Us and Them

A forward I picked up ...

Wake me up when September ends :)

Glimpses of Goa - Oct 2007

A Crisis of Confidence

Is a Liquidity Crisis

• Perception of higher inter-bank lending risk
• Banks are unwilling to lend to each other
• leading to a ripple effect across the financial markets

Ironically

• Inflation is not the main issue here
• Strong fundamentals leading to high economic growth

Requires Intervention

• From the Central banks to restore confidence in the markets

Essentially

• a financial market crisis
• however if there is no intervention from the central banks this will spill off to the economy leading to a systemic risk.

Affecting

• Investment Banks
• No assets

Not Directly Affecting

• Commercial Banks
• Has a huge deposits base

Not Affected

• Manufacturing / Brick and Mortar
• Fixed asset base

Historical Perspective

• Sub-prime loans
• Affect Alt A loans in the short term
• Affect Higher Loans in the mid term

- a synopsis of a NDTV program telecast on 19th September - "Financial Tsunami - The Ripple Effect'

Thank God!

Had bought insurance from TATA-AIG. US treasury bailed out AIG at the last moment with $86Bn!

However from the news reports it seems that the TATAs is fully covered with capital for all its liabilities. TATA holds 76% stake in the Indian JV with AIG and promoters are planning a capital infusion of Rs250Cr to meet its solvency requirements for business growth projections over the next 2 years. Quoting ET Kolkata Edition dt 18th September - ' "Currently TATA-AIG Life's capital stands at $293Mn(Rs 13000 crore) and the company's solvency margin is 304% against IRDA's stipulation of 150%" said TATA-AIG Life MD Trevor Bull'

Things look hunky dory at least in the medium. I am tied with my investments for the next 4 years. Keeping my fingers crossed.

Clock is ticking

Lehman Busted and Lynch Bought

Lehman Brothers filed for Chapter 11 bankruptcy for $613Bn and Merrill  Lynch is bought over by BofA.

Testing connection

1 2 3 check

'Sub-Prime Crisis: After Effects' for Dummies

History:

1930s Great Depression

Collapse of the national housing market discourages private lenders from from investing in home loans.

1938 US Housing Bill signed

Fannie Mae, nickname for Federal National Mortgage Association established as an US Government organization in 1938 as part of Roosevelt's US Housing Bill to buy up mortgages and sell them on to investors. The idea was to raise levels of home ownership and the availability of affordable housing. Thus building a secondary mortgage market. 

1968  Private company with a direct credit line from the US Treasury

Under pressures created by the Vietnam War, Lyndon B Johnson privatizes the lender to remove it from its accounts. Fannie starts operating as a Government Sponsored Enterprise (GSE) thus generating profit for its stockholders with a special claim for government assistance in case of any financial trouble. Being a GSE, ensures that Fannie Mae has a direct credit line from the US Treasury, exemption from State and Local Taxes and SEC oversight.    

1970 Monopoly to Duopoly 

To end the monopoly of the Fannie Mae, Federal Home Loan Mortgage Corporation - Freddie Mac was set up as a competitor. Another GSE.

2003 Financial Accounting Scandal

Investigations by Justice Department and SEC into Freddie Mac's accounting practices reveals errors of $4.5 billion. 3 top executives forced to quit.

2007 Sub Prime Mortgage Crisis

Hits the US Housing market.

2008 US Government Bailouts

Loses 74% shareholder value of investments on escalating concern that Fannie and Freddie do not have enough capital to weather the subprime debacle. 

Stats:

• Fannie Mae and Freddie Mac control 90% of US secondary mortgage market.
• Combined current assets is 45 % greater than that of US's largest private bank (Citigroup)
• Combined current debt is 46% of current US national debt. 
• $3+ trillion of debt and guarantees
• $800 billion of junky mortgages  
• China holds $376 billion of long term US agency debt and most of it is in Fannie and Freddie asset. 

The Economic Cycle - Vicious or Virtuous ? 

Virtuous Cycle?

• Local bank disburses loans with low down payment and fixed interest rate. 
• Freddie and Fannie buys mortgages from local banks, securitizes them and sells them as bonds to investors.
• Freddie & Fannie as GSEs operate as private enterprises with US government guarantee of backing in case of financial trouble. Thus their securities are as good as US government securities.
• Being least risky of securities due to US government backing, these securities have high liquidity.  This allows them to have low yield.
• Freddie and Fannie makes profit from the difference in the interest rates charged to borrower and interest rates serviced to the investor to their securities. 
• Due to the direct line of credit from the US Treasury a major buyer of their securities are foreign governments and central banks to hold their foreign reserves. 

 Vicious Cycle?

• Post the the subprime debacle, there is a growing concern amongst investors ( Foreign central banks) about Freddie and Fannie's ability to service their securities.
• Liquidity of these securities decreases resulting in increased risk thus raising the interest rate of borrowing of these securities.
• Interest rate of mortgages increased subsequently.
• US Housing market busts.
• Bad debts for such mortgages run into $800 billion.
• Concern amongst invertors continue to escalate and the vicious cycle of bad debt continues.

To break out out this vicious cycle US government bails out these secondary mortgage company as a measure of reassurance to the investors .

Monday Blues

In office, will take atleast an hour to recuperate.

Live Maps - Not bad

Snow

Red Hot Chili Peppers - Snow lyrics

Roam roam mein Chrome!

Using Live Write to blog on Blogger about Chrome.  What more can you ask for?

Besides Chrome on cyberspace, lotsa other things to talk about in the last one month.

Kosi takes its toll. Wake up Indian administration.

Mama says Na-na to Nano. Grow up guys. Pushing WB back by 20 years. Reincarnation of the grassroots leader into the commie of this decade. 

India in Beijing: Jiyo Abhinav :). Finally the elusive gold for India. Rapachage love you! Sushil brilliant comeback.  Quite unlike the typical snatching defeat from the jaws of victory syndrome we hear and see so often. Dedicating my fav song "Eye of the tiger" to Vijendra, Jitendra and Akhil. Well done Saina Nehwal.  Expecting much more from you budding teenager. Hesh & Lee not bad huh? With all that fighting over last few months wasn't expecting too much actually. Ending the Olympic update with "3 and counting" for the years to come.

"I had an accident last night. I somersaulted and hit my head. Don't remember what happened after that. Just woke up now. Was unconscious through the night". :( She is a lot better now. The A-hole she is, she has already started working and that neck rest is still on.  God bless, spare the poor child. 

3 cities in 10 days - B'lore, Hyd and Bombay. Highlight was the night out at the first couple's new home.

That its for now.

Live on Live Writer

Live on Live Writer  :)