When banks rob you...they go scot free

Jul 16, 2010

In this issue:
» Finally some shareholder activism in India
» One commodity that never goes out of fashion
» Small and mid caps lure retail investors
» China is Asia's new hotspot for outsourcing
» ...and more!!

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So you rob a bank, they put you behind bars for 10 years. But if the bank robs you, the bank has to only pay a petty amount of cash out of its pocket and that's it. Or so it seems. Yesterday, SEC ordered Goldman Sachs to pay US$ 550 m to settle charges of defrauding investors in a sale of securities tied to subprime mortgages. This amount is just 4% of the US$ 13.4 bn of profits that the bank earned just last year.

The SEC had filed fraud charges against Goldman Sachs in April this year for defrauding investors on real estate backed securities that were likely to (and which eventually did) go bust. In 2006, the real estate securities were marketed by the bank under the name of Abacus. It was touted to be a product that 'aligned the bank's interests with that of the investors'. During the sub-prime crisis, like all other such products, Abacus too became worthless. In total the investors lost US$ 1 bn. Goldman had retaliated to the charges by saying that they were not aware of any such conflicts and that they too had lost a considerable amount of money in the deal. However SEC turned a deaf ear and pronounced them guilty.

In its own statement, SEC has said that this settlement is 'a stark lesson to the Wall Street'. But, how 'stark' is this amount? Is it justified to let Goldman Sachs get away so easily despite being a participant in a sham that triggered one of the worst recessions that the world has ever seen? What do you think? Tell us.

 Chart of the day
Fears of all kinds of problems besetting the global economy in the years to come are rife these days. Inflation. Hyperinflation. Interest rates. Deflation. Double dip recession. Depression. The list goes on. How each of these things will affect the demand for different kinds of goods and services is unclear. Some may receive a fillip. Some may in turn witness a drastic dip in demand. Which will be winners and which on the receiving end can only be know in retrospect. Investors in companies are thus understandably a confused lot right now. But there is one class of commodities that always will be in demand. As today's Chart of the Day shows, whatever the economy has thrown at the world, it has never really made any significant difference to grain consumption. It is perhaps companies in this field of business that will see the most stability in the years to come.

Data Source: Earth Policy Institute

Small retail investors do not have many friends in the stock market. Their small individual holdings, and lack of technical knowledge, make them quite powerless in the stock market. If a promoter is doing something with the company where a small investor has a holding, whether it is detrimental to him or not, there is little he can do about it.

This is where big institutional investors have a huge role to play. They afterall represent a big collection of such individual investors. And by virtue of the size of their holdings and expertise, they can very well try and protect their investors if they feel that they're getting the shorter end of the straw.

This kind of shareholder activism is quite prevalent in places like the US. But sadly, in India, it is almost nonexistent. Thus we were pleasantly surprised when we read reports of one such instance occurring currently. The Life Insurance Corporation (LIC), is reportedly nudging the Indian arm of an MNC company to raise the open offer price it presented minority shareholders with recently. LIC holds a big 16.3% stake in the company. It has now asked the company - ABB - to raise its open offer price from Rs 900 to Rs 1,000. Any such move will benefit all minority shareholders, and not just LIC.

Whether ABB will budge or not is not clear at this point. But what is more important is the initiative LIC has taken. This does not happen very often in India. In the interest of the minority shareholder community, we earnestly hope this trend continues!

Should we buy large caps or prefer mid caps and small caps? It is a question we are asked often. It is observed that as the stock markets recover from a crash, the large caps bounce back first. At subsequent stages of a rally, the mid and small caps gather pace. In fact, at the peak of a rally they tend to become hottest stocks. As per a leading business daily, out of the 350 companies that have disclosed their shareholding data to the stock exchanges so far for the latest quarter, 149 have seen a rise in retail holding.

Interestingly, most of these companies are small and mid cap companies. Some of them have outperformed the broader market by a wide margin during the quarter. In our view, too much attention should not be paid to whether a stock is large, mid or small cap. Of course, smaller companies receive less coverage. Hence one must search for good opportunities. As long as an investor finds demonstrable value in excess of price, he should invest. But merely trying to catch a trend can be dangerous. After all, when the next crash comes after a rally, they tend to suffer the most.

Here's a quick roundup of what people and institutions are doing with their money parked in mutual funds. Let us hear the bad news first. A leading daily reports that the mutual fund industry's assets dipped nearly 16% in the month of June. This was the sharpest decline in percentage terms since October 2008 and the biggest ever in absolute terms. The drop seemed a consequence of banks withdrawing money parked in mutual funds to pay for the 3G and BWA auctions. The withdrawal of money by HNIs in order to come good on their advance tax payments also impacted the outflow.

And now the good news. The industry's AUM may have suffered a shocking decline. But the number of folios has gone up by quite an encouraging figure. It should be noted that folios tell us about the total investor count. However, it is quite possible that an investor has more than one folio and thus, numbers could be overstated to that extent. Nevertheless, the number of folios coming higher by around 21,000 in the month of June is indeed an encouraging sign. What more, the record number of folios is attributed to the fact that people have moved from equity to debt. The move could well be understandable. Equities are no more as attractive as say around a year back. And thus, investors seem to be playing it safe. However, we do hope that they come back when the markets end up having a meaningful correction. For when bought at the right price, there is seldom any asset class that yields better than equities over the long run.

The India-China business rivalry has continued for long now. But while India was never able to catch up with the former across any space of competition, China is leaving no stone unturned. And we are talking of something as key to India as offshoring. As per a leading business daily, China is fast catching up on India in the outsourcing game. But the key here is that this is currently restricted to only outsourcing by Asia-Pacific companies.

This conclusion is drawn based on a survey done by KPMG on 280 executives across Asian companies. What the survey has found is that the growth of China's outsourcing market is significant, faster than India!

After a volatile morning session, markets gained some momentum and the BSE-Sensex was trading 34 points higher at the time of writing this. After TCS' better than expected financial results, IT stocks were trading positive. Stocks from the oil & gas and consumer goods space however, saw some declines. Sentiments were mixed in Asia, with Japan being the biggest loser. The others were mostly trading flat.

 Today's investing mantra
"Ben's Mr. Market allegory may seem out-of-date in today's investment world, in which most professionals and academicians talk of efficient markets, dynamic hedging and betas. Their interest in such matters is understandable, since techniques shrouded in mystery clearly have value to the purveyor of investment advice. After all, what witch doctor has ever achieved fame and fortune by simply advising 'Take two aspirins'?" - Warren Buffett

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21 Responses to "When banks rob you...they go scot free"


Jul 19, 2010

I may be beating off the track but in India too when private banks are asking for minimum balance of 10000 INR for each account and more than that if balance falls below 10000, awarding a penalty of INR 750 + Taxes on quarterly basis is also kind of robbery where no one is caring for the common man due to the interest to protect only the big fish.



Jul 18, 2010




Jul 18, 2010

Hi, SEC should have ordered Goldman to return the money invested by people who trusted Goldman-- this is the least Goldman could have done. The papers here had reported abt scores of people in HongKong and S'pore who had lost their shirts holding wortless pieces of paper issued by Goldman/Citibank etc. These so called big banks should really be hauled up for thier utter callousness. regds


Nitin Patel

Jul 18, 2010

The symbolism of the punishment should not be underestimated. Shows that the US regulatory authorities are at least ready to take action.
The Central Bank of India spent 70 lacs in legal fees (most of it going to Congress Spokesman Abhijeet Singhvi)defending their former CMD H A Daruwalla (Source TOI 18/07/10)


Murali Krishnan K

Jul 17, 2010

SEC must be playing a 'drama'???????
Or may be a 'hand in glove'!!!!!!!!
Or shd have become a party to the deal.
After all SEC is made up with 'human beings'


Abhishhek Biswas

Jul 17, 2010

What Goldman n some other Banks did forced the entire world to get into such a mess from we still could not come out and actually when will be able to is uncertain. All those who are party to this disastrous and heinous crime should be forced to wind up, their assets liquidated and distributed all over the world to help us come out of the deep shit that we are into.



Jul 17, 2010

Goldman Sachs must be made to repay all those it cheated with interest and then it should be liquidated.



Jul 17, 2010

Goldman's case is a organsied crime.They have definitely, done the Risk Assesment before they executed the plan.And they have well succeded in their project.Because 4% of penalty is not even inside yellow zone of risk.It has become a case of inspiration in my opinion.


sunilkumar Tejwani

Jul 16, 2010

From the beginning itself Goldman Sachs executive Fabricc Tourre was in the know about the so called "Abacus" product was a sham, he was short on them where as the same was sold to financial institutions. The senate probe against GS Team of executives should have established guilt of these people. Goldman executives & the company itself should have been fined at least twice the amount they earned by their criminal misconduct.



Jul 16, 2010

gqldman should be made to pay all the investors with interest plus something to compensate the mental agony they had suffered

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