Billions in bonuses... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Billions in bonuses... 

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In this issue:
» CII has an idea!
» Lesser men for Goldman
» Off-the-books fiasco
» 'Gas' relief for power companies
» ...and more!!

00:00 CII has an idea!
With a view to lend a supporting hand to stock prices when foreign investors are busy adding pressure to them (by selling Indian stocks), the CII (Confederation of Indian Industry) has requested the government to intervene by way of it investing in the markets. In its recommendations sent to the Ministry of Finance, the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI), the CII has called for the creation of a special purpose vehicle (SPV) that will invest around US$ 6 to 7 bn into Indian stocks.

The CII has also proposed that this SPV be financed through the nation's burgeoning forex reserves (which currently total over US$ 270 bn). As a matter of fact, the foreigners (FIIs) have sold a net of US$ 12.6 bn of Indian equities this year so far. This is as compared to a US$ 17 bn of funds that they had invested in 2007.

While CII's recommendations are definitely worth considering, whether the government is in any mood of implementing anything reformist at this point of time is questionable.

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00:39 Japan steps in...
When your interest rates are one of the lowest in the world, there is little that the central bankers can do to spur economic growth. Japan is, however, not taking any chances. The Bank of Japan has cut its benchmark interest rate from 0.5% to 0.3% to help keep off a prolonged recession. But rate cutting is not all that Japan has stopped at.

After the US and European nations, Japan has enrolled itself into the reckoning of economies offering 'stimulus' packages to hedge themselves against the global meltdown. The Japanese Prime Minister has promised to pump in 5 trillion yen (US$ 51 bn) into the economy to help households and small businesses. Not stopping at that, the premier has also indicated that he would delay elections until the global financial crisis subsides. Japan's second stimulus package since August will be equivalent to about 1.2% of its GDP.

As per Bloomberg, the losses sustained by Japanese financial institutions were to the tune of 1 trillion yen (US$ 9.4 bn) until March 2008 and were not significant enough for the government to intervene. However, now with Japanese banks like Mizuho suffering subprime-related losses of several billion dollars, the government seems to be thinking otherwise.

01:18 Lesser men for Goldman!
Goldman Sachs, the only investment bank among Wall Street's 'Big Five' to have remained profitable through the credit crisis, employs about 2,300 people in India in its offices in Bangalore and Mumbai. Well, around 10% of them are very soon going to find themselves estranged by the company. This is part of the company's newly acquired thriftiness on the back of a 32% drop in the firm's revenue for the first nine months of 2008.

As per the company, the work that is done in Bangalore and Mumbai is a high-value, strategic part of the client service that they deliver and contributes to the company's global position within the industry. Who would have thought just a year back that a company like Goldman Sachs, in which just to get an entry level job was counted as a high measure of success, would itself become part of one of the most unsuccessful stories of the last many decades.

01:42 In the meanwhile...
While most of the key Asian indices closed in the red today, the Chinese Shanghai Composite (up nearly 4%) was amongst the few gainers in the pack. The Indian benchmark BSE-Sensex closed lower by 1%. The Indian markets in fact languished in the red throughout today's session as the rupee continued to lose ground against the US dollar.

The rupee fell to its lowest (46.3 to a dollar) in a week today as month-end dollar demand from importers and oil companies weighed on it. The US markets are expected to continue witnessing the jitters over the fate of the government's US$ 700 bn financial sector bailout plan. The European markets are trading in the positive currently.

02:05 Billions in bonuses
They made a killing in the crisis and they are at it again! According to Bloomberg, Wall Street's five biggest firms paid more than US$ 3 bn in the last five years to their top executives, while they presided over the packaging and sale of poor loans that helped bring down the investment-banking system. The 185,687 employees of the big 5 (Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers and Bear Stearns) laughed their way to the bank with a whopping US$ 66 billion in 2007 (including about US$ 39 billion in bonuses). That amounts to an average pay of US$ 353,089 per employee. The total compensation was nearly 2/3rd the combined net income of US$ 93 bn earned by the 5 firms in five years until 2007.

While this may have not surprised you, what we are going to tell you now, surely will.

Wall Street's chief executives are set to receive another fat pay packet in the midst of the worst financial crisis since the Great Depression, a taxpayer bailout and mounting political outcry. As per Bloomberg, year-end bonuses at the nine banks that received US$ 125 bn from the US Treasury under the 'bailout package' will once again run into several billions of dollars. While the taxpayers' representatives demand details on the companies' compensation plans, three of the firms, Goldman Sachs, Morgan Stanley and Merrill Lynch have already set aside US$ 20 bn to pay out as bonuses this year.

02:40 DLF presses for lower interest rates. What about real estate prices?
Last year, the real estate industry was in an exuberant mood against a backdrop of rising prices which translated into higher revenues. And then, the tide just turned. Inflation shot up leading to a rise in interest rates, which further got worsened with the liquidity crunch that began post the demise of Lehman Brothers. These high interest rates are taking its toll on the real estate industry; so much so that DLF is pressing the finance ministry for the lowering of interest rates on housing loans to ease the liquidity squeeze in real estate. Given that real estate prices had become exorbitant, a downturn seemed just around the corner and it is precisely this risk that compelled banks to stop giving loans to developers. This, according to a leading business daily, has forced realtors to raise funds from private investors and other sources with interest rates as high as 30%, which is way above the 13% to 15% they are paying to banks.

The recent turmoil in the stockmarkets which has wiped the wealth of millions of investors coupled with the firm interest rates means that there is a higher probability of people saving more and putting big ticket expenses like buying a house on the backburner. While this may support DLF's requisition for lowering interest rates, what would be interesting to know is whether the developer is willing to compromise on real estate prices as well.

03:10 Off-the-books fiasco
While the subprime crisis and its origins will be analyzed, dissected and debated for years to come, one of the real culprits that sowed the seeds of this financial disaster was an accounting rule for off-the-books assets. And the world is paying a heavy price for the same: more than US$ 680 bn in losses and writedowns, one third out of which is by European banks. And it seems that the US has still not learnt its lesson. As reported on Bloomberg, the Financial Accounting Standards Board (FASB) had come out with a plan that would force trillions of dollars back onto balance sheets of banks, thereby requiring them to raise their cash reserves; a plan which is facing considerable opposition. This off-the-books accounting rule meant that key parts of the American financial system was kept out of the reach of regulators and helped broker-dealer units of investment banks magnify profits. While the damage has been done, the US regulators will obviously have to take a stricter stance in this regard and make sure that a financial fiasco of this magnitude does not occur again.

03:43 Inflation showing signs of cooling off
Amidst the all pervading gloom in the markets, there is something to cheer about on the inflation front. Inflation fell below the 11% mark to 10.68% in the week to October 18 signaling the possibility that the RBI might go in for a cut in the key rate going forward. Inflation had reached its 16-year high in August touching 12.91% and was giving the RBI sleepless nights since the figure was way beyond its comfort limits of 5%. While the central bank recently had cut the repo rate to 8% and had slashed the CRR to 6.5% to ease the liquidity crunch, in its monetary policy released last week, the key rates were left unchanged as bringing inflation under control continued to remain the topmost priority of the RBI. Another rationale for keeping the rates unchanged was the fact that the rupee had already depreciated sharply against the dollar. Therefore a further rate cut would have reduced the interest rate differential between India and the US, thereby putting added pressure on the rupee. Whether the RBI will go in for rate cuts remains to be seen. However, it is certainly focused on bringing down the inflation level to 7% by March 2009.

04:11 Gold lost luster in October
Gold is currently trading at US$ 730 an ounce, down US$ 5 over yesterday's close. Fortunes for the yellow metal have not been bright in the month gone by. Gold's performance in October 2008 may well be the worst in more than 25 years, as a stronger dollar and declines in crude oil reduced its appeal as an alternative asset. And as per Bloomberg, the metal's 19% decline during the month was the largest plunge it has seen since February 1983. During October, while oil slumped almost 37%, the US dollar gained 7.3% against major currencies.

04:35 'Gas' relief for power companies
The international crude oil prices posted their biggest monthly drop (37%) since 1983, on concerns that the decline in the US economy will curb fuel demand in the world's largest energy consuming nation. This also seems to be bringing in some good news for domestic power companies that have been strapped for gas supplies at reasonable prices.

The Indian government is considering a proposal to withdraw import and local levies which, if approved, would reduce the landed price for liquefied natural gas (LNG) significantly. Together with the fact that international crude oil prices, and thereby of LNG, are winding down, the reduced price would make it viable for domestic power companies to buy the fuel from the spot market. While Indian power projects are yet to tie up for long-term gas supplies, they have been buying LNG in the spot market at around US$ 14 per million British thermal units (mbtu), to meet the shortfall. A waiver of levies will reduce the price by US$ 1.7 per mbtu, thus bringing down the variable cost for a power project by Rs 0.7 per unit.

04:55 Today's investing mantra
"The list of qualities (an investor ought to have) include patience, self-reliance, common sense, a tolerance for pain, open-mindedness, detachment, persistence, humility, flexibility, a willingness to do independent research, an equal willingness to admit mistakes, and the ability to ignore general panic." - Peter Lynch
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