Niveshak December 2008

NIVESHAK THE INVESTOR



VOLUME 1 ISSUE 5

DECEMBER 2008

MeRCHANTS OF DEATH

Niveshak Volume I ISSUE V December 2008

Faculty Mentor Dr. Suvendu Bose Editor Biswadeep Parida Team Niveshak Amit Chowdhary Nilesh Bhaiya Sareet Misra Sarvesh Choudhury Sujal Kumar Tripurari Prasad

From Editor's DesK

D

ay by day, the world is plunging deeper and deeper into the financial crisis. Bailouts after bailouts, rate cuts (read interest rate) after rate cuts there seem to be no way out of this for some time. Negative economic and financial data galore in government reports and corporate financial statements across the globe. Probably this is the best time for us B-Schoolers to understand the dynamics of global economics and financial markets. We, B-School students take cue of this opportunity and explore into emerging financial instruments and markets. One of the most innovative instruments that has come out recently is the “Death Bond”. A Death Bond is a security backed by life insurance which is derived by pooling together a number of transferable life insurance policies. The life insurance policies are pooled together and then repackaged into bonds and sold to investors. The peculiarity of this instrument lies in the fact that is not affected by standard financial risks. The only risk of holding a death bond is with the underlying insured person. If the person lives longer than expected, the bond’s yield will begin declining. But the risk associated with one policy is diversified as the number of policies increases in the pool of underlying assets. Going back to the financial crisis, we pick up some learning and ideas on how to avoid similar crisis in the future. Some suggest the restructuring of the IMF as the answer while some demand the strict adherence to Basel-II norms as the best way to avoid bankruptcy of banks. But are the Indian Banks ready for these strict capital adequacy norms? An article addresses the concerns and challenges that Indian Banks face in toeing the line of Basel. One of us has also explored into the low interest rate regime of Japan for an answer for cheap money. Sometimes too much of regulation makes an economy shock proof. We have tried to analyze how some regulations have made sure that the Indian economy is not much affected by the global crisis and still grows at a brisk pace of 7%. At the same time we notice that the stock markets of India have crashed heavily despite a decent economic growth. We shall try to chalk out a road to recovery in the sensex. Moreover in this issue, participants from B-Schools across India have also given their perspectives on the future (or The End) of Wall Street and the lessons learnt from the fall of the high street Investment Banks, most notably Bear Stearns. May be after reading this issue some of you will agree with the idea that I put across in the first paragraph of this message.

Cover model: Biswadeep Parida,IIM Shillong All Images and artwork are copyright of IIM Shillong Finance Club

Wish you a happy reading. - Biswadeep Parida

(Editor- Niveshak)

©Finance Club Indian Institute of Management, Shillong Disclaimer: The views presented are the opinion/work of the individual author and The Finance Club of IIM Shillong bears no responsibility whatsover.

ContentS

The end of Wall street Page 4

Cover story Merchants of death- Page 6

Article of the month Basel 2 Norms- Page 10

Institutions Restructuring IMF- Page 12

Finsight Yen carry trade- Page 13 How shock proof is the Indian economy- Page 14

Investor’s pick Bernard Madoff- Page 15

Market watch Sensex recovery- Page 16

Opinion The North East and Indian economy- Page 18

Finlounge Page 20 © The Finance Club, Indian Institute of Management, Shillong

Wall StreeT

THE

END

OF

WALL STREET Now with the growth of credit system the need of direct exchange of money started eliminating, which helped the circulation of commodities in the economy which was essential for the growth of the world market. This is what Marx called as “Finance Capital” and this speculation is the major reason why we are facing the global economic crisis today.

The newspapers have a different section altogether for business news mainly dominated by Jargons. And the reason is pretty clear. These news articles are aimed at selected few and not masses. But with the financial crisis spreading its wings, common man wanted to know how the whole of the world’s economy can be at crisis because of a mysterious creature which fin-literate people called as “Mortgage Backed Securities”.

All the US governments till date, be it the Republicans or the Democrats, have favored the deregulated banks and financial markets. This resulted in the development of a “shadow banking system” which handles $10 trillion of the financial activities which is almost of the same size as of the regulated system. Most of the activity was done on hedging by what we know as “Hedge Funds” which allows the investors to speculate both on the upward as well as the downward trends in the market and economy which could be related to the currency movements or interest rate fluctuations, thus safeguarding them against the market risk. Hedge funds mainly deal with the “derivatives” which are financial contracts, whose values are derived from the value of something else (known as the underlying). Hedge fund managers use various modeling techniques to calculate the fluctuation in the derivatives market and which help them generate big amount of money.

Now, in order to solve the whole mystery surrounding it, we first need to understand how and why the whole of the securities market was established and how it works. It all happened during the first half of the 19th Century when capitalists were seeking ways to maximize their profits. Initially they used their profits to finance themselves but with the growth of the capitalist enterprises, it became difficult for them to finance themselves from their own profits or from the bank loans. This led to the introduction of securities, mainly the stocks (which we know more commonly as shares) and the bonds in the market and by the 20th Century the credit system was fully established and the markets were in place.

Niveshak

The reason why today credit market is freezing is because of a series of bad bets by traders of these derivatives and with almost all the US and European Banks being involved in it, it has affected the global economy very badly leading to the credit crunch.

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ndoubtedly, it is not easy for every common man to understand the meaning of financial crisis. There are news channels fully devoted to financial news where news reader seems to be talking in Greek. The news about being bullish and bearish seems like he is reading a news article on zoo animals.

Wall StreeT

It all started with the economic expansion, when the wages of workers in US didn’t improved and 2001 onwards, per family income actually declined in US. During 2000s, the workers’ productivity in US grew by 10 percent but the real inflation accounted wage gains remained almost at the same level. Today, some 26.4 percent of U.S. workers still work for poverty wages. The story is completely different for the upper class with their annual earnings increasing from 7.3 percent in 1979 to 13.6 percent in 2006.

Mortgage lenders who provided these loans transferred them to Investment Banks, who bundled them into the Mortgage Backed Securities (MBS). These I-Banks then sold these securities and the buyer was sure to get the monthly mortgage payments as the revenue. But the rise in real estate price was going to stop somewhere and with the huge amount of transactions involving MBS, the trouble was around the corner. The credit banking system aggravated this problem further. Many borrowers started defaulting in 2007 and by early 2008 the credit swap defaults amounted to $62 trillion which is nearly 5 times the US GDP. Once it happened, all the firms who had sold these credit swaps incurred heavy losses as they hadn’t had enough of liquidity to cover their losses. What followed was the decline of big names on the Wall Street starting from Meryll Lynch to Lehmann Brothers. Goldman Sachs became the bank holding company. U.S. and European governments were forced to nationalize the banks in order to avoid further impact on the financial system. If we look at the impact of economic crisis it has been humungous. The technology sector has been hit hard. Some of the biggest spenders of technology are financial institutions and with the consolidation going on in these firms, they are less likely to spend on technology. The credit market is going to be tight through at least most of 2009 and franchise sales for many franchisors will slow down dramatically. The crisis has far reaching effects affecting environment as well as the scarcity of credit also threatens efforts to cut greenhouse gas emissions. The money spent on bailing out the big names on Wall Street could have been used to research on the alternative sources of energy and to build a more sus-

tainable society. This is just the start of it as there are many more and the list goes on and on. U.S. President George W. Bush at a summit in New York asserted that the global financial crisis is “not a failure of the free market” and urged world leaders to adopt modest financial reforms that stop short of the tighter regulations which Europeans favour. He favored the bolstering accounting rules for stocks, bonds and other investments so investors have a clearer sense of the true value of what they buy. Also he favored the processing of the major culprit, credit default swaps, to be done via a central clearinghouse. That would help provide crucial information on the parties involved in these complex, unregulated products. He also stressed on better co-ordination of financial regulations among countries and to give a wider variety of countries the voting power at the International Monetary Fund and the World Bank. While it is clearly impossible to predict the further amount of losses the economic crisis will incur, it has become clearly evident that the policies followed by the US and European governments supporting the free market capitalist ideologues have back fired. Now is the time for those in favour of socialist perspective to rise to the occasion and make necessary amends.

By Amit Agarwal

© The Finance Club, Indian Institute of Management, Shillong

XLRI Jamshedupur

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In order to maintain their standard of living, millions of workers borrowed by taking out second mortgages on their homes. By the end of 2007, the figure was $10.5 trillion, more than double of its value in 2000. It was a common notion amongst the working class that the higher rates could easily be avoided by refinancing and the rising prices of real estate encouraged them more as it led them to feel that their homes will become more and more costly.

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ecuritization has given the financial world many instruments, some of which—such as collateralized debt obligations (CDO)—have already made a permanent place in our memory because of present financial crisis. When the subprime mortgage market was cracking in May, many of the biggest players in financial world gathered at a conference in New York to talk about the next exotic investment coming down the pike:

Death bonds-- may be the most macabre investment scheme ever devised by Niveshak

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Wall Street.

Cover Stor Y

Death bond is shorthand for a gentler term the industry prefers: life settlement-backed security. They are just like any other asset-backed security in which the process of securitization is used to create security instruments generating income out of a pool of assets. Except here the asset is backed by cash flows generated out of securitization of insurance settlements. They can trace their origins to Life insurance settlements in the 1980s. During this time, AIDS and other terminally ill patients needed money to pay for their expensive medicines, so they began selling their life insurance policies and were paid an upfront amount. Their policy payments were taken over by the purchasers, who would receive the policy paid in full when the patients passed away. While these settlements are still around, they have been replaced by insurance policies sold by seniors 65 or older who are not terminally ill. These cases are often referred to as “life settlements”. Now the question is why policyholders will enter into insurance settlements? Answer is simple; the real motivation is obviously the money which all the parties to insurance settlement transactions make Every year, many holders of life insurance policies wish to discontinue their policy for some reason or the other. After a certain number of years, every policyholder has the option of surrendering his policy to the life insurance company, for which he gets a cash surrender value. Insurance settlement provides an opportunity to the policyholder to en-cash his policy at a price which is better than the surrender value offered by insurance firms In USA near about 90 million Americans own life insurance, but many of them find the premiums too expensive and others would simply prefer to cash in early. “Insurance settlements” are arrangements that offer people the chance to sell their policies to investors, who keep paying the premiums until the sellers die and then collect the payout. For the investors it’s a ghoulish actuarial gamble: The quicker the death, the more profit is reaped. Wall Street now is seeing huge profits in buying policies, throwing them into a pool, dividing the pool into bonds, and selling the bonds to pension funds, college endowments, and other professional investors. If the market develops as Wall Street expects, ordinary mutual funds will soon be able to get in on the action, too.

Securitization of these insurance settlements leads to the creation of death bonds through many layers of transactions. In the first step, a financial intermediary creates a pool of assets by acquiring interest in different life insurance policies through a series of insurance settlements. In the next step, the pool of assets is divided into fractional interests represented by security instruments and sold to investors. The security instruments generate a stream of income as the life insurance policies pay off on the death of the insured. The final net gain or loss for death bond investors is equal to the cost of purchasing the insurance policies plus the cost of premiums paid for the remaining term of the life of insured minus the claim amount received from the insurance company on the death of the insured. Investors of death bonds would, of course, make more profit if people die before their average life expectancy and they are bound to lose if those insured live long. But the real beauty is that to earn their money, investors in death bonds need not look at complex quarterly results and financial ratios. They just need to keep a watch on the average life expectancy of people, which does not fluctuate every day like stock indices. A death bond is an investment vehicle that has nothing to do with the market, since people die all the time regardless of the health of the stock market or the economy. Although different people live for different lengths of time, the average life expectancy of people remains constant over a period of time. Finally, as the Life insurance policies carry neither capital gains taxes nor regular taxes, since they are typically used to pay the funeral expenses of the deceased they offer tax-free income. Some of the world’s largest insurers and investment banks are selling bonds linked to life insurance and the immense cash flows associated with it. They are hoping to do something similar to what home lenders did in recent decades, when they packaged mortgages into securities that could be purchased by third parties and traded in a huge secondary market. These bonds can take a number of forms. Some, which go by the name “XXX” bonds, are backed by the piles of capital that insurers hold against typical policies. Others are pegged to death rates, and investors could lose out in a catastrophic event, such as an outbreak of bird flu. While the concept may make sense, in theory, the incentives are questionable. The opportunity for aggressive and deceptive sales tactics, adverse selection and manipulation are significant, and areas like this tend to attract the worst element. For example, Providers are trying to lure people who don’t even hold insurance. In

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Nearly 600 descended had assembled for the threeday confab, Delegates from big firms like Bear Stearns, Deutsche Bank, Lehman Brothers, Merrill Lynch, UBS, Wachovia and Wells Fargo were also present. They moved around the seminars with titles such as Legislative Review and exhibition hall picking up usual conference swag. Among all the happy banter, they were there to learn about new and imaginative ways to profit from people dying.

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Pension fund executives are seeing good opportunity in these securitized life-settlement policies for their liability-drive investment strategies, filling the gap in the market for long-duration bonds. Expert’s feels that life-settlement policies offer an opportunity for pension executives to invest assets in line with their liabilities. But the prospect of securitizing the policies might get delayed at least until next year because of credit-market woes and this might make the assets more attractive to pension executives These life settlement-backed securities have potential for pretty decent returns and are not a highly volatile investment which is additional benefits for pension funds and endowments. Pension funds and endowments that use an LDI (Liability Driven Investment) strategy would see the biggest benefits as these bonds would offer them diversification and in addition to that these asset classes is highly uncorrelated to anything else, thus making it very attractive. At this early stage, there’s no way of knowing how popular death bonds might become. Wall Street’s innovation machine has turned out both huge hits and big flops over the years. But the growth of the underlying market for life settlements has been good so far. In 2005 about $10

Niveshak

billion worth were transacted, up from virtually nothing in 2001. This number rose to $15 billion in 2006. Though Death bonds will never approach the size of the mortgage market, which saw $1.9 trillion of securities issued last year, But if Wall Street achieves its goal of turning most of the life settlements created each year into death bonds, the market could rival the size of today’s junkbond market, where issuance totalled $128 billion in 2006, up from $56 billion in 1996, according to market watcher Dealogic. Growth in life settlement policies is skyrocketing. In a report, analysts at Sanford C. Bernstein & Co., New York, wrote this market is expected to grow to $160 billion in 2030, up from $30 billion at the end of 2007 Last year, insurers sold $5.4 billion in bonds linked to life insurance and mortality, according to Fitch Ratings. That is a tiny sum compared with the multitrilliondollar market in mortgage-backed securities, but insurers had issued $6.7 billion in the prior four years combined. Buyers typically were hedge funds, pension funds and other institutional investors, rather than individuals.

Investment banks interested Investment banks have already drawn up their sales pitches to well-heeled institutional customers. Firms say death bonds should return around 8% a year, right between the expected returns of stocks and Treasury bonds According to Life-settlement industry sources investment banks are getting impatient to securitize these assets, but are hampered by difficult credit markets. Wall Street investment banks such as Goldman Sachs Group, Deutsche Bank AG, UBS Securities, Morgan Stanley and Suisse Securities are either buying pools of life settlements or independently working to make securitization a reality. Goldman Sachs has worked with National Financial Partners Corp., and Genworth Financial Inc., creat-

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this tail-wagging-the-dog scenario, speculators take out policies on the individuals’ behalf, pay them something up front, cover the premiums, and then wait for the people to die so they can collect. Note that this scenario only works if the insured person dies sooner than the insurer expects. Given these types of tactics, regulators have their hands full. Right now there is no regulation regarding life settlements, and with their growing use and popularity eventually regulation will step in. Also the tax benefits will not go unnoticed by government forever. Eventually Congress will see that these policies are being paid taxfree to investors, and will want their piece of the action.

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Some experts believe that Life settlements would not be securitized in the same way as have credit cards, automobile and home loans. The negative cash flow nature of life insurance policies doesn’t lend itself to traditional securitization. Also, it has been difficult to accumulate a pool of policies to fit the rating agencies’ model for ratings — there’s little historical data available to measure past performance to gauge future performance and assign a rating as Life settlements as a market is only 8 years old Institutional investors looking for investment options and exposure to these alternative investments would boost demand for securitized instruments. We are maybe only one or two years away from fully securitized life-settlement deals as the credit markets right now are a big problem.

Ratings agencies hesitant The ratings agencies also present another hurdle to the life-settlement securitization. The ratings agencies are a major problem as their credibility has been hurt dramatically and they do not want to launch into a new asset class given the unknowns in this market. The only one close to rating these investments is Moody’s. Moody’s Investors Service has indicated that company would probably rate at least one lifesettlement securitization within the next 12 months. Moody’s did rate one life-settlement structured deal in 2004, the Legacy Benefits Life Insurance Settlements Class A and B notes. The deal was not a true securitization because it had an annuity tied to it acting as a hedge and insurance against default. A true securitization relies on the underlying collateral’s performance to guarantee cash flow payment — not insurance or an annuity. Despite the lack

of pure securitized life settlements, there is “a lot of activity going on” as institutional investors are buying and selling life settlements and policies outright. There is a lot of informal securitization — life settlement portfolios being bought and sold or being structured in a non-rated manner, using lines of credit or open pools. The market has created its own liquidity in this fashion. Already there is a bustling market in Germany and London for unrated death bonds. But given how aggressively the banks are stockpiling life settlements, most market watchers expect big, rated deals to become commonplace soon, at which point mutual funds can dive in. Cantor Fitzgerald, one of Wall Street’s savviest bondtrading shops, is rolling out an electronic trading platform for life settlements and, ultimately, death bonds. But the push into increasingly complicated securitizations carries with it ever greater risk. That’s what Wall Street is dealing with now as bonds backed by pools of subprime mortgages blow up left and right. A surge in defaults on these riskiest of loans is battering the hedge funds that invested—and the banks that arranged, packaged, and sold them. In June, two Bear Stearns hedge funds that bet on bonds backed by subprime loans collapsed, sparking panic on Wall Street about the health of other risky investments. Many fear that same kinds of missteps can happen with death bonds. But Wall Street is good at justifying its moves into new lines of business, how bad they might seem, At the end of the day, what Wall Street does best is figuring out what investors might want and structuring products to meet those needs and its own needs.

B y Su ja l K u m ar

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ing the Institutional Life Services, a marketplace for life-settlement policies, and Institutional Life Administration, a clearinghouse for these policies. Furthermore, Goldman Sachs launched the first index tracking longevity and mortality risks. The index, QxX.LS, is the first in an expected series of life insurance policy indexes.

Article of the montH

BA

EL II

Are the Indian Banks Ready?

Capital serves as a cushion when earnings of a bank are volatile. Since banks may try to increase their earnings by increasing the spread, they may end up investing in riskier assets. Since banks use capital to create these assets, they might be putting investors’ money at risk. This underlying concern is addressed by having capital adequacy requirements, which in other words is the minimum amount of capital banks should keep in conjunction with the riskiness (specified by Risk weights) of the assets created.

fective Maturity (M). The Indian Banks initially need to comply with the Foundation IRB approach where in they need to estimate only their PD. The Advanced IRB approach would require them to measure all the four parameters.

Introduced in 1988, the Basel-I norms were implemented by the domestic Indian banks over a three year period starting from 1992-93. However, these norms envisaged capital adequacy only for market exposure not covering operational risks and lacked incentives for credit mitigation techniques. Lenders were required to calculate the minimum capital on the basis of a single risk weight. The New Basel Capital Accord was approved by the Basel Committee in June 2004. It is estimated that this Accord would be implemented in over 100 countries, including India. Basel II takes a three-pillar approach to regulate capital measurement and capital.

(RWA vs Probability of Default)

Pillar 1 spells out the capital requirement of a bank in relation to the credit risk in its portfolio. It allows flexibility to banks and supervisors to choose from among the Standardised Approach, Internal Ratings Based (IRB) Approach, and Securitisation Framework methods to calculate the capital requirement for credit risk exposures. It sets out the allocation of capital for operational risk and market risk in the trading books of banks.

Pillar 3 provides a framework for the improvement of banks’ disclosure standards for financial reporting, risk management, asset quality, regulatory sanctions etc. In March 2008, the Indian Banks with foreign operations complied with the Standardised approach of the credit risk. By March 2009 these banks need to move to the Basic IRB approach for measurement of the credit risk. The new models for operational risk do not demand many changes from the existing model. For the IRB approach the banks need to make their own internal estimation of risk components in determining the capital requirement for a given exposure. The risk components used for IRB approach are Probability of Default (PD), Loss given Default (LGD), Exposure at Default (EAD), Ef-

Niveshak

(Values for the graph) Modelling the variation of risk weights with probability of defaults when the LGD and Maturity periods of the assets (loans) vary, we obtain results as depicted in the graph below (RWA vs PD). Considering the Indian banking scenario, most of the public sector banks have high quality loans (good credit ratings) on their balance sheets and should not face high probability of defaults. But at the same time it is a cause of concern for the private banks, especially the relatively smaller players which are much more aggressive in terms of the loans given. These banks may suddenly face very high capital requirements. Finally it can be observed that the banks may go for short term loans to somewhat reduce their capital requirements. But this would in turn affect their margins.

Comparative Analysis We now look into the steps that some of the major banks in India have taken towards the implementation of

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Pillar 2 provides a tool to supervisors to keep checks on the adequacy of capitalisation levels of banks and also distinguish among banks on the basis of their risk management systems and profile of capital.

Article of the montH Basel-II for a comparative study about their level of preparedness. SBI, the largest public sector bank of India, is currently using a standardized duration approach for calculation of market risk. The Operational Risk Management Policy of the Bank establishes a consistent framework for systematic and proactive identification, assessment, measurement, monitoring and mitigation of operational risk. Bank has issued a “Book of Instructions”, providing guidelines for various banking transactions. About 90% of the branches (covering 98% of the business) of State Bank of India have been brought under Core Banking System (CBS). The Bank has obtained Insurance cover for potential operational risks. A system of prompt submission of reports on frauds is in place in the Bank. A comprehensive system of preventive vigilance has been established in all business units.

the IRB approach. Private Banks with IT support system and more risk appetite are maintaining a high value of Tier-I so that they can increase their Capital Adequacy Ratio (CAR) value easily. During our analysis we found that big banks will be able to mitigate all type of risks but small banks are yet to make even their initial Basel-II disclosures.

Concerns and Challenges

PNB currently has a much better control over its operational and market risk because of a lesser presence in remote locations. The bank has separate department for operational risk and market risk management. All the risk aspects like analysis of historical loss data are placed to these departments on regular basis. The bank is concentrating more on the credit risk. Though they have already implemented standardized approach as per RBI guidelines, they are working towards the IRB approach. It is also developing a framework for estimating LGD and EAD and also a framework for identifying concentration risk. A data warehouse is being established for effective data management and use of application tools for quantification of risks. ICICI bank is much more aggressive when compared to public banks like SBI and PNB. Thus the probability of default is higher than other banks because of which they are maintaining a high Tier-I to Tier-II ratio of 3.81. The system for operational risk is very well in place, all the data is centralized and thus capital requirement for operational risk is very low. Capital requirement for operational risk as a percentage of credit risk for ICICI bank is 4.84 percent whereas, for SBI this figure is 7.6 percent. Thus the comparative study of the banks shows that national banks with pan India presence are working towards mitigating their operational risk whereas national banks with mainly urban presence are looking to move towards

Another issue with most banks is with regards to their various banking solutions across branches. Co-coordinating with multiple vendors, each handling different parts of the overall solution in the present system is a daunting task. Public sector banks with presence in rural India face the difficulty of collection of real time data for market risk because of no internet connectivity. Even if banks are able to collect data, validation of data will be another challenge banks will face Disclosure for Basel-II would require modifications in the laws governing supervisory confidentiality and bank secrecy. The banks also need to take steps for adoption of internationally accepted accounting standards, prudent rules for asset valuation and loan loss provisions reflecting realistic repayment expectations. The current CAR requirement of 9% set by the RBI is likely to increase for most Indian Banks on account of the likely increase in the risk weights. Although most of the Indian Banks are currently maintaining healthy Capital adequacy ratios (in excess of the RBI requirements), they are likely to face a tough time in collecting the requisite data for moving towards the IRB approach for credit risk and accounting for operational and market risk. Although the large banks like SBI, PNB etc seem to be fully geared towards taking on the next step of Basel-II, the picture looks quite bleak for the many relatively smaller banks.

By Gagan Chandak & Neeraj Jain

© The Finance Club, Indian Institute of Management, Shillong

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It can be observed that SBI is concentrating more on mitigating its operational risk. This is mainly because of its Pan India presence. Thus consolidation of data on the real time basis is a huge challenge.

Basel-II needs implementation of sophisticated approaches and advanced technology which needs high level of skill set and proper training. This is a challenge for most of the public sector banks with average age of employees more than 40. These sophisticated approaches require lot of historical data, but banks (especially public sector) with no data warehouse does not have any such data.

InstitutionS

RESTRUCTURING IMF

Since the IMF was established, its broad purposes have remained largely unchanged, namely, the promotion of financial stability and economic growth among its members. However, its operations - which involve the monitoring and consultation on economic developments and policy decisions of its members (surveillance), the temporary provision of financial assistance to members facing balance of payments needs, and the provision of technical assistance and support for members’ efforts at capacity building - have evolved in line with changes in the international financial system and the changing needs of its member countries. Although IMF had in the past warned for years that the U.S. housing market was soaring at an unsustainable pace and that Americans were saving nothing, but that has not spared it from criticism that its calls for action were ineffective. It was only after the bears ran amok on Wall Street that the IMF scaled down its routine global economy growth predictions made on January 2008. In January the IMF predicted a global growth rate at 4.1 % bringing it down in April to 3.7 %. This has been scaled down further in the first week of November. For Europe the IMF prediction was 1.6 per cent in January later scaled down to 1.3 per cent in April. Japan’s growth figure was revised to 1.4 per cent from 1.6 per cent, while China’s predicted growth rate was brought down to 9.3 per cent from 10 per cent. This goes on to prove that IMF is not fully aware of the nuances of the World economy. More surprisingly, in its World Economic Outlook (WEO), published in April 2007, the IMF predicted a down swing in the US economy in 2007 but predicted that it would “return to potential by mid-2008.” International Monetary Fund, which has ladled out billions of dollars in the past to rescue developing nations from economic peril, is struggling to find its feet in the current global credit crisis affecting rich-world countries. There has been an explosive growth in cross-border investment, trade and banking over the last three decades, this gives a greater role to the IMF as a global monitoring authority to promote global supervision and co-operation.

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Can the IMF revert to its past role as lender, rehabilitation clinic, and credit organizer of last resort when private capital flows suddenly constrict? More precisely, can the United States and other members of the IMF board reenergize the IMF to tackle a new set of problems in global credit markets while also re-emphasizing the multilateral institu-

tion’s

more

role

as

global

financial

regulator?

Some of the key questions to be answered in this regard are: • Would IMF be able to assume a role for itself to ensure more transparency in global financial markets? • Would IMF be able to act upon the information it gleaned, reacting fast enough with loans to prevent a credit crisis in one country or region from rocking world markets? The other problem that IMF faces is its lack of resources to help the wealthy nations such as US, China and Japan during a crisis such as the current one. It can only assist the countries on the periphery. The foreign exchange reserve of many nations far exceeds the fund that IMF has to aid. This supports the increasing role of IMF as a regulator. However complex negotiations will be necessary to establish such regulations. The current global credit crisis clearly underscores the systemic dangers of sudden credit contractions in global financial markets and the concomitant need for a global institution that can help alleviate those illiquidity pressures as well as issue alarm signals about looming problems. There is also a need for better mechanisms to encourage all governments to think harder about the international implications of their domestic fiscal and monetary policy choices. These objectives can best be achieved by sharpening the mandate and strengthening the corresponding resources of the International Monetary Fund, which in recent decades has strayed sometimes unsuccessfully away from its core responsibilities regarding balance of payments adjustment into such areas as structural economic reform and long-term development finance. The limited use of the Fund’s surveillance powers today limits the IMF’s influence on financial market expectations and public perceptions, leaving the international monetary system without the impartial moral arbiter it needs to look after the health of the global economic system as a whole. United States should work with other members of the IMF’s board to strengthen the institution’s independent execution of its surveillance and macroeconomic coordination functions. Certainly there are national economies that could profit from such attention. Examples include Iceland, Hungary, South Korea, and Vietnam, all of which boast economies that were enjoying fast debt-driven growth but are now facing varying degrees of trouble. Investors worry about these nations’ economies—and particularly their financial institutions—in which easy credit and asset-price bubbles fuelled rapid growth. Any IMF mission-realignment contemplated by Fund board members should take into account both the global credit crisis and overall world macroeconomic conditions related to the globalization of trade and investment. Recent developments have sharply shaken the global financial system over the past year. Re-tooling the Fund so it can get back to basics could well help the international economic system better cope with the current crisis and future crises as they arise. A lean and restructured IMF could have a increased role to play in the coming era of regulation as a body that would standardize the rules for an effective globalization process, preventing a systemic crisis like we have in our hands today.

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basic

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E

ver since the financial crisis has blown out of proportion, one organization which has been severely criticized for its inaction is the International Monetary Fund (IMF). IMF has been widely criticized for its failure in its role as a regulator and supervisor. Many countries have even gone to the extent of questioning IMF’s credibility and legitimacy and consider it to have outlived its relevance. Everything about the IMF—from its quota system, to its voting rights, and emphatically its infamous conditions—is viewed as running deeply contrary to the interests of the developing countries.

FinSighT

en carry trade The Next Tsunami!!

Many economists attribute the liquidity power bestowed by this pandemic trough partially responsible for the subprime bubble too. The unremitting pursuit to short yen to further bulge the gains through belittling the yen exchange rate crafted the epicentre for all bubbles, leaving the world economy vulnerable to currency and exchange rate risks. The recent unwinding of the transactions explicitly demonstrates the snowball effect of this much publicised yet underrated demon. Of late, the coordinated move by the leading economics to stem the impeding recession by blowing the steam off interest rates, the celerity to secure gains by offsetting the attained positions affected the relinquishment of the asset exposure in developed economies, leading to sudden

rush of money back to Japan. The resultant increased demand for the yen in the currency markets shoved the yen rates up to hit the roof, making the currency dearer with respect to others dotting the flock. The rippling effect of interest rate loss, because of rising yen, induced further capital squirting, thus further debilitating the beleaguered liquidity crunch. This in turn curtailed the consumer buying behaviour thereby marginalising the demand for goods. As a result, the productivity and the economic GDPs have taken a beating with the lowering of growth expectations, corroborated by the dejected Japanese tankon surveys and the abysmal state of the Baltic Dry Index and other global cues, and rising unemployment. This increased spate has badly devastated stock markets across the globe, the worst hit being those of Brazil, New Zealand, South Africa and Korea. The undercurrents are ominous for Japan alike. Experts say that the effects could ricochet back to Japanese stocks. The Nikkei hinges on the strength of Japanese exports which will be undercut by a rising yen. If the yen rises, Japanese automakers and electronics companies probably won’t sell as many wares abroad (particularly to credit-crunched Americans, who are finally reining in their profligate spending). The rumours emanating from the stable of Honda hinge on the fear of this bubble which is unprecedented in reach and volume. Japan’s position as the second biggest holder of the US governmental bonds after China further accentuates the morbid fear of the seizure of world markets caused by liquidation of Treasury T Bills due to an upsurge of yen, leading to the demise of US economy.

B y A n ki t G u pta

© The Finance Club, Indian Institute of Management, Shillong

IIM Ahmedabad

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I

f the travel aboard the envious dreamliner Wall Street has been marred by the turbulence, affected by the unyielding subprime clouds perpetuated by the CDO smoke, the intensifying whirlpool of yen carry trade is surely going to decrease the fetish for skies. And with it the once pleasant sojourn of the global equity traders will metamorphose into a haunted house full of despair. In order to comprehend the entwined economics encompassing this ripple, one needs to trace the Japan’s decade old interest rate regime. Simply put, the yen carry trade refers to the prevalence of an era of a risk free arbitrage, fomented by the adoption of an obdurate macroeconomic policy by Japan, with the interest rate hovering around 1%. The opportunity of borrowing in Yen at shallow rates promulgated speculators, hedge funds and alike to scrounge in the anticipation of deploying the capital to exploit the surplus from the high yielding currencies. At its prime, the exposure was equivalent to a discovery of an eternal gold mine with guaranteed returns at no effort. The allure and predilection towards such this practice manifested in the ballooning of the capital efflux with even Japanese retail investors embracing the gamble. The appropriation of high returns inflated the market to a size of more than $1 trillion. The enhanced liquidity witnessed Japan cementing its position of the biggest creditor nation in the world. The consummation of this money by the bond and debt markets of New Zealand, Australia, USA and other developed and emerging economies culminated in the conjoining of the leading economies. This coupling is the root of the fear accentuated by the unwinding of this trade, emanating from the slashing interest rate cycle across the globe.

FinSighT

How Shock-Proof is the Indian Economy?

India is one of the least Globalized economies among emerging markets. Despite India’s roaring exports and successes in outsourcing, what is making this possible is its huge domestic demand and consumption base. But how decoupled and shock proof it is from global tremors? RBI governor D Subbarao puts it aptly when he says that no country can remain completely decoupled in this globalized era but if at all one country can do it, it would be India. The Indian corporate sector is reeling under severe credit crunch. As a result, its expansion and investment plans are getting stalled leading to slowdown of the economy. But there is a silver lining to it. Unlike in US and Europe this liquidity crunch is less about undercapitalized banks. In fact after the RBI turned its money taps on, the banks are sitting on huge piles of money. The deficit is more about trust and confidence. But why did the Indian Banks and Financial Institutions remained largely unaffected by the Global crisis? A part of the answer lies in the strength of our regulatory system. At a time when total deregulation was the order of the day in the 90s, the RBI and Dr. Manmohan Singh as the Finance Minister had the wisdom to foresee that the financial system had to be placed on a well-regulated basis. The RBI enforced strict capital adequacy requirements and if any financial institution or bank exceeded the specified limits of exposure to stock markets, it would have to provide more capital. This effectively insulated the banks and financial institutions from volatility of the bourses. What strengthened the system further was the fact that Indian banking system is basically owned by the public sector. So, these banks were too judicious while distributing loans thus saving themselves from any exposure to bad debts. There are a lot of speculations about the effect of this Crisis on Exports from India. But it is likely to have only a moderate impact on India’s Export growth rate. This is because lower exports of traditional products like handicrafts, textiles and leather will be compensated by higher overseas sales of engineering goods and resource intensive items as well as economic blocs like the South East Asian nations. Another factor that like metals and petroleum products in 2008-09 to China, countries in West Asia will buttress exports from India is the diversification of its export destinations. A

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study done at Goldman Sachs says that India presently exports two-thirds of its exports to non-US and non-EU members like China, West Asia, Africa as well as to the Asean. Another sector which is giving everybody a scare is IT. A quick look at numbers will show us that approximately 61% of the Indian IT sector’s revenues are from US clients and about 30% of the industry revenues are estimated to be from financial services. A recent study by Forrester reveals that 43% of Western companies are cutting back their IT spending and nearly 30 percent are scrutinizing their IT projects for better returns. The slowing U.S. economy has seen 70 percent of firms negotiating lower rates with suppliers and nearly 60 percent are cutting back on contractors. The above numbers definitely puts a question mark on the growth of Indian’s IT sector in the short to medium run. However, there are some offsetting factors softening the revenue slowdown. Favourable Rupee-Dollar exchange rate, growth de-risking through Europe and growth in nonfinancial verticals are some of the factors coming to India’s rescue. To add to that, the merger activity is going to provide new outsourcing opportunities to Indian IT companies. This financial crisis offers a plethora of other opportunities for India. The global restructuring of Banking and Financial Institutions is offering acquisition opportunities for Indian companies. The changing Investment Banking landscape in the US is opening up the doors to Indian Investment banks that have a strong investment advisory and research presence in the US. The consolidation of the Financial Institution has resulted in a small number of very large banks. These banks are looking for cash infusion to shore up their capital especially from third party investors. This too offers significant amount of new and attractive investment opportunities for Indian companies. Every crisis brings with it a set of opportunities. The opportunities that emerged out of the crisis of 1991 forever changed the landscape of India. With the fundamentals of the economy still looking strong, India looks well on its way to conquer this crisis.

Volume 1 Issue 5

K a r an Ch a d h a

DOMS, IIT Madras



December 2008

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The Global Financial Meltdown has hogged the limelight for a few months now. Iconic Financial Institutions have crumbled, share indices have tanked, wide spread job losses and income cuts have resulted and there is an air of uncertainty and panic all over. But where is India heading towards in these turbulent times?

Investor's PicK

Charles Ponzi – he started it all

Madoff’s Securities Dupery “Top broker Bernard L. Madoff arrested in $50 billion fraud”, “Ex-Nasdaq chair arrested on fraud charge in NYC” “SEC Charges Madoff for Multi-Billion Dollar ‘Ponzi’ Scheme” - These were the headlines of newspapers across the world on December 12, 2008. The reason – Bernard Madoff, owner of Bernard L. Madoff Investment Securities LLC, former NASDAQ chairman, market maker and advisor of Wall Street, was accused by SEC of a stunning fraud of epic proportions, and hence was arrested by FBI on the previous day. Madoff’s hedge fund had been found to be paying returns to certain investors out of the principal received from other investors. Basically, the multibillion dollar investment business of Madoff, as reported by FBI, was “one-big lie” and a “giant Ponzi scheme”. It is ranked as the biggest fraud in history by an individual. As a result of this, several banks from Spain, France, Switzerland, Italy, the Netherlands and other countries lost billions of dollars.

A “dollar-minting instrument” Hedge Funds are different from the usual mutual funds in the sense that Hedge funds are basically private investment funds. Most hedge funds are restricted to an elite bunch of private and wealthy customers, usually in good terms with the Fund manager or the Capital management company. In the case of Madoff, he had a wide high-class social circle of family members and friends which he used to his advantage. Most of them were his golf partners, fellow members of Clubs and few other investment firms. Hedge funds are also different in a way that they can have various investment strategies which need not be disclosed to the investors, unlike the case of mutual funds. This lack of transparency makes hedge funds secretive in nature and avoids its portfolio being analysed very easily.

Mind-blowing performance Even when the market was down, the performance of Madoff’s hedge fund was exemplary and it gave consistent returns to the investors year after year. One of the research firms in USA had observed that in the last 10 years, the fund had only 4 or 5 months when the return was below average. Other than that, it had been giving returns of 12-13% irrespective of the market performance, which is highly improbable for any kind of market-dependent instrument. The most astonishing part was that till November 2008, when the entire world economy was in doldrums, Madoff’s hedge fund was up 5.6% !!

Super-Suspicious Strategies Some of the tactics used by Madoff to avoid getting caught by Security Exchange Commission (SEC) were very unusual acts. But Madoff was successful in implementing these tactics to such an extent that SEC’s investigations of the company in 2005 and 2007 could not find any major legal violations. Madoff’s Strategies: - Normally big hedge funds like that of Madoff’s have high profile Security Brokerage firms or banks as their Brokers / Dealers. But Madoff did not have any -Madoff’s company avoided filing disclosures of its holdings with the SEC by selling its holdings for cash at the end of each period, thereby not giving a chance to SEC to detect the scam easily -He used to send the fund statements to customers by ‘Snail-Mail’, and did not give the option of electronic trading of hedge funds to his customers. This avoided easy analysis by the investors, and hence reduced further the chances of getting caught These strategies made the truth underlying the firm go unnoticed by most financial analysts, the SEC and the investors. Though at various points in time the firm was inquired and investigated upon, none of the rule violations spotted were worthy of legal action against the firm. Apart from the successful ploy of Madoff, the deregulation-happy administration of the Government under Bill Clinton and George Bush is also in for a lot of criticism. The biggest challenge for the new Government would be take a corrective action on this and the short term action plan would be to think of ways to recover the investor’s money in this time of crisis.

By Mohit Khemka

© The Finance Club, Indian Institute of Management, Shillong

IIM Shillong

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Bernard Madoff

These schemes are named after Charles Ponzi, who was responsible for one of the biggest frauds in US history. This ‘notorious’ name is given to pyramid-selling schemes where people pay into a programme that does not exist. The scheme usually offers abnormally high short-term returns in order to entice new investors. The scheme is destined to collapse over a period of time under its own weight as there is no real business as such; it’s just a fraudulent investment ploy. Charles Ponzi’s infamous “double your money in 90 days” scheme in 1920 was a starting point for such activities.

Market watcH

S enseX

Recovery: A Dream or Reality? are at their lows. It is like a collection of the season’s hottest clothes being sold for a discount after the season has ended. The sufferers are no one but the gullible retail investors like you and me. We had been mesmerized by the dream run like a child watching a magician produce a bunch of flowers from the thin air. Alas! There is a difference between the magical world and the real world. The dream soon came to an end and the Sensex began its downward descend. Was the American subprime crisis the only reason for the fall in the Sensex? Let us focus on some more points:

Mahatma Gandhi once said that there is enough in this world, for man’s need but not for his greed. How true! If someone were to ask me the root cause it would be greed, greed and only greed. How else would you explain the irrational behavior of the American bankers, who went on giving loans to all types of customers without following the principles of banking. It is like driving down a winding road without turning on the car’s headlights. Obviously sooner or later you are going to hit somebody. In this process you will not only hurt yourselves but also the other person. The domino effect can be seen all over the world including India. The Sensex stocks have taken a beating and

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3) We must accept the fact that the SENSEX does not function on the fundamentals alone. It also reflects the emotions of the participants. Human behavior is one of the most complex things to understand. Thus in spite of numerous technical and fundamental analyses it is difficult to predict the movement of the index. There is a sense of fear and apprehension in everyone’s mind as to how deep is this crisis. India is basically a consumption driven economy and not export driven. Hence the slowdown in the export

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December 2008

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he BSE Sensex or the Sensitive Index has remained true to its name. With the global financial system in a mess and no a flicker of light over the horizon, the Sensex is rocking like a boat with broken masts in the large ocean caught in tornado. It seems that nothing is a surprise anymore. Huge banks and financial institutions, which till a few months ago were envied by corporates all over, are collapsing like sand castles washed over by the sea waves. A little analysis into the causes will help us unearth the reasons for the crisis. The financial system has evolved over the years and with it has evolved scientific ways to measure and mange risk. It is like a wine getting better over the years. And yet we find ourselves starring at the worst times of modern civilization.

1) Many of the Indian firms have been engaged in the foreign acquisitions at a time when the M&A cycle was at its peak. We have seen the highly leveraged buyouts by Tata steel (Corus), Hindalco (Novelis), Tata Motors (Jaguar and Land Rover). We know that leverage is a double edged sword and it has now shown its dark side. With the slackening demand and downturn in the commodity cycles the companies are starring in the face of huge debt servicing burden. No wonder these shares are among the worst performing ones. 2) When the going is good no one questions the broker’s advice or does any research about the company’s fundamentals. Investments are made on the basis of tips and the so called ‘insider information’. When the markets are going up and everybody is making money, we pride ourselves with the wonderful stocks picked by us. But when the tide turns, we blame the anchors of business channels for misguiding us, we blame the finance minister for wrong policies, we blame all and sundry….. Only if we had done our homework and followed prudent practices like keeping stop losses, booking profits as soon as the target price is achieved, etc. Also many of the small investors invested in small and mid caps, hoping to make a windfall gains. But it is these stocks which rise the fastest and fall with the same speed.

Market watcH demand from other countries should not affect us in a big way. Also the crude oil prices are at their 3 year low. Thus India’s oil bill will be substantially lowered. This is a huge relief considering that crude oil imports make up a large part of our import burden. Thus the need of the hour is to restore the confidence of the people in India’s economy and financial system. The Sensex will definitely recover. But it will not reach the levels of 18,000 and 19000 as before. We must be realistic in our expectations and hope for a modest recovery of around 14,000-15,000. Let us look at some of the developments and ways which would aid the recovery of the Sensex. a) The inflation figures released on 4th December indicate that the inflationary pressures in the economy are weakening. The inflation fell by 44 bps to 8.40 from 8.84 a week ago. This is heartening news, since this will provide the Reserve Bank of India a cushion to cut rates. This will induce the commercial banks to cut lending rates. b) The Oil Ministry should consider a cut in fuel prices since the crude oil prices have declined to below $50 a barrel. This will lower the prices of consumer goods and give a boost to consumption expenditure. Also the automobile sector which is reeling from the impact of a slowdown in sales will get some support. The only worrying aspect is the weakening of rupee against the US dollar.

desh, the perception that the low income group are not credit worthy has been shattered as indicated by the extremely low NPA ratio. Providing small ticket loans to such people will also help in driving up the economy. f) The infrastructure needs of India are huge. India should draw up a road-map for the next 15-20 years. This will help in improving the image of India as an investment destination. If we want to develop global financial and manufacturing hubs, we require robust infrastructure of good roads, telecommunication, power etc. g) There is an urgent need to pep up the bond market in India. In India the corporate bonds and debentures are not freely traded on the stock exchanges. If this is done, it will help in strengthening the financial market. The Sensex was, is and will remain one of the important barometers of India’s economic strength. We will see a recovery soon.

B y G a la M i te sh ku m a r

K.J. S.omaiya, Mumbai

c) Along with the steps taken by the Government and RBI, the corporates should also play their part. Serious efforts must be made to cut down on costs wherever possible. We could see an example of this in the letter written by Ratan Tata to Tata group companies. The letter spoke of the current crisis and asked the companies to focus more on cost management.

e) There are many sectors in India, which look very promising from the point of view of commercial expectations as well as from overall development of the Indian economy. The sectors worth mentioning are microfinance, health insurance and SME. Micro-finance has the potential to be a tremendous catalyst for ensuring the goals of financial inclusion as well as an exciting and reliable source of revenue for the financial services sector. As has been demonstrated by Grameen Bank in Bangla-

FinQ November’08 Issue Answers 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

March 28, 1985 Unit Scheme 1964 (US-64) Nelson Bunker Hunt (&Herbert Hunt) Rhone-Poulenc and Hoechst AG Sir Joseph Lister Goldman Sachs Indian Oil Corporation Ambani brothers The Faraway Tree Wockhardt

© The Finance Club, Indian Institute of Management, Shillong

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d) The global slowdown could be a blessing in disguise for the Indian industry. To cut down on costs companies would want to move their back office and other non core processes to India. Thus Business Process Outsourcing (BPO) companies in the field of legal work, medical transcription, etc should gear up to seize the opportunities. Also the medical tourism infrastructure in India should be ramped up. Government should encourage medical tourism and act as a facilitator by laying down the guidelines for the same.

OpinioN

The North East and its Contribution to India’s Economic Growth

An interesting move by the RBI, this time around has focused on a multipronged approach to counter the recession on all fronts – through policy measures and in fact looking at long term parameters affecting the overall economy. Having set the context of the article in the backdrop of the global meltdown and the “India Implications” side of things, it will be interesting to try and explore the contribution of the North Eastern Economy, in the revival of the “great Indian growth story”. For most readers, the NE region of India is that facet that remains unexplored from an economic standpoint. The potential that exists in the North East, albeit in a latent form does amaze me. For a person who has spent 5 months in the region, I find that the opportunities are numerous – not just in the area of promoting tourism, but also in the area of economic integration with that of the national economy. Let’s look at some figures to begin with. A conference on ‘North-Eastern States Investment Mart 2008’ commented that the Northeast’s GDP needs to grow at average rates of 10%, 13.67% and 16.37% in the 11th, 12th and 13th Five Year Plan periods, respectively, for it to catch up with the rest of the country. There is a need to invest at least an average of 1.42% of India’s GDP into the region annually till year 2020. It’s estimated that 48.1% of the region’s GDP would have to be contributed by investments from outside the region over the next 12 years to achieve the goals of ‘NE Vision 2020’. These facts portray the fact that the North Eastern economy is heavily dependent on the funds that are to be pumped into the region for development. What’s more, there are other dimensions which need to be evaluated as well. Entrepreneurship deficit plagues the region like no other. The result is here to be seen - Fewer opportunities for industries to evolve and sustain, and hence the indirect effect on the lack of employment opportunities. Then we have the paucity of strong underlying infrastructure which is extremely critical in propelling development in the region. And of course, the limited connectivity deficit – attributed to by the chicken neck that connects the North East with the rest of India pose great challenges

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to development. Finally, credit deficiency and absence of financial institutions pose problems for credit availability in the region. But let us look at it from the perspective of how the North East can contribute to the National growth rate in its own might. The premise that we rely on is from the tenets of Macro Economic fundamentals that focuses on tackling downturn by means of increasing aggregate supply in addition to aggregate demand. It’s not rocket science to realize that India being a developing nation can very well utilize the North East’s natural resources to address the supply side of the spectrum. But one key factor that has to be kept in mind is that while “Look East” policy may be increasingly pursued by the central government, any seasoned bureaucrat will tell you that the “One Size fits all” cannot be directly applied to the North East. That is why, drawing direct parallels might be detrimental. What could work instead would probably be a customized implementation taking into consideration the economic plurality of the region. Oil is too clichéd to be mentioned in terms of a natural resource to be harnessed. Nonetheless, in the context of dropping crude prices, it might be a good idea to evaluate the balance between domestic sourcing and import of crude from a medium term perspective. Subsistence farming is one of the major sources of income for the people of the region. Even as strawberries from the hills of Meghalaya make their way to most of the eastern cities, this is too minuscule to be accounted for in terms of tangible numbers. SMEs and cottage industries hold great potential in the region. Right from Orange Honey to Handicraft, the moment is ripe to tap and channelize the same. The North East needs an “Amul revolution” in the near future to propel the sectors mentioned above. On its part the government can contribute by providing Geographical Indicators for some of these products. It may be interesting to note that the North Eastern region has nearly one third of the country’s hydro power potential (84000 MW). The Incorporation of the North Eastern Development Finance Corporation under the Companies’ Act , in 1995 with the mission to provide support to entrepreneurs in the North East both from a financial and professional perspective, will help alleviate the dire need of employment through self sustenance ventures. On the lines of the European Union, The North Eastern Council (NEC) ought to adopt a greater role in channelizing the collaboration of the eight sisters towards the realization of tangible outcomes. The need of the hour is

Volume 1 Issue 5



December 2008

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t was not so long ago that possibility of an unprecedented double digit growth in the context of the Indian economy was projected as the crux of the “great Indian growth story”. However, the tide has turned and in today’s turmoil of economic vulnerability across the world, India finds itself in a spot of bother as well – irrespective of the strong macroeconomic fundamentals that the Indian economists have prided themselves on as being able to counter the negatives of the financial meltdown.

OpinioN to infuse a sense of urgency into the NE economy by way of increasing trade and economic activity. While investments are going to be a major driver, an unexplored opportunity may lie in the area of setting up international trade points along the borders that exist with multiple countries including Bangladesh, Bhutan, Myanmar and China. This could be the one thing that could open up a plethora of opportunities for the North East. Let’s look at the Bangladesh example. The potential commodities that could be traded by the above means would include rice, sugar, wheat, to name a few. The current situation involves “informal trade” which could be converted into “formal trade” and maybe evolve frameworks like “Free Trade Zones” for the same. The current flow of trade has been primarily from India to Bangladesh, with inflow into India being approximately 10% of the overall trade volume through the informal channel. By taking the above measure, this would help in linking the aspects of economics and overall competitiveness of

the region. A similar model can be evolved for the mutually beneficial linkages with Eastern and South Eastern countries as well. Looking from a point of view of imparting relevant training, institutes like the IIT and IIM are doing their bit in contributing to the economic growth and sustenance of the region by means of empowering the local population. In conclusion, from a medium term perspective, the future lies in unlocking the latent potential that lies in the various parts of the North East, and the day is not far when this part of the world will be a major player in contributing to the National Economy but also actively participating in International Trade; thus bringing in foreign exchange into the coffers of the national exchequer as well…..

By Ashutosh D ikshit

IIM Shillong

© The Finance Club, Indian Institute of Management, Shillong

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FIN TOON

FinLoungE

FinQ 1. Identify the painting of this Italian Mathematician, Who introduced one of the most important concepts in accounting. Also mention the concept. 2. Identify this Princeton University graduate who was named one of the “world’s 100 most powerful and influential people” by Time magazine in 2004. 3. What milestone was achieved in Siena in Italy in 1742 in the world of trade and commerce 4. Italian American artist “A” designed world famous “B” for $3.6 million, which put Wal-Mart into trouble. Identify A and B? 5. What does the poster on the left refer to?

6. Identify both the people in this Picture. (Hint : Both of them held the same position in succession. One of them is in some way responsible for the end of the political career of Mr. Natwar Singh of Congress) 7. This person has received his doctorate of economics from Harvard University, has taught at the Yale School of Management and several other Management Schools. He is best known for the development of the X in 1970s as well as for his role in developing the model Y which uses a “discrete-time” model of the varying price over time of the underlying financial instrument. Identify the person and X and Y 8. Washington Irving coined this phrase in The Creole Village, first published in 1836 - “_______________, that great object of universal devotion throughout our land, seems to have no genuine devotees in these peculiar villages.” Fill in the blank. 9. “Go for a business that any idiot can run - because sooner or later, any idiot probably is going to run it”, Whose quote is this? 10. Connect these two pictures below

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Volume 1 Issue 5



December 2008

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