Games being played on Wallstreet during Subprime CRISIS

Citibank is an ANGEL, who made the announcement few days back to launch a SUPERFUND
This fund will loan out and SAVE the US Economy from "Subprime crisis"?
Right?........WRONG.

Don't we all know that banks/corporations don't do anything for charity. They are looking forward to their profits, balance sheets, and stock prices. & They will now play all kinds of games which will help them save themselves at the cost of others (investors in the fund).

Basics First: Why create a fund:
Companies like Citi, JPM don't issue securities themselves, they create SIV (Strcutured Investment Vehicles) which are independent subsidiary corporations of these banks who issue these securities in market, like the ones that issues Subprime Tranched Loans (CDOs) in the market. Due to Subprime crisis (mentioned in POST BELOW), these securities lost their value and suffered huge loses, but these securities were on balance sheet of subsidiary company and not citibank. So Citibank BALANCE SHEET is TECHNICALLY not affected by these writedowns and writeoffs. Investors who bought these securities & suffered loses have no claim on Citibank's assets and cant make up. So people now want Citibank to take over these subsidiary & consolidate them with Citi.
Ultimately it is Citi who is suffering loses (due to mispricing cashflows are affected & CASH is all tht matters, rest all is sham), citi's stock price is going down, management needs to do sth to loan itself out.

It makes announcements of Super-fund. What is that?
These companies will create a fund wherein again the individual and insti investors will put in money to HELP Citibank loan out its torubled subsidiaries. Citi will buy back these assets (written down in value) at FAIR market value and back these securities/Fund by its own assets rather than its subsidiary.

GAME1
Now who decides this FAIR Market Value? Citibank ofcourse.
& Who's money is at stake? Ofcourse NOT Citibank's.
So I feel again some game playing is happening here.

Game2:
Game playing has just started. What is in store? Big banks are going to play more games with higher stakes. Although these are troubled times, but thr r hidden opportunities all along. Citi will necessarily have to do writeoffs. State & tax Laws do allow "Extraordinary Loses" as writeoffs from balance sheet, which do NOT impact income statement. But these happen once in a while. Now since Citi will writeoff its loses in Subprime market without affecting it income statement, it will as well write off any other loses
-in different line of operations
-during previous years
-anticipated loses as well
Since Share holders will be tolerant (beyond obvious share price fall), they will expect Subprime writeoffs but miss out on Non-subprime writeoffs.
Not tht this has started happening, but tht is my guess, will happen & will be revealed several yrs down the line when u r too far away from this crisis.

What will this do?
This will help Citibank boost its performance next year (or may be few years to come) beyond what will be real performance.


So who gets the heat?
CEO.
Board fires the CEO & few guys here & there & blame them for all the screwup. Gets new ppl, who wipes out mistakes (writeoffs) & create a clean board for themselves to show PROFITS on, which are no less deceptive them done by prev management.
Isn't board itself responsible for this? They were supposed to be awake all this long.

"Subprime Crisis" for DUMMIES

Every AWAKE person walkin on US Streets must have heard, read, thought about "what is all the fuss about US Subprime crisis".
Based on my understanding of all the facts, research articles, numerous discussions with experts, i present here a layman's version of it.

What is Subprime?
Everything is US is available on credit so a person's credibility to repay those debts is all that matters. Company charge less to people who are more credible and more to ppl who r less credible. Credibility is established by FICO Credit Scores which get created everytime anyone in US touches upon credit.

Prime market are consumers with high credit scores. Companies happily offer these guys all kinds of credit
Subprime market consists of consumers with bad credit scores. These ppl have low income, purchasing power or have earlier defaulted or been laxed in paying back their credit. Traditionally, these people have little, if any, credit available to them. Noone gives loan to them.

So how far Subprime story goes?
All the way to 2000-01

What happened in 2000?
US economy & world were tryin hard to fight slowdown of 2000, where demand was low, consumer spending was low, less money was available in market and growth activities have slowed down. In order to push forward US Economy the then Chairman of US Fed Reserve, Greenspan lowered the fed fund rates, which in simple language means the rate at which financial instis offer loan. Since rates lowered, people starting running towards money, borrowed lots & lots of it to buy houses, build real estate get into growth activities. Economy started picking up. But Greenspan did a cardinal mistake, he reduced Fed fund rate by aprox 500bp i.e. 5 percentage points from 6.5% to 1.75% during 2001 & further to 1.25% in 2002.
Thr was too much demand for money & too much loans given out to house owners. Result, house prices went through the roof. Ppl could no longer afford houses, price were sky-high. But bonuses in fin instis (Banks) are based on how much loan can they give. So in order to keep distributing loans, banks devised various DISGUISED Glitzy products: No doc/low doc loans, interest only loans, PLAM loan, negatively amortizing loans and also went onto to offer loans to Subprime market.
These ppl have never given loans to subprime market and didnt know what rate to offer them (in short how to price loan), they shud charge more but how much more. So the second mistake Banks did was mispricing of loans. WHY?
Because loans are assets for banks, & banks go & sell off these assets in wallstreet like one sells his land to another buyer. They replenished their money & wallstreet held loans in their balance sheets. SO banks were not too much bothered about MISPRICING of loans.
But why did SMART, INTELLIGENT, SUAVE wallstreet firms buy it? Didnt they know it?
Wallstreet firms buy these loans based on thier RATINGS, create a pool of 1000s of them, cut them in pieces & sell them off to NOT SO SMART public. Sth like a construction firm buys bulk land, cut colonies & sells off indi pieces to individuals taking off its cut in between.
So imp part is RATING, which we will deal later.

Now what happened after this all. All these loans were constructed so tht ppl pay low monthly payments initially, & these payment balloon as time passes by. Somehow it convinced low credit score ppl, tht they can as well AFFORD a house. Then our favourite GREENSPAN committed another horrible mistake. He started incresing Fed fund rates all the way from low of 1% to 5.25% in 2006 (to curb inflation).
This increased monthly loan payments, combined with this payments on Interest ONLY loan etc started demanding principal payments by now. Payments ballooned & SUBPRIME borrowers cudnt keep up with payments, they defaulted on loan and asked banks to take away houses. House prices started dropping. Further, ppl saw tht loan is worth $1mn for a house which is now worth ONLY $500k. More ppl defaulted & further erosion of prices. Builders unable to sell existing houses. House invesntories build up & it all goes into vicious cycle.
But how it affects entire US Economy?
Residential real estate market is only 4% of US GDP (very small), but it is big driver of consumer spending which is 60-70% of US GDP. Every 10% fall in residential real estate, leads to contraction of $105 bn in consumer spending which takes of 25% out of growth of US GDP.

What happened in Financial Markets:
Now these i-banks which cut slices of pool of loans & sell them (Tranching of MBS), were sittin on huge inventories of these loans since they got them cheap, took huge amount of risk (what they best do) & thought they will sell it off all to NOT SO SMART public. But as people starting defaulting on loans (more than expected number), public started realising that banks have mispriced Subprime loans and are simply passing on the risk to them. Ppl stopped buying these inventories. Now this inventory started fallin in VALUE (makret value). Soon ibanks realized there unsold inventories have lost money & tht money was in order of billions of dollars. SMART bankers were not able to sell to NOT SO SMART public (which are instis, asset management companies etc etc).

Role of rating agencies:
Rating agencies rate the quality of bank loans which banks will pool, securitize and sell off in secondary markets. Based on these ratings of riskiness of loans, pricing of loans is done in secondary markets and if they r very risky, it will be inbuilt in its prices & entire Wallstreet will know this fact.
But tow problems here:
1) Rating agencies didnt have adequate models to rate these ALL NEW Subprime loans, so they force-fit old models on new data
2) Rating agencies are being selected and paid by the BANKS themselves. So in order to get business from Citibank, Moody's better rate its loans high
These agencies include Fitch, Moody's, S&P etc.
Now bad ratings, hid the actual risk inherent in these loans & ppl on Wallstreet bought them like crazy & why not, they though they will transfer risk down the line.

Who is at fault?
Lot of people
-Greenspan for reducing interest rates way too much down in 2001
-Banks for starting to offer LOANS which were mispriced since they have no experience of pricing subprime loans in diff economic cycles
-Subprime borrowers for believing tht they can afford otherwise an UNAFFORDABLE loan
-RATING Agencies for not mis-rating RISKY loans
-iBanks for not able to see through mispricing by lender banks & mis-rated securities by rating agencies
-Greenspan again for increasing interest rates back too high, and loosing entire investor confidence in credibility of US Fed & its monetary policies

Side-effects:
There is too much crisis in residential real estate market and Wallstreet has stopped replenishing the funds of lenders (Banks) to lend money to borrowers, since these people mispriced loans. Now in wake of unavailability of funds, liquidity crisis creeps in residential market. Now fears are tht even OTHER loans were also mispriced (loss of trust), so credit & liquidity crisis is seeping into other markets as well like commercial real estate, other mortgage industry. As told above, this is affects consumer spending and which in turn affects GDP. US Financial markets are integrated with world markets & hence slowdown here will have bad affect on Global Financial Markets.

What can be done?
Fed need to ease out fund rates i.e. reduce the interest rates to give some respite to borrowers and trigger economic growth. Fed has started doing tht but needs to further bring down rates
Second, from here on, DO NOT LET banks select rating agencies themselves & pay them. Instead a Govt body selects rating agency based on rotation basis & dues paid by companies to govt body which in turn pays the agency.
Third, let banks take the hit of mispricing & making bad decisions. Let them writedown loans, face wallstreet heat, share holders ire. But prevent them from closing down. If banks close down, money supply falls, interest rates sky-rocket and economy goes into recession. Work out compromise formulas to loan out these big commercial mortgage lenders.
Rest all, "Hail Capitalism !!!"

Disclaimer: There are lot of more pieces and other technical jargon which i have avoided to use in order to keep it simple.

- Amit (Jhalak) Garg

"Work as u gonna succeed, but plan on ur failures"

Nostalgia

I miss those talks with myself at 3 in silence night adulterated with sounds of wind blowing thru my face & sweat of prev day lying on my back as crystals of salt

I miss those sleepless nights spent in the lap of those unshackled dreams flying like a wild kite in the starry sky

Abstract

I thot of choosing title for this blog as sth more meaningful like "Essence of Life", which essentially is the underlying thought, but it will be clear by the end why i choose this title.

For 27 years of my life, i have pondered over what is the purpose of my life? Of our lives? Of everyone who exists on this planet?
I was never able to figure out whether we drive this life, or life is driving us? Whether we r sum total of our environ, or environ is what i make of it? Whether i choose to study & work like i am, or they were choosen for me? Whether I chose my life or i will choose my death or is it someone else who is sitting out there doing this? What happens when he chooses to call it a day, what happens to the THINGS i thot were my AIM in life? What is it tht i want to achieve?
Whether i have some impact on life, or we all r living in this Oblivion, falling through an abyss !!
Is the nirvana near or is it a vacuum in which Earth keeps falling?

I went thru school, did engg (gud ones, Ehaa !!), job (Nice payin), then MBA (one of the best ones), & on my way to be an i-banker, then lots & lots of money with no time to spend. Then may be retire soon & spend then. Enjoy & have fun. But then what??
No, i want to make a more meaningful impact on world !!
Two ways: Philanthropy or Entrepreneurship.
Entre - Create lot of wealth (i believe poverty can be distributed, u need to create lot of wealth to distribute wealth). Empires like Infosys, TCS etc which ppl will look upto and remember me. But before i make them i will be too old, to enjoy tht appreciation, wealth. Even if i do, 100 yrs later who's gonna care about it !! Or lets say after i m gone, who's gonna care bout it. Me, to whom this mattered (Remember eone has diff preferences in life), i m gone !! Then i may never succeed. To die with satisfaction of building an empire, i waste my life in regret and misery, unless i enjoy tht !!
Philanthropy, my views r not well formed for to pursue this activity !! I want some life and pleasures for myself as well. Lets leave this as of now.

Having pondered over this trade-off of earning gud money without risk Vs Entre, i couldnt satisfy myself with any answer. What is it tht god above us want us to do? Do we all earn a lot of money? Someone wid not an aptitude for Entre & someone wid not so sharp brains to go for big bucks, what do they do? Sit in a corner and feal miserable. May be HE made few more unequal than others. But if HE wanted everyone to be equal, then may be he wanted us all to enjoy life (journey is more imp than the destination) & be busy in whatever we think is our aim. For some big job, big degrees, ground breaking R&D, big building, Business Empires, secure future of kids, building Family Name etc etc. But what if some day i loose interest in all these things? The thing for which i lived all my life, about which i dreamt day n night, suddenly one day it stops mattering to me. Eth looks meaningless. Than what hope do i have from life. Suddenly, we think life is useless, meaningless and we feel world doesnt need us, we no longer need to here & all depressing thought start creepin in again. It is this state, ppl go carried away & loose this precious life, their shot at life.
Then what shud we do?

I just tried to see what has life to offer you !! It is very beautiful, so many good places to go. Just sit with very good frndz of you & spend a nice weekend. Hold hand of ur gf & sit on a beach watching sun setting down, lie in ur house with ur head in ur mother's lap, make tht nice painting or piece of art over a weekend, party like hell.....
Do they cost a lot?
Definitely NOT !!

So what is the point? Try connecting dots. We all have some aim in life, & tht HE gives us to keep us busy. These aims shud be unachievable (with intermittent path of comparatively moderate achievements). It will intrigue one, what all mistakes he do on way, what all he achieves on way, & what all he overcomes. But importantly he keeps himself busy all through his life, aspiring to achieve tht one moment of ULTIMATE accomplishment. But HE (The ONE), wanted us to remain only busy, just to pass time, & collectively as a Human Race build great things. We have certainly build up an entire world all around us, all those amazing things. We r a small part of all this world and together incrementally, generation-by-generation work towards developing sth, which HE is able to see, not we.

So.......
I will say, Life is very beautiful, establish an ULTIMATE AIM for urself, pretty high, but never be frustrated at not achieving it, it was NEVER meant to be achieved. Enjoy your path, because 50 yrs later, u will remember the wonderful conversation u had with ur frndz, the evening u spent wid tht wonderful gal.

I will call this:

"Magic Moment" theory
=====================
Eth is measured in quantas of Magic Moments (Mm). Magic Moment is defined as those moments tht u cherished and cherish whenever u remember them.

Measure your life in Mm, atleast 12 every year, preferably few 1000s in lifetime.

Measure ur frndz in Mmf, Sum[how many Mm u spent with a frnd] over all friends .
Measure ur network strength (social circle/networking)in Mmn, how many Mm u created while being in tht network, for u & others.

Measure ur wealth in Mm$, how much time & $ u spent in creating next Mm for urself, less u spend, poorer u r.

Measure ur achievements in Mmm, how many Mm milestones u created in ur life. Those events of ur life, which u will remember at the top of ur head, for which u will feel tht nostalgic pain !!

Measure ur social conscience in Mmc, how many times u created Mm for others and not necessarily for urself. Whenever they will recall, such Mm shud come on top of their list.

Think about it. What is is tht u need to create a Magic Moment?
A smile, a joke, a walk in the evening, 10 mins, 10 bucks, creating a +ive air around u, forgiving someone, seekin someone's pardon, giving blessings, making someone HAPPY !!

If u got a Magic Moment, share here in comments, it may become Mm for someone !!

Watz common btw Kerala & France?

You shud have guessed this !!
"Very High Rates of Literacy, supported by strong labor unions"......Right? Wrong.

Both these places are going down from their peak and loosing out on the unprecedented economic growth world is seeing now.

Kerala, state with highest literacy rate in India, has a very strong labor union movement (M not talkin bout CPI as yet). But unfortunately, the impression of this labor union is not of creating very conducive environment for businesses. They r thot to be anti-business rather than creating a "Responsible Labor Union". You can't tell them what to do, they won't obey orders, they can all read Economic Times (which they r very proud of), and they can hold any manufacturing unit on ransom. But what they have failed to see is that slowly industries are shying away Kerala. New industries (mainly Manufacturing units) are being setup in other states (neighbouring states mostly). Even the old units their investments, plants etc out of state. So ultimately who is lossing out?

The same old educated laborer reading ET in the morning, the state on its progress path, the community which could have dominated Indian Growth Story (because of its highly educated base, and initial lead in growth). Neither does mfg sector like it, nor does IT. I believe, as a community gets more educated it should strive to move up the value chain by adding more value per labour unit, in simple terms generating more revenue per labourer/worker i.e. engaging in white-collared jobs and doing specialised high-skill jobs. But even that is not happening.

Reason is simple to seek. Labor union leaders and political leaders who hold the power and to whom laborers have lend their voices, enjoy their status till people listen to them. Their derive their power by being able to misguide very educated ET reading laborers. They r keepin them brain-washed with their communist theories. I m neither a socialist nor a capitalist. I dont even disagree with communism. But i believe just for sake of protecting their own power, if leader of any of the wings (leftist, rightist), try enforcing their unworkable ideology on people, its wrong. Anything which brings prosperity is good. As one of the leaders said, u can distribute wealth, but if their is only poverty, what will u distribute. So u need to first create wealth & then distribute.

France too is going through a similar phase, wherein labor unions have gained too much power and people at the helm of affairs are unwilling to let it go. They want to work 32 hrs/week, when entire Europe can work 38-40 and even want to go down to 30. This unwillingness to work and more so to even fight, kill, burn to "Prevent Their Fundamental Right to Work" is gonna hamper France's long held super-power status. But France is far advanced economically, and it will take a long time for it to realize the long term affects of this stubbornness to "shirk", it will be too late to turn bak then.

I will end it by saying unions need strike a balance between how much power they assume for welfare of laborers and how much free-hand they give to entrepreneurs/businessman/corporate world. If they fail to maintain this balance (exercise too less or too much of pressure), in long term they stand to loose.

-Amit (Jhalak) Garg

BLACK

My comments on attrocities done by Indiatimes on BLACK
http://timesofindia.indiatimes.com/opinions/msid-1011394,curpg-5.cms

How safe is my city?

My comments on Indiatimes article at:
http://timesofindia.indiatimes.com/opinions/1310301.cms
(ID: gargamit80)