Big bonuses are back. Shamefully!

Jun 22, 2009

In this issue:
» Goldman Sachs to roll out massive bonuses
» Soros says the worst is over
» Mahindra Holidays IPO...will it revive the primary market?
» A scary chart...though not as yet
» ...and more!

"What's good for GM is good for America," said Charlie Wilson, the former Chairman of the US auto major General Motors (GM), once among the largest employers in the world and now bankrupt. Given what we have seen over the past 18 months or so, GM can easily be replaced by GS - Goldman Sachs, whose clout in the American capitalistic society has increased manifold since the start of this crisis, for reasons well known.

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First, the company has been able to survive the period, which the likes of Bear Stearns and Lehman Brothers couldn't. And then of course, it has its 'representatives' in the US government to thank. But the way this firm - known as 'Government Sachs' in some financial circles - has pooh-poohed the system is there for everyone to see. While the US and its citizens are reeling under job and home losses, Goldman is rewarding its employees with multi-billion dollars in bonuses. The company has in fact, set aside half of its US$ 2 bn first-quarter profit to reward staff, much of it in bonuses.

Until the release of its first quarter profits in April, it seemed inconceivable that a firm owing the US government US$ 10 bn would be looking to break all-time records in 2009. But yes, it is on the verge of hitting the record. A spectacular first half of the year - Goldman Sachs' second-quarter earnings are further expected to show a jump in profits - would result in bonus showers. If the company ends the year as most profitable as per estimates, its staff can look forward to the biggest bonus payouts in the firm's 140-year history.

We're not holding our breath. We think of Wall Street as a poker game and Goldman as the smartest player, though the fact remains that there's no one left to play with. The firm has figured out how to make the US$ 700 bn bailout package work for itself. This you can trust them to do. After all, Warren Buffett did so just a few months back.

However the irony is that while the company's minority shareholders took the risk as also did the US taxpayers (though forcefully), they have not got any chance to participate in the firm's improving fortunes.

If ace investor George Soros were to be believed, the worst days of the credit crisis are all surely behind us. In a recent interview, he expressed his view that the worst part of the global economic crisis is over and now the time is right to begin the creation of international regulations to oversee global markets. Interestingly, he added that this crisis is unlike any of the previous crisis the world has seen, and can be seen as marking the end of an era. That's because the system to date had been based on the false assumption that markets can independently regain their equilibrium and that the system is self-correcting.

But as we have all very clearly seen, that is the very assumption that directly led to the policies and regulatory environment that was a perfect breeding ground for the creation of such a massive global bubble.

Soros is emphatically of the opinion that the regulation in the economy should be focused at controlling market bubbles. "We need international regulations to retain international markets. This won't be easy...If we won't be able to do this... than globalization, as we now know it, will fall apart, he has warned.

The negative inflation figure that we saw last week must have raised eyebrows whether India is also staring at deflation. But Dr. Subbarao, the Governor of the Reserve Bank of India gives it no chance in hell. Speaking to Bloomberg, he opined that neither does the Indian economy suffer from demand constraints nor are prices stagnant or falling everywhere as some pockets like food and primary articles continue to face significant inflationary pressures.

Hence, there's no way that the deflationary trend will persist for long. The governor also assured that the central bank will manage the government's borrowing program in as non-disruptive a manner as possible, thus reducing large scale volatility in interest rates.

The International Monetary Fund's (IMF) has forecasted a 'modest' improvement in the world economic growth climate. This is interesting given that as recently as last week, another major financial body - World Bank - had outlined that the global economy will contract even more sharply than expected in 2009 and would shrink by nearly 3%, which was higher than its estimate of 1.75% made just a couple of months back.

We wonder with the US economy still going downhill, and no respite in sight, how come the IMF has upgraded its world economic outlook. Things are not really exciting out there in the world's largest economy, and also the world's largest debtor. The housing sector remains weak, unemployment continues to rise, the government continues on its borrowing binge, consumer demand remains in doldrums as people have started saving more, and companies are not doing well for all these reasons. In short, there're no real reasons to cheer.

While we might not want to sound like doomsayers for spoiling the investors' mood, the things happening around makes us wonder whether we are living in a make-believe world. See for instance the government's balance sheet in India, which is also in a mess. The deficit (government's expenditure minus its income) has risen to record proportions and given the euphoria surrounding a 'stable government', the public servants in Delhi are more vulnerable to making more of those mistakes that led to a galloping deficit in the first place.

The dry IPO market will get a new lease of life as Mahindra Holidays takes off on its public issue that opens for subscription tomorrow. But will this lead the revival of the IPO market still remains to be seen.

The offer has been priced in a range of Rs 275 to Rs 325 per share, and the company plans to raise for itself Rs 1.9 bn to fund its expansion plans. The issue also contains an offer for sale whereby the promoter company, Mahindra & Mahindra, will be selling around 10% of its stake which will then stand at 83% post the issue. A more detailed view on the IPO will be shortly available for our subscribers.

With the exception of India and Singapore, all other key Asian markets closed with gains today. The Indian benchmark index, BSE-Sensex, ended down by around 200 points, closely followed by the midcap and smallcap indices. While FMCG stocks were in the limelight today, selling pressure was seen in those from the oil & gas and metal sectors. Stocks in Europe have opened weak.

Fraud tainted Satyam finally gets a new identity. The company will now be called 'Mahindra Satyam' as Tech Mahindra, the new owner of Satyam Computer Services, deems this fit. As per the company's management, the re-branding exercise reflects 'an amalgamation of the Mahindra Group's values with Satyam's expertise, retaining a part of Satyam's identity that signifies commitment, purpose and proficiency of the organisation and its people'.

Here's a chart that doesn't look scary right away, but has all the ingredients of making of a pot-boiler! In theory, the massive creation of money in the US will lead to inflation in future years. But according to traditional inflation metrics, it hasn't been the case as yet.

Money supply Vs inflation
Image Source: Business Insider

 Today's investing mantra
"Graham wasn't about brilliant investments and he wasn't about fads or fashion. He was about sound investing, and I think sound investing can make you very wealthy if you're not in too big of a hurry. And it never makes you poor, which is better." - Warren Buffett

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6 Responses to "Big bonuses are back. Shamefully!"

kaushik botadra

Jun 23, 2009


it was a very useful informations on variable aspects and also with a global view on happenings,

apperciable remarks and useful details.



Jun 23, 2009

informative and quality article.....


Hiren Acharya

Jun 23, 2009

Thanks for the latest Information about Stock Markets it's worth reading, finally the article is useful and informative.

Hiren Acharya



Jun 23, 2009

Warren Buffett manatra that you carried here is really solid in all senses, it is so correct that many a times we just get carried away with fads and fashion and lose the sight of business realities ending up losing money than making one.

The 5 minute wrap up is extermely informative and educative, I look up to reading it almost every day. Please do keep up the Good Work. And Congrats to you and the team there.

Regards Ajay


george mathew

Jun 22, 2009

excellent articles worth reading.thank you.


Monoj Acharya

Jun 22, 2009

The present trend of the market though showing a negative trend but the real history is still to be unfolded. The current trend of us market and the sluggish growth throughout the globe except in the asian region with massive manpower and ever growing demand all the FII activity is bound to shift from the european economy to the asian region is inavitable.So knowing the future every financila managers ,brokets and FIIs are trying to fool the general investor as well as the indian institutional investors to stay away from the market making a artifical crisis of indian economy so that they can avail the opportunity to buy the indian market at a comparatevily lower price and make most of the profit as soon as possible. More over the wild swing of the nifty and sensex to the last minute of trading clearly indicates the motto behind .

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