Tears over onions: Fruits of a many-layered economy

Despite being the world’s second largest producer of fruits and vegetables, our share in global trade of such produce is dismal




Savour the delicious irony or sniff at the pungent paradox. The two nations which drive us to tears over security are among the world’s biggest producers of onions. New Delhi is importing the bulb, masquerading as a vegetable, from Pakistan, which is the world’s second largest onion producer per capita (2 million tons annual) after Australia (4 million tons). The world’s largest producer, overall, with 20 million tons, is China, comfortably beating second-placed India’s output of around 9 million tons.
Considering the Chinese have overrun the world’s marketplace with their goods, can their produce be far behind? Although India has the world’s largest area (56 per cent) of arable (cultivable) land, and there has been a shift in cropping pattern in favour of horticulture vis-à-vis grain/cereals, China is kicking India’s butt in the fresh produce business while New Delhi sits on its haunches.
We have been lamenting for two decades that 30 per cent of our fruits and vegetables rot because of poor infrastructure, lack of cold chain etc, and done squat about it. Heck, we even waste biodegradable waste, unable or unwilling to use it to produce energy. Meanwhile, China, which cultivates 22 million hectares of vegetable crops out of a global total of 52 million hectares, is steaming ahead, trading in the billions. Should it be any surprise that onions in your local market may soon be marked ‘Grown in China’?
India has arrived, Barack Obama told us earlier this year. Where? Certainly not in the world’s fruit and vegetable marketplace. A produce expo scheduled for November 2011 in London shows registrations from countries such as Algeria, Ghana, and Pakistan, but not India. My local Fresh Field has produce from almost every part of the world, but little from India. Apparently, we eat what we produce, and what we can’t, we let it rot. Which is why, despite being the world’s second largest producer of fruits and vegetables, our share in global trade of such produce is dismal — little more than $1 billion.
Let’s look at some numbers. India produces 68 million tons of fruits and 129 million tons of vegetables annually. Of this, 59 million tons, which is almost as much as what is traded by the rest of the world, is wasted. Oh, just in case you didn’t know, we also have the world’s largest population of poor, sick, and malnourished people. Go figure.
For the longest time, the world’s largest traders of fruits and vegetables were high-income countries — the US, the EU, Canada etc. More recently, countries such as China, Mexico, Chile, Morocco, and even many African and Latin American countries have clambered on to this gravy train. Little Morocco exports $500 million worth of veggies, mostly tomatoes and beans, to the EU. Mexico is one of the giants of fresh vegetables, exporting about $3.5 billion worth of produce to the US annually — mostly tomatoes, peppers, cucumbers, onions, and asparagus; the US, in turn, exports nearly $2 billion of veggies, mostly lettuce, tomato, onions, and potatoes, to Mexico and Canada.
So the US imports tomatoes from Mexico and also exports them to Mexico? That’s where free trade kicks in. Free trade logistics is not just a question of demand and supply, but also geography. Pakistan is among the world’s largest producers of onions but still imported from India till last year (while exporting to the Gulf) because is easier to transport onions from Amritsar to Lahore (and vice-versa) than from Larkana to Lahore or Aurangabad to Amritsar.
Of course, free trade is a slippery path and one needs to tread carefully. The term Banana Republic, which means a politically unstable country, has its origins in US manipulation of the produce in its Latin American neighbourhood. But outside the politics of it, banana is now the world’s leading trade item in fruit, generating more than $6 billion in revenues. The ‘banana republics’ account for nearly 60 per cent of the market value in global banana exports. India’s share is negligible, a paltry few million. And guess who’s the leading banana producer in the world? India; which at 22 million metric tonnes, produces more banana than all the Latin American countries put together.
Same thing with mangoes. We are the world’s leading producer of mangoes (we really ought to be called Mango Republic) but our fresh mango exports to the US last year, after all the hoopla about mango diplomacy during the Bush years, was a paltry $600,000 ($6 million in pulp). Heck, we exported three times as much in alcoholic beverages to the US!
There’s plenty rotten in the Republic of India, fruits and veggies among then. Maybe our agriculture minister can explain some of these things, but he’s probably busy trading in cricket.

China’s Chances as An International Financial Hub

By drawing parallels between the established financial hubs of London and Frankfurt, Prof. Horst Loechel, Director of the German Centre of Banking and Finance at CEIBS, explores whether or not China’s goal is realistic and what it would take to achieve it.

1. Why has China made this goal of transforming Shanghai into a financial centre by 2020 such a priority? What are the advantages that will come with achieving this goal? Are there any downsides?
Horst Loechel: The plan to develop Shanghai into an international financial centre by 2020 is part of China’s overall development plan of as it moves towards becoming an advanced economy. Finance is a very, very important part of this plan – nationally as well as at the international level, because in order to become an advanced or developed economy, you need a full-fledged financial sector. And Shanghai is somehow the frontrunner to develop China’s financial sector into a modern banking and finance system, with sophisticated capital markets and international banks.

In order to develop Shanghai into an international financial centre, first of all you have to make the Chinese currency, the RMB, into an international currency. That means making the RMB convertible and increasing the flexibility of the exchange rate system. Otherwise you cannot have an international centre. That means there’s a lot riding on this development of Shanghai into an international financial centre.

The advantages are clear: a financial centre means higher incomes, more growth, more development, more sophistication, a better life. And also the advantage, for China, is to become an even more important player in the global financial architecture. We can see that after the global financial crisis, the shift from West to East – which was already underway – has become even more advanced now. And so it’s very important to position Shanghai as an international financial centre, as China’s global international flagship.

As always, there are two sides of a coin. For ordinary people living in a city like New York, London or Shanghai, there are also disadvantages, especially with regard to property prices and the overall cost of living. But overall, it’s the right move for China to develop Shanghai into an international financial centre.

2. How realistic is this goal? Can it really be done, and by 2020?
HL: In London, the process took about 25 years, and it took Frankfurt about 30 years. However, given the experience with China’s development in the past – financially and economically – I think their goal is realistic. It may not happen by 2020 – it may be 2023 or 2025. But what matters is the goal, not the exact date when you achieve this goal. Setting a goal is a kind of incentive, a locomotive for further progress with regards to convertibility of the RMB, with regards to opening up of the capital markets, and with regards to lifting the entry restrictions for international banks working in China. This is what matters.

In addition, this decision to transform Shanghai into an international financial centre by 2020 was made by the State Council of China: that means this is a move supported by the central government. The Shanghai government also has its recently-launched “93 Plan”, which describes, in detail, the things that must be done in order to develop Shanghai into a financial centre.

There’s a clear difference between London and Frankfurt – and also between London, Frankfurt and Shanghai. Frankfurt is a regional centre; that means for Continental Europe, Frankfurt is the financial hub. London is a truly global centre, which means for the entire world.

But Shanghai is not only competing with New York and London as a global centre, it is especially in competition – in Asia – with Hong Kong and Singapore. That means, from my point of view, it may be better for Shanghai to, first of all, develop into a regional hub to rival Hong Kong and Singapore (but especially Hong Kong) and then leverage that to become a global financial centre, or make this a parallel process of development. I think Shanghai is now, clearly, a domestic centre. In order to become global, perhaps an intermediate step to become a regional centre for Asia is the right approach..

3. What are China’s strengths and weaknesses, in achieving its goal, as compared to London and Frankfurt?
HL: Shanghai’s most important strength is China: its size, the pace of economic development. You can only become a global financial centre if the economy backing you is important somehow. And there’s probably no economy in the world more important than China right now. So this is Shanghai’s biggest asset: to be the economic and financial centre of the most important economy in the world.
The second strength is China’s unique approach to economic development. What we actually see in China is trial and error. They never put in changes to the entire system in one go; it’s a gradual process of trial and error. And this is the same approach being taken in Shanghai. I like this approach, it’s very successful.

And the third strength is the government. The central government and the local government are supporting this process and political support is vital in China, as it is in Asia and the world.
In terms of weaknesses, the first is its client level. Most of the important financial Chinese authorities like the People’s Bank of China (China’s central bank), and regulators like the China Banking Regulatory Commission, Chinese Securities Regulatory Commission or China Insurance Regulatory Commission, their headquarters are all in Beijing. This is a disadvantage. This is neither the case in Frankfurt nor London.

Also, a lot of Chinese banks, if not almost all of them, are headquartered in Beijing – not Shanghai. In addition, a lot of regional headquarters of international companies do not have their regional headquarters for Asia in Shanghai, but in Hong Kong or Singapore. On a client level, these are things that need to be addressed.

The second weakness is that the banking market and finance markets are still narrow in China. For example, there is only a limited range of products allowed here in China. This is an obstacle for further development. There needs to be a relaxation on new products in order to facilitate further development. But progress is already under way as the recent approval of short-selling deals shows.

Education is the third weakness. There is a clear bottleneck in Shanghai’s development: it's the human resources factor. In today’s global world, it’s not very difficult to find innovation and capital; it’s very simple – you buy it or invent it or copy it. But finding educated people, this is a challenge. Shanghai has already done a lot. All the big universities like Jiaotong, Fudan, SUFE, and CEIBS are making significant progress in human resources, in general business education but also specifically in financial education.

The government has shown its support for institutional efforts to offer the MBA and EMBA in finance and applied research. CEIBS is seeking to launch an MBA in finance, we have the CEIBS-Lujiazui International Finance Research Centre – an intellectual platform for the Chinese and foreign community – and we have just launched the German Centre of Banking and Finance here at CEIBS. So things are under way. But given the task, and the amount to achieve, there are a lot of things still to do – especially with regards to professional and executive education that’s specialised in banking and finance.

For a financial centre, you need an intellectual infrastructure, education and financial research. There are obviously still a lot of things to do in Shanghai.

4. What steps MUST China take in order to achieve its goal?
HL: First, convertibility of the RMB. This is the most important thing to do. Second: improve, upgrade, and leverage financial education, especially with regards to professional and executive education. And third: build up an international competitive environment including a competitive tax environment and a competitive regulatory environment for foreign companies – especially financial MNCs – working in China. I think these are the three most important things.

5. What pitfalls will it have to avoid?
HL: First of all, avoid financial crises; we just had the worst global financial crisis since the 1930s. Opening up the market means more risk; you cannot open up without more risk in the financial system – currency risk, debt risk, default risk. It has to be controlled. And one important point here is education: you need sophisticated risk management.

6. Any final thoughts?
HL: It’s unavoidable that Shanghai will become, sooner or later, a global financial centre (and not only Shanghai but also Mumbai, for example). I don’t know any scenario which, in the medium term, can stop this shift from West to East. Actually I see even more acceleration every day.

There was a questionnaire recently by a well-known research institution in London and they asked executives all over the world their thoughts on who will become the financial centres in the next 10 years. In ranking the top three, New York and Shanghai tied for number one, London was next. That means the executives, you can say the market, is expecting that Shanghai will do it. This is clear. So this development of Shanghai is somehow part of this unavoidable overall global shift from West to East. This is not a matter of discussion; it is a matter of fact.

4 Indian Americans among ‘coolest young entrepreneurs’

4 Indian Americans among ‘coolest young entrepreneurs’

BOSTON: Four Indian-Americans have been named among 30 of America’s “coolest young entrepreneurs” by monthly business magazine ‘Inc’ that describes its young achievers as people who are “building unique brands, making money along the way and changing the way we do business”.

Naveen Selvadurai, 28, co-founder of social networking app ‘Foursquare’, 26-year old Vikas Reddy who co-founded technology start-up ‘Occipital’, Sachin Agarwal, 30 of San Francisco-based start up ‘Posterous’ and 22-year old Stanford graduate Ooshma Gar g have been named in the ‘30 under 30’ 2010 list of ‘America’s Coolest Young Entrepreneurs’ by the New York based magazine.

“They are bringing innovation to market, building unique brands, nurturing trends, giving back and making money along the way,” Inc says of the young men and women on its list.

Selvadurai, a former software architect, co-founded Foursquare in 2009. Foursquare is a mobile application that is a “friend-finder, a social city guide as well as a game”.

With more than two million users, the business is currently valued at nearly $100 million. The start-up is still growing steadily by 100,000 new members a week, with plans for a big redesign soon.

“We are all obsessed with what we want to build and think about it all day long. If you are really excited about a redesign and only half way there, you go to sleep and dream about the rest of it,” says the New York based entrepreneur.

Inc says a “defining characteristic” of this generation of entrepreneurs is that they are highly likely to start companies with partners.

“For them, building a business is not a lone pursuit, but rather an extension of their social lives”. Another thing that stands out about this year’s young entrepreneurs is that their “generational fascination with all things social extends deeply into t heir entrepreneurial zeitgeist,” the magazine adds.

Reddy co-founded Occipital, a technology start-up in Colorado in 2008. The business has developed RedLaser, a best-selling iPhone app that lets users scan barcodes.

Since debuting in May 2009, RedLaser has been downloaded more than two million times, making it one of the most popular paid-iPhone apps in the market.

The company recently sold RedLaser to eBay and used the proceeds from the deal to hire three engineers who are now working on “developing more cool products”. In 2009, Occipital earned $1 million in revenues and is targeting $2.5 million this year. - PTI

How a 16-yo Kid Made His First Million Dollars

His name: Christian Owens. His age: 16. He made his first million dollars in two years, "inspired by Apple's CEO Steve Jobs". This is how he did it.

The British teen—who lives in Corby, Northamptonshire—got his first computer age seven. Three years later he got a Mac and taught himself web design. Four years later—at age 14, in 2008—he started his first company. It was a simple site that some of you may know: Mac Bundle Box. The site was pretty, rooted into Apple's own design guidelines and style, but actually was even closer to MacHeist, which has done the same package-bundling price plan for a while now.

How a 16-yo Kid Made His First Million Dollars Following His Hero, Steve JobsThe page sold a package of very neat Mac OS X applications for a discounted price and for a limited time. He would negotiate with the developers to get a discount deal on their apps. The resulting bundle had a combined retail value of around $400, but he would sell it for a tenth of that price. (You know, like MacHeist, which we've featured before.)

Not only that: If enough people bought the package, a new application would get unlocked for all buyers, which guaranteed very good word-of-mouth promotion. And to top it all, Owens dedicated a percentage of all sales to charity.

The idea did well. Very well, in fact: In its first two years, Mac Bundle Box made $1,000,000 (700,000 British Pounds).

Not happy with that success, Owens jumped into a new venture called Branchr, a pay-per-click advertising company that distributes 300 million ads per month on over 17,500 websites, iPhone, and Android applications. The company, which claims to deliver "contextual, behavioral, publisher-defined, and geographically" targeted ads in those platforms, has already made $800,000 in its first year and employs eight adults including his 43-year-old mother, Alison.

He doesn't know where he would be in 10 years, but the next thing he wants to do is to make one hundred million British pounds with Branchr. He seems to be on his way to success. He claims his business is growing strong—Branchr has already bought another company—and he reinvests all the money back into the company.

His secret to success? There's no secret, he says:

There is no magical formula to business, it takes hard work, determination and the drive to do something great.

Letting the Machines Decide - New Wave of Investment Firms Look to 'Artificial Intelligence' in Trade Decisions

Wall Street is notorious for not learning from its mistakes. Maybe machines can do better.

That is the hope of an increasing number of investors who are turning to the science of artificial intelligence to make investment decisions.

With artificial intelligence, programmers don't just set up computers to make decisions in response to certain inputs. They attempt to enable the systems to learn from decisions, and adapt. Most investors trying the approach are using "machine learning," a branch of artificial intelligence in which a computer program analyzes huge chunks of data and makes predictions about the future. It is used by tech companies such as Google Inc. to match Web searches with results and NetFlix Inc. to predict which movies users are likely to rent.

One upstart in the AI race on Wall Street is Rebellion Research, a tiny New York hedge fund with about $7 million in capital that has been using a machine-learning program it developed to invest in stocks. Run by a small team of twentysomething math and computer whizzes, Rebellion has a solid track record, topping the Standard & Poor's 500-stock index by an average of 10% a year, after fees, since its 2007 launch through June, according to people familiar with the fund. Like many hedge funds, its goal is to beat the broader market year after year.

"It's pretty clear that human beings aren't improving," said Spencer Greenberg, 27 years old and the brains behind Rebellion's AI system. "But computers and algorithms are only getting faster and more robust."

Some sophisticated hedge funds such as Renaissance Technologies LLC, based in East Setauket, N.Y., are said to have deployed AI to invest. But for years, these firms were the exception. Some firms that have dabbled in AI are skeptical it is anywhere close to working.

Rebellion is part of a new wave of firms using machine learning to trade. Cerebellum Capital, a San Francisco hedge fund with $10 million in assets, started using machine learning to invest in 2009. A number of high-frequency trading firms, such as RGM Advisors LLC in Austin, Texas, and Getco LLC in Chicago, are using machine learning to help their computer systems trade in and out of stocks efficiently, according to people familiar with the firms.

The programs are effective, advocates say, because they can crunch huge amounts of data in short periods, "learn" what works, and adjust their strategies on the fly. In contrast, the typical quantitative approach may employ a single strategy or even a combination of strategies at once, but may not move between them or modify them based on what the program determines works best.

"No human could do this," said Michael Kearns, a computer-science professor at the University of Pennsylvania who has used AI to invest at firms such as Lehman Brothers Holdings Inc. "Your head would blow off."

Rebellion has struggled to raise money, in part because investors since the credit crisis are dubious of opaque math-based strategies.

The firm has attracted at least one long-time "quant" skeptic: famed value investor Jean-Marie Eveillard, who recently invested several hundred thousand dollars of his own money into Rebellion. "My cup of tea is not quantitative investing," he said. "But I think they are serious investors, and I'm impressed by the fact that they don't have a high turnover…and don't use leverage."

Rebellion's Mr. Greenberg is no stranger to the investing world. His father, Glenn Greenberg, is an iconoclastic value investor and manager of Brave Warrior Advisors, who recently split from his partners at Chieftain Capital Management Inc. His grandfather, legendary baseball slugger "Hammerin' Hank" Greenberg, played for the Detroit Tigers in the 1930s and '40s.

Past success doesn't mean Rebellion will continue to beat the market. As with many quant strategies, its system could stop working if market fundamentals change in ways that trip up its computer program, known as "Star."

What makes Star intelligent, says Mr. Greenberg, is its ability to adjust its strategy based on shifting dynamics in the market and broader economy. The program isn't wed to any single investing approach. Under certain conditions, the fund will buy cheap stocks, in others it will favor stocks with swiftly rising prices—or both at the same time.

Unlike the high-frequency funds that use artificial intelligence to aid rapid trading, Rebellion tends to hold stocks for long periods—on average four months but in some instances more than two years. It also doesn't short stocks or use leverage, or borrowed money, which can amplify returns but also boost risks.

The program monitors about 30 factors that can affect a stock's performance, such as price-to-earnings ratios or interest rates.

The program regularly crunches more than a decade of historical market data and the latest market action to size up whether to buy or sell a stock. When certain strategies stop working, the program automatically incorporates that information, "learns," and adjusts the portfolio.

For instance, it may detect data indicating stocks with low price-to-earning ratios are likely to rise and load up on those stocks. Then, if the program later finds that the strategy is likely to lose steam, based on shifts in the factors it tracks, it will dump those stocks and buy stocks it deems more favorable.

Every morning, Star recommends a list of stocks to buy or sell—often it offers no changes at all. A human trader implements the moves. The firm says it never overrules the computer program, which is largely the same system they started with in 2007, with a few nips and tucks. Rebellion typically holds about 60 to 70 stocks at any time.

Mr. Greenberg started designing Star in mid-2005, soon after he graduated from Columbia University with an engineering degree. He was joined by Alexander Fleiss, a high-school friend with a background in finance and math, as well as Jonathan Sturges, who has a master's degree in music composition, and Jeremy Newton, a mathematician who helped design the AI program.

In January 2007, with $2 million in capital, the program started picking stocks. That spring, it started moving into defensive positions such as utilities. Rebellion gained 17% in 2007, compared with the 6.4% gain by the Dow Jones Industrial Average, according to people familiar with the fund.

It stayed defensive throughout most of 2008, holding gold, oil and utility stocks. Still, it lost money like most investors, sliding 26% but topping the 34% decline by the Dow industrials.

In early 2009, Star started to buy beaten-down stocks such as banks and insurers, which would benefit from a recovery. "He just loaded up on value stocks," said Mr. Fleiss, referring to the AI program. The fund gained 41% in 2009, more than doubling the Dow's 19% gain.

The firm's current portfolio is largely defensive. One of its biggest positions is in gold stocks, according to people familiar with the fund.

The defensive move at first worried Mr. Fleiss, who had grown bullish. But it has proven a smart move so far. "I've learned not to question the AI," he said.

Move over London,New York,Mumbais the place to cut deals

A New World Order May Upset Global Financial Top Rankings Forever: Experts

Don Durfee SAO PAULO


LONDON and New York are not about to lose their spots as the worlds leading financial centres but they are being challenged by emerging market upstarts in a potentially lucrative area: the management of funds moving between developing economies.
With developed economies struggling and emerging markets thriving,more and more financial deals are being cut well away from the traditional centres.Rising trade between emerging economies,cross-border mergers,acquisitions by Indian and Chinese companies and moves by developing world businesses to raise capital in each others markets will spur growth of financial centres in the fastest growing economies,according to industry experts who addressed the Reuters Emerging Markets Summit in Sao Paulo last week.
For the bankers,clustering in cities like Sao Paulo and Mumbai,the intra-emerging markets movement of funds represents an alluring chance to make money.We see flows between Africa and India,India and China,India and Korea being much bigger, said Neeraj Swaroop,CEO of Standard Chartereds India business.Not just big companies but also small- and medium-sized companies are making outbound investments.For banks like Standard Chartered,these are immense opportunities to pursue.
Stephen Jennings,CEO of Renaissance Capital,said he is already seeing a rapid integration of capital flows in emerging markets.In our M&A practice,80% of our deals dont have a western face.The same thing will happen with financial flows, he said.London cannot possibly retain its role as a primary capital markets centre for emerging markets ... I think it will be displaced totally over the next two to three years, he said,adding that high taxes,intensifying regulation and unfavourable immigration policies all work against the City.
While other industry experts expect New York and London to remain dominant for years to come,examples of the worlds changing investment flows abound.Chinese investment is surging in Africa,Latin America and Southeast Asia.Russian and central Asian resources companies are lining up to list shares in Hong Kong.Jennings says UC Rusals $2.2-billion IPO in Hong Kong in January was the tip of a massive iceberg.
Both New York and London have a long list of advantages over emerging market rivals,ranging from loose capital controls and the strong rule of law to sound infrastructure and high quality schools and universities.Jim ONeill,Goldman Sachs head of global economic research and the man who coined the term BRICs,says it will take many years before the traditional financial powerhouses are overtaken by emerging market rivals.
For any of these emerging markets to truly be an international financial centre,they have to do something about the basic ingredients,including the use of English and adopting very credible and acceptable rules of business law, he said.Without those two basic things,these countries have no chance. Nevertheless,some of the new centres may soon dominate lucrative niches.
Singapore is challenging Switzerland for the worlds wealth management business,Hong Kong which led the world in IPOs last year is becoming an equity hub for Asias growing resources companies and Shanghai,not New York,is coordinating the financial resources driving Chinas private sector.To Jennings,these are the seeds of a new model: one in which the savings of emerging markets no longer flow to the US and Europe,but rather to the areas with the highest growth rates.
In the last 10 years,emerging markets savings have,through the dollar as the reserve currency,been intermediated through the West, he said.But that capital is much more efficiently deployed in emerging markets because returns are higher and in some cases risk is lower.So those connections,the new financial plumbing,are being built now. Reuters

WINNERS CIRCLE



BRICS ACCOUNTED FOR



13.5% OF GLOBAL M&AS IN YR-TO-DATE



$41b IN IPOS IN H1 2010 vs $63.9 B IN 2009



$741m INFLOWS IN H1 2010



$17.4b INVESTMENTS IN GLOBAL EMERGING MARKET FUNDS

Get ready for the next Great Crash

DODD-FRANK ACT,IF PASSED,MIGHT HELP AVOID A 2008-LIKE CRISIS,BUT A CRASH SEEMS INEVITABLE

Andrew Ross Sorkin


The next Great Crash is coming.Guaranteed.Maybe not today and maybe not tomorrow.But,in all likelihood,sooner than we think.
How can I be so sure Because the history of modern markets is a story of meltdowns.The stock market crashed in 1987,the bond market in 1994.Mexico tanked in 1994,East Asia in 1997.Long-Term Capital Management blew up in 1998,Russia that same year.Dot-coms dotbombed in 2000.In 2007 well,you know the rest.
And that was just the last 20 years or so.The stagflation of the 1970s,the Depression of the 1930s,the panics in the 1900s ... and back and back and back it goes,all the way to the Dutch and their tulip bulbs.
In those giddy years before the Great Recession,it seemed as if wed grown accustomed to the wild ride.Wall Street certainly had.Jamie Dimon,the chairman and chief executive of JPMorgan Chase likes to say when his daughter came home from school one day and asked what a financial crisis was,he told her: Its the kind of thing that happens every 5-7 years.
No one should be surprised,Dimon insists,that booms go bust.Thats the way markets work.Most Americans probably find that answer unsatisfying,to put it politely.After all,millions have lost their homes,their jobs,their savings.Perhaps something is wrong if CEOs expect the markets to break down every half decade or so.
But now here comes the Dodd-Frank Act,which is supposed to ensure that we never repeat that 2008 finale of Wall Street Gone Wild.The bill,if signed into law,might help us avoid another sorry episode like that.But one thing it wont do is prevent another crisis if only because the next one probably wont be like the last one.
So amid all the back-and-forth over this bill,keep in mind that one of the most important aspects of the act: It would give Washington policy makers a powerful tool to mitigate the next too-big-to-fail blow-up,however that blow-up manifests itself.For the first time,Washington would have what is known as resolution authority,that is,the power to wind down a giant financial institution that runs into trouble.If policymakers had had that power during the tumultuous autumn of 2008,they might have averted the catastrophic failure of Lehman Brothers.They might have placed the teetering American International Group into conservatorship.And they might have taken over Bank of America and Citigroup,and possibly even Goldman Sachs and Morgan Stanley.Senior management would have been tossed out.
We will have a financial crisis again its just a question of the frequency, said the economist Kenneth Rogoff,who,with Carmen M Reinhart,wrote a terrific book titled This Time Is Different: Eight Centuries of Financial Folly.The title says it all.Weve been through this before and will go through it again.
While Dodd-Frank might avert another crisis in the short term,Rogoff says the legislation itself is less important than how regulators implement it and keep on implementing it over the years.Before World War II,banking crises were epidemic, Rogoff said.Then things settled down because regulation had become pretty draconian and laws were actually enforced.
But memories fade.Having a deep financial crisis is the best vaccination for another right away, Rogoff said.Down the road,a lot will depend on the regulators.Ten or 15 years after a crisis,and sometimes a lot less,watchdogs start to doze.Political winds change.Regulators loosen up.
Many on Capitol Hill insist Dodd-Frank means the end of too big to fail,period.Many on Wall Street insist it means the end of American finance.Bankers and their lobbyists argue that American businesses and consumers will ultimately suffer,since all these rules will end up throttling the vital flow of credit through the economy.
Dodd-Frank,whatever its pros and cons,helps prepare us for the next Big One whatever that might be.

Is the stock market a ‘barometer' of the economy?

Is the stock market a ‘barometer' of the economy? Any suggestion to that effect is usually met with howls of protest in India. Some question how the stock market can represent the economy when a good portion of the output originates from activities like agriculture which have nothing to do with listed companies.

Then there is the fact that stock prices gyrate wildly from day to day, when corporate or economic fundamentals certainly don't. This leads cynics to argue that stock prices are purely a function of liquidity and have nothing to do with esoteric notions of ‘fundamentals' or ‘intrinsic worth'.

Nevertheless, a section of economists have over the years made a brave attempt to explain the relationship between stock valuations and the corporate assets they represent. The market capitalisation to GDP ratio, Tobin's q (market value to replacement cost of assets) and price-earnings multiple are usually cited by financial analysts to explain prices. However, they still offer only a partial explanation to the puzzle of stock valuations.

Fresh framework

A recent paper, Indian Equity Markets: Measures of Fundamental Value ( http://www.nber.org/papers/w16061), by Rajnish Mehra, Department of Economics, University of California, offers a fresh and more comprehensive framework to examine if Indian equity valuations are in line with corporate fundamentals. It comes up with the somewhat surprising conclusion that they are!

Using a quantitative model to predict what ‘fundamental values' in the Indian market should be, it finds that actual stock values were broadly in line with them between 1991 and 2008.

The paper builds on the theoretical premise that if markets were fairly valued, the price that investors are willing to pay for firms (market value of their equity plus debt) should be equal to the replacement cost of the assets that firms employ. Both values are pegged to the country's GDP (excluding its agriculture component) to normalise them.

Three aspects are factored into the evaluation of fundamentals: corporate capital stock (assets), after-tax corporate cash flows and net corporate debt. An interesting aspect of the study is its attempt to quantify ‘intangible assets' (brands, research and development, technical know-how and the all-important human capital), drawing on earlier research in the American context (McGrattan and Prescott & Corrado et al). It finds that Indian firms have sharply enhanced their ‘intangible' capital in recent years, aiding stock valuations.

Watershed year

All the above research leads to the comforting conclusion that “in a large measure, Indian equity markets were fairly priced between 1991 and 2008.”

It throws up other observations too that offer food for thought to investors. The paper notes that though corporate values have largely moved in sync with ‘fundamentals' between 1991 and 2008, the markets have become more expensive in recent years. It turns out that 2005 was a watershed year for India's stock market.

Through 1991-2004, stock values hovered in a narrow band around the adjusted GDP. Actual stock values in this period also hovered much below the ‘fundamental values', showing an undervalued market. However, the years from 2005 to 2008 saw stock prices suddenly shift gears, with valuations shooting up relative to adjusted GDP. The proportion of corporate values to adjusted GDP moved up to 1.468 in 2005-08, from 0.78 in 1991-2004.

However, this is not a cause for alarm, as higher stock values were supported by a step-up in private investment and the higher ‘intangibles' employed by companies. Nor did market values move wholly out of range of the ‘fundamental' values modelled. The paper goes on to estimate the current ‘fundamental value' at about 1.2 times and says that it may eventually stabilise at around 1.5 times. A hint that stock markets may have room for upside, if the economy continues to grow?

Qualifiers

The qualifiers to this paper are fairly important, though. The author cautions that “although our framework is well suited to examining secular movements in the value of equity relative to GDP, it is not suitable to address high frequency price movements in the stock market”, adding for good measure that “high frequency volatility remains a puzzle”. The other key effect that the paper has not accounted for is the demand for stocks from foreign institutional investors (FIIs).

However, actual stock price behaviour suggests that these two aspects could well be interrelated. As of today, more of the ‘demand' for Indian shares originates from FIIs, rather than domestic investors (only 6 per cent or so of Indian household savings go into equities). Therefore, whether we like it or not, irrespective of how robust or otherwise India's fundamentals are, it is liquidity from FIIs that decides stock values.

The money that FIIs allocate to the Indian market tends to ebb and flow on a daily basis, depending on global events and the attractiveness of other options in the FII basket. And there may lie the explanation for the unprovoked swings in India's stock market valuations and also its highly volatile stock prices.

Executive Training Swaps Whiteboards for Board Games

-- When NetApp Inc. executive Suresh Padmanabhan signed up for a class on honing management skills, he expected whiteboards and PowerPoint presentations. Instead he found a conference room full of board games.

“It did look a little bit silly,” said Padmanabhan, senior director of the critical accounts program for the Sunnyvale, California-based company, which makes data-storage technology.

His impression changed fast. The games weren’t checkers or Monopoly -- they were complex role-playing exercises where each team ran a fictional company similar to NetApp. His group won the game by increasing operating margins to 19 percent (NetApp’s real operating margin was 15 percent last quarter).

“I’ve been at NetApp for 12 years, and I came back from this more excited and stimulated than any other class I’ve had here,” said Padmanabhan, 51.

NetApp joins Hewlett-Packard Co. and other Silicon Valley giants in relying more on simulations and role play and shifting away from lecture-led training sessions. The companies are looking to avoid costly mistakes, encourage collaboration and help turn pretend profit into actual earnings. Stockholm-based BTS Group AB, which develops the customized simulations, also counts Cisco Systems Inc., Autodesk Inc., Salesforce.com and VMware Inc. among its customers.

More Realism

The programs provide a more realistic and relevant experience for participants than a lecture or reading materials, said Mike Hochleutner, executive director of the Center for Leadership Development and Research at Stanford University’s Graduate School of Business. The risk is that students who thrive in traditional settings may miss the point in cases where lessons aren’t spelled out clearly.

“While the learning may be deeper on average, you could have some participants come out who didn’t grasp what you were after,” Hochleutner said. Stanford itself has used a similar approach in its MBA program’s core curriculum since 2007.

At Autodesk, sales teams use BTS Group’s games to see the world through the eyes of their customers. Most of the company’s clients have different business models, so it helps to understand how they operate.

“It’s practical learning,” said Ken Bado, executive vice president of sales for San Rafael, California-based Autodesk, the top seller of engineering-design software. “You’re putting emotional energy into it -- it’s not just pure intellect.”

Common Mistakes

Bado said the teams that didn’t perform well tried to do too much without committing enough resources -- say, opening an office in China with only a handful of employees. Seeing the consequences of such actions in the simulation solidifies the lessons, he said. Bado also encourages participants to bet real money on the outcome.

“I say, ‘You think you know what’s going on here, you’re confident? Put $20 in, put $100 in for the team,’” he said.

North American customers bring in the biggest chunk of revenue for BTS, generating 46 percent in the first quarter. Sales for the region increased 9 percent during the period, when adjusted for changes in foreign exchange rates.

Dan Parisi, the director of BTS’s San Francisco office, said companies that stopped spending on employee development during the recession are starting to open their wallets again.

“If you’re in a cost-reduction environment, you can cut some of this stuff,” he said. “You cut back for four or five quarters on development of talent. There’s a point where it’s going to affect a few things -- employee engagement, just general capability of the organization -- if you’re not building it.”

More Cooperation

Life Technologies Corp., a provider of gene-analysis tools for medical research, had 80 of its vice presidents take BTS classes. As a result, collaboration between employees has increased, said Elsa Guynes, the Carlsbad, California-based company’s director of global sales development.

“Even today, two years later, people that were in classrooms together across countries and geographic areas --they still maintain that relationship,” Guynes said. The company plans to use the approach with its sales force too, she said.

NetApp’s Padmanabhan says the simulations were thought- provoking and engaging. He also got free beer out of the experience, thanks to bets he made with a losing team.

“It’s much better than sitting through a 100-page PowerPoint presentation,” he said.

Billionaire College drop outs!

We all would have dropped the line in defense of our mediocrity in school, “You know what? Bill Gates was a college drop-out. I’m better – I just get low grades.” I am totally in the favor of college drop-outs and the underdog making it big, but not of mediocrity. As we all feel and agree, grades just don’t mean anything. I am not totally against formal education. We need schooling at a young age as its a leveler and instills some form of discipline & competitiveness into us. But there’s only so much formal education can do! To strengthen the argument I present to you some of the world’s richest men, all worth in billions who were college drop outs. These extraordinary people are more exception than the rule. Still, don’t be skeptic. And why would you slot yourself amongst the ‘rule’, than the exception?

1) Micheal Dell, founder – Dell

Dropped out of University of Texas, Austin at 19 to business full time. Founded Dell by opening up his Mac and rebuilt to see if he could. Today, he is worth $15.5 bn.

2) Sir Richard Brandson, The Virgin Group

Suffered from dyslexia in school, and dropped out of high school itself to open a music store named ‘Virgin’ in London. From there he expanded into telecom airlines, radio. He is worth $ 2.8 bn and is known for his lavish lifestyle.

3) Steve Jobs, Founder – Apple

Valmiki who wrote the Ramayana was once a thief. Jobs was once a hacker who made a machine that let people make illegal calls. And then, like the former he too drove his energies in the positive direction to do something that is remembered forever. Jobs was a geek who dropped out of Reed College, Portland after one semester to start out in business. Today he is worth over $5 bn

4) Ralph Lauren, Founder – Polo clothing line

Ralph’s surname was Lifshitz which he changed to Lauren to disguise his Jewish roots. He worked after school in the Bronx to earn money to buy suits. Dropped out of the City College of New York after two years. Dint attend fashion school either to start Polo, initially a necktie brand. Today, he is worth $3.5 bn.

5) Ted Turner, founder – CNN, owner – MTV, VH1, Nickelodeon

Dropped out Brown University to join his father’s billboard business. He sold that to fund ‘Cable News Network’, the channel that revolutionized TV viewing with its live coverage of the Gulf war. Turner went ahead to buy over MTV, Nickelodeon and is the head of the broadcasting empire – Time Warner, that he built. He also built ESPN which was later bought over by Disney. The maverick retired young at 67 and is worth $ 4.7bn.

These are just some of the few people from the western world. There are many other lesser known billionaires who quit studying. For every B-school topper who made it big, I can point out three who dint have great formal education. For all these men were not great ‘graduates’, but great ‘learners’ if you know what the difference is. There are many more people who fit into the ‘Drop-outs Hall of Fame’ like Thomas Alva Edison, Abraham Lincoln, Frank Sinatra, Bruce Willis and Woody Allen. But these great men weren’t entrepreneurs while some of them would be worth in billions too. So my fellow men, take pride in our tribe coz we redefined what success is with our failures. And purely co-incidental that there is no famous woman entrepreneur who was a college dropout. Oops!

The Googleplex: A melting pot of creativity

Recently in San Jose, California

“What's next from Google? It's hard to say. We don't talk much about what lies ahead, because we believe one of our chief competitive advantages is surprise.”

A quick search of the Internet giant on the Web throws up that ‘mission statement'. A visit to the campus, dubbed ‘Googleplex,' revealed how the company manages to retain that element of surprise in all that they do.

As we entered the headquarters of Google in Mountain View, California, our attention was drawn to a space ship hanging from the ceiling - it is a multi-million dollar prize up for grabs, for a bright idea whose time is yet to come.

Robotic vehicle

The $30-million Google X Prize, to be given to a team from anywhere in the world which designs a robotic vehicle, which can land on the Moon and traverse 500 metres on the terrain and send back images to the Earth. Also known as the Paul Allen project, the deadline for participants to grab the prize is December 31, 2012. As we walked around the Googleplex, several objects caught our eye.

The objects are placed in no particular order but perhaps only intended to stimulate creativity among the employees. We noticed old server clusters, a piano, a Google logo on the wall, a Graffiti or creativity board (‘Geeks without frontiers'), featuring thousands of doodles and drawings by employees. A compact booth, at the entrance, allows the visitor to explore Planet Earth – by navigating through high resolution pictures from Google Earth, Google maps and similar applications.

The term ‘Googleplex' is a reference to googolplex, which is 10 to the power of 10 to the power of 100 or the numeral one followed by a googol of zeroes.

A team of nearly 60 journalists, from across the globe, was invited to tour the campus. Once inside, however, we were asked not to click pictures. This prompted one journalist to remark, “Google takes pictures of everything under the Sun, including our homes and here we are asked not to click photos.”

Discussion rooms

As we walked through the hallways, we observed rooms marked ‘Tech Talks,' where brainstorming sessions take place.

Google, we learnt, strongly believes in flexible work timings. The only thing that matters is timely completion of tasks. The company gives importance to social and recreational activities and has set up ‘play areas' within the campus. Employees can choose from a well-equipped gym, indoor games, dance lessons, video games, piano, pool tables, table tennis and so on.

Employees flock to these play areas throughout the day. There are also snack rooms stocked with soft drinks and food items, and a souvenir shop.

We saw quite a few Indians among the Google staff members, and discovered a tiny hub for Indian food (‘Namaste') in the cafeteria area, which serves American, Chinese and other types of cuisine too.

Close to the gourmet's spot, is ‘Charlie's', the melting pot of ideas for Google staff, especially on Friday afternoons. The meeting point has been named after Mr Charlie Ayers, Google's first and most popular head chef.

This spot even attracts Google founders, Mr Larry Page and Mr Sergey Brin, who gather here to make announcements or listen to new ideas.

The spokesperson later informed us that the present campus buildings were once the offices of Silicon Graphics, the famous computing solutions company.

New campus

The Internet search giant will soon move to a new address in Silicon Valley with a one million sq.ft campus at the NASA Research Park at Ames.

With a young and resourceful employee base, tonnes of cash and high valuation, Google looks all set to achieve greater heights.

Is the nation in a coma?

A few days ago I was in a panel discussion on mergers and acquisitions in Frankfurt, Germany, organised by Euroforum and The Handelsblatt, one of the most prestigious newspapers in German-speaking Europe.

The other panellists were senior officials of two of the largest carmakers and two top insurance companies — all German multinationals operating in India.

The panel discussion was moderated by a professor from the esteemed European Business School. The hall had an audience that exceeded a hundred well-known European CEOs. I was the only Indian.

After the panel discussion, the floor was open for questions. That was when my “moment of truth” turned into an hour of shame, embarrassment — when the participants fired questions and made remarks on their experiences with the evil of corruption in India.

The awkwardness and humiliation I went through reminded of The Moment of Truth, the popular Anglo-American game. The more questions I answered truthfully, the more the questions get tougher. Tougher here means more embarrassing.

European disquiet

Questions ranged from “Is your nation in a coma?”, the corruption in judiciary, the possible impeachment of a judge, the 2G scam and to the money parked illegally in tax havens.

It is a fact that the problem of corruption in India has assumed enormous and embarrassing proportions in recent years, although it has been with us for decades. The questions and the debate that followed in the panel discussion was indicative of the European disquiet. At the end of the Q&A session, I surmised Europeans perceive India to be at one of those junctures where tripping over the precipice cannot be ruled out.

Let me substantiate this further with what the European media has to say in recent days.

In a popular prime-time television discussion in Germany, the panellist, a member of the German Parliament quoting a blog said: “If all the scams of the last five years are added up, they are likely to rival and exceed the British colonial loot of India of about a trillion dollars.”

Banana Republic

One German business daily which wrote an editorial on India said: “India is becoming a Banana Republic instead of being an economic superpower. To get the cut motion designated out, assurances are made to political allays. Special treatment is promised at the expense of the people. So, Ms Mayawati who is Chief Minister of the most densely inhabited state, is calmed when an intelligence agency probe is scrapped. The multi-million dollars fodder scam by another former chief minister wielding enormous power is put in cold storage. Prime Minister Manmohan Singh chairs over this kind of unparalleled loot.”

An article in a French newspaper titled “Playing the Game, Indian Style” wrote: “Investigations into the shadowy financial deals of the Indian cricket league have revealed a web of transactions across tax havens like Switzerland, the Virgin Islands, Mauritius and Cyprus.” In the same article, the name of one Hassan Ali of Pune is mentioned as operating with his wife a one-billion-dollar illegal Swiss account with “sanction of the Indian regime”.

A third story narrated in the damaging article is that of the former chief minister of Jharkhand, Madhu Koda, who was reported to have funds in various tax havens that were partly used to buy mines in Liberia. “Unfortunately, the Indian public do not know the status of that enquiry,” the article concluded.

“In the nastiest business scam in Indian records (Satyam) the government adroitly covered up the political aspects of the swindle — predominantly involving real estate,” wrote an Austrian newspaper. “If the Indian Prime Minister knows nothing about these scandals, he is ignorant of ground realities and does not deserve to be Prime Minister. If he does, is he a collaborator in crime?”

The Telegraph of the UK reported the 2G scam saying: “Naturally, India's elephantine legal system will ensure culpability, is delayed.”

Blinded by wealth

This seems true. In the European mind, caricature of a typical Indian encompasses qualities of falsification, telling lies, being fraudulent, dishonest, corrupt, arrogant, boastful, speaking loudly and bothering others in public places or, while travelling, swindling when the slightest of opportunity arises and spreading rumours about others. The list is truly incessant.

My father, who is 81 years old, is utterly frustrated, shocked and disgruntled with whatever is happening and said in a recent discussion that our country's motto should truly be Asatyameva Jayete.

Europeans believe that Indian leaders in politics and business are so blissfully blinded by the new, sometimes ill-gotten, wealth and deceit that they are living in defiance, insolence and denial to comprehend that the day will come, sooner than later, when the have-nots would hit the streets.

In a way, it seems to have already started with the monstrous and grotesque acts of the Maoists. And, when that rot occurs, not one political turncoat will escape being lynched.

The drumbeats for these rebellions are going to get louder and louder as our leaders refuse to listen to the voices of the people. Eventually, it will lead to a revolution that will spill to streets across the whole of India, I fear.

Perhaps we are the architects of our own misfortune. It is our sab chalta hai (everything goes) attitude that has allowed people to mislead us with impunity. No wonder Aesop said. “We hang the petty thieves and appoint the great ones to high office.”

(The author Mohan Murti is former Europe Director, CII, and lives in Cologne, Germany.

SEEKING LESS SCRUTINY,HEDGE FUNDS FLOCK TO ASIA

New EU rules could make it harder to offer non-EU funds to EU investors.Assets of Asia funds are seen rising 70% over the next two years,outpacing the 50% growth in global assets

AS REGULATORS in developed markets step up oversight of hedge funds,these free pools of capital are increasingly set to make their home in Singapore and Hong Kong.
That will accelerate the flow of talent and foreign funds into Asias top two financial centres,at a time when asset managers are already eyeing the regions rising wealth and strong economic growth.
Assets of Asia (ex-Japan ) funds are seen rising 70% over the next two years,outpacing the 50% growth in global assets,according to industry estimates.Asia,and Singapore in particular,could definitely benefit from the stupid regulatory environment in Europe, said Lionel Martellini,director of Frances EDHEC Risk and Asset Management Research Centre.
Scrutiny of hedge funds has heightened in Europe as politicians in Germany and France blamed the industry for causing the financial crisis though the crisis was caused more by regulated banks in the United States,Martellini said.
The G20 nations want greater supervision of hedge funds,with the European Union debating more contentious rules that could make it harder to offer non-EU funds to European investors.London has objected to the proposed EU rules.
Tim Rainsford,managing director Asia-Pacific at hedge fund manager Man Investments,which manages $39 billion globally,said the increasing focus on emerging markets was also playing a key role in encouraging hedge funds to move to Asia.
He said hedge funds are seeking exposure to Asia,encouraged by the developments in China as a global engine of growth as well as the growing importance of Asian currencies to global trade.
Hedge funds with Asia ex-Japan mandates had assets of $105 billion at end-2009,or about 7% of global hedge fund assets of around $1.5 trillion,Singapore-based consultancy Eurekahedge estimates.By end-2012,that will rise to at least $182 billion,as global hedge fund assets grow to $2.25 trillion.A Deutsche Bank survey of the hedge fund industry in March showed 45% of investors wanted to raise allocations to Asia (ex-Japan ) funds,compared with 18% in 2009.

CRITICAL MASS

Singapore,which has not escaped the global pressure to regulate derivatives and hedge funds,recently proposed regulations to licence bigger hedge funds and force smaller funds to maintain a minimum capital base.
These rules are set to increase costs,especially for startups,but will not halt the the wave of new funds heading to Asia.New York-based Fortress Investment is planning to return to the region through a Singapore office.Soros Fund Management is eyeing Hong Kong for its Asia office and London-based Algebris Investments plans to operate an Asia office from Singapore.UK-based hedge fund firm Prana Capital is setting up an office in Singapore and its founder,Peregrine Cust,will relocate to the city-state.
The regulatory arbitrage that Singapore has will be reduced to a certain extent when it moves to the licensing regime which is a bit more stringent, said Lian Chuan Yeoh,an attorney with Allen & Overy in Singapore

ASIA JOURNEY



Tighter regulation in West pushing hedge funds to Asia



Singapore rules not considered onerous for funds vs EU



Asia (ex-Jap ) hedge assets seen up 70% to $182 billio in 2 yrs



Many Asia funds employ long/short equities strategies



Credit and macro strategies less successful in Asia



EU panel to vote on hedge fund law

BRUSSELS: A European Parliament committee may approve a proposal on Monday night to force hedge funds outside the EU to agree to transparency standards in exchange for a so-called passport to market to investors in the 27-nation bloc.EU finance ministers are scheduled to vote tomorrow in Brussels on a version of the rules that would require funds to register separately in each country.Both proposals have been opposed by the US and the UK.

South Asia Emerges Stronger

South Asia is emerging as the most promising and energetic region in the
global economy. Expansion of domestic economies, growing depth of
financial markets, rising opportunities for incomes and investments, greater
pursuit of peace and stability are the major factors that drive the current pace
of growth in South Asia.

Stronger Economic Growth
The economic growth rate in South Asia, which was lagging behind the
average for developing Asia two years ago, reversed the trend with the
former now showing sizeably higher growth. Seven out of eight countries
(Bangladesh, Bhutan, Maldives, Nepal, Pakistan, Srilanka, Afghanistan and
India) constituting the South Asia region have growth rates over six percent a
year, making it one of the dynamic regions in the world. According to Global
Economic Prospects of the World Bank, real GDP growth in South Asia that
was at 5.7 percent in 2009 is poised to reach 6.9 percent in 2010 and 7.4
percent in 2011. South Asia’s economic growth in 2011 is expected to be
five percentage points higher than that of the world average and nearly two
percentage points more than developing countries.

South Asia also came out strongly in terms of pursuing aspects of domestic
macroeconomic stability and external strength. It has displayed better Gross
Domestic Product Growth than the developing Asia region as shown below.

Growing Financial Sector

The financial systems in various countries of the South Asia region are
progressing at a rapid pace. Except Afghanistan, which is recouping from the
long years of strife and instability, the size of the financial system in other
countries is equal to the size of the domestic economy or even more, like in
India where it is several times higher. All the countries of the region have
experienced significant surge in market capitalization as also value of share
trading in stock markets. Rapid developments have taken place or are taking
place in regard to development of other exchange-traded asset markets such
as currencies, commodities and bonds.

An important aspect of the financial sector growth in South Asia has been its
positive and strong contribution to the economic output. According to World
Bank estimates, 78.5 percent of the change in the growth rate of potential
output during 2003-10 as compared to 1995-2003 was contributed by
deepening of the financial markets.

Future Prospects

In the last two decades, the exchange industry in South Asia experienced
rapid growth and diversity, emerging as one of the strong and significant
and reaching to the top league in terms of business carried out in equities
derivatives, commodities futures, and currency derivatives. South Asia also
is home for a large number of intermediaries and financial institutions.
South Asian Federation of Exchanges (SAFE) has a large role to play in terms
of harnessing cross-border cooperation to further the regional business
interests.

Growth is expected to pick up in most of South Asian economies in 2010 with
India leading the group with a good economic performance. Sri Lanka is
expected to see an uptick of 6.0%,boosted by stronger investor confidence.
Improved domestic economic fundamentals would allow Pakistan to attain
higher growth of 3.0%.Bangladesh and Nepal are also projected to turn out
a better performance.

Buffett makes good bets, bad bets

Warren Buffett may be the world's most famous investor, but even he doesn't get everything right.

Berkshire Hathaway Inc (BRKa.N) (BRKb.N), the insurance company Buffett has run since 1965, owns roughly 80 companies and invests in dozens of stocks.

It is sometimes said that even the best investors might get only six out of every 10 bets right. So while shareholders who have stuck with Buffett, 79, for the very long haul have been amply rewarded, the ride has not always been smooth.

The following are a handful of Berkshire's investments over the years -- the good, the bad and the unknown.

THE GOOD

* In 1976, Berkshire began accumulating an equity stake in auto insurer Geico Corp, 24 years after selling an earlier stake for $15,259. It finished buying Geico in 1996. The acquisition brought aboard Tony Nicely, who still runs Geico and whose leadership Buffett has lavishly praised, and Lou Simpson, whom Buffett has said could replace him as Berkshire's chief investment officer but for the fact that he, too, is in his 70s. Geico has roughly tripled its U.S. auto insurance market share to 8.1 percent since Berkshire bought the entire company. The insurer generated about 12 percent of Berkshire's revenue in 2009.

* In 1989, Berkshire bought $600 million of preferred stock in Gillette Co, the razor blade maker that had been hurt by the introduction of disposable razors. In 2005, Gillette was acquired by Procter & Gamble Co (PG.N). Although it sold some Procter & Gamble shares in late 2009 to fund other investments, Berkshire at year end still held a 2.9 percent stake worth $5.04 billion, and for which it had paid just $533 million. While Buffett in his 1995 shareholder letter called Gillette "our best holding," he also said he made his "biggest mistake" by opting to buy preferred stock rather than common stock.

* Berkshire owns 200 million Coca-Cola Co (KO.N) shares, an 8.6 percent stake it had amassed by 1994. The stake was worth $11.4 billion at year end. Berkshire paid $1.3 billion for it.

THE BAD

* In 1993, Berkshire bought Dexter Shoe for $433 million in stock. Eight years later, it folded the struggling company into another business. In his 2007 shareholder letter, Buffett called Dexter Shoe "the worst deal that I've made."

* In 2008, Buffett amassed a large stake in oil company ConocoPhillips (COP.N), not expecting oil prices to fall by about three-fourths from their record high. Berkshire spent $7.01 billion on Conoco shares, but has been reducing its stake. "The terrible timing of my purchase has cost Berkshire several billion dollars," Buffett said last year.

THE UNKNOWN

* Buffett has entered into derivatives contracts, most of which are essentially bets on the long-term direction of stocks and junk bonds. He has said these contracts differ from other derivatives that are "financial weapons of mass destruction" in part because of the billions of dollars of premiums he collects upfront from counterparties, and because Berkshire generally does not need to post collateral.

Berkshire has four major types of contracts:

-- Berkshire has equity index "put" options tied to where the Standard & Poor's 500, Britain's FTSE 100, Europe's Euro Stoxx 50 and Japan's Nikkei 225 trade between June 2018 and January 2028. At year end, Berkshire had a $7.31 billion paper liability on these contracts and said it could in theory owe $37.99 billion if the indexes all went to zero.

-- Berkshire has contracts tied to credit losses in higher-risk "junk" bonds, which at year end were on average expected to mature in two years. At year end, Berkshire had a $781 million paper liability on the contracts and said it could in theory owe up to $5.53 billion.

-- Berkshire wrote credit default swaps on various companies, mostly investment-grade. At year's end, Berkshire had no liability on these contracts.

-- Berkshire entered into tax-exempt bond insurance contracts structured as derivatives. At year end, Berkshire had an $853 million liability and $16.04 billion of potential losses. The bonds are largely secured by states' taxing and borrowing power.

* In September 2008, at the height of the financial crisis, Berkshire acquired $5 billion of Goldman Sachs Group Inc (GS.N) preferred shares that throw off a 10 percent dividend, plus warrants to buy an equivalent amount of common stock. The warrants carry a strike price of $115. Goldman shares closed Tuesday at $153.04, and those warrants are well in the money.

RESHAPING WALL STREET

RESHAPING WALL STREET
It is the first big test of US President Barack Obamas plans to rein in the excesses of a seemingly unrepentant Wall Street.And the most sweeping overhaul of financial regulation since the Great Depression may not clear its first hurdle in the Senate on Monday,as Republicans held out for a bipartisan deal.Obama and the Democrats need at least one Republican to side with them in a procedural vote in order to begin debate in the Senate.

Game-Changing PROPOSALS



PREVENTING MORE BAILOUTS


Squash the idea that some financial firms are too big to fail.Prevent future bailouts like AIGs.Seek middle ground between bailout and bankruptcy through orderly liquidation process.

PROTECTING CONSUMERS


Stop abusive home mortgages,credit cards.Senate bill creates Financial Consumer Protection Bureau inside Federal Reserve.

VOLCKER RULE


Ban risky proprietary trading,unrelated to customers' needs,at banks with cost-of-capital advantage gained from taxpayer-funded bailout.

OVER-THE-COUNTER DERIVATIVES


Police $450-trillion OTC derivatives market.A hothouse for risk during boom years,it amplified the financial crisis.Obama wants OTC trading through exchanges to boost transparency,risk comprehension and price competition.

SYSTEMIC RISK


Create new entity to spot and head off next crisis.Senate bill sets up nine-member council of regulators,chaired by the Treasury Secretary.

POLICING BANKS


Rationalise bank supervision system to stop problems from festering in the cracks.Fed to keep oversight of bank holding companies with assets over $50 billion.But Fed would lose power over state banks with less than $50 billion in assets.

REGULATING HEDGE FUNDS


Hedge funds must register with government,opening their books to more scrutiny,but Senate bill exempts venture capital funds and PE funds.

FIXING SECURITISATION


Make securitisation market more transparent and accountable.Bill forces securitisers to keep baseline 5% of credit risk on securitised assets.

EXECUTIVE PAY & SHAREHOLDER RIGHTS


Give shareholders more say on executive pay and more clout in electing directors.

CRACKDOWN ON RATING AGENCIES


Boost SEC's power over credit rating agencies.Senate bill also seeks to curb use of unneeded ratings,and exposes raters to more legal risk.

Come clean on OTC deals

IF BANKERS FEEL THERES no fun left in Manhattan,they will move to London or Singapore.A slew of stifling regulations may only fatten other financial centres.As long as there is no limit on the money that central banks can create,financial markets will move from one bubble to another.Capping salaries of bankers may be the easiest to achieve,but will serve very little.Separating safer businesses like deposit taking from riskier ones like derivatives would question the very existence of modern banks that depend on low-cost deposits to cut aggressive deals.What can help,but only a little,is to make banks and hedge funds report their over-thecounter derivative deals and spell out how much of these are collateralised.That could be a rough and ready way to figure out the degree of risk.

How I caused credit crunch - Goldman CDO man

The writer of a book entitled "How I caused the credit crunch" worked for the unit of Goldman Sachs that sold the financial product at the heart of U.S. fraud allegations against the bank.

Tetsuya Ishikawa's name appears on the preliminary term sheet for the Abacus 2007-AC1 deal, a collateralized debt obligation (CDO) the U.S. Securities and Exchange Commission accuses the bank of using to commit fraud.

"Tets" Ishikawa, who is Japanese by birth but grew up in London, was educated at the elite British school of Eton and at Oxford University, according to a short biography in his 2009 novel. He left Goldman in 2007 and then worked for Morgan Stanley, structuring, syndicating and selling credit derivatives to investors.

His name and London phone number are on the Abacus term sheet as one of six people in the "Global Syndicate" group, part of a wider contact list that also includes Fabrice Tourre, the 31-year old Frenchman who has been charged with fraud by the SEC.

Goldman is vigorously defending itself against the U.S. accusations, contesting the idea that it was selling the CDO in the knowledge it would collapse so as to allow hedge fund manager John Paulson to bet against it.

Ishikawa's novel, about a fictitious Oxford graduate, "tells how a novice to the mysteries of hedge funds, subprime mortgages and CDOs can fix complex deals worth billions in the exclusive bars, brothels and trading floors of London, New York, Frankfurt and Tokyo," a blurb on the back of the book says.

The idea for the novel was born when Ishikawa was telling his friends "about the cliched high life I had been living while creating and selling billions upon billions of these securitization and credit derivative products, now better known as 'toxic assets'," the preface of his book says.

Ishikawa was made redundant by Morgan Stanley in May 2008. He now works for fixed income house Amias Berman & Co in London. He could not be reached for comment through his current employer. A spokeswoman for his publisher, Icon Book Ltd., said he did not talk to the press.

The book -- which contains a financial glossary -- uses no real names and says "any resemblance to actual firms of persons in this book is entirely and genuinely coincidental."


Based on an article that appeared in http://thewallstreetchallenger.com the use of Synthetic CDOs after 2005 would have been very risky. Since home prices grew at a high rate till almost the end of 2007 and peaking in 2005, CDOs backed by MSS were an ideal high return investment till approximately November 2005.

Using home prices forecast it is hard to believe that the financial institutions and credit rating agencies involved in the CDO business had sophisticated risk analysis simulations, but did not forecast price movements of the underlying collateral.

CDOs played a notable role in the financial markets. Did the CDO cause the financial crisis or was it blindness, greed and the need for riskier assets? The constructors of the CDOs may not bear direct responsibility. Rather their reckless use, misunderstanding and ignorance of key warning signs likely contributed to the magnitude of the financial crisis. You can observe the financial landscape today and recognize from the survivors, walking wounded and the absentees those who knew and those who had not understood the use of these tools.

Another disaster by Swaps......

Water and electric customers in the Seattle area, most of whom pay U.S. taxes, will pay an additional $14 million to get out of an agreement with American International Group Inc., the insurance company rescued from insolvency in 2008 by American taxpayers.

The fee from the Snohomish County Public Utility District, serving Boeing Co. and 320,000 other electricity buyers, will settle a nine-month-old dispute with AIG, according to a copy of the accord obtained under state public records law. The municipal power company and AIG sued each other over a contract created in 1994 to help Snohomish reduce its borrowing costs by $2.9 million -- an early version of a financial derivative known as an interest-rate swap.

Snohomish is among at least 1,900 public institutions from Puget Sound to the Aegean Sea that sought to lessen interest expenses using similar agreements with potentially hazardous results. Harvard University in Cambridge, Massachusetts, paid more than $900 million to get out of swaps that backfired when interest rates unexpectedly plummeted, increasing its costs.

Borrowers have paid as much as $5 billion to Wall Street to exit swaps since 2008, according to Peter Shapiro, the managing director of Swap Financial Group LLC, an adviser in South Orange, New Jersey.

“There’s a lot of so-called sophisticated stuff ginned up by the finance industry,” said William Kittredge, a former utility director in Oregon who is now director of the nonprofit Center for the Study of Capital Markets and Democracy in Arlington, Virginia. “When you’re talking about public money, it’s not the way to go.”

Exchanging Payments

In an interest-rate swap, parties exchange interest payments on a set amount of debt, often with the goal of locking in a fixed rate on a related set of variable-rate bonds. During the 2008 credit crisis, interest owed by local governments on floating-rate bonds exceeded payments they received under swap agreements.

Such “synthetic fixed-rate” deals pushed Jefferson County, Alabama, close to bankruptcy two years ago. It had refinanced $3 billion of debt with variable-rate bonds and purchased swaps to guard against borrowing costs rising. Its expenses soared when insurers guaranteeing the bonds lost their top credit grades, and the rate the county received fell.

‘Reckless Traders’

The Snohomish utility, which faced increased swap-related payments of about $5 million a year, resisted paying to exit its contract for almost two years. In its suit against AIG, Snohomish alleged that a “now-infamous unit of reckless traders” had “drawn a bead” on the utility. In the end, Snohomish opted to pay the termination fee and sell 15-year bonds to replace all its floating-rate debt, said Jim Herrling, senior manager of risk management and supply for the utility. Those bonds sold yesterday at 3.18 percent.

Snohomish projects it will save $14,179,907.63 in budgeted interest costs over the life of the new debt, Herrling said. All but $133,782 of that will go to AIG in the termination payment.

That fee is enough to buy a new energy-efficient refrigerator for 11,864 homes, based on estimates from the U.S. government’s Energy Star program. It amounts to about $43.75 for each Snohomish electric customer.

“The ratepayers I don’t think are going to be paying any more in the long run,” Herrling said. “They’re just making this payment up front and we’re reducing our future debt service payments between now and 2025.”

“We’re pleased that we have settled this matter,” said Mark Herr, a spokesman for New York-based AIG, which is 80 percent owned by the U.S. government after a 2008 bailout. Neither party made any admission of liability in the settlement.

Battled Enron

The Snohomish utility, located in Everett, Washington, 30 miles north of Seattle, unearthed audiotapes of Enron Corp. traders discussing manipulating California power prices in 2004. Enron, the bankrupt energy-trading company, had sued Snohomish over canceled power contracts. The utility paid $18 million, 10 cents on the dollar, to settle the suit in 2007.

In 1994, Snohomish needed money to build transmission lines, replace electrical poles and add street lighting.

Jerry Bobo, a banker at the time for New York-based Smith Barney Inc., recommended borrowing $58.3 million for 30 years at floating rates, using a swap agreement to lock in a fixed rate lower than Snohomish could obtain by issuing conventional bonds. The savings might total $2.9 million, according to a Smith Barney presentation obtained by Bloomberg through state public records law. In 1998, Smith Barney became a unit of Citigroup Inc., the bank rescued by taxpayers in 2008.

Reset Weekly

Rates on the debt, known as variable-rate demand bonds, would reset weekly. AIG agreed to accept a fixed 6.2 percent payment from Snohomish and pay the floating rate. A traditional fixed-rate bond at the time might cost the utility 6.95 percent, according to the bank’s presentation.

Through today, that spread saved the utility more than $4 million, according to Anne Spangler, the general counsel for Snohomish.

The power company gave up something more valuable: the right to refinance the bonds without penalty if interest rates changed, said Andrew Kalotay, a former Salomon Brothers bond analyst who is now a consultant in New York. That created significant risk for the borrower over the contract’s 30-year term, he said.

Kalotay compared it to a homeowner accepting a mortgage that would require extra charges in advance for refinancing. Private borrowers typically use swaps only to cover short-term rate movements of six months or less, he said.

Smith Barney’s presentation to the Snohomish utility portrayed the longer term of the accord as a way to save money.

‘No Significant Risks’

“The economics of a swap are such that the financial benefits of the transaction increase as the swap term increases,” one slide said. Another mentioned that credit raters would view the structure as fixed-rate debt.

“The result: True Synthetic Fixed Rate Debt,” the slide said. “No significant risks.”

“They could have done the same thing much more cheaply by using plain-vanilla, fixed-coupon bonds,” Kalotay said. “The swaps are a way for the banks to make a lot of money. Every 10 swaps municipalities enter into, nine of them turn out to be completely inappropriate.”

The floating-rate debt stood to make Smith Barney more in fees. Bobo acted as salesman and adviser as the utility debated the transaction. Then, his bank served as both underwriter and “remarketing agent,” responsible for setting weekly interest rates once the floating-rate debt was sold.

Additional Fee

That last duty earned a fee: 0.1 percent a year, or $1.7 million over the life of the bonds, according to documents presented to Snohomish officials. Those terms helped the bank earn more than double what it would have underwriting a traditional fixed-rate bond, the documents show.

Bobo, who has an office in Seattle, didn’t return telephone calls seeking comment. Citigroup spokesman Alex Samuelson declined to comment.

Floating rates on the utility’s bonds fell to as little as 1 percent to 2 percent from 2002 to 2004, while the utility was paying AIG 6.2 percent. Until mid-2008, Snohomish paid AIG a net $25.7 million, court filings show.

Demand for the bonds dried up during the 2008 credit crisis. The lack of liquidity was so severe it was likely to trigger a provision of the contract that, AIG said, would limit its own payments to the utility to an amount based on international bank rates. The power company would have to pay the higher floating rates, resulting in $5 million of additional annual costs.

Buying Back

Utility bond counsel William Doyle told Snohomish commissioners at a board meeting in September 2008 that they should buy back the bonds and put them into a trust. That would force AIG, then in the midst of a government bailout that totaled $182.3 billion, to pay the floating rate.

AIG’s lawyers questioned whether the arrangement was permissible under the bond agreements during a conference call. Doyle, of the firm of Orrick, Herrington & Sutcliffe LLP in San Francisco, “cut off the question,” according to AIG’s court filings. He declined to comment. The trust purchased the bonds in October 2008.

In July, AIG sued the utility in New York state court, saying the refinancing breached the swap agreement because the 58-page document required “written consent” from AIG for any purchase of the bonds. Snohomish then filed its suit against AIG in federal court, and the cases were consolidated in Seattle. The settlement disposes of it.

Citigroup was the senior underwriter of this week’s debt sale. The utility also added a co-manager, Barclays Plc, said Herrling, Snohomish’s financing manager.

“When you have two desks working your deal, you’re making sure you’ve got some checks and balances there,” he said.

The case is Public Utility District No. 1 of Snohomish County, Washington, v. AIG Financial Products Corp., U.S. District Court for the Western District of Washington (Seattle).