Uh-oh! Another bank fails... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Uh-oh! Another bank fails... 

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In this issue:
» The biggest bank failure in US history
» US bailout in trouble?
» Richer Indians
» Shareholder activism in India
» ...and more!

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00:00  The biggest bank failure in US history
JPMorgan Chase has agreed to acquire Washington Mutual (WaMu), the Seattle-based bank, for US$ 1.9 bn after regulators seized the bank. WaMu was among the worst hit by the housing crisis. Moreover, it had witnessed customer withdrawals of nearly US$ 17 bn since Sept. 15 leaving it with insufficient liquidity. WaMu is the 13th bank to fail so far this year. It is also the biggest bank failure in US history.

The irony is that WaMu had resisted an acquisition offer from JPMorgan in March that valued the bank at US$ 4 per share. Now that it has been seized, there will be little left for the bank's shareholders. JPMorgan will acquire WaMu's banking operations and its assets and financial contracts. WaMu and a subsidiary, Washington Mutual FSB, have total assets of US$ 307 bn, total deposits of US$ 188 bn and a presence in 2,300 locations across the US.

While it is anybody's guess when these tragic events will end, we are reminded of what Warren Buffett once said, "There is seldom just one cockroach in the kitchen."

  • Also read - 'TBTF' at its best...yet again

    00:31  US bailout in trouble?
    A meeting was arranged in the White House yesterday between President Bush, congressional leaders and the presidential candidates for negotiations over the US$ 700 bn bailout package by the US government. However, it ended in chaos with lawmakers fighting over proposals and counter proposals.

    The finger pointing witnessed between the Republicans and the Democrats in the face of an acute economic crisis reminds us of the political negotiations that happen in India. The Indian Parliament had witnessed unruly scenes in the recent debate over the nuclear agreement with US. Ironically, the same agreement might now become a low priority for the US, which is witnessing unruly scenes over its worsening credit crisis.

  • Also read - Casino capitalism?

    00:50  Nuclear deal on the verge of approval
    Despite the on going financial crisis in the US, the bill concerning the Indo-US nuclear deal has already been moved in the US Congress and things are looking positive at this point of time. However, a major worry for Indian is a clause that says the 123 agreement will be subject to the provisions of the Atomic Energy Act, the Hyde Act and any other applicable US law.

    01:02  Mirror, mirror on the wall...
    ...who is the richest of them all? At least, when it comes to the pace of growth of millionaires, India seems to take the cake notwithstanding the falling stock markets and rising inflation. With people from India and China getting richer, the world's millionaires grew 6% (this includes the number of people with US$ 1 m to invest not taking into account the value of their homes or consumable goods) last year as per the Asia Pacific World Report by Merrill Lynch and Capgemini. In fact, India and China emerged on top of the heap posting growth rates of 23% and 20% in millionaires respectively. These emerging economies reaped the fruits of buoyant exports, heightened domestic demand, gains in the stock markets and downpour of foreign investments. However, the same could not be said of developed nations. According to the report, the average net worth of Indian high net worth individuals rose to US$ 3.6 m as compared to US$ 3.4 m for the Asia Pacific region and the global average of US$ 4 m. The growth in millionaires slowed down to 2.1% in the UK and about 4% in the US and the sub prime malaise afflicting these economies is only expected to shrink this number further.

    01:36  Japanese on Wall Street - Opportunity or desperation?
    Yesterday's issue of this newsletter talked about how the Japanese banks are queuing up with capital to invest in beleaguered financial companies in the US. We had also talked about how difficult the execution will be considering the difference in the ways Japanese organisations and Western banks run.

    Now, if one were to go by the view put forward by Japanese executives and bankers and as reported in Mint, 'these banks are acting not from a position of strength, but from a sense of desperation because of limited opportunities at home'. Given that Japan in itself is still trying to recover fully from the economic crisis that has spanned almost two decades, these moves are indeed brave. Interestingly, while the European and US financial system has teetered and collapsed under the weight of the crisis, Japan's banking groups have stood relatively unscathed.

    In an era dominated by globalisation where seemingly unrelated events can affect the lives of people around the world, Japan has so far floated above the anguish gripping its developed world peers. Call it the lesson from the 'lost decades' or that from its own bitter experience of the past. However, can Japan emerge successful in managing its investments in Wall Street firms shall remain an intriguing question for some time to come.

  • Also read - Japanese undoing the Pearl Harbour

    02:12  Inflation remains flat @ 12.14%
    The Wholesale Price Index (WPI) based inflation remained unchanged at 12.14% for the week ended September 13. While price of items like cereals, pulses, sugar and edible oils declined, those of salt, sea fish, tea, fruits, condiments and spices increased. It is expected that this will provide the RBI with elbow room to keep the interest rate unchanged. It may be noted that the central bank has hiked interest rates thrice since June this year and would now be cautious of another increase in the face of worries over a slowdown in the economy.

  • Also read - Inflation last week

    02:29  1,000 million sq. ft in demand by 2012
    Having taken the world's financial markets by storm and bringing the biggest economy in the world to its knees, real estate is one sector that will stay away from investors' horizon for a while now. The Indian real estate sector itself has witnessed price correction to the tune of 15% to 20% in some pockets and construction companies see little upside in demand in the near term. However, according to real estate consultants Cushman and Wakefield (C&W), not all is bleak for the Indian real estate sector. It projects the Indian demand for real estate across office, retail, residential and hospitality sectors to cross 1,000 million sq ft by 2012.

    While demand from retail and hospitality sectors will remain subject to the cyclicality of the respective sectors, the latent demand from the residential segment will continue to drive real estate demand contributing 63% of the potential demand. The demand for commercial office space (22% of the total projected demand), retail and hospitality segments (9% and 6% respectively) may however, take a while before showing up from the current levels. Although construction companies are currently willing to take several price cuts for keeping the demand stable, C&W believes that in the long-term, strong demand for real estate in India will remain intact and will probably see us through another real estate cycle once the market finds its own level by responding to the short-to-mid term global and domestic factors.

    03:08  China readies to put its man in space, India on its way
    India and China are not only competing in terms of economic growth, but also in space research. While China launched its third manned spacecraft this week with three astronauts on board to attempt the country's first-ever space walk, India's first unmanned mission to moon called Chandrayaan-1 is set to blast off in October this year. However, the worsening weather conditions in the Bay of Bengal may postpone the India's launch timeline to December. The race between the two giants to develop their own space programmes is driven by their aspiration to prove to the world that they are self reliant in developing technologies and competitive in the knowledge industries.

  • Also read - Steel: The China factor

    03:28  Rare shareholder activism in India
    Indian mining major Vedanta Resources has abandoned its restructuring plan citing recent changes in global financial markets and investor feedback as the reason. Investors took the proposed restructuring plan negatively on the grounds that it is skewed against minority shareholders and increases the interest of the promoters. The restructuring, which was announced on Sep. 9, was a direct response to shareholder requests to simplify the current corporate structure and eliminate conflicts of interest. Under the plan, the company's Sterlite Industries (India) unit would have sold its aluminum and power businesses to Madras Aluminium and Vedanta would have transferred its 79.4% in Konkola Copper Mines Plc to Sterlite. It would have created three exclusive wings with a separate focus on particular metals and avenues. It was expected to be completed by March 2009. It also had plans to invest US$ 9.8 bn to boost aluminum-smelting capacity, betting on increasing Asian demand for the metal. While the management has indicated of its commitment to simplifying and streamlining its corporate structure, the deferment negatively impacts its credibility.

    04:05  Dr Doom's still a bear on India
    Marc Faber, nicknamed Dr Doom for his 'bang on' predictions of some of the biggest crises in recent years, has given his verdict on the Indian equity market. Unfortunately, it is not a very good one as far as the near to medium term is concerned. While a lot of people are fretting over the Sensex fall from 21k levels to around 13k levels currently, Faber is of the opinion that even at 10k, the markets are up a good 3-fold from its levels in 2003. Ironically, he expects the markets to bottom out around the 10k levels. What more, Faber is also negative on the China growth story from a medium perspective, putting the blame squarely on its huge misallocation of capital and excess capacities. Over the long-term though, Dr Doom is positive on both the Asian giants and has asserted that the importance of US in the global scheme of things will diminish further.

    Another big bear on the US economy, Jim Rogers, has come down heavily on the US Fed policy of bailing out troubled Wall Street firms and has labeled the US even more communist than China. However, he has termed this trend as the welfare of the rich, going on to add that the world's largest economy has doubled its debt in just one weekend for a bunch of crooks and incompetents. Strong words indeed from the man know as 'Indiana Jones of finance'.

    04:44  In the meanwhile...
    Key Asian markets closed weak today. The losers' list was led by Taiwan and India (down 2% each). Indian markets opened in the red and moved steadily downwards as the day progressed. Overall, Asia, Europe and US index futures declined on the news that the negotiations on the US$ 700 bn bailout package were stalled and Washington Mutual was seized.

    04:54  Today's investing mantra
    "I do know that the economy, over a period of time, will do very well, and people who own a piece of it will do well. But they shouldn't own it on leverage." - Warren Buffett
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