Niveshak August 2009

NIVESHAK THE INVESTOR



VOLUME 2 ISSUE 7



August 2009

Anniversary Edition

Interview:Director of capital Market Division The JourNey of Niveshak Pg.56 Minsitry of Finance, GOI Pg.16

FROM EDITOR’S DESK Dear Niveshaks,

Niveshak Volume II ISSUE 7 August 2009 Faculty Mentor Prof. S.S Sarkar

THE TEAM Editor Biswadeep Parida Sub-Editors Amit Choudhary Nilesh Bhaiya Sareet Mishra Sujal Kumar FinToonist Dilpreet S. Gandhi Saurav K. Bagchi Design Team Bhavya Aggarwal Sarvesh Chowdhury Swarnabha Mukherjee Tripurari Prasad

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Congratulations on completing a year with us. It was last Independence Day when Niveshak (The Investor) first saw light of the day. Now we have completed one full circle round the sun, one full year, four seasons, twelve months and most importantly we sailed through the most turbulent times of the financial world. It all began with the fall of the most formidable names in the world of finance, most notably the Wall Street Investment banks. Lehman Brothers suffered the ignominy of filing the biggest ever Chapter-11 bankruptcy, Merrill Lynch disappeared into the embrace of Bank of America in a $50-billion stock deal, Goldman Sachs and Morgan Stanley swallowed their pride to convert themselves into old-fashioned retail commercial banks. The world watched with shock and horror as the Wall Street got completely wiped out of the species of its standalone I-Banks. Another I-Bank of Wall Street - Bear Stearns had already been sold out to JP Morgan Chase in February 2008. The world of high finance had been turned upside down. If this was not enough, AIG, the largest insurance company of USA got nationalized and Washington Mutual, once the largest savings and loan institution in USA was acquired cheaply by JP Morgan Chase. These were no ordinary firms. They represented the pride of America’s financial system. They attracted the brightest from the top business schools. They were held up as models of good management, producing returns on equity that were the envy of their counterparts across all sectors. But suddenly, the Sub-Prime crisis taught them the basics of investment in the hard way. Hounded by unforgiving investors and ruthless short sellers, they realized that their bets and investments made over the years have gone horribly wrong. Since then, the world of high finance had been turned upside down. Before they fell down, they had spread their wings of destruction all over the world and across all the markets, both by geography and by sector. They pushed stock market indices to unimaginable lows across all markets starting from Nikkei & Hang Seng to Dow Jones Industrial Average & Nasdaq composite through BSE & FTSE. Commodity prices & crude oil prices hit rock bottom giving respite to the world reeling under inflation, but no one wanted it that way. International Trade suffered as suggested by the sharp dip in Baltic dry index. Bail outs after bail outs were rolled out by central banks of various countries, but the ailing financial system absorbed it all without throwing any signs of recovery. This exposed countries into further trouble of widening fiscal deficits and currency value erosions. After subsequent periods of falling demands, corporate results across all sectors and geographic locations were pushed into the forbidden zone. To fight losses, industries began to shut down, throwing millions into unemployment in the process. As unemployment rates crossed 10% in most countries, economists and analysts began drawing parallels between the Great Depression of 1929 and the Sub-Prime crisis of 2008. The already bleeding US auto industry saw its worst times when two of the iconic brands of USA, General Motors & Chrysler, ran to investors with hats in hand for survival. At last they found solace under the US Federal Reserve. During this period most of the economies across geographies were pushed into or to the brink of recession. And nothing seemed to work. From January, Indian markets started showing some signs of recovery but all the fizz was taken out when the once blue eyed boy of Indian IT industry, Mr. B Ramalinga Raju, reported of severe misappropriations in Satyam. The image of India Inc suffered heavily but recovery story was intact. All the sectors improved their per-

Disclaimer: The views presented are the opinion/work of the individual author and The Finance Club of IIM Shillong bears no responsibility whatsoever.

FROM EDITOR’S DESK formance and in the quarter ending June’09, most of the companies showed profits. India was one of the first to report green quarterly reports. Much of India’s story depends on sentiments. This can be clearly seen through the two circuit breakers in the Bombay Stock Markets on 17th June when the ruling United Progressive Alliance won a clear majority in the general elections signalling a stable government. They also brought out a favorable budget to bring India into the 8% growth bracket although it threw a few short term negative signals. This story replicated in the west with most of worst hit countries showing profits in Q2 CY09. This was reflected by an upward movement in stock prices across all the exchanges of the world. Most of the financial giants like JP Morgan Chase, Goldman Sachs, Citibank and AIG which, a few days back, were billing overtime for survival also showed surprisingly huge profits even after paying almost all of their federal debts. This brought about much cheer to stock markets. But much before this, on 9th March 09 most of the stock market indices had started their upward journey. This may be attributed to huge bailout money and huge FII money in some countries. This may have been the worst of all times, but all these provided us with a once in a lifetime learning opportunity. I have already emphasized in one of our earlier editorials that this is the best time to study, rather experience and understand the intricacies of finance and economics. I am very happy to note that we have not missed any significant learning opportunity. Through Niveshak, participants of all B-Schools captured the essence of all the happenings and analyzed their implications on the world of finance. During the last 8 issues, we received more than 200 articles from more than top most 30 B-Schools of India. We are extremely thankful to all our article contributors across all B-Schools and to all our subscribers who encouraged us through their appreciation mails and by increasing the count of our subscription. We are also thankful to Public Relations committees of all B-Schools of India who have circulated Niveshak among their participants. We are extremely thankful to Prof. Ashok K Dutta, Director, IIM Shillong, for inspiring us to take up this mission. We are thankful to Prof. S. S. Sarkar, our mentor for having inspired us during difficult times and all our faculty members whose support and encouragement made us see this day. Most of all, we thank all the participants of IIM Shillong, without whom Niveshak would not have completed a glorious year. On a more personal note, I was privileged enough to get an opportunity to work with some of the brightest B-School brains like Amit, Nilesh, Sareet, Sarvesh, Sujal & Tripurari as a part of Team Niveshak. They filled the journey with passion, fun and learning. Niveshak would never have been the same without these people. To grace our anniversary issue, we have an interview with Mr. C. S. Mohapatra, Director of Capital Markets, Ministry of Finance, Government of India. He talks about the present state of regulatory affairs in the Indian Capital Markets and the major reforms which are expected soon. Our Anniversary issue is a tribute to all the major happenings that shook the world of finance over the last one year. We have attempted to capture most of the major happenings and tried to derive a lesson or two from them. We hope this would be a useful issue for you and we promise to publish more valuable issues in future. Once again, I congratulate all of you and Thank you for all your love, support and encouragement.

Niveshak Volume II ISSUE 7 August 2009 Our Contributors Include DoMS, IIT Delhi DoMS, IIT Chennai DoMS, IIT Roorkee FMS, Delhi Great Lakes, Chennai IIFT, Delhi IIM, Ahmedabad IIM, Bangalore IIM, Indore IIM, Kozhikode IIM, Lucknow IMNU, Ahmedabad IMT, Ghaziabad JBIMS, Mumbai KJSOM, Mumbai MDI, Gurgaon MIB, Delhi NITIE, Mumbai NMIMS, Mumbai SCMHRD, Pune SIBM , Pune SIIB, Pune SIMS, Pune SIOM, Pune SITM , Pune SJMSoM, Mumbai Sydenham, Pune TISS, Mumbai VGSOM, Kharagpur Wellingkar, Mumbai XIM, Bhubaneshawar XLRI, Jamshedpur

Stay Invested with us!

Biswadeep Parida (Editor-Niveshak)

©Finance Club Indian Institute of Management, Shillong

www.iims-niveshak.com Disclaimer: The views presented are the opinion/work of the individual author and The Finance Club of IIM Shillong bears no responsibility whatsoever.

CONTENTS Niveshak Times

Indicator

05 The Month That Was

07 Is it time for a New Global

HE SPeaketh

09 Can Dollar Survive SDR?

16 Mr. C.S. Mohapatra

Currency?

On Fire

Hope

26 Emergence of

New World Order: Asia 29 Asia: Leading The “Recovery Race” 42 Life After Recession

32

Cover Story

The Year That Was A snapshot of the year gone by” August 2008-August 2009

11 The Fall of Maharaja 40 Is The Worst Yet To Come?

Blunders

18 US Auto: Fading into the

oblivion 21 Detroit Shattered 24 Satyam: Too Good a Crisis to Waste! 52 The Collapse of Wall Street 55 Crack In The WALL

Opinion

13 Securitization: an angel or demon 37 Government Bailouts 44 2008 Vs 1929 48 Great Depression || Subprime crisis

Fin Lounge

25 FinToon 56 The Journey of Niveshak

Niveshak Times

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The Month That Was Tanvi Arora AIG reviving Putting an end to its six-quarter run of losses, American International Group (AIG) made a profit of $1.8 billion in its second-quarter ending June 30 2009. The balance sheet reflects that in the comparable period, the insurer suffered a loss of $5.4 billion. But the plummeting combined ratios indicated towards the low pricing for the new business. The insurer’s stock showed an increase of about 10% on 10th August on NYSE resulting in share price to be $29.88. The profit in the results is being attributed to the reductions in net realized capital losses. Though there has been a reduction in risk profile as the assets were disposed of for $2.6 billion, still the risk is very high as the worth of the assets was far more than this. Also, the Delhi-based financial services conglomerate Religare Enterprises has emerged as frontrunner to acquire American International Group’s (AIG) investment unit in India. The investment unit manages fund of about $85 billion and the expected valuation is of $500 million.

IIM, Shillong

tive sources of energy. One such possible solution is India’s vast deposits of shale gas. The share of shale gas in the US gas production has moved up from zero to 8%. This has led to a tremendous fall in the price of natural gas in US by around 75%. Some analysts expect shale gas to supply as much as half the natural gas production in North America by 2020. Companies like Anadarko Petroleum Corp. (APC.N) and Chesapeake Energy Corp. (CHK.N) are investing large amount of money for finding technologies that can be deployed for cheaper Shale oil.

Changing trends among the investors There has been more than Rs 16,000 crores investment in the capital market in the first quarter ending June. This is an increase of almost 218% from the previous quarter. This amount has been raised up by investments in IPO, follow on public offer, qualified institutional placements (QIPs) and right issues together (However, there was a dip in right issues considered individually in April-June period). This change is also being reflected in the mutual fund investments where the investments have been Increased Borrowings by Centre relatively high. This boost in capital investment reThe government intends to borrow Rs. 2.99 veals the enhanced trust of investors in the market. lakh crores from the market in the first half of the Though there might be some restraints due to the current financial year. This is 24% higher than what SEBI guidelines on variable costs. was estimated. Rs. 1.89 lakh crores have already been announced and the remaining Rs. 1.1 lakh European Markets demand again The past quarter saw a rise of 10-12% demand crores would be obtained in 10 different auctions of for automotive components manufactured in India dated securities upto September 30. It is predicted that this increase would not cause the disruption by European car-makers. This change came about by of the market as there is enough liquidity in the the decision of 10 European countries to go for car market. Also, the RBI deputy governor said that the purchases in large numbers. In addition, the governopen market operations (OMO) would continue as ments have decided to provide incentives to their citizens for replacing their low efficiency cars with announced. the new higher efficiency cars. The registrations for Oil stocks slip as crude prices increase. Is new cars grew by 2.4 % in 14 months in Europe. Shale an alternative? Germany, Europe’s largest auto market, reported a The rise in global crude oil price to $69/bar- growth of 40.5%. rel was followed by a drop in the share price of the top oil companies in the country including Reli- Aluminum industry marks major developance Industries (RIL), ONGC and GAIL. This fall was in ments As industries pile the metal & commodities, the range of 2.8 to 4.02% for these companies. The the price of Aluminium is expected to rise all over decline in the exports and gross refining margins (GRMs) also resulted in the fall in RIL’s net profit by the world. There has been lot of developments in the past one month as far as Aluminium industry 11.5% in the second quarter. In the wake of growing energy needs, India is concerned. Ormet Corporation an independent US can do well by exploring its potential for alterna- primary aluminum producer has said that it is decid-

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Niveshak Times

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The Month That Was ing whether to cut aluminum output at its Hannibal, Ohio smelter. Primary aluminum output in China rose to 1.029 million tonnes in June from 984,000 tonnes in May. Rio Tinto Plc revealed that the Sebree aluminum smelter in Kentucky has signed a new long term power contract which will secure smelting operations through to 2023. Vedanta Resources Plc will begin bauxite mining for its alumina plant in India’s eastern state of Orissa by October. Hydro Aluminium, the German unit of Norsk Hydro said that it will keep its large Neuss aluminum smelter open for the immediate future while a new German state aid plan for metal companies is assessed. Some experts are of the opinion that these developments would result in an increase in the cost of aluminum but certain others believe that continued lack of improvement in demand would lead to fall in prices. Agriculture – Monsoon India’s monsoon rainfall deficit has widened further, increasing the risk of crop damage, but its impact on the country’s economy was offset by high growth in June industrial output due to buoyant consumer demand. The shortfall in rains increased by one percentage point from the previous day to 29 percent on August 10, with rains in the soybeangrowing central region weakening, government sources said, raising the prospect of higher imports. As a relief measure for families in the drought-affected areas, the Prime Minister, Dr. Manmohan Singh, is ready to undertake open market intervention to avoid any increase in the cost of food grains due to deficient and delayed monsoon. Thus, the government would engage in the sale of wheat and paddy to control the cost of food grains.

due to the young and cheap flights coming into the market and also the merger of Indian airlines and Air India. The question stands is, if this proposal is accepted, Air India may recover but will other airlines be able to keep up the spirits? Collapse in profits for Tata Steel The major steelmaker of the country faces a dip of 47% in its profits, to Rs 789.8 crore, for AprilJune quarter of this financial year, as compared to last year. The foremost reason for this is the threefold rise in coal price and the decline in steel price. Production increased by 30%, but there was no significant change in the income due to the drop in steel price. While, the sales volumes were up by 22%, the drop in average realizations and higher raw material cost resulted in a fall. Despite a huge drop, it has been predicted that the company will recover in 2010-11.

Fluctuation in major world indices Last one month saw variations on all the stock exchanges. Sensex, Dow Jones, Nasdaq, S&P 500 all the indices are very bullish. Sensex touched 15924 points, 14-month high, with the increase in crude oil prices. Whereas, in June the sensex fell with the fall in exports. Also, the monsoons had caused a dip in the Sensex in the month of July but with the news of increase in European market demand, they shot up. In straight three sessions, the Sensex has risen by a whopping 750.77 points or 4.95 per cent. Major US indices have also moved up during the last month. While Dow Jones Industrial Average climbed up from 8300 to 9400 points, Nasdaq composite climbed up by 200 points to 2000. During the Air India unwell same time the broad based S&P 500 inched up by The worst hit airlines, Air India, is looking up to almost 10%. This could be a sign of better things to Government to bear its Rs 45000 crores expenses on come. maintaining its fleet, money needed as working capital and also, to pay for the delivery of the already ordered planes. After demanding for reduction in sales tax on jet fuel, cut in airport charges and even threatening to go on strikes, the airlines appealed for bailout from government. The proposal presented by Air India to the government talks about ontime performance and seamless connectivity. Also, it is planning to talk the banks into converting its high-cost debts into low-cost ones. They plan to turn around in 36 months with dividing the recovery plan into 4 major heads. The major reason behind this downfall of the airlines is the lost of market share

6

NIVESHAK

ANNIVERSARY EDITION

Is it time for a New Global Currency? Abhinav Chugh & Nidhi Kaicker • Should be easily convertible (so that they can be used as an emergency source of liquidity), which the dollar with its large (and liquid) capital markets satisfy well. • Should be a good store of value ; in the wake of depreciation in recent times, this goes against the dollar. Why is USD Still The King Although there has been lots of news lately about the U.S. dollar losing some of its status, there is no doubt that the dollar still dominates the Currency World. 1. The Dollar is a part of each of the world’s most actively traded currency pairs. According to the Bank of International Settlements, these currency pairs account for 67% of the daily turnover in the Forex market. When you add all of the currencies categorized as “other” traded against the U.S. dollar, the total rises to 86%. 2. USD is the world’s primary reserve currency, accounting for over 63% of the world’s currency reserves. A ‘reserve currency’ is a currency held by the governments/central banks of other countries in large quantities

Is Dollar supremacy hard to be overthrown in the near future by Euro or SDR? Going by the Forex market and the currency reserves, USD still rules the currency world. So how Euro or SDR will give a tough fight to USD is the question which needs to be answered. CURRENCY EUR/USD USD/JPY USD/GBP USD/AUD USD/CHF USD/CAD USD/OTHER

SHARE 27% 13% 12% 6% 5% 4% 19%

Indicators

The United States’ status as the unrivalled global superpower has rested on two unchallengeable pillars - the overwhelming US military superiority over all other rivals; and the control of global economic markets with the dominant role of the US dollar as reserve currency. However the scenario has changed drastically in the past few years; the US trade deficit, federal budget deficit, low interest rate, and low GDP growth compared to the high – GDP growth rest–of-the-world has caused the dollar to decline against the world’s major currencies. Though the fall in currencies’ value maybe dismissed as cyclical occurrences, what makes the situation unique is that the most country’s currency reserves are crammed with depreciating dollar assets. It is no surprise to see the US dollar’s role as a global reserve currency is coming under pressure. In the past, with no credible alternatives, such criticism has been academic. But following the recent G-20 meeting, it looks as if there is a fledgling movement to turn the SDR (Special Drawing Rights) into a dollar substitute. Typically, the factors contributing to a strong/weak currency are: • Higher/lower interest rate in home country • Lower/higher inflation rates • A domestic trade surplus/deficit • A large, consistent government deficit/surplus crowding out domestic borrowings • Sound/speculative monetary policy aimed at price stability.

FMS, Delhi

What Makes A ‘Good’ Reserve Currency The currency reserve must satisfy two very important criteria:

© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG

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Indicators

3. Another reason is that major commodities such close to US GDP, and the total Euro in circulation now as oil, gold and silver are priced in U.S. dollars. Al- exceeds dollars. most two-thirds of the world’s currency reserves are UNITED STATES EURO AREAS kept in dollars, because oil importers pay in dollars GDP ( $ TRILLION) 11.6 9.6 and oil exporters keep their reserves in the currency FOREIGN EXCHANGE MARKET 43.0 18.5 they are paid in. This makes access to U.S. dollars TURNOVER ( % OF TOTAL) essential for anyone in the world who wants to pur- STOCK MARKET VALUE 15.6 13.7 ( $ TRILLION) chase these products. Factors Determining The Future Of Dollar While the dollar still dominates the currency world, many argue that the tides are changing, and that the dollar is in danger of losing this status. Two of the main reasons for the decline are mentioned below: 1. Many people consider the monetary policy of the United States to be flawed, citing the Federal Reserve’s increase in the money supply to hold interest rates low, as a major factor in the dollar’s decline. The lowering of interest rates tends to weaken the value of a currency when all else is equal. As the value of the currency falls, countries around the world holding that currency see their wealth evaporate due to the falling value of their reserves. Obviously, this has the potential to make the dollar less attractive for them to hold as their reserve currency, which means a decrease in demand, and a decrease in the value of the currency when all else is equal. 2. The other factor that people point to as a reason why the dollar may lose its status as the most dominant currency of the world is because of the rise in prominence of the ‘Euro’ and its relative strength in comparison to the dollar in the past few years. The graph below shows the distribution of foreign exchange reserves among Dollars, Euros, Yen and Pounds.

CURRENCY IN CIRCULATION ( $ BILLIONS)

821

895

Until the advent of the Euro in late 1999 there was no potential challenge to the Dollar hegemony in world trade. The coming of the Euro has threatened the dominant role of the US dollar as reserve currency. In just a few years it has established itself as the second-most important currency in the world’s financial markets. With a significant part of the petroleum trade using the Euro instead of dollars; many countries would have to keep a part of their reserves in Euros. The dollar would then have to compete with the Euro for global capital. Conclusion While the Dollar has been and still remains the ruler of the currency world, it is no doubt that its position is now being threatened by the SDR and the Euro. With the continuous decline in its value, countries are scared of their deteriorating reserves and want an alternate to the USD. Potential middle ground could be structuring a basket of rich world currencies which would somewhat diversify the dollar-risks and allow more freedom to dollar-benchmarked economies in pursuing their monetary policy, while allowing them gradually reduce their dependence and purchase of dollars. However there remains considerable space for thought and action in this domain.

Growth Of Euro Euro is the only currency that can give competition to dollar. The combined GDP of Euro zone is

“While the dollar still dominates the currency world, many argue that the tides are changing, and that the dollar is in danger of losing this status” 8

NIVESHAK

ANNIVERSARY EDITION

Can Dollar Survive SDR? Upasna Agarwal ton Woods fixed exchange-rate system, because of concerns that there was insufficient liquidity to support global economic activity. It was originally intended as a reserve currency, but is now mainly used in the accounts for the IMF’s transactions with member countries. SDRs are allocated to IMF members on the basis of their contribution to the fund. On the face of the crisis, China suggests this shift on grounds of two reasons. Firstly , as Zhou states that the outbreak of the crisis and its spillover to the entire reflects the inherent vulnerabilities and systemic risks in the existing international monetary system. Secondly, the country issuing the reserve currency (in this case dollar) finds it difficult to pursue both the domestic goals of price stability and its international responsibilities of a stable financial system. They may either fail to adequately meet the demand of a growing global economy for liquidity as they try to ease inflation pressures at home, or create excess liquidity in the global markets by overly stimulating domestic demand. According to economist the “Triffin Dilemma”, as propounded by economist Robert Triffin, any country (America in this case)that is the sole supplier of a global currency will have to run persistent current account deficit. With the expansion of global economy, there is a rise in the demand for reserve currency. If America doesn’t provide the requisite amount of currency, it will lead

In the midst of present global financial crisis, there is a huge uproar to replace US Dollar with SDR as the reserve currency. But knowing the grasp of US Dollar across the world economy it’s a tough call for SDR to dethrone US Dollar.

Indicators

Zhou Xiaochuan, the governor of the People’s Bank of China, in his speech on Reform the International Monetary System delivered on 23 March 2009, just before the G20 London in April, sent a clear message to the world that in future, changes to the international financial system are likely to be shaped by Beijing as well as Washington. He calls for a radical approach wherein a global currency should replace dollar as the reserve currency. This global currency, according to him, would be represented by a basket of significant currencies and commodities, an extended version of the International Monetary Fund’s Special Drawing Rights (SDRs). An attempt in this regard will have serious implications in the financial world majorly undermining the strength of dollar and the U.S. economy as a whole. He suggests the use of SDR as the reserve currency in place of dollar, which was the basic aim with which SDR was created during the Bretton Woods fixed exchange system by IMF in 1969. Being composite of dollar, yen euro and pound, it tends to remove the reliance on only one international currency thus moving towards a more balanced economic system. Mr Zhou suggests that the dollar’s reserve status should be transferred to the SDR (Special Drawing Rights), a synthetic currency created by the IMF, whose value is determined as a weighted average of the dollar, euro, yen and pound. The SDR was created in 1969, during the Bret-

IIM Shillong

“A strong and open US financial system has over the years helped facilitate the dollar’s international use.”

© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG

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Indicators

to shortage of funds in the which will lead to contraction of global economy. Economies having substantial holding of US government debt are apprehensive of bailout of financial institutions by printing money as this leads to enhanced risk of inflation which will erode the value of dollar. Since China holds a huge portfolio of US government bond, it fears huge losses if dollar loses its credibility in this crisis. On the face of this scenario, China’s plea for a transition to a multicurrency reserve currency rings hollow. So what exactly is SDR? SDRs represent a basket of four currencies – comprising 44 per cent US dollars, 34 per cent euros, 11 per cent yen and 11 per cent pound sterling. Presently SDRs are too few in circulation, the outstanding amount being $33bn. Even with the new tranches lately issued by IMF, it will still constitute less than 5 per cent of the world’s foreign currency reserves. By contrast, US dollar instruments comprised 64 per cent of reserves at the end of 2008.

10

Currency Composition of Reserve Holdings

If various Central Banks try to reduce their dollar holdings by replacing them with some other single reserve currency they will eventually flood the foreign currency market thus depressing the value of dollar. However if they replace it with same amount of SDR constituting the four given currencies they can do it without depressing dollar. For every 1$ the countries will be able to reduce its exposure to dollar by 0.56$- the portion represented by the other currencies. This, however, according to Robert Pozen will transfer the risk to IMF which will then be faced by two alternatives- either to sell trade dollar which will again depress its value in the international monetary market or hold them at the risk of dollar depreciation. In this scenario it seems more likely that the IMF will go for the latter option which could lead to a dangerous mismatch – if its assets were comprised mainly of US dollars and its liabilities mainly of SDRs representing four currencies. Secondly the composition of SDR as at present does not truly reflect the strength of various cur-

rencies. SDR has to be made more neutral to global cycles and more representative of the shift in economic power witnessed over the last two decades. This implies an increase in the commodity content and the inclusion of major emerging-market currencies. While in principle, international payments could be carried out using any currency or set of currencies, in practice, the US dollar is predominant in international trade and financial flows. US dollar has been serving the role of a reserve currency quite effectively over the years which is evident from the fact that 80% of daily international trade involves US dollars. The dollar acts as a “vehicle currency” in the sense that agents in non-dollar economies will generally engage in currency trade indirectly using the US dollar rather than using direct bilateral trade among their own currencies. Especially the commodities that are fairly standardised and are sold in competitive markets is conducted in US dollars. Denomination in a single currency provides a benchmark for price comparisons making it easier to trade for all. Heterogeneous goods, where price competition is not as crucial tend to be denominated in exporters’ currencies but even in this case importers exchange their currency for dollars and then dollar for the exporter currency. After World War II, the US dollar quickly emerged as the world’s key international currency, both as an official reserve unit and for financing international commerce. The size, sophistication and relative stability of the US economy has helped dollar maintain its role as a vehicle currency over the years which renders the cost of transacting in US dollars rather low, highlighting its role as the reserve currency. A strong and open US financial system has over the years helped facilitate the dollar’s international use. The breadth and depth of US financial market being free of financial regulations and highly innovative instruments enhances liquidity of dollar denominated assets. Moreover, with Americans trading a lot globally, dollar trade expanding even between non-dollar countries and foreign financial firms offering myriad financial instruments denominated in dollars, holding dollars and transacting in them has become relatively easy. The strong global network that has expanded over the years is a self reinforcing process. A transition from dollar to any other reserve currency is only possible, if a substantial proportion of the world population makes the jump in unison to continue exploiting the benefits of globally integrated markets that we have today. Hence a shift from dollar to SDR though seems reasonable from the theoretical point of view is not likely in the near future.

NIVESHAK

ANNIVERSARY EDITION

The Fall of Maharaja Arka Khasnabis it was steered by competent professionals at the helm of affairs. Hence except for brief periods it almost always returned a profit. The downturn began after 2004, when domestic private airlines were allowed to fly overseas. AirIndia’s most lucrative sector connecting Gulf routes to West India saw fierce competition as private rivals chipped away at Air-India’s market share, robbing the airline of its cash cow. Globally the aviation market had started to shrink after the September 11 terrorist attacks in the U.S. Nevertheless Air-India went on a startling aircraft acquisition spree placing orders for 43 new aircraft (which increased to 66 later) anticipating increased traffic. Today its demand for excess aircraft over and above its capacity has come back to haunt it as it is forced to keep 10 Boeing 777s and 737s grounded at a cost of $ 170 million per day. In what is nothing short of a farce however the airline is still using leased aircraft from others despite having its own planes which are left unused. In the meantime in 2007, an ambitious merger plan was pushed by the Government to merge Air-India with the other state-owned domestic airline Indian Airlines. Hailed by many as a bold move essential for modernization at the time, the merger has been, to put it simply, an unmiti-

After few years of battle with low cost carriers and overweight crew, the flight of the Maharaja is finally grounded. This article analyses the reasons of the failure and future possibilities

On Fire

As India’s national airline, Air India has borne the brunt of multiple crises from the time of its inception six decades ago. However none of them have been as huge as the one that confronts it today. Unofficial estimates peg the airline’s losses for the 2008-09 financial year at a whopping Rs. 7000 crores , one of the highest in its history. Reports suggest that it is making a loss of 250 crore per month or 8 crore daily. To understand how things came to such a pass it’s necessary to examine the airline’s history and the complexities it has had to grapple with for a number of years. Founded by J.R.D. Tata in 1932 as Tata Airlines it was taken over by the Indian Government in 1953 and since then it has been known as India’s flagship carrier. As is usually the case in India, the airline’s problems began as politicians and bureaucrats, who consider a PSU as their private fiefdom, started their creeping interference. The plush jobs started being given out to political cronies. The workforce became bloated as labor laws prevented the use of contract employees. Service standards gradually began to slip as the airline was slow to embrace computerization and it also became increasingly unionized. All this however happened gradually and for the most part

IIFT, KolKota

In what is nothing short of a farce however the airline is still using leased aircraft from others despite having its own planes which are left unused. © FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG

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On Fire

gated disaster. The two airlines, for all practical purposes, still work as separate outfits with even the flight codes and the equipment used at every level being different. Employees on both sides have been left disgruntled by the merger with employee morale dropping to an all-time low. As a result the quality of service being offered has dropped to an alarmingly low level. Its plight has become even more dire after it was forced to parcel off bilateral rights amounting to 90000 seats per week on its lucrative routes to other airlines as part of the Government’s new open-air policy. For the previous two years itself the airline was consistently making losses amounting to almost 2000 crores. Since the beginning of this year however a string of unfavorable developments have combined to push the airline on its knees. First came high Aviation Turbine Fuel (ATF) prices which forced it to increase fares. Next came the global recession followed by the swine-flu pandemic which also had an adverse impact on air-travel. All these factors resulted in a steep fall in passenger traffic. Globally the aviation industry started to shrink. Air-India’s losses however were in a class of its own as the adverse environment coupled with its own internal problems brought it to the verge of bankruptcy. By June’09 it had virtually no working capital to keep flying. Unable to pay wages it first asked the staff to take pay cuts, and then it deferred salary disbursal to the 15th of every month. Simultaneously it appealed to the Government for a bailout amounting to Rs. 10000 Crore. The problem became compounded as the employees’ unions, unhappy over delayed payment of salaries, threatened a strike and the issue became politicized as politicians of all moulds jumped into the fray. Now the airline has asked its senior executives to forego their July salary and the quantum of bailout sought from the Government has jumped to Rs. 20000

crore over the next five years. For its part the Indian Government has said that it is ready to help out the beleaguered airline provided it undertakes an ambitious restructuring program to be worked out by SBI Capital. A huge captive market has been given to the airline as it has been made mandatory for Government employees to fly only on the airline again (This restriction had been lifted a few years back).There is also a plan by the Government to appoint 7 independent directors on the board besides setting up an advisory committee comprising top aviation experts from around the world. In an ironical twist of fate, Ratan Tata, the heir of the airline’s original founder JRD Tata, has been asked to head the panel. The airline itself has also finalized a turnaround plan to generate revenue upto 3000 crores. A separate plan is being worked out for immediately returning leased aircraft and offering VRS to some employees. However the Civil Aviation Minister has been quick to wash off his responsibility in the crisis stating that it happened because of the airline’s mismanagement and its bloated workforce overlooking the fact that the Government’s vacillating policies also played a key role in contributing to the crisis. Critics say that it is too late to save the airline and the only way to save it now would be to convert it into a full-fledged private carrier and run it like a business. However in an attempt to fend off critics the Minister has said that the crisis would be overcome and the airline would start making profits soon. Only time will tell whether the minister’s words remain a pipedream or turn into reality.

Critics say that ..it is too late to save the airline and the only way to save it now would be to convert it into a full-fledged private carrier and run it like a business

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NIVESHAK

ANNIVERSARY EDITION

Securitization Shreshth Sharma & Sumeet Mittal

IIM Bangalore

Securitization has been pronounced by many A Demon causing havoc in the Financial System which made The Year That Was full of agony, suffering and pain! This article attempts to analyze the question - Is Securitization – an angel or a demon? The article has been slated to serve three purposes. Firstly, it attempts to explain (in a jargon free manner) – what is securitization? Secondly, it explores the alleged demon side of Securitization by examining the role which securitization played in the financial crisis. Thirdly, it brings forward the angel side of securitization by featuring the benefits securitization offers. Finally, based on the discussion put forth in the article earlier, it gives the authors’ opinion on the question asked “Securitization - An Angel or A Demon?”

In the backdrop of the Sub Prime crisis, the writer tries to analyse the good, the bad and the uglier side of one of the most misunderstood subjects of Finance.

© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG

Opinion

What is Securitization? Securitization is typically defined as a structured finance process of taking an illiquid asset or a group of such assets and transforming them into a marketable security through financial engineering. Let’s have an understanding of Securitization from the usage standpoint. We will take a simplified example for the purpose of illustrating one of the ways of securitization (Securitization of receivables). Say, you want to buy a house and rent it out. One of the ways to finance it - is to take a loan from the bank and buy the house making loan your liability and house the asset. Another way to finance it, can be the devised by exploiting the fact that it is going to generate future cash flows in lieu of renting it out. You can sell the claims on the future cash flows for a definite period to an

investor and raise money to buy the house without taking loan from the bank. Hence, creating a marketable security out of claims on future cash flows is nothing but securitization. Generically, we can say any process which transforms financial claims into marketable securities is securitization. Before we delve into what role securitization played in the financial crisis, let’s have a conceptual understanding of securitization from a bank’s perspective. Simplified view of a typical balance sheet of a bank is shown in Exhibit A In Pre-securitization era - Loans item on the assets side used to be an item sitting in the bank’s book. But the innovation of securitization has changed the way. Securitization can convert these illiquid asset items into marketable securities. Now we will see how this process can be used to create leverage in the system. Before we go into this, let us have a quick review of capital requirements of a bank. As per regulatory requirements, banks need to maintain a certain proportion of risk weighted assets as Capital. The role of this risk based capital is to provide a cushion itself against unexpected losses. In simple terms, the regulatory framework requires banks to have capital as a linear function of its (risk weighted) assets. Under this arrangement, having a fixed capital puts a cap on how much assets (e.g. loans) a bank can have (crudely it can be seen as a cap on leverage a bank can have where leverage is defined as total assets/equity). Say, the bank has the balance sheet as shown in exhibit A. For the sake of

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Opinion

understanding the concept, the balance sheet has been simplified and asset side has only loans (risk weight = 100%) and cash (risk weight = 0%) where as liability side has capital and deposits. Assume that the regulatory requirement is to have the ratio of capital to (risk weighted) assets as 10%. Capital being 100 crores, the maximum loan on the asset side can be 1000 crores. Now, if bank wants to disburse more loans and hence increase assets, it will have to infuse fresh capital into the bank to maintain the capital to assets ratio. Let’s see how securitization can help create leverage in the system. With the process of securitization, bank can package a slice of this loan say 900 crores and parcel it in the form of a marketable security and sell it (assume for 900 crores only). Now, the balance sheet of bank will look like in Exhibit B. Now bank has loan of only 100 crores and cash

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loans to get converted into marketable securities which were sold to entities like pension funds, mutual funds, insurance companies and foreign central banks etc. This led to an emergence of new sources of funds, stimulating banks to look for more borrowers to lend these funds. Having given loans to prime borrowers, banks started giving loans to sub-prime borrowers to lend the funds. This kept on happening unabated. When the housing bubble burst and unemployment rates surged, the sub-prime borrowers started defaulting, making these assets (loans) toxic. The securities backed by these loans became worthless causing loss to all the holders of these securities. Summarizing the above discussion, in pre-securitization-era loans used to sit in the books of the issuer bank and if they turn out to be bad it used to cause loss to that bank only and loans used to be funded primarily by deposits of households. In the wake of securitization two phenomenons happened which caused this havoc: 1) Securitization opened a new source of funding for banks leading to more funds to lend which stimulated them to lend even to sub-prime customers hence deteriorating the quality of loans. 2) As Securitization involved slicing and dicing of of 1000 crores on asset side. Now bank can again loans and parceling them to a whole of host of indisburse loans worth 900 crores still being under vestors all around the world, the effect of default on the regulatory capital requirement norms. In this loans in US spread all-over globally. way, securitization has enabled Bank to disburse loan worth Rs. 1900 crore with the capital of just Securitization – An Angel 100 crores which was not possible earlier. InterestThe benefits that accrue from securitization can ing thing to note is this cycle (disburse loan -> se- broadly be divided into two categories of Risk Mancuritize -> loan to cash -> disburse loan) which we agement and Efficient market development. Securitihave shown once, can go on and on and bank can zation is unique in its liquidity management benefits disburse more and more loan with the same fixed because it can impart liquidity on an ongoing basis capital. This is how the banks kept on fueling the and while doing that one does not have to worry leverage in the system. It is important to make a about any surplus or deficit of balances. For a lot of note at this point that this inhibited increase in le- financial institutions and especially wholesale banks verage got created because the entities, who bought there are assets in form of project financing sitting these securitized loans (in the form of marketable in their books and they effectively block the funds of securities), were not under the purview of regulatory the institution. With securitization these funds can framework and hence did not need maintain capital be released and hence impart liquidity to illiquid to (risk weighted) asset ratio. assets. An associated benefit that flows from the above process of removing the liquidity risk is that Securitization in Financial Crisis – a Demon? the institution also ends up reducing its exposure to Employing securitization as a tool to create le- interest rate movements. As the interest sensitive verage in the system (as explained earlier) can be assets have been transferred to other investors the put as the source of this financial crisis. Securitiza- risk associated with interest rate fluctuations also tion touted to be a tool to disperse risk ended up gets transferred. concentrating the risk in the banking sector itself. The benefits of securitization go beyond the Let’s understand how securitization led to this fibooks of the banks and financial institutions. In fact, nancial mess. Role of banks in economy is to act as securitization has a big role to play in the developfinancial intermediaries between the net savers of ment of healthy and efficient free capital markets. funds and net borrowers of funds. In the traditional Some of the basic functions of financial intermediamodel, source of funds used to be the households in tion are default risk intermediation, liquidity interthe form of retail depositors. Securitization allowed

NIVESHAK

ANNIVERSARY EDITION

These two factors let to such complexities and muck in the system that even the people who created it could not clean it up. Securitization is not a demon, but its use was. Instead of taking the US implementation as the case in point we should look at the implementation in some of the European countries

is a matter of time that common investors start understanding this high return investment instrument and take to buying these papers. The fund-based intermediaries tend to increase the transaction costs and hence induce inefficiency in the system. Securitization eliminates these intermediaries. This of course saves the end user of funds, the borrower the costs and increases the returns for the savers or investors. Also availability of marketable claims with credit ratings backing them makes it easier for investors to invest. This brings in more savers into the financial system. Hence securitization also becomes a fillip for savers to save more and become a part of financial system to earn better returns on their investments. Finally securitization takes the focus away from who is holding the resource and rather focuses on what is the quality and characteristic of the underlying resource. The financial intermediaries become more of intermediaries by becoming the custodians of the assets not the holders of them. This enhances their purpose of facilitating the connection between the savers and the borrowers.

such as Germany. Where how paper was created and who bought and sold it, all was kept under regulation and the financial systems of these countries did not crumble the way the US system did. The German Pfandbriefe are similar to securitization instruments and are asset-backed bonds. But the assets backing this paper are retained on the balance sheet of the issuing bank. There is no SPV (special purpose vehicle) to which the assets are sold. The bank issuing Pfandbrief has to manage its mortgage loans etc and ensure that the value and cash flows from these assets cover the Pfandbrief liabilities at all times. The appointed supervisor BaKred from the federal bank ensures that the collateral maintained is adequate. In case of a default by the bank, the Pfandbrief holders are given a status of the highest creditors. Even when in the early part of this decade when the German regulator allowed for creation of a SPV there were some prudent measures taken. The regulators ensured that the receivables (assets) were legally transferred to the SPV hence ensuring a ‘true sale’. The repurchase of receivables from the SPV was also regulated and was permitted only for the transaction finalization purposes, and on that too a cap of 10% of the receivables sold was put. The originator or its affiliates (any entity in which the originator holds more than 40% stake) were forbidden from financing the SPV in any form, this ensured that the credit risks transferred to SPV don’t come back on the originator in some other form. This was something lacking in the US system and was the biggest cause of the meltdown. This German example is of prudent and pragmatic regulation and it avoided all the pitfalls that took the US financial system down. The authors do not suggest indiscriminate regulations as a kickback reaction to the crisis. Rather, securitization should be used as a tool for further development of efficient free markets but the regulators must ensure that the use of securitization is done in a proper way.

The Verdict We discussed the basics of securitization and how securitization wreaked havoc in the world economy. We also saw what benefits securitization as a concept has in its fold. So what went wrong? The contention of the authors is that it was not securitization that caused the problems; it was the way it was used. No matter how good a tool is in its nature and characteristics, used wildly, non-pragmatically and uncontrolled it has the potential to create a disaster. Securitization has been there for ages and did not create any problems and served its true purpose as detailed in the section on benefits of securitization. What changed was that the use of securitization was left uncontrolled. Firstly, what was securitized was not regulated, to add to it low quality paper was given good credit ratings. Secondly, no check was maintained on who could buy that paper.

© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG

Opinion

mediation and information intermediation. Securitization as a mechanism facilitates the diffusion of funds from savers to the borrowers while the banks act as trustees and take care of default risk and information asymmetry. Though in reality these papers are mostly bought by institutions themselves, it

15

He Speaketh

Mr. C. S. Mohapatra

Director Capital Market Division, Ministry Of Finance

In this interview with Biswadeep Parida of IIM Shillong, Mr. Mohapatra talks about the current state of affairs at the Indian Capital markets, the legislative and administrative measures which keep it at par with International practices & benchmarks and some of the reform measures that are expected to grace stock markets in the near future. He also talks about some regulatory measures that helped India avert the worst of crisis, the role of FIIs in Indian markets and the Debt market of India among various other issues.

Mr. C. S. Mohapatra is an officer of the Indian Economic Service of 1986 batch and is currently Director in the Capital Markets Division of the Ministry of Finance of the Government of India. He handles the important domains of Secondary Markets and International Cooperation. Prior to taking up this current assignment; he has held several important positions in civil service, including that of Director in the Planning Commission and Ministry of Social Justice and Empowerment. Mr Mohapatra is an M.Sc in Economics from the London School of Economics and Political Science and presently engaged in his doctoral research at the Centre for Economic Studies and Planning in Jawaharlal Nehru University. He also has a Masters degree in Analytical & Applied Economics from Utkal University and holds an M.Phil from Punjab University. He has edited a book and written numerous articles for leading journals. He is a member of the Secondary Market Advisory Committee of SEBI.

Niveshak: How has the strong regulatory regime (related to financial markets) in India helped us to avert the worst of the sub-prime crisis?

Mr. Mohapatra: Indian capital markets have come a long way to emerge as one of the best regulated, technology driven, transparent markets in the world. Various legislative and administrative measures are at par with International practices & benchmarks. The corporatized and demutualised stock exchanges now engage in the screen based trading of dematerialized shares which on a rolling settlement basis are electronically cleared through clearing houses or clearing corporations. The technological and institutional changes that have been brought about in a short span of time, is tremendous. In the securities market, new products are introduced on a exchange traded basis which are transparent. We could avoid a banking crisis as Indian banks were capital adequate which helped them to wither the storm. For a brief period, we witnessed a crisis of confidence and information asymmetry. Recessionary trend also set in. A series of monetary & fiscal measures have followed the dampened market to ensure the needed boost to the economy. On the back of promising corporate performance, and signs of green shoots of recovery, now stock markets have started yielding positive returns. Niveshak: India was not directly affected by the Sub-Prime crisis, but a panic was triggered when FIIS started withdrawing their investments. How much of threat do the FIIs pose to the

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market? How critical is it to control FII investments in India?

Mr. Mohapatra: FIIs account for just 13% of the turnover in the cash segment of the stock market and perhaps around 9% in the derivative segment. It will be interesting to know that proprietary traders account for 30-35% of the turnover which is much more than FII turnover. While FII funds are generally more mobile than that of other players in the market and a capital flight has its impact on the macro economy affecting exchange rate and reserve positions, it may not right to discriminate one group of players for their trading strategies & decisions which are within their domain. SEBI, as a regulator, ensures better transparency and disclosure regarding the nature and sources of flows. FIIs withdrew from the emerging markets during the crisis, and India too felt the effects of such withdrawal. Given the growth potential of this nation FIIs will remain interested in this emerging market and flows will get back. In fact, already there is a net FII inflow of US$ 10.3 billion in 200910 (up to July 31, 2009) as against net outflow of US$ 5.7 billion during the corresponding period of 2008-09. Niveshak: Removal of Securities Transactions Tax was highly expected, but nothing of that sort was mentioned in the Union Budget. This led to huge disappointment among stock brokers leading to a crash on the day of announcement of Budget. What are your future plans on that?

NIVESHAK

ANNIVERSARY EDITION

Niveshak:The Indian Debt market is quite small as compared to Debt market of the western economies. It also looks non-existent as we compare it with our equity market. Why is the Indian Debt market so immature? When can we expect some activity in the Debt market?

Mr. Mohapatra: The corporate debt market in India is small and illiquid but the Government debt market is reasonably large and liquid. The corporate bond markets will develop as the financing needs of corporate also increases beyond a threshold limit. At present the real secondary market for corporate bonds is the OTC market where counterparties strike deals directly on the phone or through a bond market broker who acts as an intermediary to the deal. Very low volumes are traded on NSE and BSE if at all. The traded volumes are reported to the exchanges rather than actually traded on the exchange. This is because hardly 30-40 players are there in the market and operating on the trading platform is costly. As corporate sector develops further, the bond market will also develop. We are doing whatever possible to encourage a deep and sound corporate bond market. The SEBI (Issue and Listing of Debt securities Regulations) 2008 has simplified the listing process recently.

net worth; (b) trading in the securities of the company has remained suspended for a period of more than six months; (c) the securities of the company have remained infrequently traded during the preceding three years; (d) the company or any of its promoters or any of its director has been convicted for failure to comply with any of the provisions of the SCR Act or the Securities and Exchange Board of India Act, 1992 or the Depositories Act, 1996 or rules, regulations, etc. is liable to as the case may, be and awarded a penalty of not less than rupees one crore or imprisonment of not less than three years; (e) the addresses of the company or any of its promoter or any of its directors, are not known or false addresses have been furnished or the company has changed its registered office in contravention of the provisions of the Companies Act, 1956 (1 of 1956); or (f) shareholding of the company held by the public has come below the minimum level applicable to the company as per the listing agreement under the Act and the company has failed to raise public holding to the required level within the time specified by the recognized stock exchange.

He Speaketh

Mr. Mohapatra: It is not true to say that nothing was mentioned in this Budget. Union Budget 2009-10 has provided that “all purchase and sale of equity shares and derivatives by the NPS Trust will also be exempt from the Securities Transaction Tax.” It is argued that avoiding STT would reduce the cost of operation in the stock market and will enhance the volume and turnover. The argument that STT makes markets inefficient stems from the argument that any form of taxation on turnover is inefficient. Taxes definitely increase costs of operation in that particular segment. However, STT has the revenue angle also.

Voluntary Delisting can also be done through a request by the company to delist any securities provided (a) the securities of the company have been listed for a minimum period of three years on the Recognized Stock Exchange; (b) the delisting of such securities has been approved by the two-third of public shareholders; and (c) the company, promoter and/ or the director of the company purchase the outstanding securities from those holders who wish to sell them at a price determined in accordance with the regulations. The SEBI (Delisting of Equity Shares) Regulations have special provisions, inter-alia, for delisting of small companies, delisting in cases of winding up of a company and de-recognition of stock exchange.

Niveshak: The market is throwing signs of recovery. How do you think will the Indian Capital Markets Niveshak: Is there a streamlined procedure for delperform in the future? Do we need huge policy isting of companies? Can a Company voluntarily changes/deregulations to make our market comget delisted? petitive with the western markets? Are we mature Mr. Mohapatra: On 10th June 2009 the Government has enough to allow the deregulations? notified the Rules for the Delisting Framework. SimulMr. Mohapatra: As I told earlier Indian capital market is taneously, Regulations dealing with the procedural one of the best regulated, technologies driven, transaspects for delisting has also been notified by the Separent markets with a lot of growth potential. I think curities & Exchange Board of India. The delisting Rules Indian capital market is mature enough to respond to inter-alia provides ground for voluntary as also compulthe dynamic situation as it evolves to ensure a well sory delisting. Delisting of securities may be done by a regulated sound & vibrant market. recognized exchange on any of the following grounds: (a) the company has incurred losses during the preceding three consecutive years and it has negative

“Indian capital markets are one of the best regulated, technology driven, transparent markets in the world.”

“The corporate bond markets will develop as the financing needs of corporate also increases beyond a threshold limit.”

© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG

17

US Auto Fading into the oblivion

Blunders

Arvind Nag K & Kumar Gaurav

IIM Indore The year 2008 could be etched in history for a very long time and in most cases, for the wrong reasons. The world witnessed a collapse of the housing sector, the financial services sector, a severe drop in oil prices etc. But the bankruptcy of the auto industry was something which took everyone by a state of shock, for the precise reason that it was able to survive several turmoils in the markets, and still maintain strong financials. While the main impact was felt at the world’s hub for the automotive industry, Detroit, enough tremors were felt in other parts of the world as well. By the time the blame game begun, the damage was already done, with several companies approaching the Governments for the bail-out packages. There were several versions flying already, about the reasons for the bankruptcy, what had happened, and what could be the impacts. This article is an attempt to dissect the whole issue from a common man’s perspective, and understand its implications. Collapse Story The fears about a possible collapse in Detroit started about three years ago, when the financials of the General Motors were out. General Motors (GM) for its part has a very long and a chequered history, where long periods of growth and consolidation have been interspersed by sporadic moments of decline. This could be traced back to the early 1900s itself when Billy Durant bought 39 compa-

nies between 1908 to 1920, resulting in an exodus of cash, and putting GM on the brink of bankruptcy. Then, when Alfred Sloan took over, he took enough care to impose tight financial controls and tried to bring order in the chaotic setup. But this wasn’t just enough, as the company expanded throughout the globe, and had to bring in an organized structure in its value chain. The only factor that kept it alive at that point of time was the lack of enough competition, which managed to hide its inefficiencies. The reality began to dawn on GM after the first oil-shock in the 1970s, when GM had to cut down on its costs by changing from the high-end chromed V8 power boxes to front-wheel drive boxes, to compete with the Japanese imports. And in the 1980s, when they entered into a JV with Toyota in California, they could understand the processes of “Lean Manufacturing”, which helped them, improve their efficiencies. After recovering from losses of over $30 billion in the early 1990s, the company was in trouble again at the beginning of the next decade. Its market share had been steadily falling, while higher interest rates and an economic downturn led to a pensions and benefits crisis. A restructuring helped, in increasing the market share of GM to 28% by 2003 , and profits at $4 billion, but this did not last long. Every year the cost of retired workers’ health care diverted billions of dollars from developing new models and added $1,400 to the

“The new GM will shed about 14 factories, 2,400 dealers, 21,000 hourly-paid jobs, 8,000 white-collar jobs and, crucially, $79 billion in debt”

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NIVESHAK

ANNIVERSARY EDITION

wake of the recession, the bailouts had to happen. In January this year, government provided a loan of $4 billion, and urged it to declare bankruptcy, to invite chances of restructuring. The firm then had to announce bankruptcy formally under the Chapter 11 scheme of the bankruptcy policies of the US. Ford comes from a different school of problem. It managed to lose an amount of $14 billion last year, and is battling on to fix its problems. But here, it has received little support from either the US or the European governments, and it had to fix up all its credit issues by itself. One thing which has gone in its favor though is the tapping of the credit markets before the freeze happened, and is fighting hard. It is interesting to look at the effects of this crisis on the companies, the stake holders and the common man. It is only an understatement to say that the crisis has dented the automobile industry to a very large extent. Even in the case of Toyota, they faced a severe financial crunch over the last 3-4 years, but managed to circumvent any serious issue with the help of approaching right credit units. Honda is probably the only company which has escaped with a limited damage to its papers and last heard, it posted a decent profit. In summary, it can be said that although there has been a drop in the sales for the non-American auto makers over the last 2 years, it is nothing compared to their American counterparts.

Blunders

cost of each car compared with those made in Asian and European transplants. There was little choice but to generate cash to feed the beast. That meant keeping production high and sustaining sales with costly dealer incentives, cheap credit and heavily discounted fleet sales. That in turn hammered residual values and damaged GM’s brands. Chrysler has a similar story to tell. Founded in 1925 in Detroit, Chrysler grew from strength to strength by adding new products to its repertoire and thus expanding rapidly. It had faced the similar kind of issues in 1970s, when it faced tough competition from the Japanese car manufacturers, and they had to put in a lot of effort and costs to cover up their inefficiencies and improve their bottom line. The company then witnessed periods of very high growth, and when it became Daimler Chrysler, after Daimler Benz bought the company. Despite offering a range of attractive models, Chrysler went into another of its financial tailspins soon after the merger, greatly depressing the stock price of the merged firm. The Plymouth brand w a s phased out in 2001, and plans for cost cutting by sharing of platforms and components began. The Mercedes-based Chrysler Crossfire was one of the first results of this program. A return to rearwheel drive was announced, and in 2004 a new line of full size cars, spearheaded by the Chrysler 300 using some Mercedes-Benz technology and a new HEMI V8 engine appeared and was successful. Financial performance began to improve, with Chrysler providing a significant share of DaimlerChrysler profits due to restructuring efforts at the Mercedes Car Group. The partnership with Mitsubishi was dissolved as DaimlerChrysler divested its stake in the firm due to Mitsubishi’s demand for more control in the management. Under this scenario, what surprised everyone was the selling of a majority stake of 80.1% to Cerberus at $7.4 billion. This sent tremors across the industry, and when the financials started to drip in

Bailouts Now what were the measures taken to bail these giants out of the crisis? While the government swung into action, and uses its bail-out packages trying to improve the situation, they were only half-measures to the problem. The companies had to search for a long term solution to this crisis. So when the bail-out packages were not sufficient and the two biggies out of the three declared bankruptcy, it came as a no surprise. GM‘s application on June 1st for Chapter 11

© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG

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Blunders

protection from creditors was the biggest bankruptcy ever. The government, which is putting $30 billion into GM on top of the $20 billion it has already handed over, will receive 60.8% of the stock. The Canadian government, which is providing $9.5 billion, will get 11.7%. The UAW’s trust will have 17.5% and the bondholders 10%. Despite the size of its stake, the government is adamant that it is a reluctant shareholder and will stay out of managing the business. It hopes that within 18 months GM might become a publicly traded company again. The new GM will shed about 14 factories, 2,400 dealers, 21,000 hourly-paid jobs, 8,000 white-collar jobs and, crucially, $79 billion in debt. The aim is for the company in North America to be able to break even in a domestic market with annual sales of 10m vehicles. Today’s extremely depressed market is running at about 9.5m. A recovery is forecast to start next year, but it may take time for sales to return to the 15m17m seen between 1995 and 2007. While all this has happened, the glory days of GM might as well be over. In case of Chrysler, the bankruptcy was filed in April, after repeated bailout packages did not help the cause of the company. Fiat came forward to take up the stake in Chrysler in the latter’s bid for survival. Under the terms of the deal, which is still only a memorandum of understanding, Fiat will take a 35% stake in Chrysler in exchange for supplying it with its highly fuel-efficient power train technology. Fiat will also make available to Chrysler its small and medium-sized vehicle platforms to be renamed as Chryslers in North America. And it will help Chrysler in overseas markets, such as Europe and South America, where its presence is minimal. With Fiat’s help, Chrysler might just be able to convince a skeptical administration that it has a plan to rectify three of its most glaring weaknesses: an over-reliance on gas-guzzling trucks and sports-utility vehicles, almost total dependence on the North American market and a wafer thin senior management team. The deal will apparently only go ahead if Chrysler gets the $3 billion additional loan that it is seeking from the American government. Inspite of all this, the recovery of Chrysler, if at all happens can only be termed miraculous.

rope also spends close to two-thirds through credit, so there might be reasons beyond it. If we look further, a Volkswagen or a BMW have had their share of slippages, but they have been able to come back well compared to the Detroit biggies. Delving deeper, it can be found that GM had its own share of woes even before the actual recession started. They were too much into debts, had too many dealers and brands, high labor costs, and liability to the pensioners. These kinds of costs became extremely magnified during the time of the recession. The same is the case with Chrysler, when the costs became unmanageable. Contrast this with their German or the Japanese counterparts, they have maintained extremely less number of overheads, and are able to come out of it easily. The adoption of a lean structure, and better employee management helped in reducing the costs to a larger extent. The expansion to other segments, as well as to the other global markets was a well planned move in their cases, against the super fast expansion inconsistent with the supply chain that was adopted by the US majors. The amount of leverage used was also uncalled for, considering their debt/asset ratios which were extremely high compared to the industry averages. These drawbacks give significant insights into what should not be done, while building such a huge organization. Anticipated Future

It is interesting to look at the possible future of the auto industry. The demand for the cars is ever increasing, and looking by the Booz Allen & Co’s report , the world needs 1.5 billion cars by 2018; up from 672 million cars today, the demand is extremely high. So the cars are going to be needed anyway. So how would the companies head for revival in this scenario? Looking at the recession and the time taken to come out of it, the smaller and cheap cars will be the most sold out ones. Also, if we look at the emerging economies, the cars that are sold are mostly the smaller and the cheap ones. So, will the companies which produce the cheaper and smaller cars gain a competitive advantage? There is an increasing demand for the greener cars these days, considering the environmental pollution, and the volatility of the oil prices. So, are greener cars the Lessons Learnt way to go? Or will the companies go the normal way, Whatever may be the end results, there are and restructure their firms to reduce their costs and quite a few lessons to be learnt for the industry, increase their bottom line? We’d rather wait and apart from blaming the huge slowdown in consumer watch!! spending. It might be claimed that the American spending relies close to 90% on credit, and this could be a reason for the crash down. But then Eu-

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Shattered S.AARANI SUBHANATHAN & C.SARAVANA BALAGEE

IIM Kozhikode

The Present Scenario The Global Economic Crisis that has destroyed worldwide consumer demand for automobiles has resulted in two of America’s three remaining domestic carmakers, General Motors and Chrysler, looking to the Government for salvation. But the priority however is still with the financial and banking system, while states and cities falling short of tax revenues are also waiting for help from the administration. However the Government thinks that the two auto makers have failed because they have not formulated a business plan that is viable in current market conditions, or rather their plan was inflexible to the changing dynamics of the macroeconomic environment. They have therefore, in effect, been sent an ultimatum. Chrysler is being told to merge with the Italian auto-

The Prospects For Chrysler Chrysler which had been asked to merge with Fiat could be another failed automotive merger in the making. The record of foreign carmakers buying large or controlling interests in American auto companies has been uniformly disastrous. The example of failed mergers can be looked from Chrysler’s relatively recent merger with Mercedes-Benz, at which time the joint company was known as Daimler-Chrysler. Also the purchase of American Motors by Renault, the French auto giant resulted in the extinction of AMC, with its remnants bought by Chrysler. It should also be noted that Fiat abandoned the American car market decades ago, so it is totally unfamiliar with the dynamics of the U.S. auto marketplace.

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Detroit, once the heart of America’s industrialization has now become an urban wilderness. A short walk from the downtown core of the Motor City can be found once vibrant neighbourhoods that are now uninhabited. The fact that animal life that has once left these areas centuries ago have now returned reveals the truth about what has happened.. The fact that most of the homes are abandoned due to a tidal wave of foreclosures also emphasizes how bad the situation is and how important these areas were for the growth of the once powerful American automobile industry.

maker, Fiat, while GM was compelled to “restructure” radically within two months, or face bankruptcy. Washington will only provide funding for the duration of the ultimatum, with further support only available if the expectations of the Obama administration are met in full.

The Prospects For General Motors General Motors is a different case which is a larger carmaker, with a global presence and vast overhead. The fact that its size is huge defines the essence of the problem being faced not only by GM but also by other global car builders, includ-

“The Global Economic Crisis has shrunken the car demand to around 50 million units.. With worldwide sales reduced to 50 million cars, no major car company can make money” © FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG

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ing Toyota, Nissan and Ford. Currently the world has the manufacturing capacity to assemble more than 90 million automobiles a year. The overhead for maintaining this complex, global manufacturing infrastructure is staggering, and can only generate profits if sales match production capacity However, the Global Economic Crisis has shrunken the car demand to around 50 million units. With worldwide sales reduced to 50 million cars, no major car company can make money.

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The Past Does Not Have Answers The only solution for preserving General Motors is to provide sufficient demand for its manufacturing capacity. This demand need not be restricted to cars. In the times of World War II Detroit became the arsenal for the Allied powers as its assembly lines built the weaponry that helped them win the famous war. However, in 2009, political leadership appears to lack the imagination to see the potential of harnessing the productive capacity of the auto manufacturers in other directions that can facilitate global economic development and recovery. In short the government does not have any other option other than fiscal and monetary stimulus to rekindle demand. Also to the Government’s credit there have not been any other alternatives to create a new line of demand that can help these auto makers. The cat on the wall situation wherein either they become bankrupt now or they become leaner but still end up being bankrupt best explains the prospects of the US automobile industry. Further unlike the past in which the car makers were the drivers of economy the current economy was driven by many sectors with banking and financial services getting the biggest pie. Further the software industry has also improved in a big way occupying an important nerve centre in the economy. Therefore the problems for the Government has become multiple as in which sector should have the maximum attention. The Crumbling Of Demand The auto industry began crumbling when the American Government ordered the industry to build smaller cars to align with new energy policies that were formed due to increased green house gas emissions. The citizens meanwhile were given no incentives to buy these fuel-efficient vehicles. Americans had developed a love affair with SUV’s and showed no signs of abandoning their beloved gas-guzzlers, but the industry continued to pump out fuel-efficient vehicles no one wanted. Thus GM poured millions of dollars into lobbying efforts against stricter fuel economy standards so they could continue manufacturing SUV and truck behemoths, instead of tak-

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ing advantage of their technological lead in electric cars. Soon after gas prices skyrocketed Americans opted for a more viable mode of transportation, but the automakers, succumbing to demand, were still producing their main cash cow: SUV’s and trucks. Foreign manufacturers had the upper-hand in producing fuel efficient vehicles as they had been perfecting them while the U.S. demanded SUV’s. Now when the country demanded fuel efficient cars finally the big three were searching for answers. The Legislation That Favoured Foreign Brands Foreign brands have been welcomed into the U.S. with open arms for decades, ever since the U.S. Justice Department ruled that Detroit could not tell its dealers to keep foreign brands out of their franchised showrooms. Meaning a Ford dealer could sell a Toyota in the same showroom. Foreign brands were allowed to be imported into the U.S. and placed directly next to American manufactured automobiles. To America’s detriment, foreign automakers were allowed to bypass the start-up costs needed to establish dealerships. They could simply ship their cars directly to the showrooms. Not surprisingly, foreign governments did not return the favour. While foreign counterparts were encouraged to outsell American manufacturers, the foreign Government imposed laws and regulations to keep the American automakers out. Koreans used to order an income tax investigation of anyone who bought a foreign car and the Japanese ensured no foreign auto companies could be built in their country. The Economic Analysis Even though the stimulus and bailout packages might result in lowering the prices of automobiles, if high financing rates and liquidity crunch continues the situation may not improve much. This is clearly a case of crowding out private investment. Even though the Government starts deficit financing which actually shifts the IS curve in economic terms to the right .But since the IS curve has actually become more flat due to high interest rate sensitivity since with even a marginal increase in interest rate companies are reducing their investment. With the demand for money with respect to increase in income high the LM curve is actually becoming steeper. Therefore a shift in the IS curve actually ends up increasing the interest rate more with only a little effect on the increase in output demand. As a result the Governments fiscal policy expansion actually results in crowding out the private investment. Logi-

NIVESHAK

ANNIVERSARY EDITION

cally it increases the interest rate to a level that prevents increased investment. As a result companies are cutting their jobs to meet the problem of giving more salaries. An increase in money supply could actually bring down the interest rate if not keep it constant but as it is seen it could result in two digit inflation since the supply curve due to lack of technological advances in the current period has been more or less shifting left if not at the same level. What Can Be Done?

If the auto industry has to survive, it will have to incorporate and encourage breakthroughs either from outsiders or improve their research and development sector. Automakers will need to transition from a vertical, proprietary, hierarchical model to an open, modular, collaborative one, becoming central nodes in an entrepreneurial ecosystem. The industry will need to undergo the same transformation that the US computer business did when the minicomputer gave way to the personal computer. Whereas minicomputers were restricted to

How It Will Help? In economic terms a technological innovation shifts the supply curve down to the right increasing the demand for the good as the price decreases tremendously Techno- logical innovations like self intelligent cars ,Cars powered on solar and electric power that can be commercially viable for the Indian middle class, cars with wifi connectivity are all steps in the right direction that can once again increase the demand .Further if these products are made more affordable at a cheaper rate they can be all the more fruitful in terms of increased revenues. If the companies make use of the fiscal benefits given by the Government to invest in R &D instead of increasing production alone they can actually prevent the problem of demand variations and interest rate increases in the long run because by that time they would have shifted the supply curve down.

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The answer lies in improving technological innovations. One industry that has tided over these effects of recession is the mobile phone industry. How were they able to sustain the growth? That is largely due to the fact that they were able to churn out technological improvements in the mobile varieties and functions. If you look closely most of the mobiles that were in demand three years back have gone out of market. But still the mobile industry comes up with the goods by introducing new products and replacing old models w i t h improved versions. The same thing happened with the comput-er industry and is happening still now with makers coming up with improved versions over and over again.

using mainly software and hardware from their makers, PCs used interchangeable elements that could be designed, manufactured, and installed by third parties. Opening the gates to outsiders unleashed a flood of innovation that gave rise to firms like Microsoft, Dell, and Oracle. It might be too late, but the same could happen in the automobile industry.

Conclusion Thus even if General Motors and Chrysler become leaner and more efficient they won’t be able to sustain unless otherwise they improve the technological barriers they have imposed upon them and also the rigidness of their operations.

Even though the stimulus and bailout packages might result in lowering the prices of automobiles, if high financing rates and liquidity crunch continues the situation may not improve much.

© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG

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Satyam : Too Good a Crisis to Waste !

Blunders

Ashwini Kumar & Rini Singhal

NMIMS, Mumbai Was Satyam an individual’s fault or a systemic failure? The answer might lie somewhere in between, but the Satyam fiasco ended up changing the landscape for India Inc. beyond what could ever have been imagined. It dealt a death blow to investors’ confidence in otherwise strong Indian corporate governance standards, and to the sanctity of an ‘independent’ audit by the ‘Big 4’ companies. Consequently, not only Satyam’s, but the (mal) practices of the entire industry were being questioned. It has made the public aware of the loop holes present in the current model of corporate governance. It also reflects on the thought processes of the ‘independent’ board members. The loss to the Indian economy was, no doubt, huge. Stock markets bled 6-7% on the day of confession. Creditors were awestruck at the potential loss of their debt exposure to Satyam. Experts quipped “This was the last thing needed amidst rising concerns of global slowdown.” Investor activism was on the rise. In called was a team of most reliable, trustworthy and competent businessmen, entrepreneurs and professionals to ensure the protection of shareholders’ interests and to oversee successful transition of a company into the hands of a new owner. While we always blame the government-controlled work not being ‘efficient’ enough, the government appointed board did a commendable job of shepherding Satyam through a potentially fatal period.

Post-Satyam there has also been a lot of change in the functioning of the corporate boards. The independent directors have become more assertive and cognizant of their responsibilities. They are present in more meetings, asking more questions, and reasoning every bit of presentations made to them. According to an ET report, 524 independent directors of 2355 companies that have submitted data to the director’s database on BSE website have quit boards since January 2009. Companies are now demanding independent directors who have sound knowledge about the company’s core business and related risks. It is not only the independent directors but also the audit committees who were complicit in the scandal. The fact that the fraud went on undetected for so many years in spite of independent external auditors giving unqualified opinions year after year clearly reflects the weaknesses in the “sound and effective” audit system prevalent in India Inc. Moving forward, audit committees will be more careful in their proceedings, which would include verifying bank balances through bankers, etc. . Also companies were forced to undergo a reconstitution of their audit committees to have a much better pool of skill sets required. Post the crisis SEBI has also actively being formulating new rules to ensure more rigorous audit and disclosures such as having external agencies to conduct internet audit and rotational auditors. It is also

“This was the last thing needed amidst rising concerns of global slowdown.”

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these, of government intervention instead of Rule of law. In any case, no one seemed to be sure which Indian laws and regulations to be applied in case the company goes bankrupt, especially with regard to prevention of job losses, honoring of contractual obligations, making good of investors’ losses, and preventing the image of industry, as a whole, from getting tarnished. While everybody has an opinion of what should not have happened (i.e. Satyam), few seem to apprehend what more could have happened had the entire system (Ministry of Corporate Affairs, SEBI, ICAI and industry stalwarts) not come together to shoulder the burden. Every failure on the part of self-regulating market to keep things under control has brought about landmark long term changes in regulatory response. While it has been largely dubbed by many (including The Economist) as India’s Enron, the regulators, market participants and all stakeholders in general, needed to prevent any recurrence. Enron case, for example, gave US one of its better regulated acts, Sarbanes Oxley Act, 2002. As has been wisely remarked, “Crisis is the mother of all reforms”. Thankfully, Indian regulators were listening!

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considering a whistle blower policy where the employees of the company can report any wrong doing of the firm. Amongst lessons that Indian regulators seem to have learnt include rotation of auditors for large companies, more professional audit of PSUs, etc. SEBI’s norms for takeover of distressed firms, for eventbased and periodic disclosure of shares pledged by promoters, and setting caps for share-encumbrances would not have seen the light of the day so soon but for the Satyam fiasco. In fact, a former SEBI chairman proposed an independent third party to select the auditors for all the listed companies, as he reasoned that this fraud was more of a failure of “Constitutional governance” rather than of “Corporate governance”. The regulations under considerations include peer review of accounts of blue chip companies, by a second audit firm and ICAI has been mandated to suitably change the accounting standards to prevent such accounting frauds from recurring. So while the entire Satyam fiasco might have brought a lot of ‘un-needed stuff’, it has brought a lot of blessings, albeit in disguise! What the government has also done is that it has set a precedent, for exceptional cases such as

This fraud was more of a failure of “Constitutional governance” rather than of “Corporate governance”.

© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG

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Emergence of New World Order: ASIA Jason Monserrate & Manish Lalwani

NIRMA, Ahmedabad

History has enough evidence of the dominance of Asian economies and one fact is that India (25%) and China (22%) had nearly half of the global GDP in 1700AD and again in the 1820s. The great decline started after that, reaching 9% (China 5% and India 4%) in 1950. Now after 300 years, the tide is changing again and India and China are returning to where they were. (Angus Madison, 2007 World economy -A millennial perspective; OECD) Asia’s share of world trade more than doubled during 1970-2005 and where as Latin America’s decreased. Within Asia, all regions have captured a rising share of world trade and the remarkable growth performance of this region reflects total factor productivity (TFP) growth as well as rapid accumulation of both physical and human capital. Asia’s strong growth performance can be analyzed in terms of demographic developments, the movement of

labor and capital from low-to-high productivity sectors and technological progress. International trade has been the engine of growth of many Asian Countries and the most important contributor to the “Asian Miracle” that lifted millions of people in the region out of poverty. The countries of the Economic and Social Commission for Asia & the pacific (ESCAP), the ratio of merchandise trade to GDP increased from 31% in 1990 to 55% in 2006. Asian spending is also an important engine of global growth. Even before the crisis, emerging Asia’s consumer spending contributed slightly more to the growth in global demand than did America’s. It is time for an even greater shift in spending power from the West to the East. Global Imbalances – Causing Shift In Economic Power This crisis has accelerated the

It is time for an even greater shift in spending power from the West to the East

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The large domestic demand of the US was met by the rest of the world, especially Asian economies, which provided goods & services at relatively low costs leading to growing surpluses in these countries. So at first, emerging economies in Asia appeared well positioned to weather the turbulence caused by the global financial crisis owing to their substantial reserves, sound economic fundamentals, improved regulatory framework and generally robust corporate balance sheet and banking sector.

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shift in economic power from the West towards Asia and now this region has got an opportunity to take a position of leadership in the world economy. According to Porter (2009), global macroeconomic imbalances were the major underlying cause of the crisis. These saving investment imbalances and consequent cross-border financial flow put great stress on the financial intermediation process. The emergence of dysfunctional global imbalances is essentially a post 2000 phenomenon and which got accentuated from 2004 onwards. The surplus of East Asian exporters particularly China rose significantly as did those of the oil exporters. In the context of the discussion of global imbalances, a key issue is the role of domestic demand versus foreign demand in driving growth in these economies. In other words, how much are these economies relying on exports to drive domestic growth. A majority of Asian economies have recorded positive contributions of net exports to growth during this decade. Over the period 2000-08, net exports have on average contributed about 1.5 to 2 percentage points to GDP growth in Hong Kong, Singapore and Taiwan. For China, this contribution has averaged only 1.1 percentage points relative to average annual GDP growth of about 10 percent, even though exports themselves have climbed from 21 percent to 33 percent of GDP over this period. (Prasad.E July 2009 Rebalancing Growth in Asia)

Recoupling Rather Than Decoupling Nonetheless, despite Asia’s significant progress in developing a shield, it is clear that the region will not be immune to a sharp deceleration. Indeed, despite Asia’s efforts to diversify its economies away from exports, these still make up a significant proportion of individual economies. Moreover, the US, with a GDP of $14 trillion, still has a larger GDP than the whole of Asia. Furthermore, with personal consumption representing around 70% of GDP, the US consumer remains the biggest single economy in the world, at US $ 10 trillion. Thus, it is inevitable that when the US slows, so too will other.

Given the region’s large trade and financial integration with the rest of the world, investors’ views of Asia soured as the global turmoil intensified and perceptions grew that the global economy was in for a major slowdown. Asia-focused hedge funds had been among the worst performers worldwide, with their returns consistently below those of other emerging market funds. It has been forecasted that the Asia-Pacific region will face some stern tests in 2009-2012. While the rise of Asia arguably represents the

Asia-focused hedge funds had been among the worst performers worldwide, with their returns consistently below those of other emerging market funds.

A majority of Asian economies have recorded positive contributions of net exports to growth during this decade.

© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG

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Hope most significant shift in wealth in five hundred years of world history, this does not mean that the region will not come a cropper along the path to prosperity. Indeed, we have already seen one major reversal in 1997-1998, which is still fresh in many investors’ and policymakers’ minds. Now the challenge for the region is not only to weather the current economic crisis while protecting citizens from the harshest effects of the downturn. The challenge is much greater: it is to turn the crisis into an opportunity to improve the long-term competitiveness of their industries. Indeed, countries must position themselves strategically for the time when the economic cycle swings back upwards. If the Asia-Pacific region is to live up to expectations of the 21st century as the “Asian Century,” the region will have to invest in innovation, new environmentally sustainable products and processes, and improved business models.(UN, ESCAP) Need A New Economic Model To Rebalance The Sources Asia has to start on a very different growth pattern; it will have to rebalance the sources of its growth more towards the domestic and regional demand without turning its back on globalization. One way Asia can lead the world economy is by changing its economic model, which means shifting away from being a producer for the world toward being a producer for itself as well:• Enhancing South-South Trade and Cooperation • Promoting Asia-Pacific Businesses for Long-Term Competitiveness • Looking Beyond the Crisis: Positioning the AsiaPacific Region for the Future

• Maintaining the Supremacy of the Multilateral Trading System • Addressing Trade Financing and Trade Development Constraints • Diversifying Products and Markets for Exports Another way is to boost consumption by making it easier to borrow. In most Asian economies household debt is less than 50% of GDP, compared with around 100% in many developed economies; in China and India it is less than 15%. In many other Asian economies financing for consumer durables is virtually nonexistent. These measures are a modest step in the right direction. But a bigger test of Asian governments’ resolve to shift the balance of growth from exports towards domestic spending is whether they will allow their exchange rates to rise. A revaluation would lift consumers’ real purchasing power and give firms reason to shift resources towards producing for the domestic market. Now when we look beyond the global recession, we reiterate that the mega-trends driving the rise of Asia are still very much in play. These include rising personal incomes, favorable demographic profiles, and rapid urbanization – all of which are conducive to the emergence of the Asian middle class. There is substantial potential in terms of consumer and industrial products, such as mobile phones, food and beverages, vehicles, and power generation etc. For the most part, rising demand from Asia will continue to keep growth in these sectors faster than in other parts of the world over the long term.

Asia will continue to keep growth in these sectors faster than in other parts of the world over the long term

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Asia: Leading the “Recovery Race” This paper explores the prefinancial crisis scenario in Asia, how Asian region has shown resilience as compared to their Western counterparts. It explains global linkages which caused spillover effect of recession in Asia. It enumerates the growth factors which will help achieve Asian states in achieving higher growth rates and the tectonic shift of power from West to East. It assesses whether Asian states are really capable of playing the role that US has been playing for last half century. There are certain potential issues which can derail the growth cycle in these countries; we explored the severity of these hurdles. To manage these concerns should be prime focus of governments of respective countries. Furthermore, we extend our vision to imagine how Asian region would look like in 2020, what kind of influence it can have in conducting regional trade at that point of time in future. Pre-Economic Crisis Any comment about Asia as a whole in one breath would be a bold statement, it being largest & most diverse continent- home to plethora of cultures & religions. Before the financial crisis gripped western world and spilled over to Asian continent, China & India were experiencing spectacular growth. India after economic liberalization in 1991 was reaping the benefits of globalization in the form of 9% GDP growth, booming service sector, expanding middle class, & exploding telecom density. China on the other hand,

took the path of mass-manufacturing to achieve double digit growth. China got its economic reforms long back in 1978. It divided the country landscape in development zones and appointed mayor to look after development, who focussed on development of their zone. Japan on the other hand had sustained period of high growth after WWII, which made it second largest economy in the world. It witnessed economic stagnancy during 1990 to 2000. Asian Resilience Once financial crisis became reality in US & Europe, there was one school of thought which opined that Asian countries, essentially China & India, are decoupled from West and the effect of recession won’t be visible in this part of the globe. But in this globalized, interwoven world, every economy is intricately linked, and the effects of recession started becoming visible in significantly lower growth rate by Asian economies within 2 quarters. The region’s sharp slowdown underlines the risks of excessive dependence on external demand. Japan was among the hardest hit in Asia, having significant exposure to Western markets. To combat slowdown, governments in Asia started giving stimulus package to lower the impact of slowdown. China gave massive $500 billion package which involved investing in infrastructure over a period of 2 years. India also gave various tranches of stimulus

JBIMS, Mumbai

The dominance of US in the world economy is expected to be severely challenged by the emerging economies, particularly Asian Economies. However, the major challenges in the path remains political instability, inequality, corruption and social unrest. The question is “How to address these issues?”

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Archit Agrawal & Amit Sabale

Higher numbers of patents are being filed up in Asian Countries

© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG

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package. Policy rates across Asia were also altered will continue to swell, thereby putting downward by respective governments to manage situation. pressure on wages and reducing wage arbitrage that Asian companies enjoy. Innovation Engine Higher numbers of patents are being filed up in Asian Countries, Cities as Bangalore & Shenzhen are emerging as Centres of excellence. If Asian Countries will maintain this momentum, Asian products will rule the world in future, at least in certain sectors. Attractive Destination for Investment With low return on investment in Western countries, Investors in developed world will increasingly turn towards developing countries thereby contribChina has got huge forex reserves which can ute further to the growth of Asian Engine. help it sail slowdown, but India on the other hand is marred by very high fiscal deficit. The effect of stimulus package is becoming real with growth recovering in Asia. Asian countries have very high saving rate, therefore governments are encouraging people to spend more. The reason for this frugality lies in lot of uncertainty in parts of Asia, so people save money to face uncertain future. It is widely accepted that Asian countries will recover earlier & faster than their western counterparts.

Factors That Will Contribute To Asia’s ReEmergence Period of Consolidation Asian Companies will use this period as consolidation and will emerge much stronger while their counterparts in West are facing the threat to survival. Greater representation in the world institutions World Institutions IMF, World Bank & United Nations will have greater representations from Asian countries. This year China has contributed $50 billion to IMF, obviously it will seek greater representation in reciprocity. India on the other hand is pitching hard for Permanent Membership in Security Council of UN. Large pool of Skilled Manpower With increasing population & level of education in Asia, the labour force, especially skilled workers

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Challenges For Asia To Achieve The Growth Path Per Capita Income While the region produces roughly 30 percent of the total global economic output, because of its huge population, its per capita GDP is still very low compared to developed counterparts. Environmental Concerns Economic Growth in Asian countries has not come for free; the price has been worsening environmental conditions. Urban excess, De-forestation, Water, Overfishing, Global Warming & Air Pollution are emerging as major issues for the governments.

Premature death from particulate matter in cities

Political Instability Asia is politically instable compared to western countries governments. Often democratic governments are dethroned by dictatorial powers. Even big economies like China, India & Japan also have serious domestic issues to deal with. Endemic Corruption According to Transparency International Survey, India, China & many other Asian countries fared poorly, while only few Asian countries like Singapore performed well. Corruption has the potential to derail the growth agenda & to reduce the effectiveness of poverty alleviation programs. Rising Inequality Most of the Asian Countries had/have agricul-

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sponsible global governance As Asia will be coming out of the global economic crisis much faster than its counterparts, it will become more evident that world’s centre of gravity is shifting from the Atlantic to the Pacific. Right now Asian Countries are not ready to provide meaningful leadership in global affairs, which is an important necessity to ensure this tectonic shift and to make world more stable and secure than it has been but given their growing footprints on global economics, politics and the environment, it is now impossible to imagine any major international agreement without China, Japan and India on board. Asian states have a tremendous opportunity to rise to this challenge. If Asian countries can catapult themselves into high growth nation they can achieve their past glory and touch new heights thereby benefiting not only themselves but everyone on this planet.

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ture based economies; almost half of the population is dependent of it. While a small minority of people are employed by organized sector therefore inequalities in income is increasing. It will lead to the creation of small specks of prosperity in the middle of desert of poverty. Social Unrest These countries face Social unrest owning to multitude of issues like Religion, Autonomy, economic problems. Recently China faced biggest Social unrest in last fifty years by Uighur people. India faces problems due to various succession movements in some parts. Naxals are also emerging as a big threat. Political rivalry among Countries Strong rivalry exists among various countries in Asia few examples are between India & China, Japan & China, India & Pakistan. Due to this collaboration among them is very less and in future these rivalries can again take centre stage and severely affect growth prospects. Asia 2020: The Way Forward There are lot of factors which can potentially stall the growth of Asian economies, but the fast growth in these countries in last few years has happened despite these constraints, so we have every reason to believe that Asian growth story can sustain itself. An outlook about how an Asian age may look like »» An integrated market with free regional flows of goods, services, and capital »» Japan, China & India extending more powerful influence across the world »» Greater representation of Asian Countries in institutions like WTO, IMF etc. »» Collective efforts to address vital social issues, such as poverty, income insecurity, migration, health, and environmental threats »» Effective frameworks to coordinate macroeconomic and exchange rate policies, taking into account global challenges and differing national circumstances »» A consistent voice to project the concerns of Asian economies in global policy forums and enhance re-

“Now is the time for us to strike. We must strengthen our foothold in Asia, to ensure no nation overtakes us. “ - Larry Summers – Director,WHNEC

© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG

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HOPE » » US Economy Recovers » » Indian Budget 2009

The Year That Was “There were times when things went bad There are times when things have started to look well Defying the Heisenberg uncertainity principle We look back at the year gone by with hope of better future”

-Niveshak

» » US Economy Melts Down » » General Motors Bankruptcy » » Satyam Fiasco

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ON FIRE » » US Unemployment R ate Surge » » Indian FII Decreases

August 2008-August 2009

» » Crude Oil Prices falls » » Inf lation turns Negative

INDICATORS © FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG

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Indicators

On Fire

Blunders

Hope

US Economy Melts Down!!!

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my. Included in this bailout plan was the investment of $250 billion in nine of the largest US banks to control the financial crisis. The aim of the bailout plan was to protect the deposits of the citizens in these financially distressed banks and support those institutions which can sustain on their own after the recovery. The announcement of the bailout plan was followed by steep decline in stock markets of America, Europe and Asia. Russia’s stock market dipped by 20%, Tokyo’s benchmark index fell 9.4% and Hong Kong stock market dipped by 8.2%.

The US economy started witnessing the heat of downturn form the month of September 2008. It all started with financial distress condition of the financial institutions. Thus, the recession of 2008 started from the financial sector and later on crept into other sectors, thus affecting the US economy as a whole. Considering the globalization and open economy policy of different countries, the US recession turned into global recession affecting major economies of the world in terms of decrease in output due to decrease in demand and also increase in US Automobile Sector: General Motors Bankunemployment rate. ruptcy And Re-Emergence Fannie Mae and Freddie Mac, two financial giAs the world started witnessing the economic ants which accounted for more than half of mort- slowdown from the month of September 2008, the gage loans of US, were announced to be placed into automobile sector of US was perhaps worst affected conservatorship of government. The US government by the recession after the financial sector. The US auwas in no position to witness the failure of these tomobile sector was represented by three big playtwo institutions, and hence took this decision with ers – General Motors, Chrysler, and Ford. In October, the aim of avoiding the US economy and the other General Motors and Chrysler were discussing a poeconomies of the world from getting into depres- tential merger. Affected by the economic slowdown sion. The failure of these two would have seriously and the significant decrease in consumer demand, affected the US loan market and also would have both the companies started planning for job cuts hampered economic growth and employment rate and closing of the loss making plants. The approval of US. of the bailout plan of $700 billion by US government

Bank of America acquired Merrill Lynch for $50 led to the infusion of $13.4 billion in General Motors billion compared to an estimated value of $100 bil- and $4 billion in Chrysler. Ford, the third player in lion, a year ago. the US automobile sector didn’t need any funding. The day would go into the history as one of However, this initial funding of $17.4 billion together the dreadful day, the modern economy has ever wit- for both the companies proved insufficient for the nessed. Lehman Brothers files for bankruptcy, and recovery. US Treasury Department asked Chrysler the Dow Jones Industrial Average drops more than to file Chapter 11 bankruptcy in April 2009. Chrys500 points – its worst one-day loss since the terror- ler eventually filed for bankruptcy protection and ist attacks of September 11, 2001. This was the first entered into a partnership with Fiat. In April, GM major hint of the future recession that would creep receives an additional funding of $2 billion which was followed by another $4 billion in the month in the economy. AIG, the insurance company, gets $85 billion of May, 2009. Thus, total funding received by GM stood at $19.4 billion. Failing to prove its sustainrescue from the Federal Reserve. ability, GM filed for Chapter 11 bankruptcy on June 1, The period witnessed the political drama over 2009. After 40 days of bankruptcy, GM emerged out the support needed to boost the US economy. The of bankruptcy on July 10, 2009 after striking a deal Bush Administration tries for a $700 billion bailout to dell key operations and core brands of Chevrolet package only to be rejected by the House. The Dow and Cadillac, to a new company, majority – owned Jones Industrial Average drops by 778 points – its by US Treasury. Thus, General Motors witnessed one biggest decline ever. of the largest successful corporate Chapter 11 reorganizations in the US history particularly considering Bailout Plan Proposed By US Government The House of Representatives approved the the fact that it was fourth largest bankruptcy in US $700 billion bailout plan for recovery of the econo- history after that of Lehman Brothers, Washington

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the biggest accounting scandals in India. The Chairman of Satyam Computers Services, B. Ramalinga US Unemployment Rate Surge!!! Raju confessed about the accounting fraud involving US Unemployment rate as a percentage of total significant overstated profits that surprised whole of labor force witnessed a steep increase from Septem- India. The share prices plunged to Rs. 11.50 per share ber 2008 to July 2009. on 10 January 2009, compared to a high of Rs. 544 in 2008. In March 2009 the company announced it would begin soliciting bids from potential buyers. In April 2009, Venturebay Consultants Private Limited, a subsidiary controlled by Tech Mahindra emerged as the highest bidder to acquire a controlling stake in Satyam. In June 2009, Satyam was renamed as “Mahindra Satyam”. Mutual and WorldCom.

Blunders On Fire Indicators

Budget 2009 Goldman Sachs posted huge profits of $3.44 The Union Budget of India for the year 2009-10 billion for the second quarter of 2009. Earlier Gold- was announced aimed at two objectives – to meet man Sachs borrowed $10 billion of federal aid which the estimated growth of 9% on the YoY basis and was repaid by Goldman Sachs just months back. to address the concerns of the people of India who JP Morgan Chase posted a profit of $2.7 billion showed their confidence in the UPA government in which is 36% above the profits for previous year. the recent elections. The budget aimed at increasBank of America posted a profit of $2.42 billion ing the domestic demand and also increasing the whereas Citigroup posted profits of $4.3 billion for infrastructure investments. While the increase in domestic demand will clearly boost the GDP of India, the second quarter of 2009. increase in infrastructure investments will not only The profits made by these companies are indiboost the GDP of India but would also lead to incations of rapid recovery of the economy and usefrastructure development where India seriously lag fulness of the steps taken by the US government to behind other emerging economies of the world, parprotect the economy from going into depression. ticularly Brazil, Russia, and China. The lack of proper Effect Of Recession On Indian Economy – Fii infrastructure facilities is one of the reasons that Decreases India has lowest FDI among the BRIC countries. The The global recession meant negative senti- key highlights of the budget for 2009-10 period are ments among the investors with respect to the increase in disposable income of the people by inmoney market. The negative sentiments of inves- creasing the tax exempt income bracket, increase tors are reflected in the amount of net FII inflow in in total expenditure by 36% compared to the preIndia as India witnessed negative FII inflow in the vious period of 2008-09, increase in infrastructure year 2008 which means that foreign investors were projects like that of National Highway Development withdrawing money from the money market of India. Programme (NHDP), Jawaharlal Nehru National Urban However, 2009 trend shows positive FII inflows which Renewal Mission (JNNURM), Brihan Mumbai Storm Water Drainage Project (BRIMSTOWA), increase in tarshow increase in investor’s confidence. get agriculture credit flow form Rs. 2,87,000 crore (2008-09 period) to Rs. 3,25,000 crore for 2009-10 period. Also, budget aimed at restoring the export growth with assistance for badly hit sectors extended till March 2010 through Export Credit and Guarantee Corporation (ECGC), and Market Development Assistance Scheme Satyam Fiasco

Hope

Us Economy Recovers

The beginning of year 2009 witnessed one of

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Hope

Negative Inflation In India The WPI inflation turned negative in June 2009 however prices of food items continued to be higher than that of previous year. Thus, CPI inflation remained high compared to WPI inflation. WPI inflation is at negative 1.74% for the week ended August 1, 2009. However, the prices of cereals increased by 12%, pulses by 18%, and vegetables by 18.4%.

Indicators

Conclusion

TED Spread TED spreads often widens during times of international crisis as money flows to US Treasury bills. This is depicted for the period of September to December of the year “bullish”.

Baltic Dry Index The recent rise in the Baltic Dry index shows that the economy is recovering from the global recession. However, we have yet to witness substantial increase in Baltic Dry index to conclude that the economy is in expansionary stage. So, at present levels, it can only be concluded that the economy is still in the phase of recovery from recession.

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Comparison Of Global Indices

For the period of September 2008 to August 2009 we find that BSE – SENSEX, NSE – S&P CNX NIFTY, Crude Oil Prices and HANG SENG indices observed positive returns The US crude oil prices dipped from the peak of on YoY basis. The other indices including DJIA, FTSE, $122.64 per barrel (inflation adjusted) in June 2008 NASDAQ, NIKKEI 225, and S&P 500 observed negative to $31.55 (inflation adjusted) per barrel in February returns on YoY basis. 2009. The decrease in crude oil prices resulted in decrease of inflation rates.

On Fire

Blunders

Economic Indicators For The Period Of September ’08 – August ‘09

Over the past year we have witnessed an economic slowdown followed by the recovery phase of the economy. The slowdown started from the failure of financial institutions and was followed by decrease in consumer demand thereby affecting the output of the economy. The elections were held in US and India during this period and in both the regions we witnessed the election of government by the people of respective countries with an expectation that the new government will bring in more economic reforms which will lead to sustainable growth in the respective regions. Thus, the Obama Administration in US concentrated on revival of the economy and the financial systems in US and looked after global integration for the recovery of global economy from recession, whereas the election of UPA government in India with overwhelming support from the people made sure that the Indian government won’t have to depend on “other parties” for the reforms and can act independently without any fear and pressure as the case in the past. Though much was expected from the Union Budget of India for the period of 2009-10, the government has followed a very focus and conservative approach to attain 9% GDP growth for the future and infrastructure development.

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GOVERNMENT BAILOUT Panacea or Poison Rituma Doshi & Subhada

After this financial crisis, the term “bailout” has become popular. Every now and then there is some news on government bailing out some industry. Recently private airlines in India threatened to suspend domestic flights on August 18th to force the government to come out with a bailout package for airline industry. The question here is should the government bailout every industry? How can this bailout help in overcoming the ongoing crisis? This article discuss about the effects of bailout and the factors that government should consider before bailing out an industry.

Opinion

system), the Treasury spent up to US $700 billion to purchase distressed assets, especially mortgage-backed securities, and make capital injections into banks. Auto Industry Bailout: In late Sept. 2008, $ 25 billion was given as low-interest loan to the auto industry to build more fuelefficient, environmentally-friendly vehicles. GM, Ford and Chrysler were the primary beneficiaries. The Troubled Asset Relief Program (TARP): This rescue plan was launched by the Bush administration (Sept. 2008) to ease the crisis on Wall Street. Under the plan, the Treasury Department purchased upto $700 billion of distressed assets from the ailing investment banks and then reselled them to investors. Federal takeover of Fannie Mae and Freddie Mac in September 2008 The federal takeover of Fannie Mae and Freddie Mac refers to the placing into conservatorship of government-sponsored enterprises Fannie Mae and Freddie Mac by the US Treasury in September 2008. American International Group (AIG): On September 16, 2008, The Federal Reserve created a secured credit facility of up to US $85 billion, secured by the assets of AIG subsidiaries, in exchange for warrants for a Bailouts In 2008- The Year Of 79.9% equity stake, the right to susFinancial Crisis: pend dividends to previously issued Under the ‘Emergency Econom- common and preferred stock. ic Stabilization Act’ of 2008 (referred to as a bailout of the U.S. financial What Are Bailouts? Bailouts are undertaken by governments usually to prevent a business/industry from bankruptcy because it is believed that the effects of the collapse will be much worse on the economy and the global financial system than to help liquidate the assets until the business can get back onto its feet. Governments and organizations like IMF and World Bank offered bailout packages to: 1. Compensate for the lack of private lending during the crisis and cushion the decline in domestic production and aggregate demand. 2. Restore investor confidence by signalling official international support for the country and its government. 3. Limit the contagion effect of the crisis from spreading to other economies as well. 4. Speed up the end of the financial crisis with the help of tighter regulations, trade liberalization etc. Bailouts in US were not newright from the Franklin National Bank bailout (1974) to the much hyped Chrysler/GM bailout package of $ 17.4 billion last year (2008); however the scope and size of the current bailouts was much wider and bigger during 2008 crisis.

NMIMS, Mumbai

“We must protect taxpayers and limit the Treasury’s powers. We must prevent those who contributed the most to this crisis from further profiting. We must establish strong oversight with a permanent in-house watchdog and a robust external congressional monitor.” –Rep. Paul Kanjorski © FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG

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Opinion

A bank rescue package totalling approximately $850 billion was announced by the British Government on 8 October 2008, as a response to the ongoing financial crisis. India’s Bailout Package: India also announced a bailout of Rs 2,75,000 crore for several industry segments and to boost the economy through various fiscal and monetary measures.

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Bailouts: Were They A Panacea For Financial Crisis? With the spate of bank failures in capitalist countries like Europe and USA in last year’s financial crisis and the death of the Wall Street era, Karl Marx couldn’t have been more correct when he said: “Capitalism Carries the Seed of Its Own Destruction” In a capitalist country, a Laissez Faire system exists wherein the ‘market-knows-best’ proponents not only permit efficient firms to keep the entire surplus but also let the inefficient firms fail. The intention is that the taxpayers should not bear the brunt to save them. So what should the government do in case of failure of capitalism? If the government does not intervene, the results can be disastrous as is evident from the after-effects of the Lehman Brothers collapse. This collapse triggered a cascading effect on the world markets, investors lost confidence in the stock markets and panic spread right from Wall Street to Dalal Street, and beyond. So, in order to help the ailing companies and to inject confidence in the economy, several government bailout packages had been disbursed in some of the world’s most free market economies. But the question is should the main street have bore the brunt of wrong doings by the Wall Street? Some of the negative aspects of the bailouts in 2008 which far outweigh the positive ones are as mentioned below: Moral Hazard: Private shareholders had a strong incentive for excessive risk-taking when they had a fall-back option of the government bailing them out. This was a kind of a market failure as it signalled lower business standards for giant companies by incentivizing their risks through the assurance of safety nets. E.g.: The AIG executives went on a $400,000 junket after receiving $85 billion from the government. Inconsistency: Bailout decisions were often political and depended on the strategic importance of the firm(s).

This policy had come under immense fire as it was unfair to have one set of rules for some companies and a different set of rules for the other. Moreover, in such cases, a government bailout is unfair to the competitors who are better managed. E.g.: The bailout packages for Chrysler and GM had stirred a controversy that the use of the $700 billion Troubled Asset Relief Fund (TARP) for an auto industry bailout was a breach in faith with the American taxpayers and that TARP was intended to be used to ease the financial and credit markets, not to bail out other U.S. industries. Nobel Prize-winning economist Joseph Stiglitz said- “The failure lies with the managers of US carmakers who failed in their oversight and encouraged short-sighted behavior.” Increase In The Bailout Demands From Other Firms: Bailout for banks created incentives for nonbanks and insurance companies to try and become banks to avail of the cheap bailout money even if they didn’t need it. Hence with bailouts, a large amount of restrictions and regulations had to be formed and a lot of time and cost went into monitoring such requests for bailout. E.g.: GMAC- the lending arm of GM tried to apply to become a bank so as to avail the bailout benefits. A State Cannot Socialize The Losses After Years Of Privatizing The Profits: The taxpayer should not be penalized for mistakes made by a few greedy people. The government could have used this money for some better purposes than providing it to the companies. Promotes a centralized bureaucracy by allowing the government to choose the terms of bailout: There was a real danger of going overboard w.r.t. regulation of financial firms and products. This would’ve resulted in an untimely death of financial innovation and lower the skill levels. Hence, a socialistic style of government in which government creates and maintains control over businesses has been partially formed. Liability on tax payers: The bailouts instilled a corporatist style of government in which the businesses used the state’s power to forcibly extract money from the taxpayers. According to the financial theory of Sharpe and Lintner, “Only the systematic risk should be borne by the taxpayers; while the idiosyncratic components like the risks specific to one industry (like automobile) should be diversified away.”

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E.g.: Many of the banks tended to use the bailout funds to bolster their balance sheets rather than to make new loans as aptly shown in the cartoon below:

Fig: Contribution of an average American Taxpayer for the total bailouts

In addition, they remained wary of extending credit in the midst of a recession. Hence even if the bailout did unlock credit markets, it had little chance of jump-starting the economy. The nations faced a daunting array of persisting economic problems of a free-falling housing market in US, fluctuating energy prices, a steady erosion of jobs and consumers being scared to spend money. Conclusion: Thus, government bailouts which have become the ‘order of the day’ for protecting the economies (especially US and Europe) from recession and deepening financial crisis, were, in reality, not the ultimate panacea for all the ailing industries. Several other measures (restoring confidence of investors, creating accountability etc) must have been carried out simultaneously to ensure that the taxpayers’ money did not go in vain. A bailout of an ailing industry in its entirety can be justified if it is affecting the economy and the GDP of the country but bailing out a few selected companies like Chrysler and GM etc, who were ailing because of their own improper business decisions, was totally wrong and comparable to the Ponzi scheme wherein the taxpayers’ money was used to help industries in trouble because of their own mismanagement and bad decisions.

Opinion

The ‘Too big to fail’ tactic: Immediately after the meltdown of various Investment banks in US, the stronger banks took over the smaller ones to create such a huge entity such that the entire financial system of the country could get threatened by its collapse. This further created a different kind of a moral hazard. E.g.: The merger of Merrill Lynch and Bank of America was aimed to create an entity which could be rest assured that the government would bail them out in case of crisis in order to ensure stability in the economy. Impact of Bailout Stimuli on Rich Nations’ Trade with Poor Nations: Obama had promised to come up with some stimulus measures for key industries and raise tariff barriers and oppose outsourcing of US jobs etc which is detrimental to global trade and its competitiveness. Need For Strong Monitoring: ‘Crisis is the mother of all reforms’- This was especially true in the context of last year’s deep financial crisis. The governments needed to ensure that the bailout money was being used by the firms only to become financially healthy and sound again and not elsewhere. The government also forced effective changes in the management structure, dividend payout scheme etc before handing over the tax-payers’ money.

“An essential element of a healthy and free capitalistic market is that both success and failure must be permitted to happen when they are earned. But instead, with a bailout, the rewards are reversedthe proceeds from successful and productive entities are confiscated and given to failing ones. By sustaining companies with obsolete or unsustainable business models, the government prevents their resources from being liquidated and made available to other companies that can put them to better and more productive use.” -- Ron Paul, Republican Congressman

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Pranav Kale

On Fire

SJMSoM, IIT BOMBAY

The results for GDP for quarter AprilJune has surprised the economists who predicted further contraction in world GDP. Results show that 6 out of top 10 economies are out of the recession. Is this the effect of expansionary monetary policy and will only have short term effects? Do we need to be cautious while interpreting those figures

Improvement in Sentiment “Green Shoots” is the buzz word these days. If you read the newspapers, watch the news, and search the internet for news of the economic crisis, you will get the impression that the global recession is easing and the global economy may soon “bottom out.” Global stock markets are rallying – The BSE Sensex is at 15000 while in America the S&P 500 has crossed 1000. Commodity prices are increasing – Copper prices which are seen as a leading indicator of future economic growth, rose for a seventhstraight month over the course of July. Stress indicators such as the threemonth LIBOROIS spreads and the TED spread have narrowed sign i f i c a n t l y. Economywatchers are forecasting an optimistic snapback scenario, based on the Zarnowitz Rule (after the late Professor Victor Zarnowitz of the University of Chicago). Prof. Zarnowitz observed that deep recessions tend to be followed by sharp recoveries. This is the socalled “V” shaped recovery that everyone is expecting.

seems that whatever the tide is doing, the waves look the same; they come in and they go out. However during high tide the waves make higher highs and eventually the tide is fully in while during low tide they make lower highs and eventually the tide is fully out. But unless you carefully study each wave relative to the previous one and the next one, you can easily be deceived. The Global economy is in a similar position right now. The economic tide went out last year and left everyone high and dry. The waves are coming in, but has the tide turned?

Green Shoots or Yellow Weeds? There are tentative signs of optimism but there is a need for caution while interpreting these figures. In the first place, the “green shoots” theory of recovery is largely based on surveys that track the expectations of businesses and households, not their actual behavior. In the real economy lagging indicators like unemployment and manufacturing output are still getting worse. Secondly, the signs themselves are only pointing to a less severe recession, not an actual recovery. Recessions can be divided into Something to think about Next time you go to the beach two very distinct groups: watch the sea very carefully. It 1. Severe recessions which are char-

“If you don’t read the newspaper, you are uniformed. If you do read the newspaper, you are misinformed!” -Mark Twain 40 40

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© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG

On Fire

acterized by decline in final demand for at least two consecutive quarters. 2. Inventory-driven recessions where final demand remains stable but the attempt by companies to liquidate excess inventories by cutting production pushes the economy into a recession. Data about end-user demand in America clearly shows that the current downturn looks much Source: U.S. Government’s Bureau of Labor more like a severe recession than an inventory de-stocking one with sharp falls in final demand in Long road to a full recovery both Q4 2008 and Q1 2009) (Refer chart below) The current financial crisis was caused by economic agents (companies, governments and consumers) amassing ever larger debts with no thought about saving. If a private person builds his life on a series of new loans, where he repays old debt with new debt, then he would end up in bankruptcy. If the same thing were to take place at the corporate and state level it would be considered perfectly normal. Debt - consumer, corporate and government - is running at very high levels. The low interest rate Source: Bureau of Economic Analysis, NIPA Table 1.1.2 environment is making the debt burden easier to In the case of deep recessions, recovery has bear, but there will be trouble when interest rates been led by final demand. Inventory adjustment fol- rise again, possibly a year or 18 months from now. lowing the sharp de stocking could contribute to a The world economy is still highly dependent on the revival in demand, but a real increase in end-user U.S economy both as an export destination and as demand needed for a sustainable recovery could be a source of capital. The recent improved sentiment and market action has been generated by expanfar off. U.S. Consumer bankruptcy filings rose 36.5 per- sionary monetary policies by Governments and Cencent in the first half of 2009 compared to the same tral Banks. The definition of recovery is to some degree period a year ago. 675,351 bankruptcies were filed between Jan. 1 to June 30, a 36.5 percent increase subjective. If it assumes a return to pre-crisis condiover the 494,610 filings during the same period a tions, that is nowhere in prospect. If it is taken to year ago. The U.S. economy relies heavily on con- mean the very worst is over, the recovery probably sumer spending, and consumers have seen their has begun. The underlying reality is that the probwealth evaporate. The U.S. Federal Reserve’s Flow of ability of the world sliding into depression like in Funds Report for Q1 2009 showed that the net worth 1930 is remote but the tide is still going out. of American households fell by $1329.7 bn. In all, U.S. households have lost $12.2 trillion due to the plunge in real estate and stocks. Past downturns were caused by higher interest rates that led people to cut back on new homes and cars, creating pent-up demand that could be unleashed when interest rates fell. This time there is very little pent-up demand to generate a “V” shaped recovery. The headlines may have stopped saying it, but the credit crunch is continuing in full force. In Q1 2009 net credit to the private sector in America fell at an annual rate of $1.8 trillion. Unemployment in America continues to increase albeit at a slower rate. Since the start of the recession in December 2007, the U.S. economy has shed 6.7 million jobs. In July 2009 the number of long-term unemployed (those jobless for 27 weeks or more) rose by 584,000 to 5 million.

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Hope

Life after Recession Venkataraman KR

SIIB, Pune With recession fizzling out after its catastrophic spell on the world economy following the collapse of Wall Street, experts across the globe are introspecting over the scarred remains of the global financial system. Barring a few prescient financial sages, majority of the lesser mortals have realized the futility of their beliefs only after enduring through the most painful part of the financial karmic cycle, the bust. For the uninitiated, here is how the financial karmic cycle works. Financial stability creates confidence in the minds of the investors. With air filled with optimism, they begin to take risks. They place unshakable faith in the markets in such euphoric times. Walter Bagehot, Editor of the Economist during the twentieth century, puts it succinctly. “All people are most credulous when they are most happy”. Optimism soon turns farcical, descending towards recklessness. In the end, it turns sinister, leading to the bust. Fragile institutions built over it collapse. After purging the market of its excesses, financial stability resurfaces and the cycle continues. Is it possible to liberate the world economy from these vicious karmic cycles? Can there be a financial nirvana? These questions might sound like a philosopher’s rant with pressing problems in fiscal management and what not. However, looking at the way the medication of the crisis is taking us irrevocably towards it again, it is important to introspect and revisit several fun-

damental levers which manage the world economy. This would help us to establish the ambitious, “new world order” effectively. The concept of risk needs to be demystified in simple terms, devoid of the baggage carried by mathematical models. These mathematical models, borne from academia acquire different dimensions altogether whenever they are transported to the real world. The assumptions holding those models become more potent. This basic misunderstanding has had devastating consequences for the world economy. For instance, the popular Value at Risk Model assumes that the volatility of the asset prices and their correlation of the prices remain constant. This is a dangerous assumption laden with far reaching implications in assessing the original value of risk. Add this with the basic human fallacy which equates recent trends with future. A perfect recipe for disaster is created. Managers of the “new world” have tremendous responsibility to weigh the risk accurately rather than pushing them aside. It is equally pertinent to understand the concept of innovation, especially in this globalization age. Although innovations have been the survival mantra during difficult times, they can also be an albatross around the neck when they tend to complicate things and make us naively believe in their sophistication. Several financial products which were built on mind boggling mathematical models stupefied the com-

Recession, in a broader sense, is similar to the pralaya metaphor of the Hindu mythology. Pralaya signifies dissolution and cosmic flood, with its ambit expanding far beyond Joseph Schumpeter’s creative destruction. Creative destruction refers to a revolutionary idea destroying an old idea, changing the rules of the game, whereas Pralaya decimates the playing field and we are let with no option but to start the game afresh 42 42

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It will be sagacious on our part to look at this recession as an essential pralaya that was bound to happen to break the crutches we placed on the ‘irrational exuberance’ of the markets. Something drastic, beyond the shores of imagination, had to occur to break the arrogant egos and confront our fears

long forgotten in euphoria. This pralaya perspective although might not compensate the common investors who have lost their wealth in the market meltdown, will definitely stop the nasty blame game that is happening in the media circles across the world. It’s indeed shameful to see ugly accusations being made on the reputation of the economics profession as a whole without proper understanding of the fundamentals. We need not be so apologetic about this recession as long as we learn the lessons taught by them and understand the new reality we are living in. At the foremost, we need to re-evaluate our priorities towards finance in our economy. Finance should not be the prime mover of the economy. Entrepreneurs, the original risk taker, engineers, scholars rather than bankers, should be the helmsmen of the economy. Finance should return to its original duty of managing the checks and balances of the economy. They however should be understood by everyone. Finance is too costly a subject to be left understood by bean counters, investment bankers and economists alone. Financial education should begin right from the day we put pocket money in piggy banks. Ignorance can never be an excuse for any disaster, no matter what. I would be living in utopia if I were to assume that recession would never occur in the “new world”, with the vast expanse of information that is being disseminated across the world through summits, documentaries, et al. We will do mistakes again, although not in the immediate future. I earnestly hope that we don’t make the same mistakes again (although history has several contrary evidences to offer). New bubbles will be created, burst and there are chances that we might have to be awakened again with another pralaya. My spiritual guru’s words, “Pain is inevitable. Suffering is optional.” resonates well for markets and individuals alike. Rather than hoping against hope that such cataclysmic events will never occur, it will be wise to look at how we are going to respond towards them. I am optimistic enough to believe that with proper sadhana (read as prudent financial actions) and commonsense wisdom, financial nirvana isn’t difficult to achieve.

Hope

mon investors and regulators alike. Globalization, with its present avatar, has brought the chaos theory to life in our everyday lives where the actions of a banker in one corner of the world affects our day to day lives. Innovation should strive to simplify this highly networked world created by globalization. This would equip us with the much sought commonsense to confront the challenges of the globalized world. Recession, in a broader sense, is similar to the pralaya metaphor of the Hindu mythology. Pralaya signifies dissolution and cosmic flood, with its ambit expanding far beyond Joseph Schumpeter’s creative destruction. Creative destruction refers to a revolutionary idea destroying an old idea, changing the rules of the game, whereas Pralaya decimates the playing field and we are let with no option but to start the game afresh. Every Yuga (unit of cosmological time, equivalent to 1000 years) comes to an end with a pralaya signifying the end of the most cherished philosophies of the times. Just like the early nineties busted the bubble of communism with its utopian ideas of equality, 2008 has laid bare the flaws of capitalism. The ongoing recession has brought to end the Greed Yuga which deified greed as the panacea for poverty and other ills of the world. Greed is no longer good. Experts of the West who had derided savings as an essential trait of the conservative east have begun to extol the virtues of savings. Alan Greenspan, former Federal bank chairman of US, who once condescendingly wrote that “only insecure people of developing nations….need to save”, in his book The Age of Turbulence, has admitted that he was wrong in his presumptions, looking at the “once in a century” financial crisis. Several investment gurus and eminent journalists have begun to question the ludicrous logic of borrowing to spend. It’s true that consumption spurs growth by increasing demand. However, isn’t it too obvious to note that consumption needs to be balanced by adequate savings?

We need not be so apologetic about this recession as long as we learn the lessons taught by them and understand the new reality we are living in. © FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG

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2008 Vs 1929 ...Are we better off??? Kumar Abhimanyu & Vineeta cherian

Opinion

IMT Ghaziabad

After the stock market crash in 1929 thousands of bank failed, output plunged, unemployment rose and a destructive deflation set in. The destruction created the damage across the globe. Economists predicted the probability for this kind of depression to be 1 in thousands of years. But again in 2008 the world witnessed the financial crisis. The two crisis share many similarities and at the same time they gave completely different perspectives. With world economy becoming more integrated, this recession has created a havoc across the globe. Is this the worst ever recession world has seen?

‘The current global recession is more severe than the Great Depression of 1929’- This has been a hot topic of debate in recent times. There are many views in support of the statement and also a considerable number countering it. To side any statement is wrong before having an in depth understanding of both the scenarios, the events that led to it and the aftermaths. Introduction

The Great Depression of 1929 was a worldwide economic downturn that was marked by the stock market crash on October 29, 1929 called Black Tuesday. This was preceded by a period of robust economic growth and tremendous prosperity despite caution of the dangers of speculation, referred to as the Roaring Twenties. It was a technological golden age as innovations such as radio, automobiles, aviation, telephone and the power grid were deployed and adopted and companies who pioneered these advances saw their stocks soar. On Black Tuesday, the Dow Jones Industrial Average dropped 12.8% to 260. The deluge of sell-

ing overwhelmed the system that normally gave investors the current prices of their shares. . Telephone lines and telegraphs were jammed and were not able to cope. This information vacuum only added to fear and panic. The great depression had a devastating effect in almost every country, whether it was rich or poor. Global Financial Crisis of 2008 – The global financial crisis, brewing for a while, really started to show its effects in the middle of 2007 and into 2008. On September 16, 2008, failures of large financial institutions in the United States, due primarily to exposure of securities of packaged subprime loans and credit default swaps issued to insure these loans and their issuers, rapidly devolved into a global crisis. All over the world stock markets have crashed, large financial institutions have collapsed or bought out, and governments in even the wealthiest nations have had to come up with rescue packages to bail out their financial systems. While on one hand

On Black Tuesday, the Dow Jones Industrial Average dropped 12.8% to 260. The deluge of selling overwhelmed the system that normally gave investors the current prices of their shares. 44 44

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many people are concerned that those responsible for the financial problems are the ones who are being bailed out, on the other hand, a global financial meltdown will affect the livelihoods of almost everyone in an increasingly inter-connected world. Similarities

Happened first in the stock markets in 1990s, followed by in real estate during the 2000s, almost mirroring the stock and real estate market bubbles of the 1920s.

Dissimilarities

• Government Policy – Even after the 1929 stock market crash, the government followed a tight money policy and hence since there was no infusion of funds, the banking system had no cash to lend. Today various protections are in place that has prevented a catastrophic economic recession. The federal officials jumped in so quickly in September to propose a $700 billion bailout plan to save several banks and major financial institutions staggering under the weight of worthless mortgage-backed securities and hoping to stave off a financial collapse. • Epicenter of the crisis – In 1929, the Main Street economy declined first, beginning in June 1929. In that month inflation gave way to deflation, and consumers began slowing their purchases of goods. Meanwhile the financial economy, type casted by the stock market, continued to roar ahead until September. It is the financial sector that is at the core, and Main Street is only peripherally giving way. Although housing has been faltering since 2006 (very much like the 1920s real estate bubble peaked in 1926), other

Opinion

Stock market crashes of 2008 and 1929 have very interesting similarities. • The pattern of the stock markets is strikingly the same. »» Bubble / Boom: stocks have risen more than 350% in 6 years before the crash. »» Stock market crash: market falls more than 50% in 3 years. »» Aftermath: markets are volatile for at least 10 years. • Practices of banks and affiliates – Following the stock market crash of 1929, the US Govt. created the Pecora Commission in 1932 to study what had caused the great crash and adjust financial policy to prevent a similar stock market crash in the future. The findings were that the wide range of abusive practices on the part of banks and bank affiliates was a major cause which resulted in conflicts of interest. Hence the Glass-Steagall Act of 1933 was established to protect the public against the abuses made by the banking industry, Unfortunately Wall Street interests were able to repeal the Act in 1999 and start its slow-motion repeat of the banking circumstances preceding the 1929 crash. • Asset Bubbles –– Happened first in the stock markets in 1990s, followed by in real estate during the 2000s, almost mirroring the stock and real estate market bubbles of the 1920s. • Corrupt Gatekeepers –It is well known that the Enrons and Worldcoms were aided and abetted by the accounting firms – those same firms that were supposedly the Gatekeepers of the financial community, yet handsomely profited from the boom while neglecting their watchdog func-

tions. In the present financial crisis, we know that the rating agencies have also been making hay during the boom. Almost same were the issues during the 1920s leading to the establishment of the SEC and other regulatory bodies to replace the malfunctioning “gatekeepers” at that time. • Lack of Transparency – Back in the 1930s, it was widely recognized that businesses and particularly financial institutions lacked transparency, which allowed for the accumulation of huge imbalances and abuses. Today, financial markets and institutions all over the world have compromised transparency in a number of ingenious, accounting tricks and financial gimmicks, like off-balance-sheet entities (SIVs), window dressing, hard-to-understand derivatives, and opaque instruments with mind-boggling complexity.

In 1929, the Main Street economy declined first, beginning in June 1929. In that month inflation gave way to deflation, and consumers began slowing their purchases of goods.

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Opinion

consumer areas have either not fallen or are just now beginning to fall to recessionary levels. Retail sales are still nominally positive, services and manufacturing in the real economy are though not expanding, and they are not significantly declining either. • Shape of the United States banking system – In 1929, American banking system was severely fragmented due to heavy restrictions on interstate banking. Combined with the fact that farming was still a dominant industry, this led to the existence of numerous small banks without ready access to capital and with enormous exposure to some specific type of loan. While the latter one seems to still exist today (many financial institutions were overloaded on subprime mortgages), the former does not; banks are much larger and many of them are public companies, which means that they have access to capital (including capital from foreign sources). In other words, bailouts are less likely to be needed and would be easier to administer if deemed necessary. Arguments – In Favor Of

The crisis is currently the ultimate scapegoat for all the economic evils that currently plague the global financial system and the global economy – from collapsing stock markets of the world to food shortages in third world countries - a depression which is likely to be remembered in history as “The Second Great Depression” or

The Greater Depression, as Doug Casey called it so aptly. • Falling Markets at a faster rate – As observed by Floyd Norris, at a time 513 calendar days after the stock market peaked on Oct. 9, 2007, the S&P 500 (prices of 500 largecap common stocks actively traded in the United States) is down 56 percent and the Dow is off 53 percent. Comparing it to January 29, 1931, the same number of days after the 1929 market peak, the S&P 500 was down 49 percent and the Dow was down by 56 percent. The 1929 crash got off to a comparatively much faster start, but we have now more or less caught up. • Overvalued Real Estate – The current overvaluation of real estate in real terms grossly exceeds the one during the 1920s. The coming correction in real estate will have an expected cumulative effect that is much worse than the Great Depression. • Global Bubbles –In the 1920s, the U.S. suffered the stock and real estate bubbles, while the European economies were struggling to rebuild themselves from the devastations of World War 1 that ended in 1919. However today the stage and situation are very different. The U.S. economy had a stock market and real estate bubble that surpassed its own during the 1920s. Europe has real estate bubbles across the board, from the U.K. and Ireland, all through the Mediterranean region (Spain, France, Italy and

At a time 513 calendar days after the stock market peaked on Oct. 9, 2007, the S&P 500 is down 56 percent and the Dow is off 53 percent. Comparing it to January 29, 1931, the same number of days after the 1929 market peak, the S&P 500 was down 49 percent and the Dow was down by 56 percent

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Greece), to the entire Baltic region (Latvia, Lithuania, and Estonia) and the Balkans (Romaina and Bulgaria). Worse still, many Asian countries like China, Korea and few others have their own stock and property bubbles. Thus, during the 1920s only the U.S. suffered from gross financial imbalances, while today the imbalances (larger in size and scope) have engulfed the whole world – both developed and developing. • Explosion of Derivatives – Derivatives are called by Warren Buffet as “financial weapons of mass destruction”. The notional amount of total derivatives, as well as “Value at Risk” (VaR), has zoomed in recent years with the potential to destabilize the financial system for decades. The size of modern-day derivatives is almost hundreds or even thousands of times larger compared to the size of the economy in comparison to the 1920s. The total notional value of derivatives outstanding surpasses one quadrillion dollars which amounts to almost 100 times the GDP of the U.S. economy. • Total Credit – Today’s total U.S. credit relative to GDP has significantly surpassed the levels preceding the Great Depression. The chart below shows a dramatic accumulation of debt (leverage) in the 1920s and a deleveraging from 1930 to 1945 (or 1952). Then it shows a consistent buildup of debt afterwards, surpassing in 2000 the previous peak in 1929. The chart shows the level of 299% at the end of 2005, but the level has already reached 350% by 2008. Arguments – Against

stock market value, a third of all banks failing and GDP falling by a third – represented “very difficult circumstances,” because “we didn’t have the social safety net that we have today. So let’s put that out of our minds; there’s no — there’s comparison in terms of severity.” • The stock market has lost nearly 40 percent of its value since its October 2007 peak. This is nowhere near as devastating as the 90 percent decline in stock values in the 33 months after Black Thursday. Conclusion

Though these may be testing times, what has been observed from history is that human nature does not change over time: greed and fear drives the market. The figure on the right shows the stock markets on the days of the crashes separated by nine decades. Manufacturing for WWII war materials is really what pulled the U.S. out of the Great Depression. Even if there is another world war, our nation would not be pulled up by building war machines because there are already unimaginable deficits. All of these stimulus efforts and bail-outs have been tried before, but they don’t address the fundamentals. People can’t borrow if they don’t have a job. People won’t have jobs if no one is willing to invest in business. Just as happened in the 1930s, no one trusts the economic climate or the government enough to invest in business. But it is heartening to see that the situation is improving and the market sentiments are too. So only time will tell.

Opinion

• Institutional Protections in place The federal government instituted protections under President Franklin D. Roosevelt’s New Deal in the 1930s such as federally insuring bank deposits and establishing the Securities and Exchange Commission to protect the broad population from bearing the brunt of the excesses of others. Federal Reserve Chairman, Ben Bernanke said the situation at that time – 25 percent unemployment, a 90 percent drop in Even if there is another world war, our nation would not be pulled up by building war machines because there are already unimaginable deficits. © FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG

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Great Depression || SUBPRIME CRISIS Amit Kumar Mittal & Mohit Gupta

Opinion

IIM Ahmedabad

The great depression that started in 1929 was caused by high war debts and overproduction. The current 2008 recession is a result of the US financial collapse and asset bubbles. In this article, we look across six parameters to compare the great depression to the current crisis. We argue that even though this crisis could have been worse on account of higher dependence of economy on financial sector, the impact has been somewhat moderate due to proactive and non-conventional actions of central banks and governments around the world. On account of stringent policy measures and regulatory reforms, we are of the opinion that the current recession has been much better handled and is milder than the Great Depression. Parallels between the Great Depression of the 1930s and the current Great Recession have widely drawn and remarked upon. The current problems have been likened to the start of the Great Depression. These comparisons are not helped by the fact that economic indicator may that be foreclosure levels, job losses or businesses going bankrupt keep hitting new levels. The article examines whether these similarities are overblown by comparing six parameters across the two periods. We have chosen these six factors as they reflect the state of the economy and are used by experts across the world to track the economy. The six factors are

Industrial Output Equity Markets

GDP Growth

Parameters World Trade

Inflation Unemployment

1. World Industrial Output- World industrial production continues to track the 1930s fall, with no clear signs of ‘green shoots’. Although we might not see the levels seen in great depression and a recovery might be faster.

In EU, German and British industrial output closely track their rate of fall in the 1930s, while Italy and France have been much more hit (Eichengreen, 2009). Japan’s output in February was 25 percentage points lower than at the equivalent stage in the Great Depression. The above highlights that current crisis has been particularly hard on industries. Thus the cut in industrial production numbers has been faster, but we believe it will be for shorter time and not as deep as was during depres-

These six factors reflect the state of the economy and are used by experts across the world

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dex that tracks sion. worldwide inter2. Equity Marnational shipketsWorld ping prices of stock markets various dry bulk have fallen lot cargoes fell to faster but have about 8% of rebounded its 2007 highs. since March. This indicated It appears una gloomy outlikely that we look for demand will see the for vessels and extent of fall trade in general. of 1930s as a We don’t expect bounce back the world trade of 30% has to fall as it did already happened (Bear Markets Since 1950, 2009). S&P 500 re- during 1929. The graph below indicates the volume cently crossed the psychologically important 1000 of world trade and the Baltic Dry Index (BDIY: IND point mark. Also, some portion of liquidity that has BALTIC DRY INDEX). been injected into the system will go into equities. The Chinese markets are a sign of what the excess liquidity injected by Chinese central bank has done to equities.

4. Unemployment- The current US unemployment rate is 9.5% which is well below the peak levels of 1930s (Key, 2008). The unemployment will not be touching the levels seen in 1930s because of the expansionary fiscal and loose monetary policies of the governments world-wide.

Opinion

It appears unlikely that we will see the extent of fall of 1930s as a bounce back of 30% has already happened (Bear Markets Since 1950, 2009). S&P 500 recently crossed the psychologically important 1000 point mark. Also, some portion of liquidity that has been injected into the system will go into equities. The Chinese markets are a sign of what the excess liquidity injected by Chinese central bank has done to equities. 3. World Trade- World trade had fallen but has rebounded in the last few months. The Baltic Dry In-

5. Inflation – The 1929 crisis didn’t suffer from infla-

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tion as the cause of crisis was overproduction which helped in reducing prices. Also, demand went down as unemployment rose and purchasing power eroded. Inflation rose in late 1930s because of the WW-II. Money supply rose substantially in 1939 which also supported inflation. Central banks today are keeping a close watch on the inflation and currently it is under control. The last 4 months in US have actually seen deflation. The figures below indicate the inflation/deflation and money supply in 1929-1939 and inflation/deflation in the last 1 year (Inflation and money supply in the great depression, 2009).

Opinion

6. GDP – According to the Bureau of Economic Analysis, the current recessionary phase has had the sharpest decline in GDP since World War II. The US economy shrank by 3.9% from Q2 2008 to Q2 2009, the sharpest in any of modern recessions since World War II (Zumbrun, 2009). The Great Depression hit the GDP of many countries hard as international trade and heavy metal industry collapsed. A look at the following figure illustrates the impact of Great Depression on the GDP (BEA National Economics Account). The GDP has fallen but we don’t expect it to go to those levels because of two reasonsa. The policy response which is helping create demand b. Change in mix of world GDP- Higher contribution from Asian economies and service sector compared to higher earlier dependence on trade, manufacturing and OECD economies

The above six indicators indicate that the economy has deteriorated rapidly but also showing signs of revival. This has been brought about by a string of policy responses, some of them are highlighted below to emphasize that the response this time has been swift and has helped in reviving. Policy Responses -Even though the impact of current crisis has been severe considering the time within which it has taken place as compared to the Great Depression, the Governments worldwide have been proactive in handling the recession. A few of the measures are described below –

• Money Supply – The governments have been proactive this time around by providing support to various institutions and also coming out with regular stimulus packages. The effort is not localized but has been envisaged by the governments world over. During the Great Depression there were no such measures to increase the money supply which would have helped to combat the deflation setting in. The governments have lowered benchmark rates to lower the short term yields and indulged in quantitative easing to lower long term rates and encourage credit flow. • Government Budget Surplus – The governments have been continuously pumping in money to revive the economy. Even though this has led to huge burdens of debt on the government (US National Debt has crossed $10 trillion), they are confident of an imminent recovery which will help in wiping out this huge burden. • Regulation – Apprehensive of the current economic and financial scenario and the fallout of large banks worldwide, the administration has been pondering over stricter regulations on the financial markets. A landmark regulation white paper presented by US President Barrack Obama is a precedent in this direction. Proposing stricter control along with key reforms in the functioning is a step not only to impose control but also provide for more accountability on part of the financial institutions.

The six indicators indicate that the economy has deteriorated rapidly but also showing signs of revival.

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tions. The current crisis is about 15-24 months old depending on the point of reference and we have not yet recovered from it. Lot of debate is going to answer the question whether the current signals are green shoots of recovery or yellow weeds of further economic trouble. The experience of past 20 months shows that economic conditions have deteriorated at faster pace, but things are either stabilizing or are Conclusion on a road to recovery. Hence, we think that 2009 is The 1929 great depression was a prolonged not as bad as 1929. crisis caused by inadequate policy response on account of inexperience in dealing with such situa• Stress Tests – Another key measure to gauge the strength of the system post fallouts and bailout packages were the Stress Tests for banking institutions. Such tests not only help in ascertaining the health of these institutions but also to find the progress they have made with the tax payers money given in the bailout packages.

FIN Q SOLUTIONS JULY 2009 1. Budget 2. Decimal Coinage System 3. Dundee Mutual Fund 4. Vietnam 5. Credit Suisse 6. Bears Stearns 7. Gillette 8. CITI 9. IDBI 10. Critical Path Method (CPM)

Opinion

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Blunders

Rohit Kumar

NITIE, Mumbai that we’ve lost the culture and habit of savings,” says Nancy Register, of the Consumer Federation of America Federal Reserve Chairman Alan Greenspan warned that the low savings rate is impairing the nation’s long-term economic prospects. An improved savings rate would provide investment money for businesses, which would create jobs, he said. Hence the absence of diversified economy placed it on a high risk of finance and real estate markets collapsed. USA engaged in military driven trillion dollar expenditure instead of concentrating these funds in high end manufacturing and technological advancements. The domestic History of USA policy market was ignored and the power After WW II, international mon- shifted from Detroit to wall street. etary policy was governed by Bretton Woods System. USA agreed to make Lessons from 1929 collapse dollar convertible to an equivalent Stock crash of October 1929 amount of gold. Subsequently dol- still inspires political and economic lar emerged as the reserve curren- debates. “Many people blamed the cy of the world. In early 70’s, this crash on commercial banks that system came apart as USA failed to were too eager to put deposits at honour its promise. However dollar risk on the stock market.“ We can’t remained as the reserve currency of be sure if it was a credit inspired the world due to lack of other cur- economic bubble which burst. But rency options. we know that it very quickly sucked From 1960s USA adopted a out huge amount of consumer credit strategy of diverting its attention and they instantly stopped spendfrom core manufacturing to FIRE ing. The collapse of Wall Street might (Finance, Insurance and Real Es- have acted as the precursor to the tate) sectors. The economy became great depression. overly dependent on services secThe banking industry was dividtor. The savings rate of US consumer ed in to two segments, lending firms declined from 11% in May 1985 to and brokerage firms i.e. investment -2.7% in Aug 2005.1 banks. To rein in the stock market, “In two generations it seems the uptick rule which prevented the The current financial crisis has been described by many as unprecedented in living memory. It was so sudden and so powerful that many were caught unaware. Many tumbled and could not climb back up. The “golden period of finance” is said to have come to an end. A new world order is emerging from the ashes of the old one. But who was responsible for it. Was it due to the bozos at investment bank or the louts among the regulators or were it the nimrods in the banks who played with our lives. USA has been the epicenter of financial activities of the world for some time now. So, let go back and try to find out.

“One in six mortgages is upside down, and 50 million families can’t pay off their credit card bills. Last year one out of seven households was called by a debt collector. More than a million people declared bankruptcy. Foreclosure has reached levels unmatched since the Great Depression”

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short sellers driving the bear market further down, was implemented after 1929 crash. It also inspired Keynesian economic which says that Governments should spend the money they don’t have in order to save capitalism. It is this theory which have been used in the 2008 to try bring the world economy out of recession.

Bursting of housing bubble and credit crunch The nadir of Soviet central planning was supposed to be a heap of left shoes without any right pair to match them. The housing boom of USA which started in late nineties witnessed a series of empty houses in 2008 without any buyer for them. The effect started to show off with increased home loan foreclosure rate as the sub-prime borrowers defaultMarket collapse and decline of organizaed. tions The financial market witnessed a lot of consolidations. J P Morgan chase bought Washington Mutual and Bear Stearns. Merrill Lynch was bought by Bank of America. Citigroup bought Wachovia. Lehman Brothers filed for bankruptcy. Investment Banks like Morgan Stanley and Goldman Sachs converted themselves from securities firm model to financial holding company model i.e. commercial banks. Thus ended the last of five standalone investment banks in Wall Street, marking the end of an era which has started with the Glass-Steagall act of 1933 when investment banking was separated from street banking. Bill Isaac, a former chairman of the Federal Deposit Insurance Corporation, said “They are the only Fig 1: Subprime Foreclosure and REO* rate by vintage two left and the handwriting was on the wall, It’s a * Real Estate Owned. Property which is in the possession of a shame because this country was built, in part, on lender as a result of foreclosure or forfeiture risk-taking by Goldman and Morgan and by a whole The buyers of “teaser rate mortgages” and bunch of firms before them.” “Adjustable Rate Mortgages (ARM)” found it difficult The conversion allowed them to take public to pay interest as the installments rose substantially. money but bought them under regulatory scrutiny. “One in six mortgages is upside down, and 50 The risk which their traders could take was severely

Blunders

million families can’t pay off their credit card bills. Last year one out of seven households was called by a debt collector. More than a million people declared bankruptcy. Foreclosure has reached levels unmatched since the Great Depression.” Washington was forced to bail out two of the biggest US mortgage banks, Fannie Mae and Freddie Mac, to prevent the American home loan system from collapse. Lehman brothers which had invested most in the American real estate of all banks saw its portfolio shrink very fast and could not sustain. As economy first began to stall, the underlying problem of consumer and corporate indebtedness in USA totalled about 380% of GDP, nearly two and a half times the level at the beginning of the Great Depression.

Fig 2: Trend of the indices which are used as base to fix interest rates of ARM. Borrower’s interest rate is generally (base+x)%

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limited and the amount of money which the firms could borrow was severely restricted. Many countries in the world including El Salvador and Iceland suffered. The depreciation of krona along with the exposure of the large banks of Iceland (the total assets of banks is 10 times the GDP of Iceland)8 to huge foreign debt and high inflation created major problems for the country. Ordinary citizens saw their investments melt away in front of them. The borrowers have no access to credit. The unfortunate participant in pension fund scheme saw his/her life’s savings evaporate because a trader in some distant place decided to take too much risk. Huge stimulus packages were announced all over the world to suck up toxic underperforming mortgage-backed assets. Most of the governments in the world turned Keynesian. IMF says that world has already spent $11.9 trillion to fight the financial crisis. That comes out to be 1,779 pounds per person on this planet. British government led by Mr. Gordon Brown started nationalizing financial institutions such as Northern Rock, Bradford & Bingley etc which was followed all over the world. Britain witnessed its first bank run case after 1870s. We again saw the resurgence of state capitalism. Rise of new world order Voices are being raised to replace dollar as the reserve currency. The Commission of Experts of the UN General Assembly on Reforms of the International Monetary and Financial System, led by Joseph E. Stiglitz, has suggested a gradual move from the US dollar to the SDR. It wants to increase the share of SDRs in total international reserves in a gradual manner starting from an issue of $ 250 billion. Hong Kong is issuing bonds denominated in renminbi. Countries are starting to use their currencies in mutual trade instead of dollar (China and Brazil). USA would be having harder time financing its trade deficit. Would China be the next superpower? Only time would give a definite answer for that. The shop till you drop attitude of Americans is showing signs of change with personal saving rate rising to about 7% from less than 1% a year before. With increase in savings, spending is less. As consumer spending accounts for 70% of USA spending, the economy is going to contract in short term due to increased saving rate. Leading economists call it “the paradox of saving”. The new America is going to inherit more from the “savers” which would spur investment of long term nature in the American economy, thereby reducing trade imbalance.

that few things are getting worse and many are getting better. However the consolidated sales of the companies are still below what it was last year. Banking sector credit in India grew at 27 % in 200708, 18%in 2008-09 and is expected to grow at 12-14% in 2009-10 as per Crisil. Financial products have been brought under great regulatory control now. Hopefully like foods and beverage, financial consumers would be having greater options and protection. As per McKinsey study, consumers change their consumption pattern during downturns. Daily amenities—eating out, personal-care products and services, and apparel—tended to suffer. But categories such as groceries and reading materials, which substituted for more expensive options, actually benefitted from higher spending, as did less discretionary items, like insurance and health care. Spending on education showed the biggest increase.

Fig 3: Average growth in USA consumer for different consumer products

As the condition improves, these sectors are likely to show the quickest and maximum improvement. When the market picks up, the consumer is likely to look for one thing in any financial product‘trust’, thanks to Mr. Bernie Madoff. Kabirdas, the famous medieval saint said “Kadli seep bhujang much, swati ek gun teen.” When the first drop of rain falls on the banana tree, it forms camphor, in the oyster’s mouth, it forms pearl and in the snake’s mouth forms venom. It is our choice what financial system do we want to gift to future generation, venom or pearl.

Current condition and outlook The financial results of the recent quarter show

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cHILMAN jAIN

IIM Shillong

They say every good thing must come to an end. This is so true when it comes to the case of the collapse of the seemingly invincible investment banks. Having once enjoyed a position of immense power in the financial markets they just disappeared into thin air. A critical analysis of the demise of Wall Street through a 5W+H study is presented:

When – The crisis has its origins in 2006 when home prices started declining due to a combination of increased interest rates and overbuilding during housing boom period leading to supply demand mismatch. By summer of 2007 America was facing a mortgage catastrophe. In March 2008, Bear Stearns was sold to JPMorgan Chase for as low as ten dollars per share. However, it was really one ‘Black September’ which really shook up the financial and economic foundations of America with dire consequences for the rest of the world as well. On September 8, the government announced a takeover of Fannie Mae and Freddie Mac. On September 14, 2008 Merrill Lynch was sold to Bank of America for 0.8595 shares of Bank of America common stock for each Merrill Lynch common share, or about US$50 billion or $29 per share. Lehman Brothers filed a chapter 11 bankruptcy case on 15 September 2008 resulting in rapid fall of world stock market. On September 21, Goldman Sachs announced itself to become the fourth largest bank holding company and to be regulated by the Federal Reserve. On Sept. 22, 2008, the Federal Reserve announced that it had granted a request from Morgan Stanley to change its status to a bank holding company. The announcement completed an overhaul of the structure of the banking industry, which had been broken up in the 1933 into commercial and investment banks under GSA (Glass-Steagall Act) to restore confidence after the Great Depression.

Blunders

What –Lehman Brothers Holdings Inc. filed for chapter-11 bankruptcy protection, and Merrill Lynch & Co. agreed to be sold to Bank of America Corp. in a $50-billion stock deal. Goldman Sachs and Morgan Stanley tucked their tails and converted themselves into traditional retail commer¬cial banks. The world watched with shock and horror as the Wall Street got completely wiped out of the species of its standalone IBanks. Another I-Bank of Wall Street - Bear Stearns had already been sold out to JP Morgan Chase in February 2008. The American financial system was shaken to its core. If this was not enough, AIG, the largest insurance company of USA got nationalized and Washington Mutual, the largest savings and loan institution and the fourth largest bank in USA was acquired cheaply by JP Morgan Chase in a flash.

said to be the sub-prime loan. Sub-prime loans were given to people with poor credit history who defaulted when the housing bubble burst. Big investment banks bought the mortgage products, securitized these loans and sold it off to end investors such as insurance companies, pension funds, local governments and foreign banks. With the decline in housing prices, as more and more sub-prime borrowers started defaulting, payments to the institutional investors who had bought the financial securities stopped, leading to huge losses. When the news came out that these institutions failed to manage their risk panic spread and this led to crash in the multimillion dollars asset based security market. Sub-prime lending firms were first one to get affected and many of them went bankrupt this was the first blow to the financial wall of the famed Wall Street. As the de¬fault kept on rising more than expectations the financial institution stared to look towards other financial firms to bail them out but these firms also stopped their credit after a while as they realized that the collateral backing this credit would soon lose their values in the falling real estate prices. Where – In this era of globalization, this financial crisis has impinged upon almost all countries UK, China, Japan, Russia, Germany, India etc. even though it originated in USA. From 8-9% GDP growth in India, it is forecasted to be around 6% now. It has become a global meltdown. Who – Were we to determine who all are impacted by this crisis, we would actually leave no one out. From the flush CEO’s of investment banks who shoulder most of the blame for the downfall of I-banks to the common man who is reeling under the dreadful effects of the worst recession to hit US since 1930; from the fresh IIM graduates seeking the most hallowed of all placements – with an I-Bank to the crusty old bureaucrats having to now sort the ensuing mayhem. Why – Now we come to the last question “why”? Why is it that with all the policies and processes in place by the most sophisticated and mature people in both the Government and the financial bodies that we landed up in this mess. The answer – self-indulgence, insatiability, short-sightedness, greediness, overconfidence and arrogance on the part of the investment banks and mortgage companies. But the Government can be charged with the biggest culpability of all – not regulating the financial markets.

In the end we need to wait and watch how far the global slowdown initiated by the collapse of the Wall Street will go. After almost a year, are we now rising from the ashes or are we staring into a grimmer How – The main cause of this financial disaster is and bleaker future?

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Sareet Mishra

Opinion

Indicators

On Fire

Blunders

IIM, Shillong

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Wow! Exactly one year has passed since the inaugural issue of “Niveshak” was launched in August 2008. What a year it was!! Yes, we saw the most turbulent time in the finance world during the last year. In this storm our finance magazine “Niveshak” sailed with mast high and maneuvering through the obstacles time and again. Today with the support of our subscribers and well wishers from B-schools all over India, we have achieved the first milestone in our journey. The magazine marked the emergence of none other than our beloved editor the “Undercover Economist”, Biswadeep Parida. What was called as “The Mag-Gang” of IIM Shillong then is today proudly known as “The Niveshak Team”. I still remember the early days of Niveshak, we were just one month old in IIM Shillong and were still getting adjusted to the system. But one guy was busy with something right from day I met him. One week before the launch of the first edition our editor gave me 3 articles for review and proof reading. I was just dumbstruck with quality of the content. I still remember reading the article “Welcome to the world of Finance” and “Birth of The Undercover Economist”. Yes it was the birth of the undercover economist and his brainchild “Niveshak”. The Finclub of IIM Shillong came together to bring the first issue of Niveshak which scaled new heights in the past twelve months and still has a long way to go. Yes what started as a newsletter of Finclub of IIM Shillong is recognized as the popular and informative finance magazine among the MBA graduates across India. The first major leap of Niveshak coincided with the great fall of Wall Street biggies in the month of September 2008. The Niveshak’s October 2008 issue marked the entry of the genius and multitalented designers of Niveshak, Tripurari Prasad and Sarvesh Choudhary. From that issue we have never looked

back and the contribution and hard work they put in each issue of Niveshak is beyond one’s imagination. Other two members of Team Niveshak who stood besides our editor from day one are Amit Chowdhary and Nilesh Bhaiya. They along with our editor represent the Finance club of IIM Shillong, the most active club of the institute. Their commitment and dedication keep the spirit of the team alive. Other member of Team Niveshak Sujal Kumar, Buffet of IIM Shillong is equally talented and my partner in making FinQ the monthly quiz of Niveshak. He has an extraordinary skills and his aptitude towards finance makes him our natural financial advisor and analyst. Other two contributors to Niveshak are Saurav Kumar Bagchi and Dilpreet Singh Gandhi, the Fintoon team of Niveshak. Their creativity and simplicity make them the adorable members of the team. Hence the above mentioned name makes the team which sits together and come out with “Niveshak” each month. As we know anything good does not come easy. The determination and the vision of Niveshak team and especially our editor “Undercover Economist” and two creative designers (Tripurari and Sarvesh) have put in many countless nights to take Niveshak to the heights which it has achieved now. We strive for excellence and in this endeavor the support we have received from different B-schools is remarkable. The best part of past twelve months is that the bonding between the team. The quality of discussion and the innovative ideas which come out during the brainstorming session are cherished by each team member. We back each other and learn from our mistake. It’s a privilege to be a part of such a great team and I am proud of being in Team Niveshak. The “Birth of The Undercover Economist” article started with the dialogue from movie Swades. I would to like to end my article with the dialogue from movie Om Shanti Om; “Kehte hai kissi cheez ko agar Dil se caho...to puri kayeenaat use tumse milane ki koshish main lag jati hai”. We, the Niveshak Team love our magazine and work with passion; we thank all our subscribers and well wisher for their love and support.

NIVESHAK

ANNIVERSARY EDITION

Hope Blunders

Dilpreet S. Gandhi and Saurav K. BagcHi IIM, Shillong

Biswadeep The Undercover Economist

Indicators

Cool Hai Dude Nilesh Always Believe in Future Value of Investments!

On Fire

Amit The Inspiration for some of our funny characters of Fintoon

Sareet Looks For Money Even While Playing Computer Games

Opinion

Sarvesh & Tripurari Creative Creaons of Niveshak

..

Sujal

Buffet of Team Niveshak

© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG

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TEAM NIVESHAK ARTICLE OF THE MONTH

The article of the month winners for August 2009 are Amit Kumar Mittal & Mohit Gupta of IIM Ahmedabad They recieve a cash prize of Rs.2000/and runner ups are S.Aarani Subhanathan & C.Saravana Balagee of IIM Kozhikode They recieve a cash prize of Rs.1000/CONGRATULATIONS!!

All Are INVITED

Team Niveshak invites article from B Schools all across India. We are looking for original articles related to finance & economics. Students can also contribute puzzles and jokes related to finance & economics. References should be cited wherever necessary. The best article will be featured as the “Article of the Month.” and would be awarded cash prize of Rs.1000/Instructions »» Please send your articles before 10th September 2009 to niveshak.iims@gmail. com. »» Do mention your name, institute name and batch with your article. »» Format: Font:- Times New Roman, Size:- 12, Length <= 5 Pages in word doc/ docx. »» Please DO NOT send PDF files and Kindly stick to the format. »» Number of authors 2 at max.

SUBSCRIBE!!

Get YOUR OWN COPY DELIVERED TO INBOX Drop a mail at [email protected] Thanks Team Niveshak www.iims-niveshak.com

TEAM NIVESHAK

(From left: ): Amit Choudhary, Tripurari Prasad, Nilesh Bhaiya, Sujal Kumar Biswadeep Parida,Sareet Mishra, Sarvesh Chowdhury

Soumyasanta Roy

IIM Shillong

COMMENTS/FEEDBACK MAIL TO [email protected] www.iims-niveshak.com ALL RIGHTS RESERVED Finance Club Indian Institute of Management, Shillong Mayurbhanj Complex,Nongthymmai Shillong- 793014