message does this send to the banks going forward? That it's ok to engage in risky, reckless behavior and they'll always get bailed out in the end?


With inputs from Mahesh Jakhotia

Riddhiman Jain

Its pouring dollars!!!Can we have it???

Pre Script: Thank you all for the comments and the criticism too!!!But i would appreciate if you post your comments queries or criticism here rather than on GTALK.

Pre Script2: For the Critics...The previous two posts were compiled, the data was accumulated from sources and was filtered and presented. The data is bound to be taken form somewhere. So these posts, you cannot call them copied but ya compiled..

Frantic Injection of huge amount of dollars in the Financial System...
Its pouring Dollars friend!!!!(and weirdly, water here in Pilani)
Are we going to get some of it??????or only financial institutions will take it home and clear their Bad Debts????(Quite Obvious meaning...)

$247 billion... FED????? Let me put it in figures
247,00 crores or 247000 million or 247000000000 Dollars........ or 1136200000000 rupees at Dollar to ruppee being 46.. This has already surpassed the total budget of the Government of India for the last fiscal.
So much of dollars?????? Into the market!! FED is ready to weaken dollar against the currencies!!!!
But den this just FED..

Bank of Japan(BoJ) injects 3 trillion yen into markets..Now i cannot handle the amout of zeroes trillion has...

Russian President Dmitry Medvedev, pledges $20 billion( Dont know the conversion in roubles!!!) injection into the stock market and also cut oil taxes.

China to scrap down duty on stock purchases and buy shares in three of the biggest banks in China to boost investors confidence..

India???????Nothing!!!!!!!!!Just supporting!! No 'explicit' injection of Liquidity! No rates cuts!! No 'explicit' heavy purchases in Stock markets?????Why?????

So far we Indians have shown strong resilience to such great pressures. Our markets follow the Global trend but by the end of day recover and negate off most of the losses. With these kind of dramatic pull backs, you might be proud to be an Indian..
The only dominant fallout in India is ICICI hit, by Lehmann bankruptcy,of $350 million,large but relatively meager..
Apart from ICICI, No explicit hit.
This shows how fundamentally strong we are and the extent to which we have decoupled(Yes!!Again the literal meaning will suffice.) from the Global turmoil.
Injection of humongous amount of dollars!! What does this predict???
It simply states how pathetic the present state is.. It states how disastrous future can be. It shows how vulnerable are the Policy makers.. It shows how the world is coupled to THE US(our Uncle SAM!!).

After Bear Sterns, we got Merill Lynch. After Merill lynch we got Fannie Mac and Freddie Mae bailout??. Then the bankruptcy of Lehman.(FED negotiating a proper price for Barclays to buy most of Lehman though!!). AIG $85.8 billion bailout..
What next?????
Morgan stanley??? Goldmann Sachs....???

Haven't it been for the timely intervention of FED, we would have had the same Great Depression of the 1930's when classical economics was followed. 200 banks were closed down,people were on roads and all this just because of a simple assumption- "There exists some restoring forces or an Invisible Hand that will rehabilitate the situation and equilibrium will be restored".

Where is India heading???? The Sensex just kissed our previous estimate of 12.5k. (Very soon than expected though!!). There's ambiguity, fear in the minds of people. Certainty has certainly taken a hit. Half the analysts, optimistic, predict sensex might be resilient and 12k would not be breached but the pessimistic half think that 12k support would be broken and not only broken but shattered.

What does this mean for us??? We students???? Placements worse!! No recourse there!! Acads??? always worse!! So no recourse there!!!
What i believe if we go by the analysis of the pessimists or the optimists fate would never again give us this opportunity.
Let it breach the psychological 12k and make the market conducive and affordable.Then we plunge in our saved pocket money( Or watever) into these so called Efficient Demand Supply driven markets.
But den, the other side of the coin says OIL has started gaining its lost ground, Inflation will not allow the market to have its run. FII( Foreign Institutional investors) sucking out money. Already a billion dollar has been sucked out in the first half of the September.
What to believe??? what theory to go by???
But den its worth to take the risk!!
Its an opportunity that takes a lifetime to come... I dont think so again can we see such great economical, political or psychlogical state of affairs.
How i wish i could exploit it!!!!How i wish i could.......

By
Riddhiman Jain

Deflating the Inflating Economies......

And we are the Back!!!!
After a long break we are back.
Lot had been happening in and around India these days. In this post I try to cover and explain each of the events in a simplified manner.

I have been getting feedback that the articles I write, go over the head. (OHT). I request the readers, to comment on the part that they din understand and I promise I will get back to them with proper explanation.

Pre Script: This one is large but keep reading u will find it very informative.

Oh My God Oil has come down to 102?????????
Fannie and Freddie takeover??
Wholesale Price index slipping these days???
NSG Waiver!!!!Boon for India???
TATAs out of Singur???
Introduction of new derivatives!!!Currency derivates, Interest rate futures and Credit derivatives???
Duvurri Subbarao new governor, RBI!!

So much have we missed.......

Oil plunged as concerns that Hurricane Gustav would cause severe damage to the US oil sector eased after the storm weakened i.e. investors discounted the potential damage from the storm and due to continuous strengthening of dollar against all currencies on account of increased risk aversion by investors. The other reason includes Sustained dollar demand from oil companies in the light of low crude oil prices and inadequate dollar supplies that weighed on the rupee sentiment. Rupee fell down to its two year low of 45.39 a dollar.

India's crude oil import price has dropped to below $100 a barrel, first time since April, but a cut in domestic retail prices is a distant possibility given the fact that state-run oil firms are still losing money on fuel sales. A cut in petrol and diesel prices may not be economically feasible as Indian Oil, Bharat Petroleum and Hindustan Petroleum are projected to lose Rs 1,65,300 crore on fuel sales this fiscal. IOC, BPCL and HPCL together are losing about Rs 400 crore per day on fuel sales
IOC, the company that controls about 54 per cent of the market, is projected to lose Rs 90,630 crore on fuel sales this fiscal. Fuel prices in India are pegged at $68 per barrel, much lower than $99 a barrel so The government has to make good half of this revenue loss by issue of oil bonds. The Finance Ministry has already taken an over Rs 22,000 crore hit in revenues by way of duty cuts announced in June and a price reduction at this stage may upset its applecart. Retailers are at present losing Rs 6.31 per litre on petrol, Rs 13.69 on diesel, Rs 31.39 on kerosene and Rs 312.58 per 14.2-kg LPG cylinder. The government is also all set to introduce dual prices for diesel, the largest consumed petroleum fuel in the country. Bulk buyers like industrial consumers, power plants, defence establishments and SEZs may have to pay a market price which would be around Rs 22/ litre costlier than the subsidised diesel.

The Wholesale price Index continues its declining streak for the third continuous week down to 12.1% from a high of 12.6. All credit to the respite provided by softening of global crude prices. Now we can finally say that the government’s supply side measures have begun to work and so is the case with RBI’s tight monetary policies. A further interest rate hike by RBI can be seen in its October review of monetary policies as this cool off might be temporary, inflation might peak to high of 13% in the third quarter of this fiscal due to increase in prices of food items. This year yield has not been to the mark owing to the lousy monsoon. However decreasing crude oil prices coupled with good monsoon would stabilise the inflation in near future. The major concern for the ministry and RBI being Inflation and as seen in the recent past they are ready to trade well between growth and Economy.

Duvvuri Subbarao, the new RBI Governor sounded positive on growth, though.
He said “ Origins of Inflation lie largely in prices of food, metals and crude. Food is an annual, if not bi-annual, phenomenon and responses have already kicked in. Even in metals such as steel although the supply response is lumpy, I think both around the world and in our country, supply response has kicked in. The movement in crude prices have been in response to the supply-demand factors and US situation and the position of the dollar. So these responses have also come in.”


Nothing seems to be positive even in the global Front except for the news of Freddie Mac and Frannie Mae, US ailing mortgage giants, bailout be the US government. China and Japan the biggest buyers of Freddie Mac and Frannie Mae bonds praised the US government for its rescue. This might no doubt stabilize the current MBS( Mortgage backed securities) market in the US and the global financial market and will help Japan, Europe and United Kingdom remove one source of anxiety that has plagued markets and helped push them towards recession but this move more or less seems to be sign of the perilous state of the global financial system than of a imminent recovery. I find it difficult to see how it is bullish that the heavy hand of government is needed to such an extent. This takeover of Fannie and Freddie is a testament to how broken the financial system is at this time. Financial firms have posted over $500 billion credit losses and write-downs since credit markets seized up a year ago after the defaults on US home loans. This risk of collapse of the lenders and a US housing firm though are just one of the threats looming over the world economy. What we see is the US government not putting in immediate cash but putting its credibility on the line, its a tremendous help but it might not solve any problems.
All in all the global sentiment seems pretty negative.

Mukesh Ambani Group firm Reliance Industries' market capitalisation fell below the Rs 3 trillion mark, as its shares were battered and slipped below Rs 2,000 on the BSE.

Even Tata Motors haven’t been doing well. All seems to be not so well at Singur front. The dhaar na undertaken by Mamta Banerjee and her agitators had forced the TATA’s to stop work on NANO plant. The demand of the agitators is the return of the land to the farmers who had to give up in order to accommodate the car plant. Even after the so called solution drawn between the TATA’s and the Mamta Banerjee, Trinamool Congress chief, by the in power CPI government’s governor, Gopal Krishna Gandhi, the stalemate continues as vendors like Sona Kayo, Rico, Lumax, Endurance, Caparo Engineering, Sharda Motors, Exide have put on hold further investment in singur. If critical suppliers are not near the mother plant, singur, of NANO, it will affect the pricing of the ultra low cost car.

But as we believe not even the turmoil in singur could cast a shadow on India’s potential to attract overseas investment. One example (singur) cannot be example for the whole country. This kind of problem one can face in any country. Of course the event provides us with something to learn. The recent NSG waiver can discount this tumult.

Nuclear supplier nations adopted by consensus a US initiative to lift a 34-year-old embargo on nuclear trade with India. NSG( Nuclear Supplier's Group) rules ban nuclear trading with India because it refuses to sign the Non-Proliferation Treaty, developed atomic bombs in secret and conducted its first nuclear test in 1974.
The United States wants a special waiver from NSG rules for India, so it can share civilian nuclear technology with New Delhi. The United States argues the deal would bring India into the NPT( Non-Proliferation treaty) fold and help combat global warming by allowing it to develop low-polluting nuclear energy.
Critics say the deal undermines international non-proliferation efforts and accuse the nuclear powers of pursuing commercial and political gains.
There had been three main sticking points: termination of trade if India tests, no transfer of enrichment and reprocessing technology and an annual review of the agreement.
But the crunch issue appeared to be nuclear testing, since New Delhi has not signed the Comprehensive Test Ban Treaty.
Overall this NSG waiver has lifted obstacles to India buying products and technologies associated with civilian uses of nuclear technology (and selling these to) most significant nuclear powers save the US. The implications are not just for nuclear energy alone- our existing reactors running short of fuel would be able to run at full capacity and we would be able to set up new nuclear plants. Vital sectors of economy stand to benefit from access to a range of products and technologies that had, till now, been outside India’s reach. Many advances in materials, technologies, communications, computing, signaling, chemical processing, avionics etc. are deemed sensitive technologies not accessible to nuclear have-nots. Access to these technologies will improve efficiencies across the board of India from weather forecasting to oil refining. Sectors that stand to gain are power, Defence, IT, Insurance and Pharma. IT can help in terms of software services, data management and control & automation. Also, the R&D skills from Pharma may play a crucial role in handling the sensitive technologies which India will get access to. They may even be useful in handling of chemical transformations and temperature controls in the nuclear plants. This NSG clearance has opened up business opportunities worth Rs. 1,20,000 crore in the next 15 years adding around 18-20 nuclear reactors at the cost of Rs 5000- 6000 crore each. The Nuclear deal will also enable addition of new capacity and help fulfill the target of adding 63,000 MW by 2030. These developments sholud benefit Infrastructure and power companies such as NTPC, Jindal, L & T, Tata Power and Reliance Power. Other companies that have traditionally not been in this field may also make a foray in this sector given the magnitude of the business potential. This deal would open gates for huge private investments by international companies and players into the Indian Economy.

Further, adding to these set of good news, there might be soon a materialization of the proposal on introduction of new derivatives like currency derivatives, interest rate futures and credit derivatives.

Do comment....

Compiled BY Riddhiman Jain