Indian Economy: News and Discussion (June 8 2008)

[Bade]

So for the bad banks in the US we have Uncle Sam to bail out. For the bad ones in China we have the PRC commies. What is the difference ? Same na ? Back to state control or public money to bail out everyone. All that was being dished out by the anti-socialists here seem like wasted effort.

vinaji, ready for crow soup.

[Avinash R]

Indian firms top Asia's 50 best performers list

New Delhi, Sep 5 (PTI) Two domestic firms -- Siemens India and Unitech -- have made to the top of a list of Asia's 50 best performing companies, compiled by international financial magazine BusinessWeek, which includes a total of 10 Indian companies such as DLF, TCS, Tech Mahindra and ITC.
India has the maximum representation in the list, followed by China's eight and six from Hong Kong.

Siemens India, the domestic unit of German conglomerate Siemens AG, and real estate major Unitech have been ranked at the first and the second positions and are followed by China's Alibaba.Com, China Molybdenum and Japan's Inpex Holdings in the top five.

A total of seven Indian companies have made to the top 20 positions -- drugmaker Cipla (sixth), ABB India (12th), Tech Mahindra (13th), Hindustan Zinc (17th) and DLF (18th).

Other Indian companies on the list include BHEL (27th), ITC (45th) and TCS (50th).

The rankings, compiled by Standard & Poor's Compustat, are based on average return on capital and sales growth over the past three years, BusinessWeek said.

The magazine said that this year's ranking of Asia's best-performing companies attests to the continuing dynamism of India and Greater China. Among sectors, infrastructure and high tech made the strongest showings, it noted.

There are eight companies from China, six from Hong Kong, five each from Indonesia, Taiwan and Pakistan, four from Singapore, three from Korea and two each from Japan and Malaysia.

[Avinash R]

RIL makes it to world's 100 most respected companies list

New York, Sep 6 (PTI) Billionaire Mukesh Ambani-led Reliance Industries has made it to the annual list of world's 100 most respected companies compiled by the Wall Street Journal, topped by US-based healthcare products major Johnson & Johnson.
Ranked 83rd, RIL is the only Indian company on the list, although there are three more companies led by persons of Indian origin -- PepsiCo, ArcelorMittal and Citigroup.

J&J is followed by FMCG giant Procter & Gamble, Japanese auto maker Toyota Motor, legendary investor Warren Buffett-led Berkshire Hathaway and technology giant Apple in the top five positions.

While Berkshire has slipped from its first position last year, J&J has moved up from its second place in 2007 list. Toyota has retained its third place, while Apple and P&G have improved on their previous year rankings.

Besides, Google (6th), Wal-Mart (7th), Coca-Cola (8th), PepsiCo (9th) and Nestle (10th) also figure among the top- ranked companies.

As part of the fourth annual survey, Wall Street Journal asked money managers to indicate the degree to which they respect or don't the 100 largest publicly traded companies, as measured by total market value.

According to the survey, 74 per cent respondents said they 'highly respect' J&J, 23 per cent said they 'respect', 3 per cent said 'respect somewhat' but none said they 'don't respect' the company making it top-ranked company.

About RIL, 4 per cent considered the company as highly respected, 17 per cent said they 'respect' it, 46 per cent responded saying they 'respect somewhat', while 11 per cent said they 'don't respect' the firm.

[Kakkaji]

Ah. Now you know why the US market tanked last week without any seemingly obvious cause. Fannie and Freddie share holders are going to be wiped out. Expect shock to shoot through the financial markets next week on open.

Guys . This one is a biggie. Fannie and Freddie going into recievership is like SBI and and UTI and all their investments going bankrupt in the Indian market.

The holders of Fannie and Freddie debt , in significant percentage are foreign central banks. Expect the pain from this to convulse the global financial markets on Monday morning open.

vina Guru:

I don't understand.

The shareholders will be wiped out on Govt takeover, but why should bondholders worry. Isn't the whole idea behind Govt. takeover to guarantee full payments to bondholders?

I think that after the initial convulsion, this move by the GOTUS might help stabilize the market. What am I missing?

[G Subramaniam]

Ah. Now you know why the US market tanked last week without any seemingly obvious cause. Fannie and Freddie share holders are going to be wiped out. Expect shock to shoot through the financial markets next week on open.

Guys . This one is a biggie. Fannie and Freddie going into recievership is like SBI and and UTI and all their investments going bankrupt in the Indian market.

The holders of Fannie and Freddie debt , in significant percentage are foreign central banks. Expect the pain from this to convulse the global financial markets on Monday morning open.

vina Guru:

I don't understand.

The shareholders will be wiped out on Govt takeover, but why should bondholders worry. Isn't the whole idea behind Govt. takeover to guarantee full payments to bondholders?

I think that after the initial convulsion, this move by the GOTUS might help stabilize the market. What am I missing?

If a typical company gets into this kind of trouble
the pain gets spread around

The shareholders may lose 99% of their investment
The bond holders may lose 50% of their investment

The losses are so big, that there is worry that the bond holders may not get back 100%
but only 50% or if they want the 100% back, the money will be released after 5 years at no interest

Since these companies are quasi sponsored by the US govt, there is more probability that the bond holders will get back 100%, but no guarantee

[svinayak]

Ah. Now you know why the US market tanked last week without any seemingly obvious cause. Fannie and Freddie share holders are going to be wiped out. Expect shock to shoot through the financial markets next week on open.

Guys . This one is a biggie. Fannie and Freddie going into recievership is like SBI and and UTI and all their investments going bankrupt in the Indian market.

The holders of Fannie and Freddie debt , in significant percentage are foreign central banks. Expect the pain from this to convulse the global financial markets on Monday morning open. Notice how this is announced over the weekend when markets are closed to ease in the shock and allow time for it to attenuate a bit before Monday.

This credit crisis has wiped out all major "mortgage specialists" . Freddie, Fannie, Bear Stearns and Lehman anyway is a goner sooner or later. Now odds are with Freddie and Fannie out, Lehman too will go under.

Something 'BIG' will (announcement) happen by 6.P.M. tomorrow ( Sunday) in Financial Mkts. before the Austrian and Japan mkts open!

By 'rescuing 'GSEs Govt will prop up all the already insolvent banks, at least temporarily. It will however affect the credit rating of USA itself. It remains to seen how the outside world react?

[Raj]

Something 'BIG' will (announcement) happen by 6.P.M. tomorrow ( Sunday) in Financial Mkts. before the Austrian and Japan mkts open!

By 'rescuing 'GSEs Govt will prop up all the already insolvent banks, at least temporarily. It will however affect the credit rating of USA itself. It remains to seen how the outside world react?

Is this "BIG" announcement already made?

[Raj]

Statement of Treasury Secretary Henry Paulson

Questions and answers on Conservatorship

[svinayak]

Removed meaningless cryptic response.

[vina]

I don't understand.

The shareholders will be wiped out on Govt takeover, but why should bondholders worry. Isn't the whole idea behind Govt. takeover to guarantee full payments to bondholders?

I think that after the initial convulsion, this move by the GOTUS might help stabilize the market. What am I missing?

Fannie and Freddie were "Govt Companies".. sort of like ALL our PSU banks in India. The public thinks that there is no credit risk associated with them because they are govt owned and that the govt will extend sovereign guarantee. But read the fine print and it is not so. However that "perception" allows Govt Companies to borrow at close to sovereign rates and Freddie and Fannie could borrow enormous amounts because of the low cost of funds.

Now when the govt extends "sovereign" guarantee to Freddie and Fannie (unlimited liquidity), then the credit risk is the same as the US treasury. So the immediate arbitrage play is to whittle away /monetize the huge price premium between the Treasury and G-Sec paper (where you price in higher credit risk) .., I would sell Treasury and buy G-Secs..Yeah, the spread between the two will narrow , with the yield on G-Secs decreasing while that on Treasury increasing.

But the bigger whammy is that the US govt assumes full responsibility for the losses on the G-Secs. Now with a potential loss of close to a trillion dollars in terms of prices to go, that is a whole lot of monetization that is waiting to happen. That is highly inflationary.

If real estate deflation continues , then Fed prints more dollars to cover the hole for Fannie and Freddie and will export the inflation globally. Inflation hurts real yeilds. The foreign govts who hold US Securities are going to get screwed one way or another. Either with falling prices of their paper or falling dollar and most probably both.

[vina]

Hmm.. Looks like Morgan Stanley in India too was involved with the Freddie & Fannie action! Injuns getting into the Noo Yawk and Lundon game

The New York Times
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September 8, 2008
As Crisis Grew, a Few Options Shrank to One
By CHARLES DUHIGG, STEPHEN LABATON and ANDREW ROSS SORKIN

This article was reported by Charles Duhigg, Stephen Labaton, and Andrew Ross Sorkin and written by Mr. Duhigg.

For Freddie Mac, the beleaguered mortgage finance giant that was desperately trying to avoid a government takeover, the moment of truth came three weeks ago.

In a last-ditch effort to raise money to offset billions of dollars of losses, Freddie’s chief executive, Richard F. Syron, traveled to New York to huddle with potential investors at the headquarters of Goldman Sachs and a law firm, Davis, Polk & Wardwell.

Over a couple of days, he and his lieutenants made their pitch — only to have every option rejected, people briefed on the discussions said.

Empty-handed and crestfallen, Mr. Syron canceled plans to join his family at their weekend home on Cape Cod and returned to Washington to deliver the bad news to Treasury Secretary Henry M. Paulson Jr.: he still hadn’t found anyone willing to save Freddie Mac.

Mr. Paulson and a team at the Treasury had been working for months on plans to prop up both Freddie and its sister company, Fannie Mae, hoping they would never have to act.

Now a consensus was emerging that they had little choice. If Freddie’s and Fannie’s problems worsened, a crisis of confidence could spread through the worldwide financial system, deepening the difficulties in the housing market and further weakening the economy — in the midst of a hard-fought presidential campaign.

So while Democrats gathered in Denver to nominate Senator Barack Obama two weeks ago and Republicans met last week in St. Paul to nominate Senator John McCain, Mr. Paulson and his top aides worked nonstop — often for 18 hours a day, including Labor Day weekend — to scrutinize possibilities and complete the details of a government takeover of both companies.

Mindful of the high stakes, Mr. Paulson convened a secure video teleconference on Aug. 26 from a bunker under the West Wing of the White House to brief President Bush, who was at his ranch in Crawford, Tex. Fannie’s and Freddie’s situation was deteriorating, he advised the president, and something needed to be done, according to a White House official who was not authorized to speak to the media.

On Sunday, with the president’s blessing, Mr. Paulson announced the solution: a takeover that could turn into the biggest and costliest government bailout ever of private companies.

The action was a huge comedown for two powerful companies that had long held enormous sway in financial boardrooms and government corridors.

“Today’s necessary but likely very expensive action for taxpayers is the consequence of regulatory neglect and of a broader political system’s reluctance to take on what should have been clearly seen as festering problems,” said Lawrence H. Summers, who as Treasury secretary under President Bill Clinton had warned of mounting problems at the companies.

The downfall of Fannie and Freddie stems from a series of miscalculations and deferred decisions, both by their executives and government officials, according to company insiders, regulators, auditors and outside analysts. The companies expanded rapidly in recent years, initially playing down the risks posed by a housing bubble. Then, as the housing slump expanded nationwide, they resisted raising enough new capital that might have provided a financial cushion to weather the storm. Lawmakers, paralyzed by partisan infighting, delayed strengthening regulatory oversight of the politically powerful companies.

Mr. Paulson did not fully recognize the extent of Fannie’s and Freddie’s financial problems until recent months. In July, seeking to avoid a government takeover, he asked Congress for the power to bail out Fannie and Freddie — hoping that gaining such authority would calm markets and make a rescue unnecessary.

But he quickly learned that getting those powers made their execution inevitable. His strategy did not anticipate that investors, already spooked by a year of troubles in the financial markets, might panic any time that rumors of problems at Fannie and Freddie cropped up.

The seizure of Fannie and Freddie is all the more surprising because, as recently as late March, Washington viewed the companies as saviors of the housing market and the economy, rather than as risks to them. Instead of requiring Fannie and Freddie to scale back, regulators gave them a green light to buy and guarantee more and bigger mortgages.

On March 19, James B. Lockhart, their chief regulator, dismissed swirling rumors about their financial health. “The actions we’re taking today,” Mr. Lockhart declared, referring to a decision to ease restrictions on how much capital they were required to hold, “make the idea of a bailout nonsense in my mind. The companies are safe and sound, and they will continue to be safe and sound.”

With this vote of confidence, the battered stocks of the two companies rose sharply, to more than $30 a share, levels they would not reach again.

But within about a month, Mr. Paulson was becoming concerned about the companies. In April, he met with their chief executives and top members of the Senate Banking Committee in a closed-door session.

Over the previous years, as the housing bubble inflated, Fannie and Freddie stepped up their purchases of the risky but profitable subprime and alt-A loans that were at the root of the mortgage crisis. Though Congress had just pushed Freddie and Fannie to accelerate purchases of loans to give the housing market a boost, Mr. Paulson was now urging lawmakers to establish stronger oversight and push the companies to raise more capital.

The companies’ thin financial cushions were becoming even more stretched, Mr. Paulson said, according to people with firsthand knowledge of the conversations; and if either company got into trouble, it could threaten the already weakened economy.

In the months after, Fannie Mae managed to raise $7 billion in new capital to offset losses, fulfilling a promise made to regulators. Freddie Mac, however, failed to make good on its pledge to raise $5.5 billion. Still, though the companies’ stock prices continued drifting downward, they continued to borrow money without problem, which is crucial to their ability to buy mortgages.

But in early July, as the housing crisis continued to widen and deepen, confidence in the companies began to evaporate. Rumors spread that Fannie and Freddie were not fully reflecting losses from rising foreclosures on mortgages they held.

The stocks of both companies fell more than 60 percent during the second week of July, to single-digit prices, and the cost of borrowing money rose for both, reflecting anxiety over growing risk. Alarmed, Mr. Paulson asked Congress to give him the authority to rescue the companies if necessary. Congress quickly granted him that power.

At the time, Mr. Paulson said he hoped never to use the authority. “If you’ve got a bazooka and people know you’ve got it, you may not have to take it out,” he told one Congressional panel.

Just in case, however, Mr. Paulson began analyzing his options.

In late July, he called John J. Mack, the head of the investment bank Morgan Stanley, and asked his firm to consider advising the Treasury. Within the agency, Mr. Paulson told his deputies to start examining contingency plans.

As those discussions progressed, a mantra emerged among top officials, people with knowledge of the Treasury’s conversations said. The government’s priorities were to maximize market stability, mortgage affordability and taxpayer protection.

Mr. Paulson added a mantra of his own: he privately said he didn’t want to “kick the can down the road” and leave the problems for a future administration and Congress to solve.

Morgan Stanley assigned teams of financial analysts in the United States, Britain and India to review loan data from Fannie and Freddie around the clock, because of concerns that the problems might be worse than the companies had revealed. Bankers estimated that it would take as much as $50 billion to offset the companies’ combined losses.

Throughout August, telephone conferences between officials and advisers often began at 7:30 in the morning and lasted until 11 at night. Mr. Paulson started telling friends that after winning authority to intervene, he “felt like a dog who’d caught the bus and didn’t know what to do with it.”

As possibilities were debated, Treasury officials eventually concluded that if they had to act, the best choice was a conservatorship — a takeover that would make government backing of the companies’ debts and obligations explicit but would remove the companies’ leadership while still keeping them operating.

“They called it ‘sticking the companies in a timeout,’ ” said one person with firsthand knowledge of the conversations. “It protects the safety and soundness of the economy but also gives everyone breathing space.”

Most worrisome, the companies’ cost of borrowing was growing more expensive, and central banks in Asia and Russia were scaling back their purchases of the companies’ debt. Freddie, in particular, was in a bind. Unlike Fannie, it had not raised capital earlier, when markets were less nervous. Mr. Syron figured that the company had one final chance to raise money and signal to debt investors that the company was viable.

However, when he went to New York, potential investors told Mr. Syron there was too much uncertainty around the Treasury’s intentions; if investors acted now, and Freddie was later seized by regulators, they would lose everything they had invested.

Mr. Syron told Mr. Paulson that efforts to raise money had been fruitless, prompting the Treasury secretary to set up the Aug. 26 video conference call with the president.

After briefing the president, the Treasury moved quickly. Over Labor Day weekend, Mr. Paulson convened meetings with Ben S. Bernanke, chairman of the Federal Reserve; Kevin Warsh, a Fed governor; and Mr. Lockhart, Fannie and Freddie’s regulator.

Meanwhile, advisers from Morgan Stanley contacted Freddie Mac and asked it to provide data on 12 million mortgages. Executives within Freddie Mac viewed the request as a signal that they had won a brief reprieve because it would take weeks to analyze that much information.

Unknown to either company, however, the decision for a takeover had already been made. Mr. Lockhart last week started interviewing potential candidates to replace the top executives. On Thursday, the last day of the Republican convention, Mr. Paulson met with President Bush in the Oval Office. Mr. Bush said the Treasury plan had his support.

The next day, Mr. Paulson called Mr. Syron and Mr. Mudd to separate meetings at the offices of Mr. Lockhart without saying why. Freddie was still looking for fresh capital and interviewing people for senior positions. But in his meetings, Mr. Paulson said he intended to put both companies into conservatorship. As part of that plan, Mr. Syron and Mr. Mudd would both be required to step down.

Mr. Mudd pleaded with Mr. Paulson to spare Fannie Mae, people with knowledge of the meeting said. He said that he abided last spring with regulators’ demands to raise more capital, adding that the company was in better financial health than Freddie.

Mr. Paulson responded that Freddie was nearing a crisis and that, in the eyes of the markets, the companies were joined at the hip. He would not treat them differently for fear that similar problems, over time, would engulf Fannie Mae, but that time closer to the election. Mr. Paulson told both companies that they had no choice.

President Bush returned from Camp David, the presidential retreat, on Saturday morning. The Treasury secretary told him that the companies had reluctantly agreed to the plan. Shortly before 11 a.m. on Sunday, in a conference room across the hall from Mr. Paulson’s office, the Treasury secretary and Mr. Lockhart signed the documents that give each company access to up to $100 billion in taxpayer money to cover future losses — but also put Fannie and Freddie directly under government control.

Edmund L. Andrews and Gretchen Morgenson contributed reporting.

[Katare]

Freddie/Fannie both would loose most of their equity capital but not all of it since it's not a bankruptcy. Federal govt will work with the private-owner/investors to recapitalize these companies to the limit where all their losses are smaller than the capital. IIRC they have $36B in capital and they are suspending $2B/year in dividends, most believe that another $50billion would be needed in capital to meet all the losses. $50 billion would allow $500billion in additional leveraged debt that will be available for these companies to buy more mortgage loans to create further revenue/profit stream.

US taxpayers would foot the bills of any additional losses that might pile up over the years. Might be a good opportunity buy some freddie/Fennie stocks down the line!!!

[John Snow]

Vina garu. also note what will be fall.

1) Social Security benefits will be drastically curtailed.
1.1 The income test will come for claiming benefits
1.2 The social security benefit age will move to 75yrs.
1.3 The social security tax Income bracket will go past 100,000
1.4 The non citizens Socail security benefits will be axed.

2) Welfare as we know will vanish.
1.1 Medicare gone
1.2 Medicaid gone


etc etc

[Katare]

Vina garu. also note what will be fall.

1) Social Security benefits will be drastically curtailed.
1.1 The income test will come for claiming benefits
1.2 The social security benefit age will move to 75yrs.
1.3 The social security tax Income bracket will go past 100,000
1.4 The non citizens Socail security benefits will be axed.

2) Welfare as we know will vanish.
1.1 Medicare gone
1.2 Medicaid gone


etc etc

Why? Because of FReddie/Fennie recap expenses?

[vina]

Hold your horses boys.. Wednesday morning will show Lehman's fate and the extent of it's losses. Either Lehman goes Kaput or it gets sold. I don't see it hanging on for much larger, now that the Koreans have wisened up.

Frankly I would love to see the fat cat "sovereign wealth funds" (aka.. fat Gulf Oil Sheiks and Panda) who put in mucho moolah in the bank rescues and who have been absolutely savaged. Those guys have taken it in the gonads and they aint going to put in anymore money behind this . Koreans seem to have factored that in. so no more liquidity for the likes of Lehman from these sources. That leaves the Fed and US Govt.. Time for Lehman to go on their knees in front of Hank Paulson at the US Treasury Dept ..

But wait for the shock to ripple across. Sensex at 15k aye ?.. Well well.. Ol' vina is waitin with the cash baby. . . Like Rotschild said, the time to buy is when the blood is flowing and it is an apocalypse. I had warned folks here if you held Lehman stocks to get out.

The New York Times
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September 10, 2008
Wall Street’s Fears on Lehman Bros. Batter Markets
By JENNY ANDERSON and BEN WHITE

Only days after the Bush administration assumed control of the nation’s two largest mortgage finance companies, Wall Street was gripped by fears that another big financial institution, the investment bank Lehman Brothers, might founder — and that this time, the government might not come to the rescue.

Waves of selling wiped out nearly half of Lehman’s value in the stock market on Tuesday, leaving the firm, one of the nation’s oldest and largest investment banks, in an all-out fight for survival.

The plunge fanned worries about the troubles plaguing the broader financial industry and sent the Standard & Poor’s 500-stock index tumbling 3.4 percent. The decline more than wiped out the market’s rally on Monday, when stocks surged after the weekend rescue of Fannie Mae and Freddie Mac, the government-chartered mortgage giants.

Lehman’s future as an independent firm now seems more uncertain than ever, and many analysts fear that the bank is running out of time and options.

Confronting gaping losses stemming from the credit crisis, the once-proud firm is racing to secure a financial lifeline, possibly including the sale of its prized money management division or an investment from an outside investor.

Lehman, which has about 24,700 employees around the world, is expected to announce a big quarterly loss on Wednesday morning, and the bank is expected to discuss its plans at that time.

Lehman has survived for 157 years, through wars, the Depression and the vagaries of the markets, but got into trouble by buying and financing commercial and residential real estate, including subprime mortgages.

On Wall Street, there is a growing sense that Lehman may have to solve its problems on its own, without drastic help from the government, which in March brokered the rescue of another Wall Street bank, Bear Stearns.

“Some may worry that Treasury has taken on so much taxpayer burden they don’t have any remaining capacity more to take on the burdens of Lehman,” said David Trone, an analyst at Fox-Pitt Kelton.

Authorities helped arrange and finance the sale of Bear because they feared that the collapse of that firm might cascade through the financial system.

But unlike Bear Stearns, which seemed to crater overnight, Lehman’s fortunes have been dimming for months. Since February 2007, its stock price has plunged 91 percent, wiping out $40 billion in shareholder value.

On Monday, as other financial shares surged after the government takeover of Fannie Mae and Freddie Mac, Lehman’s shares sank. Adding to that sell-off was concern that an investment in Lehman by a government-owned bank in Korea would fall through after Korean regulators threw cold water on the idea.

Standard & Poor’s, the ratings agency, warned on Tuesday that it might cut one of Lehman’s primary credit ratings, citing concern about the firm’s ability to raise capital.

Even as Lehman’s stock price plunged anew on Tuesday, however, some questioned whether the government could let a global financial institution like Lehman fail.

Vincent R. Reinhart, a top former Fed official who has repeatedly criticized the shotgun takeover of Bear Stearns by JPMorgan Chase, said it would be very difficult for the Federal Reserve to let Lehman collapse.

“The plain fact about financial crises is that policy makers are unwilling to test the resilience of markets,” said Mr. Reinhart, now a senior fellow at the American Enterprise Institute.

Financial institutions have been closely measuring their exposure to Lehman. On Tuesday, commercial and investment banks said they continued to do business with Lehman, and hedge funds did not appear to be pulling their accounts with the firm, events that helped precipitate the fall of Bear Stearns.

Since March, Lehman has been in a fight for its life, as some investors, including prominent short-sellers betting against the bank’s stock, questioned how the firm was valuing some of its assets. Lehman lost $2.8 billion in the second quarter and was forced to raise $6 billion in new capital. But investors were not placated, and the firm was compelled to explore more extreme measures.

For months, it has tried to raise capital, sell its asset management division and examined spinning off of its commercial mortgage assets into a new company.

Richard S. Fuld Jr., Lehman’s hard-charging chief executive, has replaced virtually every major division head, including the firm’s president and chief financial officer.

During that time he has replaced the global head of fixed income — the division from which most of Lehman’s problems have arisen — twice.

But with every measure taken, Lehman’s stock price has fallen further.

“Clearly the company does not believe that it has a serious balance sheet problem, and it simply refuses to take what it believes are fire sale prices for its key assets,” said Richard X. Bove, an analyst at Ladenburg Thalmann.

While the bank has talked to many prospective investors, its most serious discussions appeared to be with Korea Development Bank, a state-run institution that is moving toward privatization. But on Monday, K.D.B.’s top regulator cast further doubt on prospects of an investment in Lehman.

“It should take a cautious approach toward taking over Lehman, at a time when its privatization is not accomplished, and given the current conditions in domestic and foreign financial markets,” said Jun Kwang Woo, chairman of the Financial Services Commission.

“The focus now should be on stabilizing the Korean markets,” Jun told lawmakers.

He said it would be “inappropriate for a state-owned company to pursue such an acquisition at this time.”

To some observers, Mr. Fuld has waited too long to take the major steps needed to shore up Lehman. A market veteran with almost four decades of experience, he seemed more optimistic than many of his peers that the market had gone too far and would come back, a strong case against selling. Bids for the company’s investment management division are due on Friday.

“It is certainly the case that had Lehman seen this problem evolving as it has, then they could have and should have done something many, many months ago,” said Joseph A. Grundfest, professor of law and businesses at Stanford.

Waiting has proved to be a dangerous gamble. Sovereign wealth funds, once eager to invest in troubled financial companies, have been burned by losses. American investors who bought shares of Lehman in June when it raised $6 billion have also lost billions.

“He is dealing as if he has a whole deck of cards, when he has none,” said one banker who has had recent dealings with Lehman, representing a potential foreign buyer.

Unlike Bear Stearns, which effectively collapsed when customers fled for the exits and the firm could not finance itself, Lehman Brothers has more sources of long-term financing and like other broker-dealers, access to emergency financing from the Federal Reserve. Mr. Fuld said that the existence of that lending facility should take any question of Lehman facing a liquidity crisis “off the table.”

But with the stock price in free fall and the cost of buying protection against Lehman defaulting on its bonds skyrocketing, far surpassing the levels reached when Bear went under, it is clear Lehman is not immune to the kind of panic that can put a financial institution, which depends on confidence, at risk.

“No bank or broker can withstand a strong panic by customers, clients or counterparties,” said Mr. Trone. “Even the best liquidity profile gets you only so far,” though he said that the existence of the emergency lending facility means that Lehman will have more flexibility and time than Bear did.

Turmoil at the firm has led some to question whether Mr. Fuld should remain at the helm.

“He’s been getting a lot of extra credit and good will based on his reputation and disposition as an honorable leader and as a smart, likable guy, but that’s not enough right now,” said Jeffrey A. Sonnenfeld, associate dean of the Yale School of Management.

Edmund L. Andrews contributed reporting from Washington.

[Vipul]

Lehman suffers nearly $4 billion loss.

[Katare]

Rupee ends at 22-month low- Rs45.15 to $1

[Suraj]

The Rupee is being hit by the surge in demand for dollars due to the fall in price of crude, result in significant exchange rate 'booking' since falling cost of imports is denominated in the dollars but domestic Rupee prices are fixed. The Rupee ought to stabilize once an equilibrium is reached, and slowly start to appreciate again . The dollar will lose further intrinsic value as the Fannie Mae/Freddie Mac capitalization measures drive inflation and further erode the dollar's value, not to mention anything they might do to 'save' Lehman Bros.

[ramana]

Report sees change in Finance Minister

Report sees change in Finance Minister

K.R. Srivats

Barclays Capital says in its research report that the current Finance Minister, Mr P. Chidambaram, will be replaced by Dr C. Rangarajan, the ex-chairman of the Economic Advisory Council to the Prime Minister, in the next few weeks.

“The appointment of Dr Subbarao (as RBI Governor) and the possibility of Dr Rangarajan being made the new finance minister, is a response, in our view, by the Prime Minister to embark with a fresh economics team to address the inflation problem and large off-budget subsidies…”, says the research report.

When contacted over telephone, the author of the report, Mr Sailesh K. Jha, Senior Regional Economist with Barclays Capital, told Business Line that “the change is imminent” and this was what he had gathered from his discussions with various policy makers in top echelon of the Government before he authored the report.

it was one of the SP demands to support the govt. Lets see if it happens.

[Satya_anveshi]

The Rupee is being hit by the surge in demand for dollars due to the fall in price of crude

How does fall in crude prices spur demand for dollars? Isn't it the other way around? Can you please explain what you mean?

[Suraj]

The domestic oil players need dollars to pay for the crude. When the crude prices fall, they try to take advantage of it by buying more, for which they need more dollars, which in turn makes the dollar dearer relative to the Rupee locally. This is just one part of a broad exchange rate equation, though.

[pradeepe]

Shining India's rank slips in ease of business

India may be shining with BRIC partners Brazil, Russia and China in the high-growth game, but when it comes to ease of doing business, it ranks below Pakistan, Bangladesh and Nepal,

Sure, sure, its always fun doing bizness with fireworks and IEDs going off around you. Just adds to the festive environment Who can fault the civil contractors for KFC enjoying their bizness. Guaranteed work every month.

[Satya_anveshi]

The domestic oil players need dollars to pay for the crude. When the crude prices fall, they try to take advantage of it by buying more, for which they need more dollars, which in turn makes the dollar dearer relative to the Rupee locally. This is just one part of a broad exchange rate equation, though.

I suspect something else also is going on here. Increased buying should nullify lower payments we make for our current purchases (although I presume, buyers will enter futures contracts rather than buy in spot market).

Perhaps we are seeing a possibility that US corporations are taking away (or have taken away) their earnings in India in preparation for declining economy and maintaining cushion in the times of need. I hope their won't be a repeat of Enron where after signing the deal and committing for dollar payments, exchange is screwed so much that the entire venture went kaput. Hope is that we have learnt our lessons from that fiasco.

[vsudhir]

Shankar Acharya on YV Reddy's legacy at the RBI

Interesting read.

[John Snow]

Crude price went up last few months on two fold.

1) Weaker Dollar, to get same value for the crude pumped you have to charge more.

2) Speculation about demand, Us fiancial stability.


3) The dollar became strnger with

a) US govt stepping in and picking up the failing business ( n the short run this induces stability, even though uncle will borrow more money to sustain this)

b) The oil broke the psychological barrier of $4.00

c) consumption fell as consumers restrained themselves and pumped less of it.

When dollar becomes stronger commodity prices will fall because people take shelter in commodity to off set the loss in value of money, the reverse is ahhpening now.

Why only to dollar all this because Oil and most of the international trade is in dollar.

The above was explained by SUraj garu in very cryptic way I think.

[Katare]

Insurance companies become largest investors in stock market during 2007-08 surpassing the FII

The council in a briefing to the media here today said, the net investment by life insurance companies in the equity markets during 2007-08 was Rs 55,000 crore, against an investment of Rs 53,400 crore by foreign institutional investors.

[Suraj]

John Snow: I don't give myself so much credit I just tried to emphasize that a primary dollar-denominated commodity has fallen in value (denominated in dollars), driving up spot demand for it by local buyers, who refine and sell it in Rupees. They have to buy dollars to do so. The equilibrium is at some point where the rupee earnings balance out the dollar purchase cost.

There are doubtless other factors too, though large scale foreign investment outflows don't appear to be happening; even if FIIs are selling, FDI already much exceeds FII volume now, with FDI predicted to reach ~$40 billion this year, much more than FII (portfolio investment in stock market), which will probably be around $5-10 billion at most, unless there's a surge in the latter part of the year.

Katare: there are further proposals to expand the ability of domestic insurance cos and PSUs to invest their corpus in the equity markets. It's a good way forward, since it brings in stable domestic funding sources in the place of foreign hot money.

[putnanja]

Chidambaram a hurdle to exports growth: Kamal Nath

Chidambaram a hurdle to exports growth: Kamal Nath

A Correspondent in New Delhi | September 11, 2008


Who would you blame for India not achieving its exports target for the second consecutive year now?

Well, Commerce Minister Kamal Nath has laid the blame squarely at the doorstop of Finance Minister P Chidambaram and his ministry for the roadblocks that will see India miss its exports target yet again.

The government had set the export target of $200 billion for 2008-09, an increase of over 28 per cent over the last year. The target of $160 billion set for the last year had fallen short by $5 billion.

Kamal Nath has written a letter to Prime Minister Manmohan Singh seeking his intervention to resolve over 50 issues which, because of the finance minister's hurdles, have posed many a problem. Nath has stressed that if these issues were resolved in time, "we can achieve growth targets set for industrial production and exports in the remaining months."

His complaint is, ". . . unfortunately a number of issues are still pending clearance with the ministry of finance," and he has sought the prime minister's intervention since "despite efforts at various levels, we have not been able to resolve these issues."

Pointing out that extra efforts would be needed this regard, considering the slowdown in the global economy, Kamal Nath has pleaded with the prime minister that "we need the support of every arm of the government in our efforts."

The issues on which he has sought the prime minister's intervention include exemptions under the Income Tax Act in various fields and various other forms of relief that his ministry has been seeking for different sectors.

Rajan, Virmani in running for RBI deputy governor

Finance Minister P Chidambaram held informal consultations on Wednesday on possible candidates for the Reserve Bank deputy governor's post.

Former International Monetary Fund chief economist Raghuram Rajan, 45, and the finance ministry's chief economic adviser Arvind Virmani, 59, are said to be in contention.

The position may fall vacant if current Deputy Governor Rakesh Mohan were to move on to a teaching assignment or join a multilateral institution overseas. Of the four deputies at Mint Road, one position is meant for a monetary economist.

Rajan is currently professor of finance at the Graduate School of Business at the University of Chicago and considered one of the most promising of economists of his generation. He has a doctorate in economics from MIT.

Earlier this April, a committee headed by Rajan had submitted a detailed roadmap on financial sector reforms to the Planning Commission.

Virmani, who joined the government in 1987 from the World Bank, has held a number of assignments since. Among these was a stint as adviser to Manmohan Singh, when the latter was finance minister, between 1991 and 1993.

Virmani's name has also been mentioned as one of the contenders to chair the powerful Competition Commission of India.

[vina]

Folks.. Things are looking ominous, with the only silver lining being a drop in oil prices and commodity prices. However, growth aint gonna kick start anywhere anytime soon.

I think the bigger news beyond America and UK's credit related troubles is Panda's. I had posted in PRC economy thread about the meltdown in real estate in China . That huge excess in building is clearly unsustainable. The most skyscrapers anywhere, giant apartment complexes of a scale unseen before.. all that are just so much junk that no one can afford to pay back in terms of rent. It was fine in a bubble , but now with the bubble bursting, they are seeing price drops of upto 40% in many markets!.

Bottom line, Panda is screwed. Just like the US, they too dont have the house price asset bubble lever to get the economy moving. With housing /construction gone and Olympics over, expect commodity prices of steel, cement and copper and all the raw materials that Panda was vacuuming up from all over the world at unprecendented rates to drop . I think the peak commodity prices are behind us. Get out of Commodities NOW , if you already havent done so. Panda has invested massively in steel capacity for the past few years and now all of those investments are down the drain. Panda cant dump that steel inthe world market, in a scene of a consolidated industry with cunning Yindoo Mittal and Tata going and buying out capacity behind national market barriers. The Euros and Americans will kick Panda in the gonads if they try to export steel and try to get out of trouble.

It is not for any reason why I compared Fizzicists to Financial Whiz kids for Bade Saar and also drew an analogy between the megaton boom and financial boom.. Implosion (Primary Stage) --> Sub prime meltdown Secondary (Boosted Fission)--> Banks failing ,,igniting Freddie and Fannie ; leading to beginning of tertirary where the lithium deuteride and tritium are getting compressed for the mega boom --> Panda bank losses and post Panda bubble bust in sectors after sectors (Autos, steel, power, cement, real estate..).. all financed by Panda banks. Panda got away with it earlier becuase they could export their way out of trouble. Panda's excess capacity and the need to use them created a deflationary impact from 1990s to 2005.. But they cant export anymore.. especially . No way in hell that Panda factories are going to export their autos anywhere. no one will take commodity exports. and traditional panda exports are saturated !.

If Panda goes into a bubble to bust, then commodity prices , already on the way down are going to drop and that is a goo d thing. The inflationary pressures will abate. However fixing the financial sectors will mean tremendous amount of pain. I think we are going to see a Japan like "lost decade" .. That is the time the Japanese took to fix their banks and financial systems. Panda and Japan share tremendous similarities in how they look before the bust. Both cases, massive real estate speculation. banks over exposed and basically broke and decades of runaway growth giving a sense of invincibility.

If only the babus sitting in Dilli could get their thumbs out of their axxes and fix the basics in terms of land acquistion and infrastructure, India could chug along at near double digit growth rates ,with the favorable winds of falling input prices and global interest rates tending down.

[Suraj]

Indian industrial growth accelerates to 7.1% in July

India's industrial production growth accelerated to a five-month high in July, before higher interest rates had a chance to damp consumer spending. Output at factories, utilities and mines rose 7.1 percent from a year earlier after a 5.4 percent gain in June, the Central Statistical Organisation said in New Delhi today. Economists expected an increase of 6 percent.

Manufacturing, which accounts for about 80 percent of Indian production, gained 7.5 percent in July from 6.1 percent in June, today's report showed. Electricity output rose 4.5 percent in July from 2.6 percent, mining grew 5 percent and consumer-goods production increased 7.3 percent. Capital goods production rose 21.9 percent in the month, compared with 12.3 percent in June.

Concerns that a slowdown in industrial growth may hurt corporate profits have resulted in the Bombay Stock Exchange's benchmark index declining 26 percent this year. The Sensitive Index pared losses today after industrial production for July beat expectations.

Bonds were little changed. The yield on the benchmark 8.24 percent security maturing in April 2018 was at 8.27 percent as of 12:10 p.m. in Mumbai, from 8.28 percent before the data, according to the central bank's trading system.

[Katare]

Forex kitty shrinks by a record $6.5 bn

Since end-March, its forex kitty has shrunk by almost $21 billion. The dollar demand, particularly from oil producers, has risen sharply since early March, as global crude prices have been spiralling. Also, rising commodity prices have resulted in higher dollar demand from importers.

[vina]

Will be interesting to see how it plays out tomorrow when we wake up on monday morning in India. As of now, Lehman is heading towards liquidation. they are preparing a contingency filing for bankruptcy and this will be the biggest failure in Wall St ever.

Ah.. now comes the good part. Looks like Merrill and AIG could be in for some tough times. AIG has sank 30% ..told you that Fannie and Freddie were the boosted fission second stages and that the tritium and lithium dueteride were getting compressed in the tertiary for a multi mega ton boom. .. Well, point is , Fed cant go about saving every company.

Now everyone will have to fess up and declare the bad assets on their books. If Lehman liquidates and flood the markets with fire sale priced assets, then everyone will have to mark their books. Would love to see the look in the faces of he soverign wealth funds and Panda , sitting on all those MBS assets!!

The New York Times
Printer Friendly Format Sponsored By

September 15, 2008
Lehman Heads Toward Brink as Barclays Ends Talks
By BEN WHITE and JENNY ANDERSON

Unable to find a savior, the troubled investment bank Lehman Brothers appeared headed toward liquidation on Sunday, in what would be one of the biggest failures in Wall Street history.

The fate of Lehman hung in the balance as Federal Reserve officials and the leaders of major financial institutions continued to gather in emergency meetings on Sunday trying to complete a plan to rescue the stricken bank.

But Barclays, considered the leading contender to buy all or part of Lehman, said Sunday that it could not reach a deal without financial support from the federal government or other banks, making a liquidation more likely.

The leading proposal had been to divide Lehman into two entities, a “good bank” and a “bad bank.” Under that scenario, Barclays would have bought the parts of Lehman that have been performing well, while a group of 10 to 15 Wall Street companies would agree to absorb losses from the bank’s troubled assets, according to two people briefed on the proposal. Taxpayer money would not be included in such a deal, they said.

But that plan fell apart on Sunday, making it likely that Lehman would be forced to liquidate.

What remained unclear was how a liquidation might proceed. One option that was discussed on Saturday would have major banks and brokerage firms continue to do business with Lehman as it unwinds its assets and liquidates over a period of months, according to several people briefed on the discussions. That would buy Lehman time to sell those assets in an orderly way and avoid a fire sale that could depress prices of similar assets held by other banks.

The overarching goal of the weekend talks was to prevent a quick liquidation of Lehman, a bank that is so big and so interconnected with others that its abrupt failure would send shock waves through the financial world. Of deep concern is what impact a Lehman failure would have on other securities firms, insurance companies and banks, notably Merrill Lynch and the American International Group, both of which have come under mounting pressure in the markets.

A.I.G., one of the world’s largest insurers, may need to raise $30 billion to $40 billion to avoid a severe downgrade to its credit rating, according to people briefed on the situation. An A.I.G. spokesman, Nicholas J. Ashooh, called that estimate speculative and declined to comment further.

Some considered the weekend talks as high-stakes brinksmanship.

Both Barclays and Bank of America expressed interest in buying Lehman and were negotiating hard, initially insisting that the government provide financial support. But federal officials were adamant that no public money be used — a big point of contention because many of the top Wall Street executives believe that their banks, which have each written down tens of billions of dollars in assets, do not have the capacity to lead the rescue on their own.

The prospects of a deal involving Bank of America appeared to fade as talks progressed Saturday and it became clear that the government would not stray from its position.

[Sanjay M]

Now everyone will have to fess up and declare the bad assets on their books. If Lehman liquidates and flood the markets with fire sale priced assets, then everyone will have to mark their books. Would love to see the look in the faces of he soverign wealth funds and Panda , sitting on all those MBS assets!!

Well, before we laugh too soon, I'm wondering what the spillover impact on the Indian market will be. Which Indian players have significant exposure to the US asset-bubble mess?

Perhaps it's good that India has not yet started its own sovereign wealth fund, and once the bubble aftermath has worked itself out, we could then start one on a clean slate.

We seem to have escaped a bigger drubbing based on sheer luck, and the timing of our economic rise. Otherwise, India would have had Panda-like exposure.

[vina]

Sovereign wealth funds are a terrible idea. Govts and bureaucracies simply dont have the ability and nimbleness and the shark like business sense to navigate these waters. they will be ripped to pieces by these sharks.

I asked one of my profs whom i deeply respect, back when the sovereign wealth funds were the next best thing. he laughed and said something prophetic. "They will lose their shirts" .. Exactly what has happened. I hope India never ever gets into that idiotic idea of soverign funds. The record, collectively and otherwise of the soverign wealth funds have been nothing short of miserable and at best and mostly miserable on the average.

[AshokS]

One of my prof, also heads alternative investment group at GS, said that the sovereign funds are getting more sophisticated. no longer run by bureaucrats but hiring MBAs from top schools. look at what Dubai's "sovereign fund" is doing.... they are competition for PE funds and both PE / Sovereign were able to outspend corporate houses. The only thing now is that a very large section of liquidity for PE (30% to 40%) has simply vanished.... and will not reappear for a while.

[svinayak]

One of my prof, also heads alternative investment group at GS, said that the sovereign funds are getting more sophisticated. no longer run by bureaucrats but hiring MBAs from top schools. look at what Dubai's "sovereign fund" is doing.... they are competition for PE funds and both PE / Sovereign were able to outspend corporate houses. The only thing now is that a very large section of liquidity for PE (30% to 40%) has simply vanished.... and will not reappear for a while.

e.

India is not in this league. It does not have the reletionship and the connection to the world financial markets.

[AshokS]

Not yet, but will in the next 3 years. GS's alternative investment group (PE) has had an office there for a while. Other VC / PE funds are emerging, I am sure there are a few members on this forum involved

Also note that with PE taking a hit, the biggest beneficiary are corporate houses able to finance acquisitions from their own reserves and cash flow. Speaks well for Indian business looking to buy on the cheap. Think about it, lots of PE funds from 1998/1997 timeframe are coming to the end of their harvest period and they are in pretty bad shape - they bought in assets when the market was really high and now need to exit when its really low. The GPs can't extend any further and need a liquidation event . Their IRR must suck big time, and if they can't liquidate, then lots of limited partners are going to own shares of some random company they don't want. US / Indian / Euro / Middle East institutions that can offer decent value for the assets based on reserves or leverage (if they can get it) will do well.

Its too late for the 1998 funds, but also think about the 2004/2005 ones will need to cash out some of their investments in Y5, Y6 to maintain a decent IRR. You can cash out by doing an asset sale or an IPO. An asset sale is good if you can do some sort of financial engineered transaction (LBO) or get some multiples expansion on the asset. They don't seem likely due to the credit markets, therefore if a lot of the 2004/2005 PE funds go an IPO route on their early harvesting, then the IPO market will be really crowded by 2010 / 2011. A crowded IPO market may not have enough liquidity to support desired price levels (lots of offerings for the same amount of buyers)... . you guys get the point. Not good times ahead...

[svinayak]

Meltdown as bank collapses

By Stephen Foley in New York
Monday, 15 September 2008

Wall Street banks were preparing for one of the most dramatic shake-ups in the finance industry's history last night as it emerged that Lehman Brothers, an investment bank with a 158-year history, was working on a plan to declare bankruptcy.

As a marathon session of weekend talks went into its final hours, an even bigger rival, Merrill Lynch, also assembled its board to vote on a takeover offer. With the opening of Asian markets as a deadline, the signs were that two of the most powerful corporations in global finance could disappear. Insiders said other financial institutions were examining the creation of a massive fund, perhaps as large as $50bn (£28bn), which would be used to prop up other firms that get into difficulty.

Whatever the exact shape of the deal, it was clear that it would have profound – and unpredictable – consequences for the world economy. The events represent a crescendo for the year-long credit crisis, which has wiped out half-a-trillion dollars in investments held by Wall Street's biggest firms, forced governments to nationalise once-proud financial institutions and has made it ever harder for ordinary people and businesses to get loans. Failure to end the crisis soon could tip the world into a severe recession, say economists.

For that reason, the Federal Reserve, the US central bank, had called in the chief executives of Wall Street's biggest banks for crisis talks over the future of Lehman Brothers on Friday night, but few expected such dramatic action would be necessary.

One by one, the major players revealed that the credit crisis had so weakened their finances that they would not be able to fund a rescue deal for Lehman. When the UK bank Barclays walked out of negotiations to buy the company yesterday, there seemed no option left but a liquidation of Lehman.

Fears grew over the weekend that Lehman's failure could trigger a crash when Asian markets resumed trading. The Fed and the US Treasury refused to hand over government money to prop up firms brought low by their own bad mortgage investments.

There were signs, however, that the Fed was considering taking some action to aid markets by loosening conditions for lending money to Wall Street firms.

The question is whether a once-in-a-generation shake-up on Wall Street will bring stability and help restore confidence, or presage a new leg-down in the credit markets that are the lifeblood of the global economy.

It is certain to throw thousands more bankers out of work. Lehman employs 25,000 people around the world, including 4,500 in London, where it has its European headquarters.

Coming on the heels of the fire sale of the government-backed Bear Stearns in March, the disappearance of Lehman Brothers and Merrill Lynch would mean the Big Five investment banks will become just two.

Bank of America was cajoled by the Fed into talks to buy Merrill Lynch after walking away from negotiations with Lehman Brothers yesterday. It will pay $40bn, but not in cash, issuing Merrill Lynch investors instead with new BofA shares. If the takeover is consummated, it will spare Merrill Lynch, one of the most famous brands on Wall Street, from the ignominious fate of Lehman Brothers, which declined to accept cut-price offers to refinance the firm earlier in the year, only to find that its value continued to plummet and its business began to wither.

Dealers across Wall Street were called in for an unprecedented shadow trading session, supervised by the derivatives industry regulator, aimed at reducing exposure to Lehman. The trades would only go into effect if Lehman filed for bankruptcy before midnight, NY time.

Such a liquidation has not been tried since the explosion of derivatives trading, which meant the collapse of one institution could mean unpredictable losses elsewhere. Bill Gross, of Pimco, one of the most outspoken fund managers, predicted an "immediate tsunami" if Lehman fails.

http://www.independent.co.uk/news/busin ... 30989.html

[svinayak]

1) Lehman is expected to file bankruptcy before midnight ET.

2) AIG rejected private equity investment and has asked the Fed for help. A restructuring plan will be announced tonight or early tomorrow morning. Update: From the NY Times:

The American International Group is seeking a $40 billion bridge loan from the Federal Reserve, as it faces a potential downgrade from credit ratings agencies that could spell its doom, a person briefed on the matter said Sunday night.

3) BofA bought Merrill Lynch for $29 per share in stock.

4) The Fed has expanded its lending facilities, including accepting equities.

http://calculatedrisk.blogspot.com/

[Sanjay M]

special trading session will be opened, if Lehman files for bankruptcy before midnight, in order to give people a chance to unload their positions asap