Too big to fail

Sep 8, 2008

In this issue:
» Mortgage giants get 'capital' punishment
» 'Root' lessons for India Inc.
» Power needs people
» Divestment to be given a second chance
» ...and more!

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  Mortgage giants get 'capital' punishment
Organisations that were once considered too big to fail are now getting a fair sense of reality. In what has been dubbed as 'a seismic event in a year of repeated financial crises' by the International Herald Tribune, the US Treasury has seized control of the nation's two largest mortgage finance companies - Freddie Mac and Fannie Mae, that have succumbed to the worst housing crisis in decades. Both Freddie Mac and Fannie Mae were created during the depths of the Great Depression in 1970's, to help make mortgage loans more affordable to borrowers. The companies also bought billions of dollars in mortgages each month from banks. However, the steep decline in real estate prices had put the giants on the brink of bankruptcy and exposed the entire US financial system to significant risks as together the two companies own 70% of US mortgages. The bailout plan designed by the US treasury places the companies in a government conservatorship, much like a bankruptcy reorganization. It commits the government to provide US$ 100 bn to each of the beleaguered companies and also involves a change in management.

However, the chiefs of Freddie Mac and Fannie Mae are not the latest casualties of the subprime catastrophe. Washington Mutual, which is US' largest thrift (a financial institution that specialises in accepting savings deposits and offering mortgage loans), has recently ousted its chief executive officer after the company declared mortgage related losses to the tune of US$ 19 bn.

  • Also read- Freddie and Fannie cast their net wide

      India's (nuclear) promises to keep
    India needs to keep its moratorium on nuclear-bomb tests, suggested the 45-member Nuclear Suppliers' Group (NSG) as it lifted a 34-year ban on the country on nuclear trade. India now has the right to buy atomic-energy equipments to increase its nuclear power generation capacity multifold. This shall bring some respite to the power-starved nation which suffers from peak deficit of nearly 18% currently. However, it will still take years before the power facilities come up to fire India's sustainable growth ambitions.

  • Also read- Of fusion and fission

      Real estate developers far from gloomy
    While the sector's fortunes have been battered and bruised on the bourses in the past twelve months, the optimism of the firms have definitely not! We are referring to the real estate industry. As per a recent survey by Ernst & Young, 62% of real estate developers have opined that the high growth trajectory that the sector has entered into is here to stay for the long-term and the current slump is only a momentary one. Further still, a vast section of the respondents also expressed great willingness in entering the affordable housing space provided certain factors like government and basic infrastructure support and low cost of land work in their favour.

    Not harbouring any wrong notions, a majority of these respondents defined affordable housing in the range of Rs 1 - 2.5 m and also demonstrated their keenness to move beyond the obvious 8 cities as hedge against market fluctuations. The survey comes as a breath of fresh air in an industry that has struggled to make ends meet in recent times and further endorses the industry body, Assocham's projections of a 14 fold growth in the sector over the next decade. Besides spiraling land costs, the respondents have identified rising manpower and material costs as their biggest challenges.

      Rupee's another record-breaking move
    Barely has the ink dried on news of rupee's record rise against the US dollar, the currency has swiftly moved in the opposite direction and now a new 18 month record is staring it in the face. With the so called 'hot money' invested in the Indian stock market making a hasty retreat, the Indian rupee has continued to come under pressure against the US dollar and had it not been for the RBI intervention, it would have closed below the current level of 44.7. Indian stock markets are off nearly 33% from their highs so far this year with FIIs being the wreckers in chief. This has led to huge outflow of dollars and with the crude prices also at higher levels as compared to last year, problems for rupee had compounded, leading to its slide. This is likely to go down well with export dependent sectors like IT and pharma and give them a breather in wake of rising wage and raw material costs respectively.

  • Also read- India rupee to depreciate by 6.4% against the US dollar

      CIL's maiden attempt at imports
    First it was steel and now its coal. In what is likely to prove to be a major embarrassment for the country, Coal India (CIL), country's largest coal producer is set to import about four million tonnes of coal in the current financial year, FY09. This is even as the coal ministry has claimed that the country has sufficient coal to meet its needs! Infact, as per the ministry, it is the shortage of wagons that is creating supply problems. Whatever be the reason, it is indeed shameful that despite the country sitting on huge reserves of coal, we will have to spend our precious foreign reserves to import the commodity. Imports seemed to have made necessary as the country tries hard not to push its citizens into darkness further and keep its industries running by ensuring enough coal for its power plants.

    Another similar instance that comes to mind is import of steel that the country had to resort to in FY08 to tide over excess demand. Like coal, India is also sitting on a huge iron ore reserve but lack of political consensus and infrastructural bottlenecks is coming in the way of successful utilisation of the same. Infact, cases of similar delays or lack of planning abound, are costing the nation a few percentage points in its GDP every year. We hope the decision makers learn some valuable lessons from these incidents and try their best not to repeat them in the future.

      'Root' lessons for India Inc.
    Ratan Tata can heave a sigh of relief or so it may seem. West Bengal state's opposition party Trinamool Congress party, which had been spearheading opposition to the company's 'Nano' plant, is reported to have reached a deal with the state government that would see some of the land for the nearly-complete factory returned to displaced farmers.

    At a price of just US$ 2,500, the Nano was billed early in its development as the world's cheapest automobile. It was supposed to be the only car that was both affordable and practical enough for India's fast burgeoning middle class. However small it may be, the car has now come to symbolise the human cost of rapid industrialisation.

    Considering that India has around 70% of its billion plus population scattered throughout almost 660,000 villages, the process of development through urbanisation has already been difficult. And now with mass protests in the country's hinterland (propagated by political interest) against business houses blamed to be grabbing land in the name of industrial development, the inclusive and well spread-out growth remains a distant dream.

    The Tatas may well be successful in their endeavours at Singur, but there are some core lessons that these incidents leave for India's industrialists to ponder. One of the most important being that a majority of Indians identify themselves with the land they own. Separate them from their land and you are sowing the seeds of a crisis.

  • Also read- Tata Motors: Margins take toll

      Power needs people
    If a shortage of resources, materials and equipments was not enough, power companies are also expected to face scarcity of personnel in the future. A recent study by Crisil and Ficci states that, for India to wipe out electricity deficits and to meet the targets planned for the 11th and 12th five-years plans, it needs the adequate manpower. With statistics such as peak electricity demand deficit of 13%, power shortages of 6 to 8%, along with robust capacity addition of 161,000 megawatts planned until the twelfth plan, it is estimated that the Indian power sector needs manpower in excess of 700,000. Although Indian educational institutions do generate a large number of engineers, the challenge for companies from the power sector will be to actually hire them given the multiple options available in other well-paid fields.

      Divestment to be given a second chance
    After lying dormant due to vehement opposition from the Left, the divestment activity is set to take off for the first time after the government won the trust vote. The two public sector companies proposed to be divested are in the fertiliser space. The rationale behind the same is to revive these companies, which have been sick for some time now and invite private participation. If the proposed sale takes place the government gets to add Rs 7 bn to its kitty. A new fertiliser policy is in place, which aims at attracting investment in the urea sector by resumption and expansion of existing units to meet the set target of 40 m of urea by 2012. As a result, the divestment of public sector companies in this space is expected to rope in many private players. Readers would do well to recall that the divestment proposals of the oil PSUs HPCL and BPCL had raised an outcry from the Left party, which finally led the government to shelve those plans. Now that the government no longer has to dance to the tunes of the Left, maybe now is the time to let go of some public sector companies, especially the sick ones. This will also help the government improve its public finances to an extent.

      Which way will OPEC go?
    A survey conducted by Bloomberg indicates that the 13-nation Organization of Petroleum Exporting Countries (OPEC) will keep oil production unchanged at their meeting tomorrow in Vienna. OPEC, the supplier of 40% of the world's oil, hosts regular meetings among the oil ministers of its member countries with a view to safeguard its member countries' interests, and to pursue ways and means of ensuring the stabilisation of international oil prices.

    According to an August 15 forecast by OPEC, demand for crude will increase by only 1% in 2009. Hence, it would not want to prevent a buildup of crude stocks, which would rule out an increase. However, they would also not want to send prices zooming upwards by announcing a cut. Hence OPEC is expected not to take any formal action.

  • Also read- Fuel price hike: Impact on OMCs

      In the meanwhile...
    Key Asian markets closed firm today. The gainers list was led by Taiwan (up 5.6 %) and Korea (up 5.2%). Indian markets, buoyed by the NSG waiver and signs of settlement of the Singur issue, had a steady stay in the green through out the day and ended with substantial gains. Overall, gains in Asia were led by the optimism about strength in US markets after the government's bailout plan for Fannie Mae and Freddie Mac was announced during the weekend. US stocks ended on a positive note last Friday. European markets are also trading in the green currently.

      Today's investing mantra...
    "In the stock market the more elaborate and abstruse the mathematics the more uncertain and speculative is the conclusions we draw therefrom." - Benjamin Graham

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