Apologies by bankers have come too late...

Jan 14, 2010

In this issue:
» India has the third highest number of billionaires
» Paul Krugman's take on financial reforms
» Demand for luxury homes is rising
» FM aims to reduce fiscal deficit to 5.5% next year
» ...and more!!

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It has been a more than a year since the collapse of Lehman Brothers triggered a severe credit crunch across the globe. It has been more than two years since the first signs of the credit crisis began to manifest globally. And it is now that top Wall Street bankers, one of the many architects of the crisis, have apologised for risky behavior that led to the worst financial crisis since the Great Depression. However, they have declared that it seemed appropriate at the time.

Because an imminent collapse of the financial system was staring the US in its eyes, the government chose to bail out these big banks and investment banks by way of stimulus packages from taxpayers' money. This made sure that most of the big financial institutions managed to keep heads above water. However, these bankers (notably Goldman Sachs, Morgan Stanley, Bank of America, JP Morgan Chase) have offered no regrets for executive pay that is now likely to increase as a result of their survival. This obviously will not go down well with the American people who are grappling with an unemployment rate as high as 10% and the US government which does not want to antagonize its citizens further.

Apologies apart, we believe the bankers' justification that the 'risky behaviour' seemed appropriate at the time does not hold much water. After all, the seeds of the crisis were sown when loans were granted to 'subprime' borrowers having little or no credit history. This very practice goes against the basic principles of sound banking. That it was imperative to capitalise on the buoyancy pervading in the global markets then to bolster their incomes and balance sheets is a losing argument as far as these banks are concerned. All in all, it appears that these apologies have come too late!

 Chart of the day
India is a land of many contradictions. On one hand you have an economy which is the second fastest growing in the world after China, strong Indian companies with a global footprint, surging stockmarkets and an interesting diversity in terms of culture and languages. On the other hand you have poor infrastructure, lack of significant development in the rural hinterland, a majority of population which depends upon agriculture as means of livelihood and ethnic tensions. Of the various phenomenon that have put India on the global map, one such factor is the number of billionaires in the country. As today's chart of the day shows, in 2009, India had the third highest number of billionaires after the US and China. Interestingly, India also has the highest percentage of population living below the poverty line as compared to its BRIC peers further accentuating a myriad of stark contrasts in the country.

Data Source: Wikipedia

It seems to be the season of reforms in the US. Barely have the policymakers put finishing touches to the health care reform then they took upon themselves the task of fixing the US financial system. But is a financial system reform necessary in the first place? After all, even with reforms there is no guarantee that booms and busts could be avoided. So why have financial reforms at all? Nobel laureate Paul Krugman offers a good line of argument. In an op-ed piece in NY Times, Krugman opined that reforms probably cannot prevent either bad loans or bubbles. But they can certainly do a great deal to ensure that bubbles don't collapse the financial system when they burst.

Krugman's thinking does seem to be along the right lines. It should be noted the recent financial crisis was caused by too much of leverage, way beyond what is considered to be safe. And this leverage in turn was encouraged by lax regulation. Thus, unless regulation is tightened, there is every chance that the same mistakes could well be repeated.

Now that the world economy is out of the recession mode, observers believe it is time for the next crude oil rally. After all, oil consumption is directly related to economic growth. Most also expect the emerging giants - China and India to play a key role in ramping up demand. In fact, Jeff Rubin, the author of an energy economics book called, "Why Your World is About to Get a Whole Lot Smaller" believes oil will easily reach US$ 100 per barrel by the end of 2010. By 2012, it will reach US$ 200 per barrel. In our opinion, the long term trend for crude oil prices will indeed be upwards. There simply aren't enough new sources of supply. On the demand side, China and India are going to consume more oil per person. Having said that, precise predictions of any nature must be taken with a pinch of salt. That's the lesson of the last crude oil spike.

The reticent builders and developers who seemed to be 'once bitten'- twice shy' after the subprime fiasco, are at it again. They are once again luring buyers to properties in the super luxury category. And the irony is that the properties worth crores are getting sold within days and weeks. The builders laughing their way to the banks could not have asked for a better 'recovery'. At a time when affordable housing was supposed to be the mantra, villas, duplexes and penthouses spanning several thousand square feet are back in flavor. The improved demand for such luxury apartments is leaving the luxury realty market irresistible to even the smaller builders. A business daily reports how a leading developer sold its entire project in South Mumbai priced at Rs 150 m per apartment within a month. Thus, the real estate bubble and debt-led recovery in Indian mortgage industry is back. While we are not so sure of India's economic resilience to withstand another realty bust, the early signs are certainly not encouraging.

Are we seeing the beginning of the end for the FMCG stock dream run? According to a leading daily, FMCG companies witnessed lower product off take in the 2009 December quarter compared to the corresponding period in 2008. This was a result of higher food prices which resulted in households adjusting their expenses by decreasing their purchase of consumer goods. Furthermore, the operating margins of the consumer goods companies are expected to be under pressure. This is due to rising input costs and higher advertisement spending. At the same time, FMCG companies have been reluctant to increase prices in an effort to protect their market shares. For these reasons, we believe that the bottom line growth for FMCG companies could be subdued in the near term as compared to the previous few quarters.

FY09 saw India's fiscal deficit zoom to 6.2% of GDP. This deficit is expected to widen to 6.8% of GDP in FY10. What with interest payments, salaries to government employees and subsidies eating away into its revenues and the government introducing stimulus measures to spur the economy, the surge in fiscal deficit is hardly surprising. Interestingly, as reported in the Wall Street Journal, the Finance Minister Pranab Mukherjee expects to cut fiscal deficit to 5.5% next fiscal year and then shrink it to 4% a year later. But this could prove to be challenging. For starters, what the government needs to focus on is the curtailment of expenditure (especially on the revenue front), a fact which has not been witnessed in previous fiscals and which seems unlikely in the near future as well.

Ideally for an emerging economy like India, spending on social sectors such as education, agriculture and healthcare is of paramount importance. The problem is that while the Indian government may not curtail this spending, the strained fiscal position does not leave it much headroom to increase this spending either. Of course, tax revenues will provide respite but from a longer term perspective it will be important to reduce the expenditure by improving productivity and efficiency. Therefore, while the government's aim to bring this fiscal deficit down is certainly a step in the right direction, it remains to be seen how it chooses to go about it.

Meanwhile, led by buying across index heavyweights, the BSE-Sensex was trading higher by 98 points (0.6%) at the time of writing. Metals and oil & gas stocks led the pack of gainers. While most Asian markets were trading in the green at the time of writing, European markets are trading mixed.

 Today's investing mantra
"Of one thing be certain: if a CEO is enthused about a particularly foolish acquisition, both his internal staff and his outside advisors will come up with whatever projections are needed to justify his stance. Only in fairy tales are emperors told that they are naked." - Warren Buffett

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12 Responses to "Apologies by bankers have come too late..."

abhishek goswmai

Jan 24, 2010

actually it is futile to blame the bankers for credit crunch.. I believe it was because of the absence of reforms which had lead to the this crisis.
if we had reforms which had stopped these bankers from making a riskful scheme a risk free scheme... and also it is the fault of the rating agencies who rated those schemes as AAA. this was the reason why many people had entered that scheme.
these bankers have done their job, they have a found the way of earning more profits.
They are the culprits but should not be blamed alone..



Jan 16, 2010

Builders have increased the prices of home many fold and its out of reach of common people...

Simple thing.. Bank earlier gave huge loan to builders in recession time but now as economy is recovering, builders have increased prices and affecting sales in large number and inspite banks having no option to reduce home loan rate, the sales are not picking so in future their NPA will rise around 1.25 percent for sure...

so Builders have cheated banks as they do to common people as there is no regulation in real estate...


N. Srinivas

Jan 15, 2010

It is very refreshing again to listen that our bourses will now brim with zoom especially real estate and oil companies will do brisk business, but sad part is common man who is constantly dependent on oil for transport purpose will be hit hard


Capt Amit Sharma

Jan 14, 2010

Yes, I also Belive that oil will easily reach US$ 100 to 150 per barrel by the end of 2010/2011.
Watch for it.
"Top Wall Street bankers, one of the many architects of the crisis, have apologized for risky behavior that led to the worst financial crisis"- I dont blame them as it is in the nature of human kind ,Even indian private banks have gone in the same way as the western banks but thank god that in india there were not enough borrowers .
In capitalism it is not possible to control the bubble in different parts of economy only thing we can do is to minimize the losses.


Murali Krishnan K

Jan 14, 2010

Let the offenders keep their 'apologies' with themselves; nobody needs it. They are economic offenders. They are more cruel than even criminals. They shd be punished in public by canning; chaining. Even death penalty can be considered, after confiscating their 'ill-gotten' wealth; which shd be utilised for pmt to the gullible investors.



Jan 14, 2010

Daily chart on various subjects are really educative.Equitymaster definitely increases the knowledge of the readers.


sunesh s

Jan 14, 2010


It would be of good use to everyone if we could have some insights on the gold purchase by RBI using the SDR allocation and its impacts on the economy...




Jan 14, 2010

not much interested, its boring.



Jan 14, 2010

Equitymaster's column captioned "Apologies by bankers have come too late" is highly informative. It is absolutely true that India happens to be a land of amazing contradictions. While taking pride in proclaiming that it has the third highest number of billionaires in the world, it cannot hide the truth that it has the largest number of people below the poverty line. Perhaps, it would have been appropriate if a world chart showing comparative positions of people below the poverty line in various countries had been furnished alongside the one relating to the world's billionaires.


amit parmar

Jan 14, 2010

Yesterdays Wrapup said Iraq has so many reserves of Crude oil that it can significantly reduce of crude in the future but today you are saying the price per barrel can double. Quite contradictory...

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