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Okay, Satyam not only stumbles but it falls flat on its face. Tuesday after the Indian equity markets closed Satyam Computer Services, the 4th largest IT company, decides to acquire two companies as part of a diversification strategy. When I heard about the diversification, I thought maybe it was buying a data center company or some online advertising company. Nope, the Raju family decides to REALLY diversify and get into real estate and infrastructure. If cash is king then Satyam is ruling, they have over USD 1.2 billion in cash so they decide to blow USD 1.3 billion on Maytas Properties and USD 300 million on Maytas Infra. If you are wondering Maytas is Satyam spelled backwards. The problem is that both Maytas entities are Raju family owned companies and they were basically moving the cash from one company to another where they had a larger ownership stake. The most appalling part was on the conference call they mentioned they had a “Big 4″ accounting firm help with the deal but would not reveal the name. Does anyone really still give a damn what a “Big 4″ accounting firm has to say? And when asked about other real estate or infrastructure companies they looked at they again decided not to reveal any names.

Then Wednesday morning, they must have been enlightened because after ALL that due diligence and working with a “Big 4″ accounting firm they decided to call the whole deal off. Then they get on TV and try to justify how just 12 hours ago it seemed like the best thing since sliced bread but now they are all about “shareholder value”. Bottom line, they don’t seem so transparent as a publicly listed company should be.

The irony is that in 2008 they received the Golden Peacock Award for corporate governance. I wonder if they have to return the award like Milli Vanilli gave back their Grammy after their lip sync scam?

The ultimate irony, Satyam means truth in sanskrit, something that is truly missing with the Raju family at the moment.

Wow, what a day on the Indian equity markets…Sensex down 1070 points and the Nifty down 360 points. Currently the Sensex is EXACTLY where it was when I landed 3 years ago at 8,700. And the fun is only beginning the Dow Industrial Futures are down 550 points – limit down. I can honestly say I have NEVER seen this happen before. But that is not the reason I’m speechless, I read this NY Times article this morning and having a very tough time trying to sympathize with this family:

…Last month, Mrs. DeCicco, 32, was laid off from her $35,000-a-year job managing a hotel business center in Orlando, and the family moved north where Mr. DeCicco, 28, a security guard supervisor for SecurAmerica, could earn $13 an hour instead of $10.

…these include a four-piece marble and mahogany bedroom set for which they paid $8,000 after they refinanced their house two years ago.

WTF, are you kidding me? Mrs. DeCicco spent nearly 25% of her yearly salary on a marble and mahogany bedroom set. Dude, I can’t even begin to comprehend how you could justify this purchase, based on this logic everyone should be living in McMansions, driving leased cars and living beyond their means…oh wait…

Intel’s Andy Grove penned a great book back in 1996 about Intel, business and being paranoid about the competition. People have been asking me what’s happening worldwide, what’s up with India, etc…I see two stories being told depending on the audience.

The positive spin is “in the long term everything will be okay and you might actually want to invest now” and the other is “dude, watch the expenses, be liquid and don’t trust anyone.”   When it comes to my money, I’m absolutely paranoid and the competition is anyone out there trying to reduce my capital. In the last 6 weeks I have seen legitimate deals vanish, what was a viable business plan back in September is now apparently crap. The VC studs at Sequoia Capital had a meeting this week with a slide deck titled “RIP: The Good Time” and in short – get your house in order, things might get real crazy real fast. (Here is summary from Om Malik of the meeting).  

Someone asked me what is the silver lining to all this. I would take this time to vet out money managers, if they can survive this period they can rock in any market. If big companies can be paranoid about the future, I’m not sure why you shouldn’t be. It’s not me being a permabear, it’s just me protecting my capital at all costs.

Here are some great quotes from today’s newspaper:

The property rates in Mumbai will not see a correction above 10-15%, given the land rates are very high in Mumbai…

Gopal Sharma of Gundecha Builders 

Gopal has to be positive or his cashflow won’t be positive

Indians buy a home for long term use, unlike people in western countries

Pravin Doshi, Pres of Maharashtra Chamber of Housing

Seriously, Pravin have you even visited the West or just talking smack?  I know several of my cousins in India that have bought property for a quick flip. And several of my cousins in the US, that only have one house – the one they live in.

Be absolutely paranoid about your portfolio and don’t let anyone sway you.  People talk about risk metrics, the best risk metric is if you can sleep peacefully at night.

Over the past several years the great Indian real estate story has been front and center. From a Bombay point of view it’s been fun to hear about how prices will never come down and the time to buy is now.  Even in the last 3 months, people have been saying the real estate market will not crater like in the US.  I’m sorta leaning towards bulls@#$ when I hear that.  

I’m expecting every country that had a real estate bubble will have at least one bank and one developer go bust. Every time I rattle off a list of developers people have a reason why they will never implode:

Indiabulls – politically connected, it’s just a front for converting black to white money
DLF – lots of land, good rental income, political money
Unitech – backers with deep pockets
HDIL – politically connected, focused on slum rehab projects

On the bank front, the last 48 hours have generated more headlines and rumors about a bank going under. The one name that consistently seems to come up is ICICI, hence they have been appearing on TV the last 2 weeks telling everyone everything is okay. I’m sure the only reason it comes up because it was the most aggressive of the Indian banks. I have pulled all my money out of ICICI because if they fail, I’m not sure the Indian gov’t can create magic like Paulson and Company.

If you are watching your portfolio plummet and wondering what is happening, this post might help you understand with better clarity why it seems your money is being flushed down the toilet.  The 3 combined podcasts run about 100 minutes, I’ve summarized the key points and some choice quotes. However, I highly recommend you downloading them yourself to listen to. (If you have a Zune or don’t use iTunes, please close your browser and jump off a cliff)

60 Minutes (iTunes link, 42 minutes)
- What went wrong with the risk models

“You can’t model human behavior with math”

- What is a credit default swap (CDS) 

“It is an insurance contract, but they’ve been very careful not to call it that because if it were insurance, it would be regulated. So they use a magic substitute word called a ‘swap,’ which by virtue of federal law is deregulated,” 

- The CDS market is around USD 50-60 trillion dollars

Radioeconomics.com (iTunes link, 34 minutes) – The guest is Barry Ritholtz (from The Big Picture blog which is one of the best blogs covering the financial crisis)

- The Commodity Futures Trading Act of 2000 exempted any derivatives instrument (such as CDS) from being regulated
- The CDS market went from USD 2 trillion to USD 50-60 trillion in just several years
- Ratings agencies (Moody’s, S&P and Fitch) were rating most mortgage backed commerical paper as “triple A” investment grade
- Housing sales peaked in 2005 and housing prices peaked in 2006
- Why in 2004, were 5 investments banks exempted from the Net Capitalization rule?
- The ban on short sales in financial stocks is stupid

This American Life (iTunes link, 1 hour)

Part 1 – Commericial Paper Market
- The commerical paper market (one of the largest markets) locked up after “breaking the buck” occured with the Reserve Fund

Part 2 – CDS’s
- Satyajit Das talks about the market originally being used for insurance and soon turned into gambling. (He has a great book, that I reviewed a while back)
- Great analogy of using CDS’s for fire home protection
- CDS’s are traded via over-the-counter (OTC) between two private parties in an unregulated market
- USD 5 trillion in Bonds and USD 60 trillion in CDS  - a 12x leverage

Part 3 – CDS’s traded in an unregulated market

After listening to all 3 podcasts it’s clear, there is no quick fix to the problem.  The Fed stepped in on Tuesday and announced a Commercial Paper Funding Facility and the DJIA still got slammed over 500 points down. 

The two largest financial markets: commercial paper and CDS are unregulated and I’m sure the market participants like it that way. With regulation and transparency, you have to fight for business and lower your prices, look at the US brokerage model.  Once the US brokerage model was littered with companies offering rock bottom services, the industry looked towards new markets – CDS.

The size of the world stock market is estimated at about USD 60.9 trillion  at the end of 2007.  The size of the CDS market is between USD 50-60 trillion. Shouldn’t both be regulated the same way based on their size and importance?

The ONLY thing that is going to continue to rise is the US National Debt…USD 10 trillion and counting…