The Sub-Prime Crisis

Over the past several weeks everybody has been hit by this global economic crisis. If not financially then definitely mentally (like us). This tectonic financial crisis has captured the attention of people all over the world. Well if your 160 year old company is about to go bust (read Lehman Brothers) then you better panic!

Investors across the world are in total panic. People are losing their hard earned money, established banks and companies are becoming bankrupt, stock markets and currencies are plummeting. Scary situation! Definitely scarier than Ram Gopal Verma Movies at least! So what exactly is this whole thing? And how does it affect us in India? I attempt to address this here, in my new post.

The origins of today’s crisis lie in the progressively digressing US Government policies. Over the last 5 to 6 years, the US administration has successfully rescinded well-placed restrictions and safeguards in the banking and market sector. Regulations regarding granting of loans or restrictions on banks becoming share market speculators have been removed. Any Tom, Dick or Harry can obtain a loan in the US which he otherwise would not have been eligible for. Also there is little control on hedge fund investment companies and this kind of investment can become multi-fold.

Thus as a result, low income (i.e. sub-prime) US households borrowed heavily from banks to buy homes, etc. and then started defaulting on their payments. Then the house prices dropped. So the value of the purchased property decreased and any hopes of positive returns were squashed. This coupled with the inherent tendency or attribute of eating more than they can chew, living beyond their means resulted in compounding defaults on their debt obligations.

Here are few statistics to make it crystal clear. The ratio of outstanding loan to GDP in India is about 60%. Kindly indulge your mind in working some of those Grey cells and make a wild guess about the corresponding figure in the US!

75%, 90%, 95% or 99.999% ? Guys and Gals you hit way below the target! This figure is a staggering and mind boggling 330% in the US and about 240% in the UK! This means their respective GDPs are virtually non existent and feed almost completely on these loans. Thus the sub-prime housing loan market in the US is huge at about 1.4 Trillion $.

Now Wall Street’s Geeks (shrewd and cunning geeks however) repackaged these loans into a very complicated entity called CDO (Collateralized Debt Obligation) and sold these entities to various European and American Banks and financial corporations. This feature is known as the Hedging. It's simple: Suppose I lend you Rs. 100. Now I will sell this loan to a third-party hedge fund for Rs. 90. They in turn will sell it to some one else for Rs.85 and so on. The complexity lies in the calculations of profit and other percentages on these assets. These hedge Fund companies expect huge profit on these instruments in the future. But there is a glitch, a serious and glaring pitfall. What if these housing loans turn bad? The instruments based on them would then lose value. That is what has exactly happened. The defaults on US house loans started increasing and as result CDO prices stated tumbling. Falling prices made the portfolios of the banks ugly and eroded the banks' capital to a large extent thus affecting liquidity.

Also it is interesting to note that banks do not have all the ready cash that they distribute as credit. The inter-bank lending serves the purpose of getting cash-surplus and cash-deficit banks together and fuels the process of giving loans, lending money, etc. to individual consumers (to buy cars, white goods) and also to corporations (working capital,etc.) With increasing market uncertainty banks become suspicious and the inter-bank loan rates are affected. In the past few weeks the inter-bank loan rates have risen from around 3% to about 7%! With no one willing to buy anything the whole situation has become frightening. All over the world inter-bank markets have become frozen and liquidity in the market has taken a toll.

To address this problem the US Government is putting in about $700 billion as a bailout plan. They will buy these bad loans from the banks and improve the cash-flow in the market. Interest rate will be reduced. But remember that it has no Money Tree or a treasure hove, but the money ultimately comes from the tax-payers pocket! In India the apex bank, RBI is trying to address this problem by reducing the CRR (Cash Reserve Ratio) and thus increase the liquidity in the Inter-Bank market.

We in India are slightly cushioned against a very catastrophic financial adversity because our domestic markets are pretty large and secondly because our banks are not exposed to these CDO business to a large extent. According to ICICI and other Indian Banks their institutions are cash-rich and can wade through these troubled times. (I hope it is true!!!) But ultimately Indian Companies have become more global than before and therefore the global economic meltdown in bound to affect our sanctimonious markets. Tatas acquired a host of companies in recent years. This meltdown is surely going to burn a hole in their pockets! Corus would be laughing hysterically right now. They got out with their money and it is the Tatas who now face the acid test!

A large number of Indian sectors might face problems, market pundits believe. This includes hotels, software, some outsourcing services, real estate, infrastructure, construction, banking, stock broking, mutual funds, and to some extent air travel. Hotels, mainly those in big cities that cater to business travelers, are largely dependent upon foreign tourists. In India, most foreign tourists are from the UK, followed by the US. Moreover, the October-December period is peak travel time and the impact could be higher on hotels because the pace of blow-ups in the US has recently peaked.

The software industry, one of India's largest export-earners, is almost certain to be affected. The industry earns more than 60% of its revenue from the US and the recent spate of closures and mergers will mean the trimming of various software-related services, analysts believe. It could be a mixed bag for the BPO sector. While some BPOs, which were heavily dependent on the BFSI sector, could see their fortunes dwindling, some high-end BPOs with substantial cost advantage could see more business coming their way.

The real estate sector, which was booming just a few months ago, could be affected in a major way. Industry players predict that real estate companies could suffer because of high property prices, high interest rates, and lower demand from IT-BPO companies and reduced availability of speculative funds because of bad stock market conditions. A slowing real estate sector could also lead to a slowdown in the construction industry. This in turn is likely to affect the cement and steel sectors. The construction industry could also suffer from a slowdown when it comes to new projects.

The US crisis and the resulting slowdown in India are also expected to weaken the Indian Rupee. It touched 49 Rs. to a Dollar yesterday! This in turn would mean a higher oil-import bill. With almost no scope to adjust prices, companies selling petroproducts are likely to be hit. Stockbrokers too are expected to suffer as the market slides, volume of trade dwindles and speculators vanish from Dalal Street. Big players and brokers with deep pockets could survive the tough times, but the smaller ones may be forced either to fold up or sell out, market veterans say. Also because the Rupee gets weaker, the software companies and other firms which earn in dollars will benefit from the stronger dollar as there net earning might increase and this might balance the reduction in business. Also petroleum prices are falling so the weakening of Rupee would not have a drastic impact. The assurances of our PM to achieve a GDP growth of 7% are hence pragmatic and not illusionary.

So this, my friends is the whole thing. I sincerely hope that you find this post informative. And as far ass the economic problem is concerned let our Dads worry, we better worry about our submissions and exams!

Writing Nightmare...Literally

Evil, Devil, Sinful, Wicked, Criminal, Nefarious, Depraved, Iniquitous, Pernicious...

Alright Guys and Gals you don't need a dictionary nor those filthy little things called flash cards - which have now become a yardstick to measure your chances of flying to ('Oh... I am losing my Money which I never really had') America. As I was saying, all these words are really easy to understand, comprehend and then remember if you happen to know our math professor! Yes, this person is the epitome of all the above adjectives!

Over the last night I have burned the midnight oil, left no stone unturned, to finish what everybody calls a ASSignment. Man I have written so much that I feel I have become a sort of Human Printer...HP should start a new series...


Vaidya Series!...Fast printers to solve all your ASSignment troubles...Just provide all the material and it will be copied word to word, letter to letter, angle to angle to angle, line to line, etc as fast as lightning.

The only solace was my little iPod which dutifully kept playing songs to keep me company in those unearthly hours! Last night's playlist on my iPod contained a staggering 111 songs...ok Dickie Bird can do his dance (the English umpire and not my dear friend mind you) for reasons known to him alone (I doubt whether he is aware of the reason himself). Even the ghosts were afraid of me yesterday night. They told me that they were previously of the opinion that Humans don't really exist and are only a fictional creation to scare them. But now I have removed their doubts. They were petrified. I tried inquiring whether they knew of someone amongst them who taught at VJTI but they answered in the negative. They said the only person they know is Ram Gopal Verma, the comedian.

I think my fingers and my arms emit a weird mechanical sound every time they start to write. They must ban this torture. This is worst than third degree torture. It is more like a 14,567 degree torture. Apply this to Abu Salem or anyone equally (in)famous and they will be blurting out all the secrets and all the information you need! And it does not end here...Part two was officially launched today!

I really wonder how much paper, ink, pencil carbon(it is not lead-plumbum), etc. we waste in our four years of Engineering! Collect all this stuff ( journal, assignment, tutorial) of this college and distribute it amongst the US Banks. They will make an amazing amount of money out of scrap(Raddi) and they wont need a 700 billion dollar bail-out!

HaHa Ha - Why so serious!

The Passing of an Enigma...The End of an Era

There are the Maestros,
There are the Dons,
and then
There is Dada !

The prince of Calcutta, The God of the Off-Side, The Royal Bengal Tiger,... ; the epithets for Sourav 'Dada' Ganguly are diverse and numerous. But the writing on the wall is just one...'This really is the last series you are going to see the phenomenon, the master, the persona par excellence, in action on field! He might still oblige Rukh-Rukh Khan in the second edition of IPL.


It has been a rough ride for Sourav all the way along...


The Boy from Behala made his debut in 1992, in the ODI series in Australia but was shockingly given the boot after just one failure(vs WI). He emerged four years later, literally from the ashes and purely on fantastic domestic performances but a smear campaign was started by his back trackers claiming that he was in the team courtesy Jagmohan Dalmiya.


Dada answered by scoring a blazing hundred on (Test) Debut versus England at the famous Lords. Anyone daring to say that this was just a flash in the pan had to wait for only a few more days. Dada followed this with another hundred at Nottingham! A star was born and there was no denying it.

As his career progressed Indian Cricket had regressed under the captaincy of Mohammad Azaruddin and even Sachin could not change it when he took over the reins as Captain and that too twice. Then the match-fixing scandal rocked Indian cricket and India was at it's Nadir!

In such adverse times the board offered the captaincy to Ganguly and the rest as they say is history! The space in this blog falls short to mention all the histrionics, achievements and records of this great man; so i will say this one thing only : India was metamorphosed into a fighting, confident and aggressive unit capable of beating anyone anywhere due to this one man alone!!!

While grace and timing were the hallmarks of Sourav Ganguly's cricket, I am not sure whether this sudden decision to ride into the sunset was true to those qualities. But such is the situation in Indian Cricket. It does not help if you have been the most consistent performer in Tests for over two seasons! You still have to prove yourself constantly. This is what happens when non-cricketing, money and power hungry politicians become the powers-that-be and control the BCCI

I cannot write more because my eyes well-up...but Dada, We always loved you and we always will!

I am of the strong opinion that Sourav will end his career on a high as he is the kind of man who never goes down without a fight! Go Dada Go...Give the aussies and the idiots in BCCI a piece of your mind and score runs by the ton. And even if you do end up scoring a hundred in every match of the series do not look back because you donot deserve to be in this quagmire...u deserve better...BCCI President!