Why the Communists are barking up the wrong tree
Going by Indian media reports, one would think that the whole issue was about India compromising on her sovereignty by agreeing to various terms and conditions imposed by the US. Of course, it is the communists who have made the maximum noise. So much so that even during the past few days when much of the country’s attention has been riveted on the Hyderabad bomb blasts, the communists have remained completely focused on the 1-2-3 agreement. How misguided our communists are and how jaundiced their mindset is, can be best gauged when we read better informed and unbiased reports in some western media. The Economist (Aug 25) has for instance criticized the US for agreeing to give so many concessions to India. As we all know, India has not signed the Nuclear Proliferation Treaty (NPT). By making India accept International Atomic Energy Agency (IAEA) safeguards, even if on her own terms and conditions, the Bush administration has attempted to bring India out of isolation and make her take on similar responsibilities like the five major nuclear powers, USA, UK, France, Russia and China. India has not agreed to sign the test ban treaty. Moreover, India has reserved the right on what reactors can be inspected and when. As the Economist mentions, “Such unprecedented laxity in India will make it hard to get others to accept the tougher inspections that the IAEA wants as standard for all NPT members… Exemptions from India will convey a different message, “first get your bomb." Such rule bending puts at risk the anti nuclear regime that everyone else’s safety and security is built on."
In short, India seems to have succeeded in extracting several important concessions from the US. All this talk from the communists about India compromising her sovereignty must be dismissed as rubbish.
Thursday, August 30, 2007
The essence of the India-US nuclear deal
(Ref: The Economist, August 25, 2007)
Though a nuclear arms power,India has not signed the Nuclear Proliferation Treaty (NPT). India has consequently been barred from civilian nuclear trade by America and other developed countries. Through the recently negotiated agreement, America has made an exception in the case of India. USA will supply India with civilian nuclear fuel and technology. In return, India has agreed to submit to safeguards on its civilian nuclear programme and will separate it from its military one.
But India has negotiated special terms. India will have a say in what reactors are inspected and when. India will retain the right to reprocess atomic fuel for energy generation, a procedure which will also yield fissile material for weapons. America’s nuclear technology will, however have to be returned, if India tests another nuclear weapon. At a meeting of the IAEA next month, India will seek approval for “India specific” safeguards. India will also need an exemption from the 45 nation Nuclear Suppliers Group (NSG) which bars nuclear trade with countries such as India, that refuse to apply international safeguards to all their facilities.
Though a nuclear arms power,India has not signed the Nuclear Proliferation Treaty (NPT). India has consequently been barred from civilian nuclear trade by America and other developed countries. Through the recently negotiated agreement, America has made an exception in the case of India. USA will supply India with civilian nuclear fuel and technology. In return, India has agreed to submit to safeguards on its civilian nuclear programme and will separate it from its military one.
But India has negotiated special terms. India will have a say in what reactors are inspected and when. India will retain the right to reprocess atomic fuel for energy generation, a procedure which will also yield fissile material for weapons. America’s nuclear technology will, however have to be returned, if India tests another nuclear weapon. At a meeting of the IAEA next month, India will seek approval for “India specific” safeguards. India will also need an exemption from the 45 nation Nuclear Suppliers Group (NSG) which bars nuclear trade with countries such as India, that refuse to apply international safeguards to all their facilities.
The sub prime crisis : Will cuts in interests rates restore risk appetite?
Will cuts in interests rates restore risk appetite and encourage entities to take up new debt. Or will growth slow down? According to George Magnus, writing in the Financial Times, the reduced availability of cheap credit will lead to a sharp reverse in spending. Magnus also mentions that the current crisis is different from 1998 when liquidity was the main concern. This time the problem is about solvency. The rapid deterioration in financial conditions and rising cost of capital will almost certainly lead to higher default rates. Magnus expects that in the near future, the price of capital will depress borrowing, capital mobilization, capital spending and employment. While the US will be the worst hit, Europe and Japan will slow down though not so much. But overall, the world economy may lose momentum and the business cycle may get rough.
Meanwhile, there have been wild swings in prices of some of the safest and most liquid government securities. After a flight to quality, there has been a massive sell off of T Bills. On August 22, the yield on one month treasury bill rose 83 basis points to 3.15%, while the 3 month T bill yield increased by 17 basis points to reach 3.44%. Swings of 50-100 basis points in T bill yields have become quite common. These fluctuations are of course the result of serious concerns about the $2130 billion commercial paper market, 50% of which is estimated to be backed by assets such as consumer loans, including mortgages and complex structured securities such as CDOs (Collateralised Debt Obligations) Money market funds, which are usually major buyers of such paper have shifted to the much safer T Bills. Till the markets become more confident that the skeletons are out of the cupboard, uncertainty and mistrust will continue. So will the market fluctuations.
Meanwhile, a more optimistic view has been expressed by Ken Fisher again writing in the Financial Times. According to him, while credit spreads have widened, they have not widened all that much compared to credit crunches of the past. Fisher also argues that a lot of cash hoarding is taking place, a clear signal that these are the late stages of a panic or correction, not the early stages of a bear market. Even today, interest rates remain low and debt is attractive. Firms can borrow globally and buy back shares to increase EPS. If that continues, the supply of equity will shrink and the bull market will resume.
Meanwhile, shakeouts continue. On August 23, Lehman Brothers announced plans to shutdown its sub prime mortgage unit, BNC Mortgage. Lehman will take a charge of about $52 million. According to company sources, sub prime lending activities account for less than 3% of revenues in recent quarters. Some 1200 people are expected to lose their jobs.
Meanwhile, Accredited Home lenders, a sub prime lender and HSBC have announced combined job losses of more than 2000. Accredited will cut 1600 jobs while HSBC will slash 600.
On the other hand, Bank of America has plans to invest $2 billion in country wide financial, the troubled mortgage company’s current market cap of about $12.6 billion. Bank of America’s move indicates that some companies are seeing a big opportunity to pick up undervalued stocks even as the market turmoil continues.
Meanwhile, there have been wild swings in prices of some of the safest and most liquid government securities. After a flight to quality, there has been a massive sell off of T Bills. On August 22, the yield on one month treasury bill rose 83 basis points to 3.15%, while the 3 month T bill yield increased by 17 basis points to reach 3.44%. Swings of 50-100 basis points in T bill yields have become quite common. These fluctuations are of course the result of serious concerns about the $2130 billion commercial paper market, 50% of which is estimated to be backed by assets such as consumer loans, including mortgages and complex structured securities such as CDOs (Collateralised Debt Obligations) Money market funds, which are usually major buyers of such paper have shifted to the much safer T Bills. Till the markets become more confident that the skeletons are out of the cupboard, uncertainty and mistrust will continue. So will the market fluctuations.
Meanwhile, a more optimistic view has been expressed by Ken Fisher again writing in the Financial Times. According to him, while credit spreads have widened, they have not widened all that much compared to credit crunches of the past. Fisher also argues that a lot of cash hoarding is taking place, a clear signal that these are the late stages of a panic or correction, not the early stages of a bear market. Even today, interest rates remain low and debt is attractive. Firms can borrow globally and buy back shares to increase EPS. If that continues, the supply of equity will shrink and the bull market will resume.
Meanwhile, shakeouts continue. On August 23, Lehman Brothers announced plans to shutdown its sub prime mortgage unit, BNC Mortgage. Lehman will take a charge of about $52 million. According to company sources, sub prime lending activities account for less than 3% of revenues in recent quarters. Some 1200 people are expected to lose their jobs.
Meanwhile, Accredited Home lenders, a sub prime lender and HSBC have announced combined job losses of more than 2000. Accredited will cut 1600 jobs while HSBC will slash 600.
On the other hand, Bank of America has plans to invest $2 billion in country wide financial, the troubled mortgage company’s current market cap of about $12.6 billion. Bank of America’s move indicates that some companies are seeing a big opportunity to pick up undervalued stocks even as the market turmoil continues.
Friday, August 24, 2007
The Sub Prime Crisis: The Fed’s impact on money markets
(Ref: Wall Street Journal, August 21, Financial Times August 21)
About a week back (August 17th) the Fed reduced the discount rate, the interest rate at which the Fed provides funds to banks, as a lender of last resort. The Federal funds rate, the interest rate at which banks led to each other, has still not been cut. But the stock markets, in anticipation of such a cut, have bounced back a little. In contrast, the money markets, for whom the message was intended, have reacted in a negative way. Money market investors have retreated to safety, investing heavily in short term US government debt. On August 20, the yield on the one month treasury bills fell to 1.34% (about 160 basis points) while that on three month treasury bills fell to 2.51% (123 basis points). This retreat to safety is a clear indication that risk aversion has seized the markets. There is now speculation that the Fed will cut the Federal Funds rate on September 18, the date of the next policy meeting. Meanwhile, yesterday (August 20), major central banks continued to pump funds into money markets. The ECB has so far injected liquidity to the tune of Euro 95 billion on August 9, Euro 61 billion in Aug 10, Euro 47.7 billion on August 13, and Euro 7.7 billion on August 14. Yesterday (August 20) the Fed pumped in $3.5 billion of overnight funds while the Bank of Japan added $8.76 billion to short term money markets.
About a week back (August 17th) the Fed reduced the discount rate, the interest rate at which the Fed provides funds to banks, as a lender of last resort. The Federal funds rate, the interest rate at which banks led to each other, has still not been cut. But the stock markets, in anticipation of such a cut, have bounced back a little. In contrast, the money markets, for whom the message was intended, have reacted in a negative way. Money market investors have retreated to safety, investing heavily in short term US government debt. On August 20, the yield on the one month treasury bills fell to 1.34% (about 160 basis points) while that on three month treasury bills fell to 2.51% (123 basis points). This retreat to safety is a clear indication that risk aversion has seized the markets. There is now speculation that the Fed will cut the Federal Funds rate on September 18, the date of the next policy meeting. Meanwhile, yesterday (August 20), major central banks continued to pump funds into money markets. The ECB has so far injected liquidity to the tune of Euro 95 billion on August 9, Euro 61 billion in Aug 10, Euro 47.7 billion on August 13, and Euro 7.7 billion on August 14. Yesterday (August 20) the Fed pumped in $3.5 billion of overnight funds while the Bank of Japan added $8.76 billion to short term money markets.
The Sub Prime Crisis: Some investors see an opportunity
(Ref: The Financial times dt August 21)
Wilbur Ross, the US financier specializes in distressed businesses. In 2000 he bought a bankrupt lender, Kofuku Bank of Osaka and sold it three years later for a profit. Planning to invest in the sub prime segment in a big way, Ross recently remarked, “We are going to be in sub prime. It is a valid business. There is nothing wrong with lending sub prime, what is wrong is doing it recklessly.” Having lent $50 million to American Home Mortgage, a move which he equates to getting his feet wet, Ross has much bigger plans ahead.
Ross’s move is reflection of the maturity and dynamism of the US financial markets. True there is currently a crisis. But even in a crisis, people are seeing opportunities. There is a lot of soul searching going on out there. No one is trying to downplay the magnitude of the crisis. The only debate is on what is the best policy measure under the circumstances. And what are the structural measures needed in the long run? If such a crisis had happened in India, the country’s leaders would have almost certainly gone into a state of denial, arguing that the crisis had been exaggerated. In contrast, the crisis is being discussed in a very transparent way in the US. Even Henry Paulson the highly respected Treasury Secretary and former Goldman Sachs CEO has admitted that the US economy will take a hit. The strength of the global economy, less dependence on the US, pragmatic measures by the Fed and the arrival of bargain hunters like Ross mean that there is still a silver lining in the cloud. The markets may stablise faster than expected.
Wilbur Ross, the US financier specializes in distressed businesses. In 2000 he bought a bankrupt lender, Kofuku Bank of Osaka and sold it three years later for a profit. Planning to invest in the sub prime segment in a big way, Ross recently remarked, “We are going to be in sub prime. It is a valid business. There is nothing wrong with lending sub prime, what is wrong is doing it recklessly.” Having lent $50 million to American Home Mortgage, a move which he equates to getting his feet wet, Ross has much bigger plans ahead.
Ross’s move is reflection of the maturity and dynamism of the US financial markets. True there is currently a crisis. But even in a crisis, people are seeing opportunities. There is a lot of soul searching going on out there. No one is trying to downplay the magnitude of the crisis. The only debate is on what is the best policy measure under the circumstances. And what are the structural measures needed in the long run? If such a crisis had happened in India, the country’s leaders would have almost certainly gone into a state of denial, arguing that the crisis had been exaggerated. In contrast, the crisis is being discussed in a very transparent way in the US. Even Henry Paulson the highly respected Treasury Secretary and former Goldman Sachs CEO has admitted that the US economy will take a hit. The strength of the global economy, less dependence on the US, pragmatic measures by the Fed and the arrival of bargain hunters like Ross mean that there is still a silver lining in the cloud. The markets may stablise faster than expected.
The structural reasons behind the Sub Prime Crisis
(Ref Financial Times dt August 22)
In a recent article in the Financial Times, Martin Wolf, the well known columnist has dug deeper into the sub prime crisis. Many of the articles written on the subject have focused on the linkages between different markets. But this one looks at broad macro economic factors contributing to the crisis. We all know the US has been running a major current account deficit in the recent past. A current account deficit essentially means the country is spending more that it is saving. According to Wolf, there is an excess of savings over investment (and consumer spending) in much of the world. This has been offset by an excess of investment (and consumer spending) over savings in a smaller part of the world. In 2006, the countries with surplus savings generated a current account surplus of about $1300 billion. The US current account deficit absorbed about two thirds of this surplus.
In simple terms, foreigners have been buying US assets on a vast scale. The funds provided by foreigners have been absorbed by the US government and households since the stock market bubble burst in 2000. Between the first quarter of 2000 and the third quarter of 2003, there was a negative swing in the US budget balance of 7% of GDP. Household spending has also been on the rise since the 1990s. By 2006, households had accumulated a financial deficit of close to 4% of GDP. This household deficit has absorbed the financial surpluses of the business sector. This rise in household indebtedness has worked through asset backed borrowing. Or more precisely mortgages. This had to happen because with the US absorbing so much of capital, the government already having piled up a huge fiscal deficit and businesses showing surpluses, somebody had to spend to prevent the economy from going into recession. That is also why the Fed is likely to cut interest rates and sort of prolong the party. The other alternative which the Fed has, cutting the current account deficit or increasing the budget deficit, are not that practically feasible.
Wolf concludes on a poignant note: “Today’s credit crisis, then, is far more than a symptom of a defective financial system. It is also a symptom of an unbalanced global economy. The world economy may no longer be able to depend on the willingness of US households to spend more than they earn. Who will take their place?”
In a recent article in the Financial Times, Martin Wolf, the well known columnist has dug deeper into the sub prime crisis. Many of the articles written on the subject have focused on the linkages between different markets. But this one looks at broad macro economic factors contributing to the crisis. We all know the US has been running a major current account deficit in the recent past. A current account deficit essentially means the country is spending more that it is saving. According to Wolf, there is an excess of savings over investment (and consumer spending) in much of the world. This has been offset by an excess of investment (and consumer spending) over savings in a smaller part of the world. In 2006, the countries with surplus savings generated a current account surplus of about $1300 billion. The US current account deficit absorbed about two thirds of this surplus.
In simple terms, foreigners have been buying US assets on a vast scale. The funds provided by foreigners have been absorbed by the US government and households since the stock market bubble burst in 2000. Between the first quarter of 2000 and the third quarter of 2003, there was a negative swing in the US budget balance of 7% of GDP. Household spending has also been on the rise since the 1990s. By 2006, households had accumulated a financial deficit of close to 4% of GDP. This household deficit has absorbed the financial surpluses of the business sector. This rise in household indebtedness has worked through asset backed borrowing. Or more precisely mortgages. This had to happen because with the US absorbing so much of capital, the government already having piled up a huge fiscal deficit and businesses showing surpluses, somebody had to spend to prevent the economy from going into recession. That is also why the Fed is likely to cut interest rates and sort of prolong the party. The other alternative which the Fed has, cutting the current account deficit or increasing the budget deficit, are not that practically feasible.
Wolf concludes on a poignant note: “Today’s credit crisis, then, is far more than a symptom of a defective financial system. It is also a symptom of an unbalanced global economy. The world economy may no longer be able to depend on the willingness of US households to spend more than they earn. Who will take their place?”
The Sub Prime Crisis: The dollar as a safe haven
(Ref: Wall Street Journal, August 20)
Whenever there is a crisis or a major instability in the global markets, the dollar attracts investor attention. As the saying goes, when the going gets tough, the tough get going. And the dollar is indeed a tough currency despite occasional see saws. During the Sub Prime crisis, with many market participants getting into serious trouble, the dollar has actually risen against the Euro. The yields the US government pays on its debt have fallen. The Wall Street Journal quotes Michael Dooley of the University of California at Santa Cruz: “The collapse of the yield on the 10 year treasury is probably the best indication of how quality is defined in people’s minds. The fact that the US still produces by far the best assets in the world, will as things settle down, be very good for the US.”
The fact that the ECB had to intervene with much bigger chunks of liquidity is an indication that the European markets are less able to adjust to rapid price movements than the US. The US has some structural problems to address but these are in a relative sense not all that daunting. Professor Catherine Mann of Brandeis University feels that the US current account deficit can be easily financed by investors unless an alternative investment emerges.
Whenever there is a crisis or a major instability in the global markets, the dollar attracts investor attention. As the saying goes, when the going gets tough, the tough get going. And the dollar is indeed a tough currency despite occasional see saws. During the Sub Prime crisis, with many market participants getting into serious trouble, the dollar has actually risen against the Euro. The yields the US government pays on its debt have fallen. The Wall Street Journal quotes Michael Dooley of the University of California at Santa Cruz: “The collapse of the yield on the 10 year treasury is probably the best indication of how quality is defined in people’s minds. The fact that the US still produces by far the best assets in the world, will as things settle down, be very good for the US.”
The fact that the ECB had to intervene with much bigger chunks of liquidity is an indication that the European markets are less able to adjust to rapid price movements than the US. The US has some structural problems to address but these are in a relative sense not all that daunting. Professor Catherine Mann of Brandeis University feels that the US current account deficit can be easily financed by investors unless an alternative investment emerges.
The Sub Prime Crisis: The impact on Asia
(Ref: Wall Street Journal, August 20)
If consumption in the US weakens, Asian economies will get affected. While ruling out an Asian financial crisis, Singapore PM Lee Hsien Loong admitted that economic growth could be affected if uncertainty continues and the US economy slows down. South Korea’s Kospi index fell 10.4% last week. Shares in big Japanese companies like Toyota and Canon also fell sharply on August 17th due to concerns that the rising Yen would affect export performance. The rising Yen is due to the unwinding of carry trade positions by investors who are scrambling for liquidity. IPOs are being postponed in Japan. More and more analysts feel that the Bank of Japan will not raise interest rates in the near future. This is a reversal of earlier expectations. Malaysian company MISC and South Korean car maker Kia are postponing their bond issue.
If consumption in the US weakens, Asian economies will get affected. While ruling out an Asian financial crisis, Singapore PM Lee Hsien Loong admitted that economic growth could be affected if uncertainty continues and the US economy slows down. South Korea’s Kospi index fell 10.4% last week. Shares in big Japanese companies like Toyota and Canon also fell sharply on August 17th due to concerns that the rising Yen would affect export performance. The rising Yen is due to the unwinding of carry trade positions by investors who are scrambling for liquidity. IPOs are being postponed in Japan. More and more analysts feel that the Bank of Japan will not raise interest rates in the near future. This is a reversal of earlier expectations. Malaysian company MISC and South Korean car maker Kia are postponing their bond issue.
The Sub Prime Crisis: Strange developments in Asian currency markets
(Ref: Wall Street Journal, August 20)
Strange developments are being reported in the Asian currency markets. These are related to the carry trade, a favourite strategy among forex dealers for the past few years. The carry trade consists of borrowing the low interest rate Yen, and selling it and investing in high interest rate currencies like the Aussie $ and the New Zealand $.
In the wake of the sub prime crisis, with many investors scrambling for liquidity, there has been unwinding of these positions. That means people have sold the Australian and New Zealand currencies and bought Yens and squared off their positions to book profits. Consequently, the Yen rose 9% against the Aussie Dollar last week.
Indeed, trading in these Asian currencies has become so one sided that traders have been struggling to find buyers. In Australia, the trading reached panic levels on 17th August. Because of illiquid positions in London and New York, the Reserve Bank of Australia had to intervene. This is the first time in 6 years that the Reserve Bank has intervened. The Bank has indicated that it is ready to act again if needed.
Strange developments are being reported in the Asian currency markets. These are related to the carry trade, a favourite strategy among forex dealers for the past few years. The carry trade consists of borrowing the low interest rate Yen, and selling it and investing in high interest rate currencies like the Aussie $ and the New Zealand $.
In the wake of the sub prime crisis, with many investors scrambling for liquidity, there has been unwinding of these positions. That means people have sold the Australian and New Zealand currencies and bought Yens and squared off their positions to book profits. Consequently, the Yen rose 9% against the Aussie Dollar last week.
Indeed, trading in these Asian currencies has become so one sided that traders have been struggling to find buyers. In Australia, the trading reached panic levels on 17th August. Because of illiquid positions in London and New York, the Reserve Bank of Australia had to intervene. This is the first time in 6 years that the Reserve Bank has intervened. The Bank has indicated that it is ready to act again if needed.
The puzzling ways of the left in India
The left parties live in a world of their own. Their leaders are well educated and articulate. But they are probably the most misguided people in the world. Full of knowledge and little wisdom! Not surprisingly, they are bent upon creating problems for the current government on what is clearly a trivial issue (The1-2-3 agreement) and if need be, even bring it down.
The left finds it easy to open its mouth on any issue for no rhyme or reason. They have an uncanny knack for backing the wrong horse, be it Palestine or Cuba or North Korea. Not having any meaningful vision in life, they tend to support others without vision! That is why they did not criticize North Korea’s nuclear test. The left is a master of obstruction. They criticized the Marrakesh agreement that gave birth to the WTO and have consistently criticized economic reforms, including more recently those relating to pensions.
Unfortunately, the Congress lacks the guts to call a spade a spade. Instead of holding the bull by the horn, the Congress is trying to placate the west in various ways.
As I mentioned in one of my earlier blogs, the lack of enlightened political leadership is a major structural flaw in our economy. Whether it be Brazil or Russia or China or Argentina, the leaders in those countries may be a bit less intelligent but they are certainly wiser. There is a basic sense of purpose and a general consensus on economic reforms and progress. Just like a company cannot become great without sound leadership, without the right kind of politicians, there is little hope for the country.
The one man who has emerged the clear hero from the uproar is the US ambassador, Ronen Sen. By calling critics of the Indo-US nuclear deal, headless chickens he has articulated the view of many in the country. Notwithstanding his apology, Sen has done what Manmohan and Sonia could not! And for that he deserves a big round of applause.
The left finds it easy to open its mouth on any issue for no rhyme or reason. They have an uncanny knack for backing the wrong horse, be it Palestine or Cuba or North Korea. Not having any meaningful vision in life, they tend to support others without vision! That is why they did not criticize North Korea’s nuclear test. The left is a master of obstruction. They criticized the Marrakesh agreement that gave birth to the WTO and have consistently criticized economic reforms, including more recently those relating to pensions.
Unfortunately, the Congress lacks the guts to call a spade a spade. Instead of holding the bull by the horn, the Congress is trying to placate the west in various ways.
As I mentioned in one of my earlier blogs, the lack of enlightened political leadership is a major structural flaw in our economy. Whether it be Brazil or Russia or China or Argentina, the leaders in those countries may be a bit less intelligent but they are certainly wiser. There is a basic sense of purpose and a general consensus on economic reforms and progress. Just like a company cannot become great without sound leadership, without the right kind of politicians, there is little hope for the country.
The one man who has emerged the clear hero from the uproar is the US ambassador, Ronen Sen. By calling critics of the Indo-US nuclear deal, headless chickens he has articulated the view of many in the country. Notwithstanding his apology, Sen has done what Manmohan and Sonia could not! And for that he deserves a big round of applause.
Wednesday, August 22, 2007
The Sub Prime crisis : Impact on the real economy
(Ref: The Economist, dt. 18 August; The Financial Times, August 20)
Are the problems in the housing market affecting the real economy? Wal-Mart the bell whether of the US economy recently announced that spending by American consumers could fall in the coming months. The company gave a downward profit guidance.
As the pressure to generate liquidity increases, there have been sell offs in the oil market. Oil prices have fallen substantially from their peak of $79 per barrel reached in late July. The Economist’s metals index is 14% below the highs it reached in May.
Meanwhile, hundreds of US companies are facing significantly higher interest rates on the short term debt used to fund their day-to-day operations. Walt Disney, Heinz and Motorola are among the well known US companies which have major commercial paper borrowings. So far, however, the higher end of the CP market featuring issuers such as GE, IBM and AT&T, with higher credit ratings has been spared. The yields of these blue chips seem to be stable, at least for the time being.
Are the problems in the housing market affecting the real economy? Wal-Mart the bell whether of the US economy recently announced that spending by American consumers could fall in the coming months. The company gave a downward profit guidance.
As the pressure to generate liquidity increases, there have been sell offs in the oil market. Oil prices have fallen substantially from their peak of $79 per barrel reached in late July. The Economist’s metals index is 14% below the highs it reached in May.
Meanwhile, hundreds of US companies are facing significantly higher interest rates on the short term debt used to fund their day-to-day operations. Walt Disney, Heinz and Motorola are among the well known US companies which have major commercial paper borrowings. So far, however, the higher end of the CP market featuring issuers such as GE, IBM and AT&T, with higher credit ratings has been spared. The yields of these blue chips seem to be stable, at least for the time being.
The Sub Prime Crisis: What next from Fed?
(Ref: The Economist, dt. 18 August; The Financial Times, August 20)
How will the Fed respond to the recent turn of events? Many analysts are recalling what happened in 1998, as they try to predict what might happen now. In 1998, against the backdrop of the Asian currency crisis, the collapse of the Russian rouble and the Long Term Capital Management (LTCM) bankruptcy, the Fed cut interest rates by 25 basis points each, three times, beginning on September 29. Accordingly some analysts are predicting that the Fed will cut interest rates by 25 basis points on September 18 and again in October if required.
Expectations from the Fed are high keeping in view that the venerable financial institution played a key role in restoring sentiments both after the 1987 stock market crash and the 1998 LTCM collapse. Knowledgeable observers argue that the Fed, however, will be careful to avoid moral hazard. It will send signals based on the possible impact of market events on the real economy, not because of the plight of the financial intermediaries alone.
Meanwhile, the Economist in its recent issue has examined the kind of role that a Central bank should play during such crises. The Economist recalls how in 1873, the famous writer Walter Bagehot urged the Bank of England to stave off financial panics by “lending quickly, feely, readily at a penalty rate of interest to any bank that can offer good securities as collateral.” By lending liberally, central banks make it less likely that their money will be needed. By demanding good collateral, the central banks can distinguish insolvent banks from illiquid ones and by charging a penal rate of interest, they ensure that they are truly the lenders of last resort.
What Bagehot mentioned in 1873 is exactly what the Fed (and the European Central Bank) seems to have done in the past few days. The only difference (but a big one) is that the Fed did not charge a penal rate of interest. Meanwhile, William Buiter and Anne Sibert, two London based academics argue that central bankers must become the “market makers of last resort,” by setting a price for securities that can no longer be sold on orderly markets. This will prevent distress sales that can further aggravate the market turmoil. For example, the central bank could make a market in CDOs, either by accepting them as collateral or by buying them out right. But Buiter also makes it clear that hedge funds should not receive from central banks the same kind of protection as banks, unless they accept similar restrictions (i.e., like those applicable to banks) in the way they conduct their operations
How will the Fed respond to the recent turn of events? Many analysts are recalling what happened in 1998, as they try to predict what might happen now. In 1998, against the backdrop of the Asian currency crisis, the collapse of the Russian rouble and the Long Term Capital Management (LTCM) bankruptcy, the Fed cut interest rates by 25 basis points each, three times, beginning on September 29. Accordingly some analysts are predicting that the Fed will cut interest rates by 25 basis points on September 18 and again in October if required.
Expectations from the Fed are high keeping in view that the venerable financial institution played a key role in restoring sentiments both after the 1987 stock market crash and the 1998 LTCM collapse. Knowledgeable observers argue that the Fed, however, will be careful to avoid moral hazard. It will send signals based on the possible impact of market events on the real economy, not because of the plight of the financial intermediaries alone.
Meanwhile, the Economist in its recent issue has examined the kind of role that a Central bank should play during such crises. The Economist recalls how in 1873, the famous writer Walter Bagehot urged the Bank of England to stave off financial panics by “lending quickly, feely, readily at a penalty rate of interest to any bank that can offer good securities as collateral.” By lending liberally, central banks make it less likely that their money will be needed. By demanding good collateral, the central banks can distinguish insolvent banks from illiquid ones and by charging a penal rate of interest, they ensure that they are truly the lenders of last resort.
What Bagehot mentioned in 1873 is exactly what the Fed (and the European Central Bank) seems to have done in the past few days. The only difference (but a big one) is that the Fed did not charge a penal rate of interest. Meanwhile, William Buiter and Anne Sibert, two London based academics argue that central bankers must become the “market makers of last resort,” by setting a price for securities that can no longer be sold on orderly markets. This will prevent distress sales that can further aggravate the market turmoil. For example, the central bank could make a market in CDOs, either by accepting them as collateral or by buying them out right. But Buiter also makes it clear that hedge funds should not receive from central banks the same kind of protection as banks, unless they accept similar restrictions (i.e., like those applicable to banks) in the way they conduct their operations
The Sub Prime Crisis: Hedge funds in trouble
(Ref: The Economist, dt. 18 August; The Financial Times, August 20)
One of the first groups of market participants to find themselves in trouble when the sub prime crisis unfolded was hedge funds. Some of the hedge funds which have found themselves badly mauled by the market turmoil include the global equity fund of Goldman Sachs, Renaissance, a successful quant fund and various hedge funds in Japan. Basin Capital of Australia has also lost heavily.
Both human factors and computer driven models have contributed to the sad plight of these hedge funds. Banks started putting pressure on hedge funds to increase their collateral forcing them to take desperate measures to generate liquidity. At the same time, long-short equity neutral funds which assume that some stocks will rise while others fall, found that underlying assumptions behind their computer based trading strategies were faulty.
On August 13th, Goldman announced its leading global equity fund had lost more than 30% of its value within a week. The bank had to put in $2 billion of its own money and $1 billion contributed by investors. Renaissance, founded by James Simons, a prize wining mathematician also suffered big losses. Quantitative hedge funds in Japan seem to be among the worst affected. Whether hedge funds will stage a comeback in the foreseeable future depends on a big question. Will the pension funds, endowments and rich individuals investing in hedge funds hold their nerve?
As hedge funds find themselves in serious trouble, quantitative models are again coming under close scrutiny. Recall that they were the undoing of the celebrated Long Term Capital Management (LTCM) in 1998. Quantitative models try to find minute market inefficiencies and exploit them. Computers help in finding these inefficiencies quickly so that the traders can take advantage of them before they disappear. As many people start using similar models, such opportunities disappear.The only way to get ahead is to come up with more complex and sophisticated models. Long-short funds, for example generated profits as recently as February/March 2007, using this approach. But to get really good returns, leverage is needed. And as we have seen, leverage can be a risky proposition.
One major lesson which seems to be emerging from the crisis is that quantitative models also cannot overlook the behavioural factors involved in trading. As John Authers has mentioned in the FT (Aug 20), “ …human judgement when it comes to investment is flawed in predictable ways that lead to predictable mis-pricings in the market. A quantitative model that will follow rules set for it by humans, without the risk of human judgment subsequently messing things up, is needed to take advantage of those mispricings.”
In recent weeks, these models have come to naught. The models wanted the funds to hold certain positions. But the need to generate liquidity forced funds to sell their good investments. As many quants followed suit, what we saw were 25 standard deviation events which in normal circumstances, would happen only once in 100,000 years. Leverage amplified these losses. In other words, the models failed to account for the “fat tails.”
Authers mentions that mathematical models will need to improve significantly in the months to come. The quants must take into account:
The herding effects, i.e., other funds taking similar positions
Impact of their own actions on the market
Need to use leverage to magnify returns.
If the regular steam of profits based on the models, comes up with huge losses occasionally, the combination of rigid quantitative strategies with leverage may not be all that appealing.
In short it looks as though there may not be that many leveraged active quant funds we will see going forward. Quite likely the ones that remain will belong to the large well capitalized investment banks.
One of the first groups of market participants to find themselves in trouble when the sub prime crisis unfolded was hedge funds. Some of the hedge funds which have found themselves badly mauled by the market turmoil include the global equity fund of Goldman Sachs, Renaissance, a successful quant fund and various hedge funds in Japan. Basin Capital of Australia has also lost heavily.
Both human factors and computer driven models have contributed to the sad plight of these hedge funds. Banks started putting pressure on hedge funds to increase their collateral forcing them to take desperate measures to generate liquidity. At the same time, long-short equity neutral funds which assume that some stocks will rise while others fall, found that underlying assumptions behind their computer based trading strategies were faulty.
On August 13th, Goldman announced its leading global equity fund had lost more than 30% of its value within a week. The bank had to put in $2 billion of its own money and $1 billion contributed by investors. Renaissance, founded by James Simons, a prize wining mathematician also suffered big losses. Quantitative hedge funds in Japan seem to be among the worst affected. Whether hedge funds will stage a comeback in the foreseeable future depends on a big question. Will the pension funds, endowments and rich individuals investing in hedge funds hold their nerve?
As hedge funds find themselves in serious trouble, quantitative models are again coming under close scrutiny. Recall that they were the undoing of the celebrated Long Term Capital Management (LTCM) in 1998. Quantitative models try to find minute market inefficiencies and exploit them. Computers help in finding these inefficiencies quickly so that the traders can take advantage of them before they disappear. As many people start using similar models, such opportunities disappear.The only way to get ahead is to come up with more complex and sophisticated models. Long-short funds, for example generated profits as recently as February/March 2007, using this approach. But to get really good returns, leverage is needed. And as we have seen, leverage can be a risky proposition.
One major lesson which seems to be emerging from the crisis is that quantitative models also cannot overlook the behavioural factors involved in trading. As John Authers has mentioned in the FT (Aug 20), “ …human judgement when it comes to investment is flawed in predictable ways that lead to predictable mis-pricings in the market. A quantitative model that will follow rules set for it by humans, without the risk of human judgment subsequently messing things up, is needed to take advantage of those mispricings.”
In recent weeks, these models have come to naught. The models wanted the funds to hold certain positions. But the need to generate liquidity forced funds to sell their good investments. As many quants followed suit, what we saw were 25 standard deviation events which in normal circumstances, would happen only once in 100,000 years. Leverage amplified these losses. In other words, the models failed to account for the “fat tails.”
Authers mentions that mathematical models will need to improve significantly in the months to come. The quants must take into account:
The herding effects, i.e., other funds taking similar positions
Impact of their own actions on the market
Need to use leverage to magnify returns.
If the regular steam of profits based on the models, comes up with huge losses occasionally, the combination of rigid quantitative strategies with leverage may not be all that appealing.
In short it looks as though there may not be that many leveraged active quant funds we will see going forward. Quite likely the ones that remain will belong to the large well capitalized investment banks.
The Sub Prime Crisis: Trouble at banks
(Ref: The Economist, dt. 18 August)
Many banks and financial institutions have been affected by the sub prime crisis. These include HSBC, Lloyds, HBOS (England), Coventree (Canada), Citi (USA), IKB, West LB, Sachsen LB (Germany). Some of these banks have used off balance sheet investment vehicles popularly called “conduits”. These vehicles are typically funded in the asset backed commercial paper market. The loans are cheap but of short maturity and are rolled over every few months. The conduits use the money to buy Collateralised Debt Obligations (CDOs), which are much higher yielding securities. But as market conditions have worsened, the source of funds has dried up and the problem has spread to banks who typically provide the conduits back up credit. The global asset based commercial paper market is estimated at $1.2 trillion, up from $650 billion three years ago. These are not trivial numbers and the rapid growth confirms that greed can drive markets crazy.
Banks have also gone beyond conduits and set up the more leveraged structured investment vehicles (SIV). Indeed, SIVs represent one of the fastest growing areas of structured finance. Some 23% of SIV assets seem to be in residential mortgage securities. Covenant-lite versions of SIVs (i.e., SIVs with less restrictions) are also floating around. These involve borrowings of up to 40-70 times the equity collateral. The SIV lites seem to have gone heavily into sub prime assets.
In an environment of mistrust, as these kinds of information come to the notice of the public, banks are being viewed increasingly with suspicion.
Many banks and financial institutions have been affected by the sub prime crisis. These include HSBC, Lloyds, HBOS (England), Coventree (Canada), Citi (USA), IKB, West LB, Sachsen LB (Germany). Some of these banks have used off balance sheet investment vehicles popularly called “conduits”. These vehicles are typically funded in the asset backed commercial paper market. The loans are cheap but of short maturity and are rolled over every few months. The conduits use the money to buy Collateralised Debt Obligations (CDOs), which are much higher yielding securities. But as market conditions have worsened, the source of funds has dried up and the problem has spread to banks who typically provide the conduits back up credit. The global asset based commercial paper market is estimated at $1.2 trillion, up from $650 billion three years ago. These are not trivial numbers and the rapid growth confirms that greed can drive markets crazy.
Banks have also gone beyond conduits and set up the more leveraged structured investment vehicles (SIV). Indeed, SIVs represent one of the fastest growing areas of structured finance. Some 23% of SIV assets seem to be in residential mortgage securities. Covenant-lite versions of SIVs (i.e., SIVs with less restrictions) are also floating around. These involve borrowings of up to 40-70 times the equity collateral. The SIV lites seem to have gone heavily into sub prime assets.
In an environment of mistrust, as these kinds of information come to the notice of the public, banks are being viewed increasingly with suspicion.
The Sub Prime Crisis: Trouble in the inter bank market
(Ref: The Economist, dt. 18 August)
The inter bank market is supposed to be one of the safest places in the financial system. After all, the borrowers are people with some of the best credit ratings gong around. But the sub prime crisis has challenged this assumption. On August 9th/10th, US rates hit 6%, 75 basis points over the Fed benchmark and in the Euro area, 4.7%, 70 basis points over the benchmark of 4%. Under normal market conditions, these spreads would have been much smaller. To ease the situation, the ECB provided funds to the tune of $131 billion on August 9th followed by about $85 billion on the following day. The Fed injected liquidity to the tune of $24 billion and $38 billion or the two days respectively. The Fed also allowed mortgage backed securities, though guaranteed by federal agencies, as collateral. The liquidity injection did succeed in pushing money market rates down. But it is not clear whether these moves have really dealt with the core of the problem – the absence of trust in the markets today. As the Economist summed up, “Markets are jumping at every shadow. Only when imagined bad news has been flushed out will inter bank markets return to obscurity.”
The inter bank market is supposed to be one of the safest places in the financial system. After all, the borrowers are people with some of the best credit ratings gong around. But the sub prime crisis has challenged this assumption. On August 9th/10th, US rates hit 6%, 75 basis points over the Fed benchmark and in the Euro area, 4.7%, 70 basis points over the benchmark of 4%. Under normal market conditions, these spreads would have been much smaller. To ease the situation, the ECB provided funds to the tune of $131 billion on August 9th followed by about $85 billion on the following day. The Fed injected liquidity to the tune of $24 billion and $38 billion or the two days respectively. The Fed also allowed mortgage backed securities, though guaranteed by federal agencies, as collateral. The liquidity injection did succeed in pushing money market rates down. But it is not clear whether these moves have really dealt with the core of the problem – the absence of trust in the markets today. As the Economist summed up, “Markets are jumping at every shadow. Only when imagined bad news has been flushed out will inter bank markets return to obscurity.”
The Sub Prime Crisis: Dispersed risk becomes dispersed mistrust
(Ref: The Economist, dt. 18 August)
Securitization has been one of the major financial innovations of modern times. Securitization has helped banks in the past two decades to repackage mortgage loans, convert them into liquid instruments and sell them in tranches with varying degrees of risk to other market participants. They in turn have sold securities to other investors. This way, the risk has spread across the system. But this seems to have created more problems than solved them.
As the Economist (August 18, 2007) mentions, the dispersal of risk should logically lead to many players holding small losses. “But the swings in almost all financial markets this month have made dispersed risk suddenly morph into dispersed mistrust.”
The magazine quotes Avinash Persaud, a respected financial analyst: “Securitisation has meant that credit risks have moved from knowledgeable long term hands to fast hands, where the principal risk management strategy is to sell before the prices fall more.”
Let me give my own take now. Think of a spicy Indian dish. If big chilly pieces are seen floating, one can easily pick them out and avoid getting into trouble. If on the other hand, we have cut them into small pieces or ground them nicely, and the dish becomes “too hot,” people are going to consume little of that and whole dish may have to be discarded. A very crude anology but that may well sum up the situation today.
Securitization has been one of the major financial innovations of modern times. Securitization has helped banks in the past two decades to repackage mortgage loans, convert them into liquid instruments and sell them in tranches with varying degrees of risk to other market participants. They in turn have sold securities to other investors. This way, the risk has spread across the system. But this seems to have created more problems than solved them.
As the Economist (August 18, 2007) mentions, the dispersal of risk should logically lead to many players holding small losses. “But the swings in almost all financial markets this month have made dispersed risk suddenly morph into dispersed mistrust.”
The magazine quotes Avinash Persaud, a respected financial analyst: “Securitisation has meant that credit risks have moved from knowledgeable long term hands to fast hands, where the principal risk management strategy is to sell before the prices fall more.”
Let me give my own take now. Think of a spicy Indian dish. If big chilly pieces are seen floating, one can easily pick them out and avoid getting into trouble. If on the other hand, we have cut them into small pieces or ground them nicely, and the dish becomes “too hot,” people are going to consume little of that and whole dish may have to be discarded. A very crude anology but that may well sum up the situation today.
The Sub Prime Crisis: Is it worse than we thought?
(Ref: The Economist, dt. 18 August)
If one were to go by the recent issue of The Economist (18 August 2007), things are much worse than we thought. The mess has gone well beyond rash mortgage lending. Banks no longer seem willing to provide liquidity to each other. As the magazine puts it, “It is alarming when the very outfits that exist to supply the economy with credit start to hoard it from each other. At best, this tightens monetary policy, at worst a shortage of cash will cripple the payments systems and cause runs on otherwise solvent banks and businesses that cannot rapidly raise funds.”
The Economist has also neatly summed up the basic reasons contributing to the crisis. Lenders have indulged in reckless lending because they could easily securitise the loans and sell off the risk to someone else. Logically, risk should be borne by the party which is best equipped to understand and manage it. But thanks to slicing, repackaging and selling of risk, no one really knows where the risk has finally landed. There is fear all around that risks may have ended up with people who least understand them. Illiquid long term securities have been bought with short term debt, leaving borrowers vulnerable to a change in sentiment every time the debt falls due.
Now the markets seems to be adjusting and retreating to a new level of risk. The market jargon for this process is deleveraging. And going by past history that process may not be smooth. Yet, the Economist argues that central banks must resist the temptation to intervene. If at all they intervene, it must be not to save the financiers but to save the rest of the economy from the folly of the financiers. The Economist concludes on a note of warning: “ …anyone who says the worst is definitely over is either a fool or someone with a position to protect.”
A primer on the Sub Prime crisis
(Ref: Time, August 27, 2007)
Time Magazine recently gave a lucid account of the US sub prime crisis. For generations, U.S. home price appreciation largely tracked inflation. But since 1995, home prices began rising at an unprecedented pace. The boom created a lot of wealth but also created risks that spread far beyond the housing market.
To attract more home buyers, lenders began offering mortgages with only a cursory scrutiny of the borrower's qualifications. Many of these loans had low starting interest rates that would rise over time. As long as home values rose and interest rates stayed low, everyone was happy. But once prices flattened or fell and interest rates crept up, sub prime borrowers became vulnerable. They could not sell or refinance their loans because they owed more than what their home was worth.
In recent weeks, the scenario has changed for the worse and defaults by borrowers have increased. In the past, the trouble would end with a borrower in default and a bank foreclosing on the home. But today few banks hold onto mortgages until maturity. Most loans are securitized, ie bundled together and sold as mortgage-backed securities.
The new owners of the mortgages can use them as collateral to issue bonds to finance other deals. Money from thousands of homeowners covers the interest payments on those bonds. To attract investors, the bonds are rated by risk groups, called tranches. The more secure the bond, the lower the payoff for investors. Those who buy the riskiest pool of bonds - the ones backed by the riskiest home mortgages - are promised the highest return.
To further complicate the picture, some firms create structured finance products, called collateralized debt obligations (CDO), from pieces of other mortgage securities. These new bonds are re-rated, creating an illusion of safety even though the top-rated bonds may include very risky original loans. Last year nearly $500 billion in CDOs flooded the market. Many hedge funds invested heavily in them, often using borrowed money, and thus increasing their exposure.
In short, the entire process is based on using borrowed money (home mortgages) as collateral to borrow more money (mortgage-backed securities) to borrow yet more money (CDOs), and hoping the payment chain does not break. Once home-mortgage defaults started, the whole system began to unravel. Without the payments from homeowners, the issuers could not pay off the bonds. The bonds lost value, and the hedge funds that borrowed money to buy the bonds had to put up more collateral. Alternatively they had to try to sell the bonds, which caused their value to drop even more. The rout began. Banks tightened credit, raising the cost of financing corporate and private-equity deals. Other investors then wanted to reduce their risk. Stock prices fell, and bond prices rose. With global markets so closely linked, fear began to spread rapidly around the globe. Tighter credit meant fewer people getting home mortgages, further depressing the housing market and perpetuating the cycle.
Time Magazine recently gave a lucid account of the US sub prime crisis. For generations, U.S. home price appreciation largely tracked inflation. But since 1995, home prices began rising at an unprecedented pace. The boom created a lot of wealth but also created risks that spread far beyond the housing market.
To attract more home buyers, lenders began offering mortgages with only a cursory scrutiny of the borrower's qualifications. Many of these loans had low starting interest rates that would rise over time. As long as home values rose and interest rates stayed low, everyone was happy. But once prices flattened or fell and interest rates crept up, sub prime borrowers became vulnerable. They could not sell or refinance their loans because they owed more than what their home was worth.
In recent weeks, the scenario has changed for the worse and defaults by borrowers have increased. In the past, the trouble would end with a borrower in default and a bank foreclosing on the home. But today few banks hold onto mortgages until maturity. Most loans are securitized, ie bundled together and sold as mortgage-backed securities.
The new owners of the mortgages can use them as collateral to issue bonds to finance other deals. Money from thousands of homeowners covers the interest payments on those bonds. To attract investors, the bonds are rated by risk groups, called tranches. The more secure the bond, the lower the payoff for investors. Those who buy the riskiest pool of bonds - the ones backed by the riskiest home mortgages - are promised the highest return.
To further complicate the picture, some firms create structured finance products, called collateralized debt obligations (CDO), from pieces of other mortgage securities. These new bonds are re-rated, creating an illusion of safety even though the top-rated bonds may include very risky original loans. Last year nearly $500 billion in CDOs flooded the market. Many hedge funds invested heavily in them, often using borrowed money, and thus increasing their exposure.
In short, the entire process is based on using borrowed money (home mortgages) as collateral to borrow more money (mortgage-backed securities) to borrow yet more money (CDOs), and hoping the payment chain does not break. Once home-mortgage defaults started, the whole system began to unravel. Without the payments from homeowners, the issuers could not pay off the bonds. The bonds lost value, and the hedge funds that borrowed money to buy the bonds had to put up more collateral. Alternatively they had to try to sell the bonds, which caused their value to drop even more. The rout began. Banks tightened credit, raising the cost of financing corporate and private-equity deals. Other investors then wanted to reduce their risk. Stock prices fell, and bond prices rose. With global markets so closely linked, fear began to spread rapidly around the globe. Tighter credit meant fewer people getting home mortgages, further depressing the housing market and perpetuating the cycle.
The Sub Prime crisis-How legitimate are the fears of a crash?
(Ref: Gillian Tett, Financial Times August 17)
An insightful article by Gillian Tett in the Financial Times dt. 17 August 2007 mentions that the current market turmoil cannot really be called a crash. We have not seen a big drop like what we did after the dotcom boom of 2000, say. The article then goes on to cover the various concerns arising out of the market turmoil.
Is the turmoil a prelude to a bigger bear market? There is no doubt that the contagion is spreading. Initially, defaults were rising among American households with bad credit histories who had taken out mortgages – i.e., the “subprime” sector. This hit the debt markets because mortgage loans were repackaged into new securities and sold by banks to new investors. When US homeowners defaulted, the value of these related securities suffered.
Then came the hedge funds who bought sub prime securities. These hedge funds, typically borrowed money from investment banks. When these funds suffered losses on their sub prime securities earlier this year, banks asked them to funds post more “collateral”. At the same time, some hedge fund investors started to demand their money back. So hedge funds came under pressure to raise cash in a hurry. Some responded by cutting their risky strategies and conducting firesales of their assets. This is how the contagion is spreading to other markets.
When things go wrong, many things often go wrong at the same time. That is what seems to be happening now. In the past couple of weeks, the computer models that some hedge funds use to make trades have gone haywire. These models typically scan markets to spot tiny price discrepancies, and accordingly place large orders. Under normal market conditions, this technique often produces great results. But in recent weeks it appears to have triggered a flurry of equity sales, which has not only hurt the markets, but also created big losses at some hedge funds.
Now the concerns are shifting from hedge funds to banks. True banks have sold subprime securities to other investors, which means they are not directly affected. But banks have also promised to provide credit lines to other institutions with subprime exposure, such as mortgage lenders, if those institutions have problems raising finance in the financial markets. Right now, some of those secondary groups are facing funding woes, making it likely that they will soon demand credit lines from the banks.
True most of the global banks have very strong balance sheets. But what makes the situation very intriguing is that they are under pressure right now from several sources. For example, banks have arranged loans to risky companies, such as private equity buy-out groups. They are now finding it hard to sell these loans because investors are so nervous. That means an estimated $300bn worth of unsold loans are sitting on their balance sheets. And, these pressures are coming at a time when banks themselves are facing problems raising funding in the money markets.
Indeed, raising funds has suddenly become more difficult, creating serious liquidity problems. Investors in the money markets are very nervous about lending money to anybody who might be potentially exposed to subprime losses! And because of financial innovations and slicing and dicing of risks across the financial system, it is hard to know who is holding subprime exposure. So anyone looking for funds is being punished in an indiscriminate fashion without seriously examining the fundamentals.
Central banks are now getting involved. Last week, the European Central Bank pumped liquidity into Europe’s overnight money markets. The Fed, has also sprung into action cutting a key discount rate by 50 basis points. The Fed has promised to pump even more money into the market, to help the banks get access to funding. It has also signalled its willingness to take even more dramatic steps, in the future. But we don’t know yet whether all this will be enough to ensure that the money markets will work normally again or stop investors worrying about where the losses on subprime loans now lie.
One way to understand the market turmoil is to see it as a period during which investors and institutions cut their debt levels. De-leveraging a financial system is never easy, and financial history suggests this often leads to economic shocks. However, in many ways, de-leveraging is good news. For in recent years, debt levels have become unhealthily high in parts of the financial world, because the cost of borrowing money has been quite low.
What might make the current bout of de-leveraging less painful than before is that it is not mainstream companies that are burdened with excess debt. Instead, the pain is now being felt in hedge funds or private equity groups. Meanwhile, the “real” economy has been performing pretty well recently. In theory, this according to the optimists should provide some cushion against these market shocks. Will the optimists be proved right? That is the billion dollar question staring at the markets.
An insightful article by Gillian Tett in the Financial Times dt. 17 August 2007 mentions that the current market turmoil cannot really be called a crash. We have not seen a big drop like what we did after the dotcom boom of 2000, say. The article then goes on to cover the various concerns arising out of the market turmoil.
Is the turmoil a prelude to a bigger bear market? There is no doubt that the contagion is spreading. Initially, defaults were rising among American households with bad credit histories who had taken out mortgages – i.e., the “subprime” sector. This hit the debt markets because mortgage loans were repackaged into new securities and sold by banks to new investors. When US homeowners defaulted, the value of these related securities suffered.
Then came the hedge funds who bought sub prime securities. These hedge funds, typically borrowed money from investment banks. When these funds suffered losses on their sub prime securities earlier this year, banks asked them to funds post more “collateral”. At the same time, some hedge fund investors started to demand their money back. So hedge funds came under pressure to raise cash in a hurry. Some responded by cutting their risky strategies and conducting firesales of their assets. This is how the contagion is spreading to other markets.
When things go wrong, many things often go wrong at the same time. That is what seems to be happening now. In the past couple of weeks, the computer models that some hedge funds use to make trades have gone haywire. These models typically scan markets to spot tiny price discrepancies, and accordingly place large orders. Under normal market conditions, this technique often produces great results. But in recent weeks it appears to have triggered a flurry of equity sales, which has not only hurt the markets, but also created big losses at some hedge funds.
Now the concerns are shifting from hedge funds to banks. True banks have sold subprime securities to other investors, which means they are not directly affected. But banks have also promised to provide credit lines to other institutions with subprime exposure, such as mortgage lenders, if those institutions have problems raising finance in the financial markets. Right now, some of those secondary groups are facing funding woes, making it likely that they will soon demand credit lines from the banks.
True most of the global banks have very strong balance sheets. But what makes the situation very intriguing is that they are under pressure right now from several sources. For example, banks have arranged loans to risky companies, such as private equity buy-out groups. They are now finding it hard to sell these loans because investors are so nervous. That means an estimated $300bn worth of unsold loans are sitting on their balance sheets. And, these pressures are coming at a time when banks themselves are facing problems raising funding in the money markets.
Indeed, raising funds has suddenly become more difficult, creating serious liquidity problems. Investors in the money markets are very nervous about lending money to anybody who might be potentially exposed to subprime losses! And because of financial innovations and slicing and dicing of risks across the financial system, it is hard to know who is holding subprime exposure. So anyone looking for funds is being punished in an indiscriminate fashion without seriously examining the fundamentals.
Central banks are now getting involved. Last week, the European Central Bank pumped liquidity into Europe’s overnight money markets. The Fed, has also sprung into action cutting a key discount rate by 50 basis points. The Fed has promised to pump even more money into the market, to help the banks get access to funding. It has also signalled its willingness to take even more dramatic steps, in the future. But we don’t know yet whether all this will be enough to ensure that the money markets will work normally again or stop investors worrying about where the losses on subprime loans now lie.
One way to understand the market turmoil is to see it as a period during which investors and institutions cut their debt levels. De-leveraging a financial system is never easy, and financial history suggests this often leads to economic shocks. However, in many ways, de-leveraging is good news. For in recent years, debt levels have become unhealthily high in parts of the financial world, because the cost of borrowing money has been quite low.
What might make the current bout of de-leveraging less painful than before is that it is not mainstream companies that are burdened with excess debt. Instead, the pain is now being felt in hedge funds or private equity groups. Meanwhile, the “real” economy has been performing pretty well recently. In theory, this according to the optimists should provide some cushion against these market shocks. Will the optimists be proved right? That is the billion dollar question staring at the markets.
The Rupee
Some observations on RBI's exchange rate management
I used to teach International Finance to CFA students in the late 1990s. Those days, the main question which would come up in the class was whether the rupee would plunge, (as it did in Asia, during the Asian currency crisis) if we had less restrictions on capital flows. Those were the days when the prospects for the Indian economy in general and the Indian IT industry in particular were not that firmly established. Neither had growth rates picked up nor had companies like Infosys and TCS reached anywhere near today’s scale. The general feeling we had was that the country had been saved by the lethargy of our policy makers (articulated in as many words by the famous economist, Paul Krugman, who was then on a visit to India). Several rounds of discussions had not built up political consensus about the need for capital account convertibility. As a result, decisions were postponed time and again. This benefited the country as the rupee held its own even as the South Korean Won and the Indonesian Rupiah plunged as did the Malaysian Ringitt and the Philippine Peso during 1997-98.
In general, the Reserve Bank of India (RBI), has been comfortable maintaining the rupee in a narrow band. Notwithstanding its pretensions, RBI likes to micromanage and dole out directives/instructions one after the other to market participants. Now, however, there are signs of change. Since March 2007, RBI intervention seems to have decreased and the currency has appreciated by 10% in the last 4 months or so. One reason for this trend is that the RBI feels rupee appreciation, by making imports cheaper would help control inflation. That way the RBI will not have to raise interest rates again. Remember earlier interest rate hikes created turmoil in our mortgage market. But another unsaid explanation is that a central bank, especially in an emerging economy like India, is under less psychological pressure when the currency is appreciating compared to when it is falling.
Meanwhile, intervention does involve costs. Rupees have to be sold and dollars bought. These dollars have to be invested in risk free instruments. The risk free interest rate on dollar assets is currently about 3% less than that on rupee assets. But as well known economist Surjit Bhalla recently mentioned in a Business Standard article, this cost is not all that high as it is made out to be. The amount in the currency stabilization scheme is currently around $ 22 billion or Rs. 88,000 crores. The loss due to lower interest costs on dollar assets is only around $ 660 million or Rs. 2600 crores, fairly small for an economy of our size.
Bhalla further argues that the Asian countries from Japan to China have all prospered and grown by keeping their currencies undervalued. His research reveals that on a long term basis, each 10% initial undervaluation of a currency allows the country to gain an extra 0.2% growth per annum.
Bhalla’s argument is well taken. But I would argue that an even better course of action is not to spend too much time arguing about what is the “correct” exchange rate or what is the “correct” policy. Corporates should be competitive even when the currency appreciates. The Germans and the Japanese are good examples. Take Japan. The Yen was fixed at 360 to the dollar till 1971. It touched 80 in 1995. Yet Japanese companies like Toyota did not lose their competitiveness. That is because they worked hard, when the currency was undervalued and made their operations learner and meaner. They also invested in overseas manufacturing facilities to insulate themselves from the fluctuation of the Yen.
Indeed, keeping the currency undervalued amounts effectively to the infant industry argument, a hot topic for discussion a couple of decades back. An infant industry must be protected by tariffs. But after it grows into an adult, the protection must be withdrawn. Alas, many of our infants protected by the license raj and import restrictions did not show any strong desire, leave alone capability, to grow. Only after 1991, when the economy started to open up and competition increased, the men were separated from the boys. Similarly, if we allow the rupee to find its own level and if there is some appreciation, the better companies will come up with innovative solutions.
And in any case, it is wrong to assume that the rupee will continue to appreciate. Currently we are on a high, thanks to the IT and BPO industries. But there are serious structural problems underlying our economy. These include the poor education system, pathetic infrastructure, lack of innovation and a very weak political leadership. As our economy comes under the closer scrutiny of more and more foreign investors, we can expect these problems to receive as much attention as the stellar performance of blue chip companies like Infosys and TCS. Then our third world inadequacies will be factored along with our first world capabilities by the markets while valuing the currency. After all, the foreign exchange rate is not so much about interest rates and inflation as it is about the bets people are making on the country’s future.
I used to teach International Finance to CFA students in the late 1990s. Those days, the main question which would come up in the class was whether the rupee would plunge, (as it did in Asia, during the Asian currency crisis) if we had less restrictions on capital flows. Those were the days when the prospects for the Indian economy in general and the Indian IT industry in particular were not that firmly established. Neither had growth rates picked up nor had companies like Infosys and TCS reached anywhere near today’s scale. The general feeling we had was that the country had been saved by the lethargy of our policy makers (articulated in as many words by the famous economist, Paul Krugman, who was then on a visit to India). Several rounds of discussions had not built up political consensus about the need for capital account convertibility. As a result, decisions were postponed time and again. This benefited the country as the rupee held its own even as the South Korean Won and the Indonesian Rupiah plunged as did the Malaysian Ringitt and the Philippine Peso during 1997-98.
In general, the Reserve Bank of India (RBI), has been comfortable maintaining the rupee in a narrow band. Notwithstanding its pretensions, RBI likes to micromanage and dole out directives/instructions one after the other to market participants. Now, however, there are signs of change. Since March 2007, RBI intervention seems to have decreased and the currency has appreciated by 10% in the last 4 months or so. One reason for this trend is that the RBI feels rupee appreciation, by making imports cheaper would help control inflation. That way the RBI will not have to raise interest rates again. Remember earlier interest rate hikes created turmoil in our mortgage market. But another unsaid explanation is that a central bank, especially in an emerging economy like India, is under less psychological pressure when the currency is appreciating compared to when it is falling.
Meanwhile, intervention does involve costs. Rupees have to be sold and dollars bought. These dollars have to be invested in risk free instruments. The risk free interest rate on dollar assets is currently about 3% less than that on rupee assets. But as well known economist Surjit Bhalla recently mentioned in a Business Standard article, this cost is not all that high as it is made out to be. The amount in the currency stabilization scheme is currently around $ 22 billion or Rs. 88,000 crores. The loss due to lower interest costs on dollar assets is only around $ 660 million or Rs. 2600 crores, fairly small for an economy of our size.
Bhalla further argues that the Asian countries from Japan to China have all prospered and grown by keeping their currencies undervalued. His research reveals that on a long term basis, each 10% initial undervaluation of a currency allows the country to gain an extra 0.2% growth per annum.
Bhalla’s argument is well taken. But I would argue that an even better course of action is not to spend too much time arguing about what is the “correct” exchange rate or what is the “correct” policy. Corporates should be competitive even when the currency appreciates. The Germans and the Japanese are good examples. Take Japan. The Yen was fixed at 360 to the dollar till 1971. It touched 80 in 1995. Yet Japanese companies like Toyota did not lose their competitiveness. That is because they worked hard, when the currency was undervalued and made their operations learner and meaner. They also invested in overseas manufacturing facilities to insulate themselves from the fluctuation of the Yen.
Indeed, keeping the currency undervalued amounts effectively to the infant industry argument, a hot topic for discussion a couple of decades back. An infant industry must be protected by tariffs. But after it grows into an adult, the protection must be withdrawn. Alas, many of our infants protected by the license raj and import restrictions did not show any strong desire, leave alone capability, to grow. Only after 1991, when the economy started to open up and competition increased, the men were separated from the boys. Similarly, if we allow the rupee to find its own level and if there is some appreciation, the better companies will come up with innovative solutions.
And in any case, it is wrong to assume that the rupee will continue to appreciate. Currently we are on a high, thanks to the IT and BPO industries. But there are serious structural problems underlying our economy. These include the poor education system, pathetic infrastructure, lack of innovation and a very weak political leadership. As our economy comes under the closer scrutiny of more and more foreign investors, we can expect these problems to receive as much attention as the stellar performance of blue chip companies like Infosys and TCS. Then our third world inadequacies will be factored along with our first world capabilities by the markets while valuing the currency. After all, the foreign exchange rate is not so much about interest rates and inflation as it is about the bets people are making on the country’s future.
The US Sub Prime crisis
(Ref Financial Times dt August 17)
An insightful article by Chris Giles, Gillian Tett and Paul Davies in the Financial Times dt. August 17, has given a detailed account of the US sub prime crisis which has affected markets all over the world.
First the basic facts. The crisis surfaced in February when two specialist lenders to the subprime segment, Novostar and New Century Financial reported losses. New century filed for bankruptcy protection on April 12. In May, another hedge fund Dillon Read Capital Management ran into problems. On June 19, Bear Stearns announced two of its hedge funds had run into trouble. Many other funds reported losses. The common thread running through these troubled entities was exposure to supposedly very safe, highly rated complex debt products, which in turn had exposure to bonds backed by sub prime mortgage debt.
Since then the crisis seems to have hit other sectors. On July 25, financing for two major LBO deals, Alliance Boots and Chrysler ran into problems amidst fears of a credit crunch. Stock markets were hit as a consequence. Money market funds were later hit. A German bank IKB had to be bailed out. Sentinel, a large American investment house recently stopped investors from withdrawing their money. Most recently Countrywide Financial, traditionally considered as one of the most solid mortgage companies lost access to the market for commercial paper and had to draw down an entire $11.5 billion line of credit to boost its cash position. The venerable US government backed Fannie Mae recently announced that it expects higher delinquencies and credit losses this year in view of the credit market turmoil.
What these incidents confirm is that concerns about exposure to risky mortgages have virtually closed the market where mortgage providers resell their loans. At the same time, anxiety has seized the markets where companies raise short term cash. And this is happening not just in the US. In the UK, mortgage providers have come under pressure as wholesale borrowing costs have gone up.
Looking at the turn of events, there is no doubt that the quest for generating more returns has led to more leverage. And financial innovation has resulted in risks being repackaged and sold to entities that are not fully under the control of the regulatory authorities. What seems to be occurring now is deleveraging, i.e., the phenomenon of investors and financial institutions trying to cut their debt in a hurry by selling assets. History tells us that such deleveraging rarely occurs smoothly and usually has some impact on the wider economy. The big question now is whether the US sub prime crisis will spread to the wider US economy and indeed to other parts of the world.
There is no doubt that the contagion is spreading to the banks. One link between the banks and financial markets is the SIV, a vehicle that funds itself in the short term money markets and does not appear on the balance sheets of banks. Many of these vehicles have emergency credit lines with banks. There is a big concern that as normal sources of liquidity dry up, the banks’ balance sheets will come under huge strain as they are forced to bail out these vehicles.
Meanwhile, the “real” economy does look quite healthy. Corporate debt has been falling. The cost of borrowing for strong companies has been flat or falling. Creditworthy households have been enjoying a period of falling long term interest rates. Of course, the sub prime segment has been an exception. But even here, the net economic losses are estimated to be $50 - $100 billion, much smaller compared to the $500 billion savings and loan debate of the late 1980s. The losses will not exceed .05% of the world bond market. A few central bankers have even mentioned that some amount of correction will help in repricing of risk , which is quite desirable.
Meanwhile, the longer the turmoil continues, the more the potential risks to business and consumer sentiment. A serious crisis at a bank or rise in borrowing costs can affect the real economy. If people start saving more, anticipating slower growth or fall in house prices, that too could affect the real economy. This in turn would depend no how households and companies perceive the current events and anticipate the impact.
At the moment, central banks are not showing any panic reaction. They are trying to smooth the process of adjustment to a more deleveraged world and trying to ensure that repricing of risk continues without any major disruption. They are hoping that growth will continue without the need for any major bail out. In case this happens, it would speak volumes for the resilience and maturity of the global financial system.
In a recent interview with the Wall Street Journal, Henry Paulson, the US Treasury secretary and former Goldman Sachs CEO mentioned that the current strength of the global economy is the big difference been 2007 and 1998. The other differences, Paulson pointed out, were the global integration of economies and markets during the past ten years and the large increase in the number and size of hedge funds and other private pools of capital. If what Paulson says is indeed true, there is no doubt that we would have come a long way indeed since the 1998 Long Term Capital Management (LTCM) crisis.
An insightful article by Chris Giles, Gillian Tett and Paul Davies in the Financial Times dt. August 17, has given a detailed account of the US sub prime crisis which has affected markets all over the world.
First the basic facts. The crisis surfaced in February when two specialist lenders to the subprime segment, Novostar and New Century Financial reported losses. New century filed for bankruptcy protection on April 12. In May, another hedge fund Dillon Read Capital Management ran into problems. On June 19, Bear Stearns announced two of its hedge funds had run into trouble. Many other funds reported losses. The common thread running through these troubled entities was exposure to supposedly very safe, highly rated complex debt products, which in turn had exposure to bonds backed by sub prime mortgage debt.
Since then the crisis seems to have hit other sectors. On July 25, financing for two major LBO deals, Alliance Boots and Chrysler ran into problems amidst fears of a credit crunch. Stock markets were hit as a consequence. Money market funds were later hit. A German bank IKB had to be bailed out. Sentinel, a large American investment house recently stopped investors from withdrawing their money. Most recently Countrywide Financial, traditionally considered as one of the most solid mortgage companies lost access to the market for commercial paper and had to draw down an entire $11.5 billion line of credit to boost its cash position. The venerable US government backed Fannie Mae recently announced that it expects higher delinquencies and credit losses this year in view of the credit market turmoil.
What these incidents confirm is that concerns about exposure to risky mortgages have virtually closed the market where mortgage providers resell their loans. At the same time, anxiety has seized the markets where companies raise short term cash. And this is happening not just in the US. In the UK, mortgage providers have come under pressure as wholesale borrowing costs have gone up.
Looking at the turn of events, there is no doubt that the quest for generating more returns has led to more leverage. And financial innovation has resulted in risks being repackaged and sold to entities that are not fully under the control of the regulatory authorities. What seems to be occurring now is deleveraging, i.e., the phenomenon of investors and financial institutions trying to cut their debt in a hurry by selling assets. History tells us that such deleveraging rarely occurs smoothly and usually has some impact on the wider economy. The big question now is whether the US sub prime crisis will spread to the wider US economy and indeed to other parts of the world.
There is no doubt that the contagion is spreading to the banks. One link between the banks and financial markets is the SIV, a vehicle that funds itself in the short term money markets and does not appear on the balance sheets of banks. Many of these vehicles have emergency credit lines with banks. There is a big concern that as normal sources of liquidity dry up, the banks’ balance sheets will come under huge strain as they are forced to bail out these vehicles.
Meanwhile, the “real” economy does look quite healthy. Corporate debt has been falling. The cost of borrowing for strong companies has been flat or falling. Creditworthy households have been enjoying a period of falling long term interest rates. Of course, the sub prime segment has been an exception. But even here, the net economic losses are estimated to be $50 - $100 billion, much smaller compared to the $500 billion savings and loan debate of the late 1980s. The losses will not exceed .05% of the world bond market. A few central bankers have even mentioned that some amount of correction will help in repricing of risk , which is quite desirable.
Meanwhile, the longer the turmoil continues, the more the potential risks to business and consumer sentiment. A serious crisis at a bank or rise in borrowing costs can affect the real economy. If people start saving more, anticipating slower growth or fall in house prices, that too could affect the real economy. This in turn would depend no how households and companies perceive the current events and anticipate the impact.
At the moment, central banks are not showing any panic reaction. They are trying to smooth the process of adjustment to a more deleveraged world and trying to ensure that repricing of risk continues without any major disruption. They are hoping that growth will continue without the need for any major bail out. In case this happens, it would speak volumes for the resilience and maturity of the global financial system.
In a recent interview with the Wall Street Journal, Henry Paulson, the US Treasury secretary and former Goldman Sachs CEO mentioned that the current strength of the global economy is the big difference been 2007 and 1998. The other differences, Paulson pointed out, were the global integration of economies and markets during the past ten years and the large increase in the number and size of hedge funds and other private pools of capital. If what Paulson says is indeed true, there is no doubt that we would have come a long way indeed since the 1998 Long Term Capital Management (LTCM) crisis.
Monday, August 20, 2007
Heathrow in a mess
India is not the only country whose airports are in a mess. London’s Heathrow airport has also been attracting a lot of negative publicity in recent months. As the Economist recently reported, the qeues are getting longer, tempers shorter, a third of the departing flights are getting delayed and thousands of bags are being misplaced each day. The threat of terrorism has put the airport on a state of high alert. As a result, the security checks have become a real ordeal. I passed through Heathrow recently and can endorse this wholeheartedly.
Heathrow’s mess is a result of inadequate investments even as traffic volume has gone up significantly. The aircraft handles 67 million passengers a year even through its facilities are designed for only 45 million. Heathrow has several shops to keep customers engaged, but they are overpriced. No wonder, the airport consistently finds a place in the bottom in customer surveys.
The main lesson for us in India is that infrastructure has to be created ahead of demand. Look at the Kuala Lampur airport. What a joy it is to be at that airport. Large open spaces, comfortable seating arrangements and plentiful avenues for shopping. And of course friendly staff.
While on the subject of airports, I may add that Frankfurt does not seem to be too much better off. When I passed through the airport a couple of months back, it was crowded and the aerobridge facility was not available. The airport may be less crowded than Heathrow but the layout is bad and the staff are not all that cordial.
Heathrow has many lessons to offer to us. If Mumbai has any dreams of becoming a leading financial centre in the region, it had better invest sufficiently in its airport.
Heathrow’s mess is a result of inadequate investments even as traffic volume has gone up significantly. The aircraft handles 67 million passengers a year even through its facilities are designed for only 45 million. Heathrow has several shops to keep customers engaged, but they are overpriced. No wonder, the airport consistently finds a place in the bottom in customer surveys.
The main lesson for us in India is that infrastructure has to be created ahead of demand. Look at the Kuala Lampur airport. What a joy it is to be at that airport. Large open spaces, comfortable seating arrangements and plentiful avenues for shopping. And of course friendly staff.
While on the subject of airports, I may add that Frankfurt does not seem to be too much better off. When I passed through the airport a couple of months back, it was crowded and the aerobridge facility was not available. The airport may be less crowded than Heathrow but the layout is bad and the staff are not all that cordial.
Heathrow has many lessons to offer to us. If Mumbai has any dreams of becoming a leading financial centre in the region, it had better invest sufficiently in its airport.
Hierarchy will not go away
We have kept hearing again and again about the importance of talent management, empowering people to be creative, encouraging individualism, and so on. But as Peter Coy mentions in a recent BusinessWeek article, even in an innovation driven economy, hierarchy will remain indispensable for getting things done. The author quotes a reputed organizational behaviour expert, Harold J Leavitt, “You still have to do what the boss expects you to do. There is a veil of humanism. We call each other by our first names. But when the chips are down, the boss says you are fired.” While individual initiative and creativity cannot be undermined, systems and processes will continue to be important. Indeed that is what companies like TCS, Infosys and Wipro have mastered as they have scaled up their operations. If we take a larger perspective, we will see that a system centric approach and strong people orientation are not totally inconsistent. When systems and processes are strong, talented individuals are freed from the drudgery of routine jobs and can do more creative tasks.
Bernanke’s performance
Ben Bernanke took over from Alan Greenspan as Fed Chairman in February 2006. Since then he has slowly but surely demonstrated that he is coming to grips with his job.
The most important quality of a central banker in my opinion is focus. A central banker must focus on a few key issues and forget everything else. Bernanke has not allowed himself to be distracted by the US sub prime mortgage crisis. He has refused to respond to calls for easier money. He realizes that lowering interest rates in a bid to rescue this troubled market might lead to excess borrowing and inflationary pressures in other sectors of the economy.
Endorsing Bernanke’s stand, Prof. Allan Meltzer of Carnegic Mellon recently mentioned in a Businessweek report: “The people on Wall Street are making a lot of noise because they do not like to lose money… it would be a huge mistake to change policy to rescue a bench of people who made stupid mistakes. Capitalism without failure is like religion without sin. It doesn’t work.”
At the same time, Bernanke has shown flexibility when needed. Just a couple of days back (on August 17) the Federal Reserve cut the discount rate by 0.5% to 5.75%. The Fed admitted market conditions and increased uncertainty could slow down growth in the months to come. The move came amidst worries that problems in the mortgage sector could affect the real economy.
Bernanke’s general philosophy seems to be that in the long run, low inflation promotes stable, job generating growth. He is quite happy to keep interest rates high to check inflation, even if some people are unhappy. As Business week concluded: “Clearly this is one soft spoken professor who knows how to say no.” (Bernanke had taught at Princeton from 1985 to 2002.)
The growing stature of Bernanke is also a tribute to the strength of the Fed as an institution. The Fed has produced three top class leaders in a row- Paul Volcker followed by Greenspan and now Bernanke. Clearly the Fed knows how to choose its leaders and give them a free hand to run the place according to their discretion.
The most important quality of a central banker in my opinion is focus. A central banker must focus on a few key issues and forget everything else. Bernanke has not allowed himself to be distracted by the US sub prime mortgage crisis. He has refused to respond to calls for easier money. He realizes that lowering interest rates in a bid to rescue this troubled market might lead to excess borrowing and inflationary pressures in other sectors of the economy.
Endorsing Bernanke’s stand, Prof. Allan Meltzer of Carnegic Mellon recently mentioned in a Businessweek report: “The people on Wall Street are making a lot of noise because they do not like to lose money… it would be a huge mistake to change policy to rescue a bench of people who made stupid mistakes. Capitalism without failure is like religion without sin. It doesn’t work.”
At the same time, Bernanke has shown flexibility when needed. Just a couple of days back (on August 17) the Federal Reserve cut the discount rate by 0.5% to 5.75%. The Fed admitted market conditions and increased uncertainty could slow down growth in the months to come. The move came amidst worries that problems in the mortgage sector could affect the real economy.
Bernanke’s general philosophy seems to be that in the long run, low inflation promotes stable, job generating growth. He is quite happy to keep interest rates high to check inflation, even if some people are unhappy. As Business week concluded: “Clearly this is one soft spoken professor who knows how to say no.” (Bernanke had taught at Princeton from 1985 to 2002.)
The growing stature of Bernanke is also a tribute to the strength of the Fed as an institution. The Fed has produced three top class leaders in a row- Paul Volcker followed by Greenspan and now Bernanke. Clearly the Fed knows how to choose its leaders and give them a free hand to run the place according to their discretion.
What contributes to enduring success?
A recent article by Christian Stadler, an Austrian professor, in the Harvard Business Review ( July-August 2007) explains the reasons behind the strong performance of some companies over long periods of time. Measured by total returns for shareholders, these companies fared 62 times better than the general market. The comparison companies which were also good but not “great” beat the market only by a factor of eight. Stadler’s research has through up four key findings:
The great companies emphasise exploiting existing assets and capabilities over exploring for new ones.
These companies diversify their business portfolio, taking care to maintain a wide range of suppliers and customers.
Such companies tell and retell stories of past failures to make sure these mistakes are not repeated.
They seldom make radical changes and take great care in their planning and implementation.
The great companies emphasise exploiting existing assets and capabilities over exploring for new ones.
These companies diversify their business portfolio, taking care to maintain a wide range of suppliers and customers.
Such companies tell and retell stories of past failures to make sure these mistakes are not repeated.
They seldom make radical changes and take great care in their planning and implementation.
Kakushin vs Kaizen
Toyota's quest for perfection
Toyota, the Japanese car maker is well known for its commitment to Kaizen or continuous improvement. Now it seems as though Toyota is embracing the mantra of Kakushin or radical innovation. Toyota’s president, Katsuaki Watanabe mentions in a recent interview with Harvard Business Review ( July-August 2007) that while Kaizen will continue as in the past, Kaikaku , drastic change or reform, will be equally important. At its new manufacturing facility in Takaoka, Toyota will change completely the way it makes cars. The processes at Takaoka will be simple, making it easier for people to observe abnormalities immediately. Robots, a new painting process and high-precision quality monitoring instruments, will help Toyota to strengthen its competitive position. The Takaoka lines will also have tremendous flexibility. As many as 16 models can be produced on two lines as against 4 or 5 on three lines earlier. Toyota’s relentless quest for perfection continues!
Toyota, the Japanese car maker is well known for its commitment to Kaizen or continuous improvement. Now it seems as though Toyota is embracing the mantra of Kakushin or radical innovation. Toyota’s president, Katsuaki Watanabe mentions in a recent interview with Harvard Business Review ( July-August 2007) that while Kaizen will continue as in the past, Kaikaku , drastic change or reform, will be equally important. At its new manufacturing facility in Takaoka, Toyota will change completely the way it makes cars. The processes at Takaoka will be simple, making it easier for people to observe abnormalities immediately. Robots, a new painting process and high-precision quality monitoring instruments, will help Toyota to strengthen its competitive position. The Takaoka lines will also have tremendous flexibility. As many as 16 models can be produced on two lines as against 4 or 5 on three lines earlier. Toyota’s relentless quest for perfection continues!
Forecasting is not the same as prediction
A brilliant article by Paul Saffo in a recent edition of Harvard Business Review (July-August 2007) brings out the differences between prediction and forecasting. Prediction is possible only in a world in which events are preordained and current actions will not influence future outcomes. As Saffo mentions: “Prediction is concerned with future certainty; forecasting looks at how hidden currents in the present signal possible changes in direction for companies, societies or the world at large.”
The key function of forecasting is to identify a full range of possibilities based on a set of reasonable assumptions. A forecast must have a strong logic. And people who use the forecast must understand the logic and evaluate for themselves the quality of the forecast. As Saffo mentions: “The wise consumer of a forecast is not a trusting bystander but a participant and above all, a critic.”
This is a great article for people who want to know more about forecasting and how to be intelligent users of forecasts.
The key function of forecasting is to identify a full range of possibilities based on a set of reasonable assumptions. A forecast must have a strong logic. And people who use the forecast must understand the logic and evaluate for themselves the quality of the forecast. As Saffo mentions: “The wise consumer of a forecast is not a trusting bystander but a participant and above all, a critic.”
This is a great article for people who want to know more about forecasting and how to be intelligent users of forecasts.
Reaping the demographic dividend
Can India do it?
India’s population is expected to increase from 1.02 billion in 2001 to 1.4 billion by 2026. The country remains one of the youngest nations in the world today, with 54% being 24 years and below. Approximately 371 million will be added to the population between 2001 and 2026. It is expected that people in the age group 15-59, will account for about 83% of this increase. The big question is what proportion of this segment will be sufficiently educated and skilled to be meaningfully employed.
Nearly 50% of the demographic bulge will come from seven backward and generally badly governed states – Bihar, Uttar Pradesh, Jharkand, Chattisgarh, Uttaranchal, Rajasthan and Orissa. Neither are jobs being created in these states nor is the educational infrastructure anything to rejoice about.
Meanwhile, primary enrolment is going up, leading to rising expectations among our youngsters. Unless enough investments are made in education in general and skill building in particular, there may be frustration at the mildest level and social unrest in a worst case scenario.
Another big concern is that the country’s health indicators are not looking particularly good. India has the largest number of underfed children in the world, very high rates of tuberculosis incidence and one of the highest rates of maternal mortality. So clearly, along with investments in education, we also need to spend more on health care.
As Latha Jishnu mentions in a recent Business World article, “Young and raring to go,” “If India begins in earnest to provide the right environment for the army of its young people, then it can expect to reap the demographic dividend and become a prosperous nation. If not, it will remain a poor country of ageing people.”
India’s population is expected to increase from 1.02 billion in 2001 to 1.4 billion by 2026. The country remains one of the youngest nations in the world today, with 54% being 24 years and below. Approximately 371 million will be added to the population between 2001 and 2026. It is expected that people in the age group 15-59, will account for about 83% of this increase. The big question is what proportion of this segment will be sufficiently educated and skilled to be meaningfully employed.
Nearly 50% of the demographic bulge will come from seven backward and generally badly governed states – Bihar, Uttar Pradesh, Jharkand, Chattisgarh, Uttaranchal, Rajasthan and Orissa. Neither are jobs being created in these states nor is the educational infrastructure anything to rejoice about.
Meanwhile, primary enrolment is going up, leading to rising expectations among our youngsters. Unless enough investments are made in education in general and skill building in particular, there may be frustration at the mildest level and social unrest in a worst case scenario.
Another big concern is that the country’s health indicators are not looking particularly good. India has the largest number of underfed children in the world, very high rates of tuberculosis incidence and one of the highest rates of maternal mortality. So clearly, along with investments in education, we also need to spend more on health care.
As Latha Jishnu mentions in a recent Business World article, “Young and raring to go,” “If India begins in earnest to provide the right environment for the army of its young people, then it can expect to reap the demographic dividend and become a prosperous nation. If not, it will remain a poor country of ageing people.”
Friday, August 17, 2007
Even Manual workers can become knowledge workers
Empowerment holds the key to job enrichment
In his book, “The 8th Habit,” Stephen Covey narrates a true story about a group of janitors.
An instructor in a training program was explaining to a group of first-level supervisors how to enrich the job of the janitors working under them. One of the foremen, involved in maintenance, felt the idea was too idealistic and unrelated to most of the work a janitor did. All the supervisors being trained agreed that there was a problem with the janitors. They were uneducated and were there because they couldn’t get a better job. Essentially their only desire was to clock in and clock out.
Knowing the maintenance foreman was sincere, the instructor abandoned his prepared discussion and began to deal with the janitorial problem directly. He wrote three words on the blackboard: Plan, Do, and Evaluate – three major elements of job enrichment. He than asked the participants to list the maintenance duties and activities associated with these three words.
Under the “planning” part of the job were: establishing schedules for maintenance, selecting and purchasing waxes and polishes, and determining which janitor covered which areas of the plant. During the discussion, the maintenance foreman said that he was about to purchase several new floor polishing and scrubbing machines. All of these planning activities were carried out by the maintenance foreman.
Listed under the “doing” section were the normal activities of janitors – sweeping, scrubbing, waxing, and removing the rubbish and refuse.
The “evaluating” part of the job included such activities as routine daily checks on the cleanliness of the plant, evaluation of the effectiveness of different soaps, waxes and polishers, identifying ways of improving and ensuring that the cleaning schedules were maintained. Additionally, the maintenance foreman also contacted vendors to determine the type of new machine he could purchase.
When the various activities had been listed, the instructor asked, which of these activities could be done by the janitors. For example, why did the foreman determine which soaps to buy? Why not let the janitors decide? How about having the salesmen give the demonstration of the new machine to the janitors and let them decide which of the machines was best? How about having the janitors identify parts of the job they would be interested in taking on?”
The maintenance supervisor started giving the janitors more responsibility for planning, doing and evaluating their work. The janitors tested out new machines and made the final recommendations for purchase. They experimented with different waxes to determine which stood up the best under normal usage. They began examining the cleaning schedule to determine how much attention should be given to each area. The janitors developed their own criteria for determining plant cleanliness and began to exert peer pressure on janitors who did not meet the norms.
Gradually, quality went up, job turnover and discipline problems went way down, social norms developed around initiative, cooperation, diligence and quality, and job satisfaction increased significantly. The janitors no longer needed supervision because they supervised and managed themselves according to the criteria they helped develop.
Soon other foremen began thinking about how they could apply the same principles in their own areas, especially since they could begin to see for themselves the results of the maintenance foreman’s work with the janitors.
In his book, “The 8th Habit,” Stephen Covey narrates a true story about a group of janitors.
An instructor in a training program was explaining to a group of first-level supervisors how to enrich the job of the janitors working under them. One of the foremen, involved in maintenance, felt the idea was too idealistic and unrelated to most of the work a janitor did. All the supervisors being trained agreed that there was a problem with the janitors. They were uneducated and were there because they couldn’t get a better job. Essentially their only desire was to clock in and clock out.
Knowing the maintenance foreman was sincere, the instructor abandoned his prepared discussion and began to deal with the janitorial problem directly. He wrote three words on the blackboard: Plan, Do, and Evaluate – three major elements of job enrichment. He than asked the participants to list the maintenance duties and activities associated with these three words.
Under the “planning” part of the job were: establishing schedules for maintenance, selecting and purchasing waxes and polishes, and determining which janitor covered which areas of the plant. During the discussion, the maintenance foreman said that he was about to purchase several new floor polishing and scrubbing machines. All of these planning activities were carried out by the maintenance foreman.
Listed under the “doing” section were the normal activities of janitors – sweeping, scrubbing, waxing, and removing the rubbish and refuse.
The “evaluating” part of the job included such activities as routine daily checks on the cleanliness of the plant, evaluation of the effectiveness of different soaps, waxes and polishers, identifying ways of improving and ensuring that the cleaning schedules were maintained. Additionally, the maintenance foreman also contacted vendors to determine the type of new machine he could purchase.
When the various activities had been listed, the instructor asked, which of these activities could be done by the janitors. For example, why did the foreman determine which soaps to buy? Why not let the janitors decide? How about having the salesmen give the demonstration of the new machine to the janitors and let them decide which of the machines was best? How about having the janitors identify parts of the job they would be interested in taking on?”
The maintenance supervisor started giving the janitors more responsibility for planning, doing and evaluating their work. The janitors tested out new machines and made the final recommendations for purchase. They experimented with different waxes to determine which stood up the best under normal usage. They began examining the cleaning schedule to determine how much attention should be given to each area. The janitors developed their own criteria for determining plant cleanliness and began to exert peer pressure on janitors who did not meet the norms.
Gradually, quality went up, job turnover and discipline problems went way down, social norms developed around initiative, cooperation, diligence and quality, and job satisfaction increased significantly. The janitors no longer needed supervision because they supervised and managed themselves according to the criteria they helped develop.
Soon other foremen began thinking about how they could apply the same principles in their own areas, especially since they could begin to see for themselves the results of the maintenance foreman’s work with the janitors.
Balancing priorities
When we are serious and sincere, we can find time for everything.
In his book, “The 8th Habit,” Stephen Covey narrates another powerful story. A friend was quite attached to his mother. At one time in his life, he got caught up in his own commitments. His life got so busy that weeks would go by before he would make even a quick phone call to his mother. And when he did manage to make a visit, it would be very hurriedly done. Another meeting to go to, another deadline to meet. The meeting with his mother became a chore.
The mother never complained to her son. But the son wasn’t happy with the situation. He was dejected that he couldn’t consistently spend time with his mother. So, he discussed it with his wife. She suggested scheduling a time each week or so that would work for both his family and his mother. When they looked at the calendar, they saw the wife had choir practice every Wednesday evening. That night became his night to spend with his mom.
Now the visits became scheduled and regular. The son did not run off within the first ten minutes, and there were few interruptions. If the mother wanted to get some exercise, the two would go for a walk together. On other occcasions the mother would cook a meal for her son. Sometimes the son would take her to do shopping at the mall, which was a bit too far away for her to drive to. And they kept talking about family, about current events, about old memories. Every evening the son spent with his mother gave him peace which he had not previously enjoyed.
In his book, “The 8th Habit,” Stephen Covey narrates another powerful story. A friend was quite attached to his mother. At one time in his life, he got caught up in his own commitments. His life got so busy that weeks would go by before he would make even a quick phone call to his mother. And when he did manage to make a visit, it would be very hurriedly done. Another meeting to go to, another deadline to meet. The meeting with his mother became a chore.
The mother never complained to her son. But the son wasn’t happy with the situation. He was dejected that he couldn’t consistently spend time with his mother. So, he discussed it with his wife. She suggested scheduling a time each week or so that would work for both his family and his mother. When they looked at the calendar, they saw the wife had choir practice every Wednesday evening. That night became his night to spend with his mom.
Now the visits became scheduled and regular. The son did not run off within the first ten minutes, and there were few interruptions. If the mother wanted to get some exercise, the two would go for a walk together. On other occcasions the mother would cook a meal for her son. Sometimes the son would take her to do shopping at the mall, which was a bit too far away for her to drive to. And they kept talking about family, about current events, about old memories. Every evening the son spent with his mother gave him peace which he had not previously enjoyed.
Rediscovering your passion
The key lies in finding a larger purpose.
In his book “The 8th Habit,” Stephen Covey narrates a powerful, true story involving an Englishman who had spent his childhood as a street urchin but had gone on to become a reasonably successful writer. At the time of the story, however, he had developed the “writer’s block.” It seemed his creativity had completely dried up. His debts were mounting. He was under tremendous pressure from the publisher to meet the deadline. He was becoming more and more depressed. He began to fear that his own children would end up on the streets.
The writer, finding it difficult to sleep, began to spend his nights walking the streets of London. He saw the poverty, the inhumane conditions of children working nights in the factories, the terrible struggle of parents trying to eke out a living for their families. Soon, he forgot his own problem. He wanted to do something that would make a difference!
He no longer felt doubt or discouragement. He didn’t worry about his own financial concerns. He returned to his writing with an energy level he had never known. The desire to contribute became his passion. He wanted to make the story quickly available and affordable to as many people as possible. His whole life had changed. He’d truly found his voice.
In his book “The 8th Habit,” Stephen Covey narrates a powerful, true story involving an Englishman who had spent his childhood as a street urchin but had gone on to become a reasonably successful writer. At the time of the story, however, he had developed the “writer’s block.” It seemed his creativity had completely dried up. His debts were mounting. He was under tremendous pressure from the publisher to meet the deadline. He was becoming more and more depressed. He began to fear that his own children would end up on the streets.
The writer, finding it difficult to sleep, began to spend his nights walking the streets of London. He saw the poverty, the inhumane conditions of children working nights in the factories, the terrible struggle of parents trying to eke out a living for their families. Soon, he forgot his own problem. He wanted to do something that would make a difference!
He no longer felt doubt or discouragement. He didn’t worry about his own financial concerns. He returned to his writing with an energy level he had never known. The desire to contribute became his passion. He wanted to make the story quickly available and affordable to as many people as possible. His whole life had changed. He’d truly found his voice.
India’s rise
A time to celebrate or to reflect?
A recent article by historian, William Dalrymple in a special isue of Time Magazine, to commemorate 60 years of the country’s independence mentions: “The idea that India is a poor country is a relatively recent one. South Asia was always famous as the richest region of the globe.”
Dalrymple mentions that at the height of the Mughal empire, our country was rivalled only by China. By the 17th Century, Lahore had grown larger and richer than Constantinople and with some two million inhabitants, dwarfed London and Paris.
In 1600, when the British East India company was founded, Britain was generating 1.8% of world’s GDP while India was producing as much as 22.5%. By 1870, Britain contributed 9.1% of the world’s GDP while India had been reduced to a third world nation. After this period of set back, Dalrymple argues that India is well on the way to making a strong comeback.
He concludes: “Extraordinary as it is, the rise of India and China is nothing more than a return to the ancient equilibrium of world trade, with Europeans no longer appearing as gunboat riding colonial masters but instead reverting to their traditional role: that of eager consumers of the much celebrated manufactures, luxuries and services of the East.”
I wish I could share Dalrymple’s optimism. Pardon me for my cynicism which it seems is also shared by a few others. A report in a recent issue of Newsweek,which covers global trends in education, mentions that the country’s educational system is in a mess. The report quotes opinion leaders like Kiran Karnik of Nasscom and TV Mohandas Pai of Infosys who mention that developing and growing India’s skilled workforce will be the biggest challenge the country faces in the years to come. Meanwhile, there seems to be a severe dilution of our basic values. Indiscipline, corruption, religious violence and child labour show no signs of declining. Our traditional strengths, thrift and saving for the rainy day are eroding rapidly in an age of consumerism, easy loans and credit cards. The manner in which the current president of India was elected or the way a high performer like Dayanidhi Maran was asked to quita few months back, reflects the lack of integrity, leave alone vision, in our political leaders. And the manner in which the Indian cricket team lost a golden opportunity to score a comprehensive 2 – 0 win over England in the recently concluded test series, is a strong indication that even for the people who are widely perceived as role models, self preservation triumphs over national pride.
There is an old English proverb: “One swallow does not make a summer.” Similarly, a few IT or pharma companies cannot be equated with a prosperous country. or for than matter an enlightened society.
A recent article by historian, William Dalrymple in a special isue of Time Magazine, to commemorate 60 years of the country’s independence mentions: “The idea that India is a poor country is a relatively recent one. South Asia was always famous as the richest region of the globe.”
Dalrymple mentions that at the height of the Mughal empire, our country was rivalled only by China. By the 17th Century, Lahore had grown larger and richer than Constantinople and with some two million inhabitants, dwarfed London and Paris.
In 1600, when the British East India company was founded, Britain was generating 1.8% of world’s GDP while India was producing as much as 22.5%. By 1870, Britain contributed 9.1% of the world’s GDP while India had been reduced to a third world nation. After this period of set back, Dalrymple argues that India is well on the way to making a strong comeback.
He concludes: “Extraordinary as it is, the rise of India and China is nothing more than a return to the ancient equilibrium of world trade, with Europeans no longer appearing as gunboat riding colonial masters but instead reverting to their traditional role: that of eager consumers of the much celebrated manufactures, luxuries and services of the East.”
I wish I could share Dalrymple’s optimism. Pardon me for my cynicism which it seems is also shared by a few others. A report in a recent issue of Newsweek,which covers global trends in education, mentions that the country’s educational system is in a mess. The report quotes opinion leaders like Kiran Karnik of Nasscom and TV Mohandas Pai of Infosys who mention that developing and growing India’s skilled workforce will be the biggest challenge the country faces in the years to come. Meanwhile, there seems to be a severe dilution of our basic values. Indiscipline, corruption, religious violence and child labour show no signs of declining. Our traditional strengths, thrift and saving for the rainy day are eroding rapidly in an age of consumerism, easy loans and credit cards. The manner in which the current president of India was elected or the way a high performer like Dayanidhi Maran was asked to quita few months back, reflects the lack of integrity, leave alone vision, in our political leaders. And the manner in which the Indian cricket team lost a golden opportunity to score a comprehensive 2 – 0 win over England in the recently concluded test series, is a strong indication that even for the people who are widely perceived as role models, self preservation triumphs over national pride.
There is an old English proverb: “One swallow does not make a summer.” Similarly, a few IT or pharma companies cannot be equated with a prosperous country. or for than matter an enlightened society.
The tale of two cities
London vs New York
With some $100 billion in foreign investment pouring in annually from countries like Russia, India, China and the US, London is challenging New York very seriously in the race to become the financial capital of the world. British PM Gordon Brown recently pointed out that over 40% of the world’s foreign equities are traded here as also 30% of foreign exchange. And unlike New York and Tokyo which are backed by large domestic markets, London’s business is truly global.
In contrast, as Fortune magazine recently reported, New York seems to be plagued by self doubt. Too much litigation and heavy handed regulation are factors cited behind this phenomenon. US Treasury secretary, Henry Paulson and Christopher Cox, Chairman of the SEC have called for reforms to revitalize the US capital markets. While the US is weighed down by Sarbanes Oxley, London seems to have been quite successful in putting together a new, more flexible regulatory approach that makes it easy to do business, regardless of nationality, currency or accounting system.
London has become a magnet for firms from emerging economies looking to raise capital. In fields like OTC derivatives, foreign exchange and metals trading, it has taken a worldwide lead. About 21% of global hedge fund assets are handled from London. The city has also been successful in attracting hundreds of smaller firms from around the world, including the US to its less prestigious markets, especially the AIM exchange.
New York is trying to stage a comeback. NYSE and Nasdaq are trying to merge with London’s European rivals. The SEC has recently accepted the International Financial Reporting Standards that differ from the US GAAP. The SEC has also relaxed Section 404 of SOX which stipulates that outside auditors must monitor internal controls.
Ironically enough, much of the expertise fuelling London’s boom is American. Four of the top five deal makers in the US last year, were American. Meanwhile, both London and New York cannot overlook competition from other centres like Mumbai, Shanghai, Warsaw, Dubai and Sao Paulo. Looks as if the days when one or two cities dominated international finance are over.
With some $100 billion in foreign investment pouring in annually from countries like Russia, India, China and the US, London is challenging New York very seriously in the race to become the financial capital of the world. British PM Gordon Brown recently pointed out that over 40% of the world’s foreign equities are traded here as also 30% of foreign exchange. And unlike New York and Tokyo which are backed by large domestic markets, London’s business is truly global.
In contrast, as Fortune magazine recently reported, New York seems to be plagued by self doubt. Too much litigation and heavy handed regulation are factors cited behind this phenomenon. US Treasury secretary, Henry Paulson and Christopher Cox, Chairman of the SEC have called for reforms to revitalize the US capital markets. While the US is weighed down by Sarbanes Oxley, London seems to have been quite successful in putting together a new, more flexible regulatory approach that makes it easy to do business, regardless of nationality, currency or accounting system.
London has become a magnet for firms from emerging economies looking to raise capital. In fields like OTC derivatives, foreign exchange and metals trading, it has taken a worldwide lead. About 21% of global hedge fund assets are handled from London. The city has also been successful in attracting hundreds of smaller firms from around the world, including the US to its less prestigious markets, especially the AIM exchange.
New York is trying to stage a comeback. NYSE and Nasdaq are trying to merge with London’s European rivals. The SEC has recently accepted the International Financial Reporting Standards that differ from the US GAAP. The SEC has also relaxed Section 404 of SOX which stipulates that outside auditors must monitor internal controls.
Ironically enough, much of the expertise fuelling London’s boom is American. Four of the top five deal makers in the US last year, were American. Meanwhile, both London and New York cannot overlook competition from other centres like Mumbai, Shanghai, Warsaw, Dubai and Sao Paulo. Looks as if the days when one or two cities dominated international finance are over.
Thursday, August 16, 2007
Lessons from Henry Cavendish
The remarkable story of a truly great scientist
The great British scientist Henry Cavendish has a lot to teach us about achieving professional excellence through complete dedication and commitment to the task at hand.
Born into a rich family, Cavendish was the most gifted English scientist of his age, but suffered from shyness to a ‘degree bordering on disease’. Any human contact was for him a source of the deepest discomfort.
Once he opened his door to find an Austrian admirer standing outside. Words of praise flew out of the excited Austrian. For a few moments Cavendish listened to the visitor. Then, unable to take any more, he ran out of his house. It was some hours before he would be coaxed back to his home.
Although Cavendish did sometimes attend social events, the other guests were clearly informed that he was on no account to be approached or even looked at. Those who sought his views were advised to wander into his vicinity as if by accident and to ‘talk as it were into vacancy’. If these remarks were scientifically worthy they might receive a mumbled reply, but more often than not they would hear a peeved squeak and turn to find the place was actually vacant. Cavendish would be seen retreating towards a more peaceful corner!
In the course of a long life, Cavendish made a series of important discoveries. He was the first person to isolate hydrogen and the first to combine hydrogen and oxygen to form water. His experiments with electrical conductivity were a century ahead of their time, but unfortunately remained undiscovered until that century had passed.
Without telling anyone, Cavendish discovered or anticipated the law of the conservation of energy, Ohm’s Law, Dalton’s Law of Partial Pressures, Richter’s Law of Reciprocal Proportions, Charles’s Law of Gases, and the principles of electrical conductivity. He also foreshadowed the work of Kelvin and G H Darwin on the effect of tidal friction on slowing the rotation of the earth, the work of Pickering on freezing mixtures, and some of the work of Rooseboom on heterogeneous equilibria. Finally, he left clues that led directly to the discovery of the noble gases, some of which are so elusive that the last of them wasn’t found until 1962.
What an amazing man Cavendish was. He devoted his entire life to the pursuit of scientific discovery in a range of fields. He fully shut himself off from all distractions. He did not work to gain recognition. He worked for the joy of finding out new things. A man who truly achieved flow.
Adapted from “ A short history of nearly everything” by Bill Bryson
The great British scientist Henry Cavendish has a lot to teach us about achieving professional excellence through complete dedication and commitment to the task at hand.
Born into a rich family, Cavendish was the most gifted English scientist of his age, but suffered from shyness to a ‘degree bordering on disease’. Any human contact was for him a source of the deepest discomfort.
Once he opened his door to find an Austrian admirer standing outside. Words of praise flew out of the excited Austrian. For a few moments Cavendish listened to the visitor. Then, unable to take any more, he ran out of his house. It was some hours before he would be coaxed back to his home.
Although Cavendish did sometimes attend social events, the other guests were clearly informed that he was on no account to be approached or even looked at. Those who sought his views were advised to wander into his vicinity as if by accident and to ‘talk as it were into vacancy’. If these remarks were scientifically worthy they might receive a mumbled reply, but more often than not they would hear a peeved squeak and turn to find the place was actually vacant. Cavendish would be seen retreating towards a more peaceful corner!
In the course of a long life, Cavendish made a series of important discoveries. He was the first person to isolate hydrogen and the first to combine hydrogen and oxygen to form water. His experiments with electrical conductivity were a century ahead of their time, but unfortunately remained undiscovered until that century had passed.
Without telling anyone, Cavendish discovered or anticipated the law of the conservation of energy, Ohm’s Law, Dalton’s Law of Partial Pressures, Richter’s Law of Reciprocal Proportions, Charles’s Law of Gases, and the principles of electrical conductivity. He also foreshadowed the work of Kelvin and G H Darwin on the effect of tidal friction on slowing the rotation of the earth, the work of Pickering on freezing mixtures, and some of the work of Rooseboom on heterogeneous equilibria. Finally, he left clues that led directly to the discovery of the noble gases, some of which are so elusive that the last of them wasn’t found until 1962.
What an amazing man Cavendish was. He devoted his entire life to the pursuit of scientific discovery in a range of fields. He fully shut himself off from all distractions. He did not work to gain recognition. He worked for the joy of finding out new things. A man who truly achieved flow.
Adapted from “ A short history of nearly everything” by Bill Bryson
Saturday, August 11, 2007
Management lessons through story telling-Sony Radio
Commitment to core values
Morita came across an American buyer who looked at his radio and said he liked it very much. He said his chain had about 150 stores and he would need large quantities. He wanted a price quotation on quantities of 5000, then 10,000, 30,000, 50,000 and 100,000 radios. Morita was thrilled! But back in his hotel room, he began pondering the possible impact of such grand orders on the small facilities in Tokyo. Sony had expanded its plant a lot in recent years but did not have the capacity to produce 100,000 transistor radios a year and also make the other things in Sony’s small product line. Sony’s capacity was less than 10,000 radios a month. If the company got an order for 100,000 units it would have to hire and train new employees and expand its facilities even more. This would mean a major investment, a major expansion, and a gamble.
As Morita put it : “I was inexperienced and still a little naive, but I had my wits about me. I considered all the consequences I could think of, and then I sat down and drew a curve that looked something like lopsided letter U.”
The price for 5000 would be the regular price. That would be the beginning of the curve. For 10,000 there would be a discount, and that was at the bottom of the curve. For 30,000 the price would begin to climb. For 50,000 units, the price per unit would be higher than for 5000 and for 100,000 units the price would have to be much more per unit than for the first 5000.
He mentioned: “I know this sounds strange, but my reasoning was that if we had to double our production capacity to complete an order for one hundred thousand and if we could not get a repeat order the following year we would be in big trouble, perhaps bankrupt, because how could we employ all the added staff and pay for all the new and unused facilities in the case? It was a conservative and cautious approach, but I was convinced that if we took a huge order we should make enough profit on it to pay for the new facilities during the life of the order....... In Japan we cannot just hire people and fire them whenever our orders go up or down. We have a long-term commitment to our employees and they have a commitment to us.”
Adapted from “Made in Japan,” by Akio Morita
Morita came across an American buyer who looked at his radio and said he liked it very much. He said his chain had about 150 stores and he would need large quantities. He wanted a price quotation on quantities of 5000, then 10,000, 30,000, 50,000 and 100,000 radios. Morita was thrilled! But back in his hotel room, he began pondering the possible impact of such grand orders on the small facilities in Tokyo. Sony had expanded its plant a lot in recent years but did not have the capacity to produce 100,000 transistor radios a year and also make the other things in Sony’s small product line. Sony’s capacity was less than 10,000 radios a month. If the company got an order for 100,000 units it would have to hire and train new employees and expand its facilities even more. This would mean a major investment, a major expansion, and a gamble.
As Morita put it : “I was inexperienced and still a little naive, but I had my wits about me. I considered all the consequences I could think of, and then I sat down and drew a curve that looked something like lopsided letter U.”
The price for 5000 would be the regular price. That would be the beginning of the curve. For 10,000 there would be a discount, and that was at the bottom of the curve. For 30,000 the price would begin to climb. For 50,000 units, the price per unit would be higher than for 5000 and for 100,000 units the price would have to be much more per unit than for the first 5000.
He mentioned: “I know this sounds strange, but my reasoning was that if we had to double our production capacity to complete an order for one hundred thousand and if we could not get a repeat order the following year we would be in big trouble, perhaps bankrupt, because how could we employ all the added staff and pay for all the new and unused facilities in the case? It was a conservative and cautious approach, but I was convinced that if we took a huge order we should make enough profit on it to pay for the new facilities during the life of the order....... In Japan we cannot just hire people and fire them whenever our orders go up or down. We have a long-term commitment to our employees and they have a commitment to us.”
Adapted from “Made in Japan,” by Akio Morita
Management lessons through story telling-Sony’s transistor radio
Understanding vision
Sony’s first transistor radio of 1955 was small and practical – Morita saw the United States as a natural market; business was booming, employment was high, the people were progressive and eager for new things, and international travel was becoming easier.
Morita took his little $29.95 radio to New York and made the rounds of possible retailers. Many of them were unimpressed. They said, “Why are you making such a tiny radio? Everybody in America wants big radios. We have big houses, plenty of room. Who needs these tiny things?”
The fidelity was not as good as a large unit, but it was excellent for its size. Many people saw the logic of this argument, and Morita was happy to be offered some tempting deals.
The following is Morita’s narrative:
“The people at Bulova liked the radio very much and their purchasing officer said very casually, “We definitely want some of these. We will take one hundred thousand units.” One hundred thousand units! I was stunned. It was an incredible order, worth several times the total capital of our company. We began to talk details, my mind working very fast, when he told me that there was one condition: we would have to put the Bulova name on the radios.
That stopped me. I had vowed that we would not be an original equipment maker for other companies. We wanted to make a name for our company on the strength of our own products. I told him I would check with my company, and in fact I did send a message back to Tokyo outlining the deal. The reply was, “Take the order.” I didn’t like the idea, and I didn’t like the reply. After thinking it over and over, I decided I had to say no, we would not produce radios under another name. When I returned to call on the man from Bulova he didn’t seem to take me seriously at first. How could I turn down such an order? He was convinced I would accept. When I would not budge, he got short with me.
“Our company name is a famous brand name that has taken over fifty years to establish,” he said. “Nobody has ever heard of your brand name. Why not take advantage of ours?”
I understood what he was saying, but I had my own view. “Fifty years ago,” I said, “your brand name must have been just as unknown as our name is today. I am here with a new product, and I am now taking the first step for the next fifty years of my company. Fifty years from now I promise you that our name will be just as famous as your company name is today.”
Adapted from “Made in Japan,” by Akio Morita
Sony’s first transistor radio of 1955 was small and practical – Morita saw the United States as a natural market; business was booming, employment was high, the people were progressive and eager for new things, and international travel was becoming easier.
Morita took his little $29.95 radio to New York and made the rounds of possible retailers. Many of them were unimpressed. They said, “Why are you making such a tiny radio? Everybody in America wants big radios. We have big houses, plenty of room. Who needs these tiny things?”
The fidelity was not as good as a large unit, but it was excellent for its size. Many people saw the logic of this argument, and Morita was happy to be offered some tempting deals.
The following is Morita’s narrative:
“The people at Bulova liked the radio very much and their purchasing officer said very casually, “We definitely want some of these. We will take one hundred thousand units.” One hundred thousand units! I was stunned. It was an incredible order, worth several times the total capital of our company. We began to talk details, my mind working very fast, when he told me that there was one condition: we would have to put the Bulova name on the radios.
That stopped me. I had vowed that we would not be an original equipment maker for other companies. We wanted to make a name for our company on the strength of our own products. I told him I would check with my company, and in fact I did send a message back to Tokyo outlining the deal. The reply was, “Take the order.” I didn’t like the idea, and I didn’t like the reply. After thinking it over and over, I decided I had to say no, we would not produce radios under another name. When I returned to call on the man from Bulova he didn’t seem to take me seriously at first. How could I turn down such an order? He was convinced I would accept. When I would not budge, he got short with me.
“Our company name is a famous brand name that has taken over fifty years to establish,” he said. “Nobody has ever heard of your brand name. Why not take advantage of ours?”
I understood what he was saying, but I had my own view. “Fifty years ago,” I said, “your brand name must have been just as unknown as our name is today. I am here with a new product, and I am now taking the first step for the next fifty years of my company. Fifty years from now I promise you that our name will be just as famous as your company name is today.”
Adapted from “Made in Japan,” by Akio Morita
Management lessons through story telling-The Sony Walkman
Leading by intuition
The idea took shape when Ibuka came into Akio Morita’s office one day with one of the portable stereo tape recorders and a pair of standard-size headphones. He looked unhappy and complained about the weight of the system. Morita asked him what was on his mind and then he explained, “I like to listen to music, but I don’t want to disturb others. I can’t sit there by my stereo all day. This is my solution – I take the music with me. But it’s too heavy.”
The following is Morita’s account: “Ibuka’s complaint set me into motion. I ordered our engineers to take one of our reliable small cassette tape recorders we called Pressman, strip out the recording circuit and the speaker, and replace them with a stereo amplifier. I outlined the other details I wanted, which included very light-weight headphones that turned out to be one of the most difficult parts of the Walkman project.
Everybody gave me a hard time. It seemed as though nobody liked the idea. At one of our product planning meetings, one of the engineers said, “It sounds like a good idea, but will people, but it if it doesn’t have recording capability? I don’t think so.”
I said, “Millions of people have bought car stereo without recording capability and I think millions will buy this machine.”
Nobody openly laughed at me, but I didn’t seem to be convincing my own project team, although they reluctantly went along. I even dictated the selling price to suit a young person’s pocketbook, even before we made the first machine.
The tape recorder was a relatively expensive unit, selling for 49,000 yen in Japan, Morita wanted the first models of our new stereo experiment to retail for no more than thirty thousand yen. The accountants protested but Morita persisted. Morita told them he was confident about making the new product in very large numbers and the cost would come down as volume climbed. Morita chose the basic configuration of the Pressman because many parts for the Pressman were available worldwide at service centers, and Sony knew the unit was reliable. Therefore Sony could start out without worrying about any mechanical failure.
Morita continues his narrative: “In a short time the first experimental unit with new, miniature headphones was delivered to me, and I was delighted with the small size of it and the high-quality sound the headphones produced. In conventional stereo with large loudspeakers, most of the energy used to produce the sound is wasted, because only a fraction of it goes to the listeners’ ears. The rest of the sound vibrates off the walls and the windows. Our tiny unit needed only a small tricky of battery power to the amplifier to drive the tiny lightweight headphones. The fidelity that came through the small headphones was as good or better than I expected.
I thought we had produced a terrific item, and I was full of enthusiasm for it, but our marketing people were unenthusiastic. They said it wouldn’t sell, and it embarrassed me to be so excited about a product most others thought would be a dud. But I was so confident the product was viable that I said I would take personal responsibility for the project. I never had reason to regret it. The idea took hold and from the very beginning the Walkman was a runaway success.”
Adapted from “Made in Japan,” by Akio Morita
The idea took shape when Ibuka came into Akio Morita’s office one day with one of the portable stereo tape recorders and a pair of standard-size headphones. He looked unhappy and complained about the weight of the system. Morita asked him what was on his mind and then he explained, “I like to listen to music, but I don’t want to disturb others. I can’t sit there by my stereo all day. This is my solution – I take the music with me. But it’s too heavy.”
The following is Morita’s account: “Ibuka’s complaint set me into motion. I ordered our engineers to take one of our reliable small cassette tape recorders we called Pressman, strip out the recording circuit and the speaker, and replace them with a stereo amplifier. I outlined the other details I wanted, which included very light-weight headphones that turned out to be one of the most difficult parts of the Walkman project.
Everybody gave me a hard time. It seemed as though nobody liked the idea. At one of our product planning meetings, one of the engineers said, “It sounds like a good idea, but will people, but it if it doesn’t have recording capability? I don’t think so.”
I said, “Millions of people have bought car stereo without recording capability and I think millions will buy this machine.”
Nobody openly laughed at me, but I didn’t seem to be convincing my own project team, although they reluctantly went along. I even dictated the selling price to suit a young person’s pocketbook, even before we made the first machine.
The tape recorder was a relatively expensive unit, selling for 49,000 yen in Japan, Morita wanted the first models of our new stereo experiment to retail for no more than thirty thousand yen. The accountants protested but Morita persisted. Morita told them he was confident about making the new product in very large numbers and the cost would come down as volume climbed. Morita chose the basic configuration of the Pressman because many parts for the Pressman were available worldwide at service centers, and Sony knew the unit was reliable. Therefore Sony could start out without worrying about any mechanical failure.
Morita continues his narrative: “In a short time the first experimental unit with new, miniature headphones was delivered to me, and I was delighted with the small size of it and the high-quality sound the headphones produced. In conventional stereo with large loudspeakers, most of the energy used to produce the sound is wasted, because only a fraction of it goes to the listeners’ ears. The rest of the sound vibrates off the walls and the windows. Our tiny unit needed only a small tricky of battery power to the amplifier to drive the tiny lightweight headphones. The fidelity that came through the small headphones was as good or better than I expected.
I thought we had produced a terrific item, and I was full of enthusiasm for it, but our marketing people were unenthusiastic. They said it wouldn’t sell, and it embarrassed me to be so excited about a product most others thought would be a dud. But I was so confident the product was viable that I said I would take personal responsibility for the project. I never had reason to regret it. The idea took hold and from the very beginning the Walkman was a runaway success.”
Adapted from “Made in Japan,” by Akio Morita
Management lessons through story telling-The Boeing 707
Setting Big Hairy Ambitious Goals
Until the early 1950s, Boeing focused on building huge flying machines for the military. However, Boeing had virtually no presence in the commercial aircraft market. McDonnell Douglas had vastly superior abilities in the smaller, propeller-driven planes that composed the commercial fleet.
In the early 1950s, however, Boeing saw an opportunity to take on McDonnell Douglas by marrying its experience with large aircraft to its understanding of jet engines. Led by Bill Allen, Boeing executives debated the wisdom of moving into the commercial sphere. They concluded that, whereas Boeing could not have been the best in the commercial plane market a decade earlier, the cumulative experience in jets and big planes they had gained from military contracts now made such a dream possible. They also realised that the economics of commercial aircraft would be vastly superior to the military market. They were just flat-out turned on by the whole idea of building a commercial jet.
So, in 1952 Allen and his team made the decision to spend a quarter of the company’s entire net worth to build a prototype jet that could be used for commercial aviation. They built the 707 and launched Boeing in a bid to become the leading commercial aviation company in the world. Three decades later, after producing five of the most successful commercial jets in history (the 707, 727, 737, 747, 757), Boeing stood as the greatest company in the commercial airplane industry, worldwide.
Adapted from “Good to Great” by Jim Collins.
Until the early 1950s, Boeing focused on building huge flying machines for the military. However, Boeing had virtually no presence in the commercial aircraft market. McDonnell Douglas had vastly superior abilities in the smaller, propeller-driven planes that composed the commercial fleet.
In the early 1950s, however, Boeing saw an opportunity to take on McDonnell Douglas by marrying its experience with large aircraft to its understanding of jet engines. Led by Bill Allen, Boeing executives debated the wisdom of moving into the commercial sphere. They concluded that, whereas Boeing could not have been the best in the commercial plane market a decade earlier, the cumulative experience in jets and big planes they had gained from military contracts now made such a dream possible. They also realised that the economics of commercial aircraft would be vastly superior to the military market. They were just flat-out turned on by the whole idea of building a commercial jet.
So, in 1952 Allen and his team made the decision to spend a quarter of the company’s entire net worth to build a prototype jet that could be used for commercial aviation. They built the 707 and launched Boeing in a bid to become the leading commercial aviation company in the world. Three decades later, after producing five of the most successful commercial jets in history (the 707, 727, 737, 747, 757), Boeing stood as the greatest company in the commercial airplane industry, worldwide.
Adapted from “Good to Great” by Jim Collins.
Management lessons through story telling-The hedgehog and the fox
What the hedgehog teaches us about focus
In his famous essay, “The Hedgehog and the Fox,” Isaiah Berlin divided the world into hedgehogs and foxes, based on an ancient Greek parable.
The fox, a cunning creature, can devise several complex strategies for sneak attacks upon the hedgehog. Day in and day out, the fox circles, around the hedgehog’s den, waiting for the perfect moment to pounce. Fast, sleek, and crafty – the fox looks like the sure winner.
The hedgehog, on the other hand, waddles along, searching for lunch and taking care of his home. Minding his own business, the hedgehog wanders right into the path of the fox.
“Aha, I’ve got your now!” thinks the fox,. He leaps out, bounding across the ground, lightning fast. The little hedgehog, sensing danger, looks up and thinks, “Here we go again. Will he ever learn?” Rolling up into a perfect little ball the hedgehog becomes a sphere of sharp spikes, pointing outward in all directions. The fox bounding toward his prey, sees the hedgehog defense and calls off the attack.
Retreating back to the forest, the fox begins to calculate a new line of attack. Each day, some version of this battle between the hedgehogs and the fox takes place, and despite the greater cunning of the fox, the hedgehog always wins.
Adapted from “Good to Great” by Jim Collins.
In his famous essay, “The Hedgehog and the Fox,” Isaiah Berlin divided the world into hedgehogs and foxes, based on an ancient Greek parable.
The fox, a cunning creature, can devise several complex strategies for sneak attacks upon the hedgehog. Day in and day out, the fox circles, around the hedgehog’s den, waiting for the perfect moment to pounce. Fast, sleek, and crafty – the fox looks like the sure winner.
The hedgehog, on the other hand, waddles along, searching for lunch and taking care of his home. Minding his own business, the hedgehog wanders right into the path of the fox.
“Aha, I’ve got your now!” thinks the fox,. He leaps out, bounding across the ground, lightning fast. The little hedgehog, sensing danger, looks up and thinks, “Here we go again. Will he ever learn?” Rolling up into a perfect little ball the hedgehog becomes a sphere of sharp spikes, pointing outward in all directions. The fox bounding toward his prey, sees the hedgehog defense and calls off the attack.
Retreating back to the forest, the fox begins to calculate a new line of attack. Each day, some version of this battle between the hedgehogs and the fox takes place, and despite the greater cunning of the fox, the hedgehog always wins.
Adapted from “Good to Great” by Jim Collins.
Management lessons through story telling-The Stockdale paradox
Lessons from a Vietnam War survivor
The story of Admiral Jim Stockdale offers some great lessons in leadership. Stockdale was the highest ranking United States military officer in the “Hanoi Hilton” prisoner-of-war camp during the height of the Vietnam War. He was tortured over twenty times during his eight-year imprisonment from 1965 to 1973. He shouldered the burden of command, doing everything he could to create conditions that would increase the number of survivors, while fighting an internal war against his captors and their attempts to use the prisoners for propaganda. At one point, he beat himself with a stool and cut himself with a razor, deliberately disfiguring himself, so that he could not be put on videotape as an example of a “well-treated prisoner.” He exchanged secret intelligence information with his wife through their letters, knowing that discovery would mean more torture and perhaps death. He instituted rules that would help people to deal with torture. He instituted an elaborate internal communications systems to reduce the sense of isolation that their captors tried to create, which used a five-by-five matrix of tap codes for alpha characters. Once the prisoners mopped and swept the central yard using the code, signalling “We love you” to Stockdale.
The famous author Jim Collins eagerly looked forward to the prospect of spending an afternoon with Stockdale. As they got talking, Stockdale remarked, “I never lost faith in the end of the story, I never doubted not only that I would get out, but also that I would prevail in the end and turn the experience into the defining event of my life, which, in retrospect, I would not trade.”
After a period of silence, Collins asked, “Who didn’t make it out?”
“Oh, that’s easy,” he said, “The optimists.” Collins was completely confused.
Stockdale explained, “The optimists, Oh, they were the ones who said, “We’re going to be out by Christmas.” And Christmas would come, and Christmas would go. Then they’d say, ‘We’re going to be out by Easter.’ And Easter would come, and Easter would go. And then Thanksgiving, and then it would be Christmas again. And they died of a broken heart.”
Adapted from “Good to Great” by Jim Collins.
The story of Admiral Jim Stockdale offers some great lessons in leadership. Stockdale was the highest ranking United States military officer in the “Hanoi Hilton” prisoner-of-war camp during the height of the Vietnam War. He was tortured over twenty times during his eight-year imprisonment from 1965 to 1973. He shouldered the burden of command, doing everything he could to create conditions that would increase the number of survivors, while fighting an internal war against his captors and their attempts to use the prisoners for propaganda. At one point, he beat himself with a stool and cut himself with a razor, deliberately disfiguring himself, so that he could not be put on videotape as an example of a “well-treated prisoner.” He exchanged secret intelligence information with his wife through their letters, knowing that discovery would mean more torture and perhaps death. He instituted rules that would help people to deal with torture. He instituted an elaborate internal communications systems to reduce the sense of isolation that their captors tried to create, which used a five-by-five matrix of tap codes for alpha characters. Once the prisoners mopped and swept the central yard using the code, signalling “We love you” to Stockdale.
The famous author Jim Collins eagerly looked forward to the prospect of spending an afternoon with Stockdale. As they got talking, Stockdale remarked, “I never lost faith in the end of the story, I never doubted not only that I would get out, but also that I would prevail in the end and turn the experience into the defining event of my life, which, in retrospect, I would not trade.”
After a period of silence, Collins asked, “Who didn’t make it out?”
“Oh, that’s easy,” he said, “The optimists.” Collins was completely confused.
Stockdale explained, “The optimists, Oh, they were the ones who said, “We’re going to be out by Christmas.” And Christmas would come, and Christmas would go. Then they’d say, ‘We’re going to be out by Easter.’ And Easter would come, and Easter would go. And then Thanksgiving, and then it would be Christmas again. And they died of a broken heart.”
Adapted from “Good to Great” by Jim Collins.
Management lessons through story telling-Circuit City
Lead with questions, not answers
In 1973, one year after he became CEO, Alan Wurtzel’s company stood at the brink of bankruptcy. At the time, the company was a hodgepodge of appliance and hi-fi stores with no unifying concept. Over the next ten years, Wurtzel and his team not only turned the company around, but also created the Circuit City concept and laid the foundation for a stunning record of results.
When Wurtzel started the long turnaround, he began with the question of where to take the company. Unlike many CEOs, Wurtzel resisted the urge to walk in with the answer. Instead, he began with questions. Wurtzel stands as one of the few CEOs in a large corporation who put more questions to his board members than they put to him.
He used the same approach with his executive team, constantly pushing and probing and prodding with questions. Each step along the way, Wurtzel would keep asking questions until he had a clear picture of reality and its implications. “They used to call me the prosecutor, because I would home in on a question,” said Wurtzel. “You know, like a bulldog, I wouldn’t let go until I understood. Why, why, why?
Adapted from “Good to Great” by Jim Collins.
In 1973, one year after he became CEO, Alan Wurtzel’s company stood at the brink of bankruptcy. At the time, the company was a hodgepodge of appliance and hi-fi stores with no unifying concept. Over the next ten years, Wurtzel and his team not only turned the company around, but also created the Circuit City concept and laid the foundation for a stunning record of results.
When Wurtzel started the long turnaround, he began with the question of where to take the company. Unlike many CEOs, Wurtzel resisted the urge to walk in with the answer. Instead, he began with questions. Wurtzel stands as one of the few CEOs in a large corporation who put more questions to his board members than they put to him.
He used the same approach with his executive team, constantly pushing and probing and prodding with questions. Each step along the way, Wurtzel would keep asking questions until he had a clear picture of reality and its implications. “They used to call me the prosecutor, because I would home in on a question,” said Wurtzel. “You know, like a bulldog, I wouldn’t let go until I understood. Why, why, why?
Adapted from “Good to Great” by Jim Collins.
Sunday, August 05, 2007
The strange paradox that India is
First world capabilities and third world inadequacies
India is a strange paradox. As the leading social activist , Jayaprakash Narayan of Lok Satta recently mentioned in a public gathering, our country combines first world capabilities in some areas with third world inadequacies in others.
We have business leaders like N.R.Naraynamurthy and Azim Premji who are second to none in terms of their vision and statesmanship and commitment to the highest standards of corporate governance.We have companies like TCS, Infosys and Wipro who have demonstrated consistently their ability to execute large IT outsourcing contracts. We have some public servants like Kiran Bedi who can match the Rudi Gullianis of the world in terms of their go getting capabilities. We have some of the most hard working people in the world in the corporate sector, toiling very long hours in their offices.
But we also have some of the most incompetent and dishonest politicians in the world. And the few who are competent and honest are not the greatest communicators. That includes our current prime minister. Recently, I watched a video of Al Gore the former vice president. He could bring the crowd on its feet by his impassioned appeal to save the earth from global warming. And recall Ronald Reagan when he was the US president. Or more recently Tony Blair, former prime minister of England. I can think of few Indian politicians who have that kind of an oratorial capability, people who can combine substance with style and deep conviction.
Even more of greater concern is the concentration of power in the hands of a few individuals and the complete subversion of the democratic process. Indeed, there are few checks and balances on some Indian politicians. Recall the way in which the current president was selected. And that too when the previous president (who most people accept as one of India's most popular presidents ever) was available for a second term and was a clearly better candidate.
We also have some of the most in disciplined people in the world- who drive rashly on the roads throwing all traffic rules to the wind, who do not like to stand in the queue and who talk loudly in public places without caring about the inconvenience caused to the people around. Not to talk about the Diwali crowd who seem to draw sadistic pleasure bursting crackers which can damage the ear drums of people around, especially the senior citizens.
And while we do have some great companies, none of them find a place among the world's 100 most corporate brands published by Business Week recently.
Our legal system is pathetic. Judgments relating to some of our most celebrated cases like the Coimbatore and Bombay blasts have been delayed for years and are only now coming close to delivery.
And I need not mention our pathetic infrastructure which is choking many of our cities including Bangalore.
Clearly, notwithstanding the hype created by a few intellectuals and columnists,our current rate of economic growth cannot be sustained if we are not able to develop first world capabilities in many more areas where our current standards are shameful to say the least.
India is a strange paradox. As the leading social activist , Jayaprakash Narayan of Lok Satta recently mentioned in a public gathering, our country combines first world capabilities in some areas with third world inadequacies in others.
We have business leaders like N.R.Naraynamurthy and Azim Premji who are second to none in terms of their vision and statesmanship and commitment to the highest standards of corporate governance.We have companies like TCS, Infosys and Wipro who have demonstrated consistently their ability to execute large IT outsourcing contracts. We have some public servants like Kiran Bedi who can match the Rudi Gullianis of the world in terms of their go getting capabilities. We have some of the most hard working people in the world in the corporate sector, toiling very long hours in their offices.
But we also have some of the most incompetent and dishonest politicians in the world. And the few who are competent and honest are not the greatest communicators. That includes our current prime minister. Recently, I watched a video of Al Gore the former vice president. He could bring the crowd on its feet by his impassioned appeal to save the earth from global warming. And recall Ronald Reagan when he was the US president. Or more recently Tony Blair, former prime minister of England. I can think of few Indian politicians who have that kind of an oratorial capability, people who can combine substance with style and deep conviction.
Even more of greater concern is the concentration of power in the hands of a few individuals and the complete subversion of the democratic process. Indeed, there are few checks and balances on some Indian politicians. Recall the way in which the current president was selected. And that too when the previous president (who most people accept as one of India's most popular presidents ever) was available for a second term and was a clearly better candidate.
We also have some of the most in disciplined people in the world- who drive rashly on the roads throwing all traffic rules to the wind, who do not like to stand in the queue and who talk loudly in public places without caring about the inconvenience caused to the people around. Not to talk about the Diwali crowd who seem to draw sadistic pleasure bursting crackers which can damage the ear drums of people around, especially the senior citizens.
And while we do have some great companies, none of them find a place among the world's 100 most corporate brands published by Business Week recently.
Our legal system is pathetic. Judgments relating to some of our most celebrated cases like the Coimbatore and Bombay blasts have been delayed for years and are only now coming close to delivery.
And I need not mention our pathetic infrastructure which is choking many of our cities including Bangalore.
Clearly, notwithstanding the hype created by a few intellectuals and columnists,our current rate of economic growth cannot be sustained if we are not able to develop first world capabilities in many more areas where our current standards are shameful to say the least.
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