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The brighter side of the slump

Feb 24, 2009

Banks make money from fees
Probably the US banks that have managed to survive the onslaught of the economic crisis did not see this coming. But the absence of competitors like Lehman Brothers and the flush of debt issuances have actually brought in good times for them. The debt issuances in the US in recent times have been at a pace not seen for months. As per Bloomberg, in January 2009 itself, US$ 127 bn of dollar-denominated debt was issued, well above the US$ 82 bn raised in January 2008. Taking advantage of the situation, the banks are charging hedge funds and other clients lofty fees for their trades, something they were not able to do when markets were flush with liquidity and there were more banks offering these services. The higher fee earnings could have important implications for some big banks, especially those now supported by taxpayer money.

The Obama administration meanwhile will begin reviewing the financial condition of the country's 20 biggest banks this week to judge whether they can withstand the market pressures if the downturn worsens. These reviews of the banks' books, being termed as 'stress tests', are expected to pressurise entities like Citigroup and Bank of America that have failed to relieve themselves of their funding woes despite receipt of taxpayer money.

Indian firms aid employment in the US
Seized by the wave of anti-offshoring sentiment in the US, the Obama government may have passed a legislation restricting the issue of H1-B visas, which allow US companies to temporarily hire foreign workers in a specialty field, particularly technology. However, the same is not dissuading the Indian offshoring giants - Infosys and Wipro - from seeking to deliver services in Uncle Sam's land. Even if that means hiring more Americans!

As per the Wall Street Journal, Infosys had received 4,559 H1-B work visas while Wipro was granted 2,567 in 2007 (last data available), making them the largest recipients of the same in the world. The Indian technology giants that have been long derided by some US politicians for taking US jobs away are now laying the groundwork to boost the number of jobs they create onshore. This is largely to make sure they can still do business if the US government's legislation restricts their ability to send Indians to the US to work. But their operating margins may no longer remain as lofty as they were so far. Hiring Americans comes with a downside for the companies. The Indian software companies had the advantage of utilising low-cost, skilled Indian engineers. But the heftier salaries they will have to pay to the Americans will cut into that cost advantage.

Further, their onshore recruitment plans may harm the domestic employment scenario. The companies' plan to ramp up recruiting in the US comes as a double blow as they have sharply cut down hiring at home because of the downturn in the global economy. Infosys has said that it made 15% fewer offers to Indian graduates this year, while Wipro does not plan on hiring any more than 8,000 Indian graduates this year.

Tatas and Birlas see opportunity in adversity
The real estate market may still be finding few buyers despite the correction in prices and interest rates. However, there are those that can spot opportunity in adversity. As per a leading business daily, two of the largest business houses in the country, the Aditya Birla group and the Tata group, are looking at real estate as a major investment area. While the Birlas, through their financial services arm, are offering real estate as an alternative investment option to clients, the Tatas are planning to develop surplus land held by group companies. Tata Housing, the property development arm of Tata group, has begun identifying excess land banks owned by group companies such as TCS, Voltas, Rallis India, Tata Motors, Tata Coffee and Tata Tea. In fact, the Tatas may also invest in the sector part of funds raised through recent public offerings.

This move seems to be well timed since the poor demand for projects has prompted large developers to default on financial commitments and project deadlines. However how far these groups can go given their internal cash crunch will be interesting to see.

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