Financial Cry-sis | 2007 to 2010

(This is the 4th in the series of blogs that I will be writing in an attempt to brush up my general and business specific awareness, improve my thinking, and of course, to substantiate the raison detre of my blog: s p a c e. For starters, the blogs will be intensive in facts and figures, with justifiable opinions, added here and there.  Content will be sourced from Wikipedia and other miscellaneous sites. Intention will be to repackage the information into simpler forms)

FINANCIAL CRISIS

Disclaimer: I am uninitiated and unqualified. Any undulations in facts should be excused unconditionally.

A Quick Look

• Recent Financial Crisis - lasted from 2007 - 2010 (though wiki says 2007-present)

• Triggered by - Sudden realisation (announcement) by US banks that they had little money left.

• Resulted in - Collapse of such 'large' banks (with tiny liquid deposits) & Consequent 'bail-out' of banks by 'benevolent' national governments; downturns in stock markets around the world (people stopped 'banking' on others with/for their money)

• Affected agents - Housing industry, Consumer Wealth, Economic Activity, Key Businesses, Government Pockets

• Solutions - Market based (e.g.-trading in bonds) and Regulatory solutions (stricter financial policies/conditions for banks)

• Officially ended - In 2008 - but some people enjoyed spreading the after shocks - (especially some miserly Indian  firms who had been longing to cut jobs and salaries) 

What Happened Basically

Housing Bubble Burst:
See now, people like buying big nice plush homes, without having much money to buy them. What do they do? They take 'home-loans'- because interest rates are low and nice and loans are easy to get. And so, the 'sale' of houses grows in 'account-books'. Thus, the real-estate market 'sales' and housing market 'sales' and construction/builders' market sales 'grew'. And other global financial institutions and investors started investing in such 'growth'. No one thought that the newly married guy and his wife, taking the loan, and living on credit-cards, have little ability to pay it all back.


Soon what happened? Two interesting things: Some people took a 2nd loan to pay back the first one. And slowly, the debt burden grew and grew. The banks realised that they had given away the 'precious' deposits of 'trusting' consumers/depositors/investors to 'untrustworthy' borrowers. How would they pay back! Forget paying back. They did not have enough money to give 'new' loans. The 'cycle' of borrowing and lending was jammed!

All this happened because the 'lending' policy was weak and everyone chose to overlook it.  The big shots had little 'vision' and 'awareness'.  Soon, there were large scale evictions (people were dragged out of their homes), foreclosures (bank wanted to get its money back- even if partially - by selling the house). Now, these things led to 'Fall in Housing Prices'. They plummeted. The bubble burst. Boom. Or rather.. Phushh ~

Many people cried - those who had been lured into investing in real estate. All this was pretty large scale! Trillions of US dollars they say. And I like to imagine that is an understatement. :P

Loans Were Easy to Get:
There was a dot-com bubble (some other time) in US in 2000, and of course the very famous September 11 attacks. All these made Federal Reserve feel that deflation will occur (they were right in their guess :P). So they thought, to increase money circulation, interest rates should be lowered. They were, thus lowered. And so, there was this very high demand for more home-loans. Now, where from will the banks get money, to give more loans?


Note that the US had a great trade deficit (was not able to pay for imports). So what it did? It printed 'papers' - Treasury Bonds, and asked Foreign Countries to 'buy' the bonds for a high price. US used this money to finance its imports.  Now we Asians are good with our money. We Save a lot. And there is a great tendency to buy government bonds. So there was great demand. After all the US government was offering it. This lowered interest rates. (Just as high demand increases prices). Our money was well used by US banks to give more risky loans.

Later the Federal Reserve thought, let us now increase interest rates. People are no longer discouraged by September attacks and dot-com bubble. The economy is healthy now. And then, ... it happened. Phushh ~

But, if not for Asian oil-rich countries and savings-rich Asians, it would have been PHUSHHH~

Other Bad Practices by Financial Institutions: 

• Sub-prime lending (giving loans to people with bad track record with debts)
• Weak and fraudulent underwriting practice (risk avoiding policies, documents and verifications were not present)
• Fraudulent lending by attracting consumers into dangerous loans through 'apparently' low interest rates.
• US government had deregulated the market a bit too much. It overestimated the 'maturity' and 'strength' of its financial institutions. Too big to fail. It thought.
• Increased debt burden : Example - In 2007, if an average American had $100 as disposable income, his debt was $127.
• Financial innovation and complexity: US banks came up with strange abbreviations - CDO, MBS, ARM, etc. All these were basically euphemisms for 'we are careless-but you can't see'. People couldn't speculate the risks correctly.

What It All Led To

• Commodity prices fluctuation: When there is less money in the market, and people do not 'intend' to buy/spend, prices fall. People stop being extravagant and spend less. Cash in hand becomes more important than comforts, as they witness so many people losing money in risky investments. First, the prices fell in 2008-2009, then they rose high in 2009-2010 as the demand recovered. I have no idea, if this interpretation is right.

• Impact on Financial institutions: Several major institutions either failed, were acquired under duress, or were subject to government takeover. These include Lehman Brothers, Merrill Lynch, Fannie Mae, Freddie Mac, Washington Mutual, Wachovia and AIG.

• Bank Runs: Fear spreads, and spreads like fire!! When people came to know that their money was not safe in banks, they ran and queued up in long lines at the ATMs and at the Bank counters, to get all their money OUT!! This further pushed the banks into deeper trouble.

• Wealth Reduction: Federal Reserve or any country's central bank is called 'a lender of last resort'. Federal Reserve became the 'lender of only resort', and in some cases, the 'buyer of last resort'.  A lot of the nation's wealth was spent in bank bail-outs.

• Global contagion: US banks' risky debts were bought and traded by corporate and institutional investors globally, and thus the 'links' in the chain were formed, leading the crisis into other continents.

• Emergence of Arabian Cushion and strong belief in the markets of Developing Countries: The Asian nations were flying high on their Kaleen, powered by great surpluses from oil exports. 

The name Goldman Sachs: Despite the crisis of 2007, Goldman Sachs (global investment banking and securities firm) was able to profit from the collapse in the sub-prime mortgage bonds,  by short-selling the 'securities' backed by mortgages. Actually 'mortgages' are a 'hedge' against loss, so securities have a high demand when backed by them. But people did not realise that the mortgages were 'sub-prime' (undependable) and thus spent on them. So now you know, how some people could have made the money that everyone else lost.

brok e n meanings

my face in the mirror feels familiar
but I still have to know
whose eyes, nose, and lines they are
where was I, when they started to grow

we all have stories
is yours perfect, without confusion..
lately they said, mine is false..
will I have to erase my old illusion

my meanings have been broken
what do I do
just pick up the pieces, wrap them up
and hope for a glue.

Random Terms and Concepts: Part 1

(This is the 3rd in the series of blogs that I will be writing in an attempt to brush up my general and business specific awareness, improve my thinking, and of course, to substantiate the raison detre of my blog: s p a c e. For starters, the blogs will be intensive in facts and figures, with justifiable opinions, added here and there.  Content will be sourced from Wikipedia and other miscellaneous sites. Intention will be to repackage the information into simpler forms)


Before I jump to the details of 'recession', I realised I need to cover certain basics, which I wrongly presumed, I knew.  So here, I am covering a few concepts that I found 'special' or 'novel'.


TRANSACTION COSTS: Costs incurred in relation to executing a 'sale' or 'buying' of a service or commodity as opposed to the 'price'. This can be:

• search and information costs: of buyer, or seller, of products, of prices (current and future)...in order to get the best out of an investment/expenses incurred.
• bargaining costs: costs required to come to an acceptable agreement with the other party to the transaction, drawing up an appropriate contract and so on. 
• policing and enforcement costs: to make sure that the other party follows the rules of the contract and to take a course of action (legal), if it flouts the rules.

According to Oliver E. Williamson, the transaction costs are determined by frequency, specificity, uncertainty, limited rationality, and opportunistic behaviour. 

Often, it is said that 'transaction' costs are actually 'institution' costs, as in, the costs that are created by 'firms', 'markets' and 'franchises'...these being the various 'institutions' in an economy. 

There was a transition from the classical and hedonic schools of economic thinking to institutional schools, which was marked by the concept that the basis of an economic thinking was 'TRANSACTION'

The classical schools dealt with mere labour manufacturing commodity 

The hedonic schools dealt with consumers enjoying commodity

The institutional school said that it was the 'transaction' that interfered in the 'labour producing' a commodity or 'consumer enjoying' a commodity. It emphasised that social forces controlled the access to a 'service or product' and hence 'negotiations' were actual and the more important means to aqcuire it.  And this includes the broader context of 'transaction' and doesn't restrict itself to 'give and take'.

SWITCHING COSTS: These are costs that will have to be borne if a seller changes or substitutes the current buyer with a new one; or when a buyer changes/substitutes the current seller, with a new one.

There can be three specific cases: When the such costs are high only for Seller (MONOPSONY)

                                                         When the such costs are high only for Buyer (MONOPOLY)

                                                         When the such costs are high for both (BILATERAL MONOPOLY)

MARKET ECONOMY: It relies primarily on the 'interactions' between buyers and sellers to allocate resources. Here, decisions on production, distribution, pricing and investment are made my private owners of the factories of production based on their individual interests (a blind-belief in this system is blamed to an extent, for the recession period 2007-10)

PLANNED / COMMAND ECONOMY: Here, the above referred decisions are taken by the central government. It draws out the map and the rules of manoeuvreing, for the participants in an economic transaction. 

PLANNED MARKET ECONOMY: Here, the government uses 'indicative' planning, by exerting moderate influence over the market interactions, through the tools like subsidies, grants and taxes, but doesn't compel. I believe, this is the kind of economy India follows...a 'middle' path...everywhere :)

EFFICIENT MARKET HYPOTHESIS (EHM): It asserts that markets are informationally efficient, that is, one cannot gain continually on the basis of monopoly over the 'information' or 'data' related to the transaction costs.  When everybody has easy access to such information, markets as a whole, as a cluster, reacts 'rationally' to a new information, though there may be individual cases of over-reaction or under-reaction (Just what factors influence market reaction, will be covered in a later blog)

ENTERPRISE RESOURCE PLANNING (ERP): A business is a constantly changing phenomenon. The items are sold continuously, money enters and leaves the cash books now and then, and all of these, collevctively, have an effect on the company health, and hence should be constantly judged in order to change plans or take new decisions.  But it is virtually impossible to guage and track all the data manually, and even more so, to sift and process the information in order to find what is 'relevant' to management functions, and interactions. Thus an 'automated' system, using software applications is used to do these functions. 

ERP integrates internal and external management information across an entire organisation (finance/accounting, manufacturing, sales, services) and facilitates the flow of this information between all business functions inside the boundaries of an organisation. This thereby helps the company to manage its connections to outside stakeholders.

Related terms: MIS (Management Information System), EIS (enterprise..), SCM (Supply Chain Management), Customer Relationship Management (CRM)

FINANCIAL MARKETS: It is a mechanism that allows people to buy and sell financial securities (stocks and bonds) and commodities (precious metals and agricultural goods) and other fungible items (when one unit of an article is equal in value to any other unit of the same article). It works in an environment where transaction costs are lower and market information is widely available and accessible.

Financial Markets facilitate:

• Raising capital - In capital market business enterprises and governments raise long-term funds
• Risk transfer - In derivative market a contract can be drawn, such that, it fixes the 'price' of a financial instrument at a current rate, and binds the contract holders to abide by that price, irrespective of future variations in the price of that instrument. Thus it has a 'value', and can itself be 'traded' (the contract paper can be traded). Such a contract can be used in combination with other risky investments (price dependent on markets) to balance the risk for an individual. (Hopefully, more on various alternative investments..later)
• International Trade - In currency market, for example, it involves purchasing the quantity of one currency by paying the quantity of another currency.

LIQUIDITY: It is a feature of being 'easy' to sell.  A product will be easy to sell (related to transaction costs), when the buyer will be able to 'resell' it too, as and when needed, with no loss, or even preferable, some gain! Money, or 'cash in hand' is the most liquid asset. 

An act of exchange of a less liquid asset with a more liquid asset is called 'Liquidation'.

Liquidity also refers to business's ability to fulfill its payment obligations; that is, the presence of sufficient liquid assets.

MARKET TRENDS: It is just the 'behaviour' of a market, its tendency to move in a particular direction (as we say share market gir gaya/ uth gaya). Now, there are 'trends' within trends.  To draw an analogy, how would you say India's climate is? You will say, it is Tropical.  But would you say the same for Himalayan region? No! So there are climates within a larger climatic region.  Similarly, there are Very Long Term trends - SECULAR TRENDS, which are made up of a series of PRIMARY MARKET TRENDS, which are again, made up of further, even shorter-period SECONDARY MARKET TRENDS. The term bull market refers to upward movement in market and the term bear market refers to downward movement in the same. 

• Secular Market Trends: Lasts 5-25 years. There may be secular bear/bull markets depending on which of the two are larger influence - bears or bulls
• Secondary Market Trends: These are short term changes in price direction lasting for a few weeks or a few months. One such price change, when downward, can be termed as 'price correction', usually it is a decline of 5% to 20%.  It is not a decline so low, as to be termed a bear market. A similar contrary trend can be a slight, may be temporary rise in a largely bearish market - 10% to 20% - which is not enough to make it bullish. This situation is called as a 'bear market rally'. (don't know why - help..anybody?? - I know nobody reads this stuff I write here)
• Primary Market Trends: This lasts for a year or more.

SOME FINANCIAL MARKET TERMS (and slangs)

POISON PILL: Usually, a company tries to prevent being 'bought' by another. Buying a company can be done by 'buying' majority shares of that company.  Now, if a company feels that it is under such a threat, it can issue more shares, such that, the 'attacking company' will need to 'invest' more than it earlier expected/planned, to be able to buy a big percentage of the total number of shares (now suddenly increased). Poison Pill is such a strategy to discourage hostile takeovers.

WHITE KNIGHT: It is really interesting! Consider a situation where company A is in threat of being bought by party B.  To buy A, B will simply buy its shares, which are available in the market.  Now, to save itself, company A wants to protect its shares.  But it may not be able to buy its own shares, on account of certain issues. Then, a friendly partner will help it, buy capturing its shares (buying them, temporarily may be) before the dangerous party B can do so. Such a friendly partner is called a white knight.

Bored now :( other terms laterrrrrrrrrrrr....as if anybody is waiting for them... :P 

INDIA INC.

(This is the 2nd in the series of blogs that I will be writing in an attempt to brush up my general awareness, my writing skills, and of course, to substantiate the raison detre of my blog: s p a c e. For starters, the blogs will be intensive in facts and figures, with justifiable opinions, added here and there.  Content will be sourced from Wikipedia and other miscellaneous sites. Intention will be to repackage the information into simpler forms)


India Inc. is a term used to refer to the 'formal' sector of the nation. By formal, here, we mean well orgnanised instututions and enterprises, that have a critical and major contribution in a nation's economy.  According to the surveys done, it has been seen that India Inc. employed just 7% of the national workforce, and yet contributed 60% to the nominal GDP of the nation.

There are well over 8 lakh companies in India. Not surprisingly, 1/5th or 20% each headquartered in Maharashtra  and Delhi, and 1/8th in West Bengal (and they say, Communists are anti-industrial-development). Of all the companies in India, a huge majority are the Private Limited Companies.

Any body, aiming for an MBA, must know about the major companies in India, that have made a mark on not just the national economy, but even international discourse.

To begin, I decided to do a basic study of the INDIAN companies listed in the FORBES GLOBAL 2000 ranking for the year 2010. It should be noted, that this is a list considering only the PUBLIC companies, and had been prepared based on certain parameters, which when changed, could affect changes in the list itself!

NAME	RANK	SECTOR	HEAD-QUARTERS	KEY PEOPLE
Reliance Industries	126	Oil & Gas Operations	Mumbai	Mukesh Ambani, Chairman & MD
State Bank of India Group (state-owned)	130	Banking	Mumbai	O.P. Bhatt, Chairman
Oil & Natural Gas (state-owned)	155	Oil & Gas Operations	Dehradun, Uttaranchal	A. K. Hazarika, Chairman & MD
ICICI Bank	282	Banking	Mumbai	K. V. Karmath (Chairman), Chanda Kochhar (MD & CEO)
Indian Oil (state-owned)	313	Oil & Gas Operations	New Delhi	S. V. Narsimhan (Chairman- acting)
NTPC (state-owned)	341	Utilities	Delhi	Arup Roy Choudhury (Chairman & MD)
Tata Steel	345	Materials	Mumbai	Ratan Tata (Chairman)
Bharti Airtel	471	Telecommunications Services	New Delhi	Sunil Bharti Mittal (Chairman & MD)
Steel Authority of India (state-owned)	502	Materials	New Delhi	Chandra Shekhar Verma (Chairman)
Larsen and Toubro	548	Construction	Mumbai	A. M. Naik (Chairman & MD)
HDFC Bank	632	Banking	Mumbai	Hasmukhbhai Parekh
Punjab National Bank (nationalised)	695	Banking	New Delhi	- ?-
Bharat Heavy Electricals (state-owned)	699	Capital Goods	New Delhi	B. Prasad Rao
Tata Consultancy Services	741	Software & Services	Mumbai	Ratan Tata (Chairman)
Reliance Communications	742	Telecommunications Services	Navi Mumbai	Anil Ambani, Chairman
HDFC Housing Development	783	Diversified Financials	- apparentky same as HDFC -	- apparentky same as HDFC -
Infosys Technologies	807	Software & Services	Bengaluru	N. R. Narayana Murthy (Chairman) Kris Gopalakrishnan (CEO & MD)
Wipro	826	Software & Services	Bangalore	Azim Premji (Chairman), T.K. Kurien (CEO)
Axis Bank	858	Banking	Mumbai	Adarsh Kishore (Chairman) Shikha Sharma (MD & CEO)
Bank of Baroda (nationalised)	892	Banking	Mumbai	M D Mallya (Chairman & MD)
Hindalco Industries	1005	Materials	Mumbai	Kumar Mangalam Birla (Chairman)
Canara Bank (state-owned)	1008	Banking	Bangalore	S. Raman (Chairman & MD)
ITC	1023	Food, Drink & Tobacco	West Bengal	Y C Deveshwar (Chairman)
Power Grid of India (state-owned)	1093	Utilities	Gurgaon	S. K. Chaturvedi (Chairman & MD)
Bharat Petroleum (state-owned)	1111	Oil & Gas Operations	Mumbai	R K Singh (Chairman & MD)
Power Finance (state-owned)	1123	Business Services & Supplies	New Delhi	Mr. Satnam Singh (Chairman & MD)
Jindal Steel & Power	1131	Materials	New Delhi	Savitri Jindal
Union Bank of India (state-owned)	1278	Banking	Mumbai	Mavila Vishwanathan Nair (Chair)
Hindustan Petroleum (state-owned)	1302	Oil & Gas Operations	Mumbai	S Roy Choudhury (Chairman & MD)
Mahindra & Mahindra	1308	Consumer Durables	Mumbai	Anand Mahindra (Chairman)
NHPC (Govt.of India Enterprise)	1385	Utilities	Faridabad	S K Garg (Chairman & MD)
Indian Overseas Bank	1423	Banking	Chennai	M Narendra (Chairman & MD)
Grasim Industries	1425	Construction	Mumbai	Kumar Mangalam Birla (Chairman & MD)
Oil India (state-owned)	1466	Oil & Gas Operations	Noida	Nayan Mani Borah (Chairman & MD)
Sun Pharma Industries	1470	Drugs & Biotechnology	Mumbai	Dilip S Sanghvi (Chairman)
Rural Electrification (state-owned)	1492	Diversified Financials	- New Delhi, I guess -	- Ministry of Power administers it -
Tata Power	1539	Utilities	Mumbai	Prasad Menon (MD)
Indian Bank (nationalised)	1568	Banking	Chennai	T M Bashin (Chairman & MD)
Hero Honda Motors	1571	Consumer Durables	New Delhi	Brijmohan Lal Munjal (Chair & Founder)
Syndicate Bank	1611	Banking	Manipal	Basanth Seth (Chairman & MD)
IDBI Bank (state-owned)	1642	Banking	Mumbai	Shri R M Malla (CMD)
Oriental Bank of Commerce (nationalised)	1670	Banking	New Delhi	T Y Prabhu (Chairman & MD)
Reliance Infrastructure	1702	Utilities	Mumbai	Anil Ambani (Chairman & MD)
HCL Technologies	1746	Software & Services	Noida	Shiv Nadar (Founder, Chairman, CSO) Vineet Nayar (CEO)
Central Bank of India (state-owned)	1775	Banking	Mumbai	Mr. S Sridhar
Corporation Bank (Public Sector Undertaking)	1802	Banking	Mangalore	- ? -
National Aluminium (NALCO) (Public Sector)	1813	Materials	-?-	- Ministry of Mines -
Allahabad Bank (nationalised)	1852	Banking	Kolkata	Shri J P Dua (Chairman & MD)
Adani Enterprises	1865	Trading Companies	Ahmedabad	Gautam Adani (Chairman)
United Commercial Bank (UCO) (nationalised)	1910	Banking	Kolkata	-?-
ACC (The Associated Cement Companies Ltd)	1952	Construction	Mumbai	N S Sekhsaria (Chairman)

OTHER INTERESTING FACTS:
First FIFTEEN rankers:

NAME	NATION	SECTOR	KEY PEOPLE
JPMorgan Chase	US	Banking	Jamie Dimon, Chairman, President & CEO
General Electric	US	Conglomerates	Jeffrey R. Immelt, Chairman & CEO
Bank of America	US	Banking	Charles O. Holiday, Chairman Bryan Moynihan, President & CEO
ExxonMobil	US	Oil & Gas Operations	Rex W. Tillerson, President, Chairman & CEO
ICBC	China	Banking	Jiang Jianqing, Chairman & Executive Director
Banco Santander	Spain	Banking	Emilio Botin, Chairman Alfredo Saenz Abad, CEO
Wells Fargo	US	Banking	John G. Stumpf, Chairman, President & CEO
HSBC Holdings	UK	Banking	Douglas Flint (Group Chairman) Stuart Gulliver (Group Chief Executive)
Royal Dutch Shell	Netherlands	Oil & Gas Operations	Jorma Ollila (Chairman), Peter Voser (CEO)
BP	UK	Oil & Gas Operations	Carl-Henric Svanberg (Chairman), Bob Dudley (CEO)
BNP Paribas	France	Banking	Bauouin Prot (CEO), Michel Pebereau (Chairman)
Petro China	China	Oil & Gas Operations	Jiang Jiemin (Chairman of the Board) Zhou Jiping (CEO)
AT&T	US	Telecommunications Services	Randall L. Stephenson, CEO, Chairman, President
Wal-Mart Stores	US	Retailing	Mike Duke (CEO) H. Lee Scott (Chairman of the Executive Committee of the Board) S. Robson Walton (Chairman)
Berkshire Hathaway	US	Diversified Financials	Warren E. Buffett (Chairman & CEO)

Among the 2000 companies, well over 500 were headquartered in United States - more than 25% guys! 
In Japan - Over 270

About 160 in China (including some of Hong Kong).
As mentioned above in the list, 50 or so were from India.


SECTOR wise: (number of companies)
Banking - 300+
Diversified Financials - 150+ - (various lending products home equity loans, credit cards, insurance, security, investment products)
Oil & Gas Operations - 100+
Materials - 100+ (inputs to production and manufacturing)
Utilities - 100+ (infrastructure for a public service)
Insurance - 100+
Construction - 80+
Food, Drink & Tobacco - 80+
Transportation - 80+

Technology Hardware and Equipment - 50+ (related to electronics)

Telecommunications Services - 50+
Capital Goods - 50+ (factories, machinery, tools, equipment)
Chemicals - 50+
Retailing - 50+
Consumer Durables - 50+ (home appliances, consumer electronics, furniture etc.)
Media - 50+
Business Services and Supplies - <50 (Banking, Internet, Office Supplies etc)
Conglomerates - <50 (often a multi-industry company, formed when two or more corporations combine)
Aerospace & Defense - <50
Drugs & Biotechnology - <50
Food Markets - <50
Health Care Equipment and Services - <50
Hotels, Restaurants & Leisure - <50
Household & Personal Products - <50
Semiconductors - <50
Software & Services - <50
Trading Companies - <50 (may involve in exports and imports of a product)