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Two hands to clap - Views on News from Equitymaster
 
 
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  • Jan 10, 1998

    Two hands to clap

    How many times have the wise told us: it takes two hands to clap? It is a moral that every grandparent tells the naughty grandchild when the plea bargain for innocence is: I did not do it, he did. Someone should call in the owners of foreign capital and remind them of this "sharing of the blame" concept. Over the past four months, the international business press has bombarded news channels with the image of this Asian contagion caused by governments and their cronies. Of an Indonesian President whose family and friends built vast fortunes based on connections and connectivity. Of a Malaysian leadership that shoveled projects - and money - in the directions of friends and family. All of this is true. But guess where a big chunk of that money came from? From foreign banks and the savings of the invisible millions who live in the sophisticated western world.

    Look at a map of the world in 1988. And use coloured pins to mark the cities where all the large, global banks had their branches. Then write down the number of employees in each of those branches. Now take another set of coloured pins and mark the cities where the global banks had offices in 1997 and write the number of employees in each branch in 1997. Do the same for these things called investment banks. See how they mushroomed? See how they came in with heaps of money to find projects to fund? See how they did not care about the kind of people they were investing in? We have seen it in India, too. We went through our own little "bust" cycle when foreign money chased poor quality management (actually they were crooks) and took share prices to stupid highs. Sure, the crooks did what all crooks do. They bought properties and personal assets at company expense. But they could not have done it without the help of all those dollars that the foreign investors sent into India - Rs 30,000 crores of money.

    The years 1992 to 1995 were a humbling lesson for me for it made me realize that neither is "crookedness" a third world characteristic and nor is honesty a monopoly of the developed world. Do you remember the scam in India in 1991-1992? Do you remember which banks were involved? If the foreign banks had not gotten into the act (a market practice, they called it) the scam would probably have been a lot smaller and less damaging than what it was. Access to more money from the foreign banks kept it growing bigger. The same conclusion for this Asian asset bubble. How many times could the politicians and their friends swindle their innocent citizens? The foreign money gave them a new market to exploit.

    And Asia is not the only place where bubbles have occurred. They have existed in the United States as recently as the 1980's when the savings and loan associations (institutions set up for the purpose of financing home purchases) got adventurous and did silly things out of their lines of business. The lessons of the Asian bust are many, but most notably:

    1. Crooks exist everywhere,

    2. Crooks need people willing to be swindled,

    3. The process of screening deals for the use of money is very, very poor - globally. Imagine, giving a Rs 1,200 crore loan to a taxi company that has 4,000 taxis (valuing each taxi at a collateral value of Rs 30 lakhs per taxi) or giving a company money 3 times for the same project!

    4. The people who raise money for these companies (politely called investment bankers) don't get punished enough for their crimes - they get bonuses!

    5. The people, like myself, who manage money wrongly and refuse to learn from past mistakes also do pretty well

    6. The people whose money it actually is, those invisible savers all over the world, would keep their money under their mattresses if they knew the five points above. That is what happened in India after the 1994 collapse, people just kept their money hidden at home where it was safe. Having zero returns, they realised is better than having no returns and no principal!

    So the next time you read a story about how the Asians have gone bust, remember that a big chunk of that money came from the sophisticated, developed world. Your grandmother was right: it does take two hands to clap.

     

     

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