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The subprime crisis has caused havoc to anyone with a pulse.  Most people are affected in a negative way and a select few are actually doing well because of it.  

First the bad news, I’m not 100% sure but I believe Karthik Rajaram is the first person to commit suicide due to the crisis. He lived in a suburb of Los Angeles and not only killed himself but 5 others – mother in law, wife and 3 sons. His 19 year old son was a Fulbright Scholar, no small feat, at UCLA.  Really, there is not much else to say…[LA Times story]

Now the good news, the USD 700 billion dollar man is Neel Kashkari, he used to work in Redondo Beach, California a stones throw from where I used to live.  According to his biography Neel “developed technology for NASA space science missions.” Paulson is brilliant for selecting Neel, maybe he can re-package all this toxic paper and shoot it into outer space…problem solved.

On Friday, the US House approved the revised USD 700 billion bailout to stabilize the financial markets. Henry Paulson has finally gotten his way and now the question remains…will it work? Based on what the equity markets did the last couple days, there is not much confidence. The credit markets are still locked up and LIBOR rates have hit recent highs.

I personally feel Paulson is the wrong guy to be leading the clean up, since it seems he was partly to blame in the creation of this mess.

…we and other global firms have, for many years, urged the SEC to reform its net capital rule to allow for more efficient use of capital. This is the single most important factor in driving significant parts of our business offshore, so that our firms can remain competitive with our foreign competitors risk-based capital standards must become the norm. The SEC has made it clear that risk-based capital rules can be implemented only when the Commission is confident that firms employing value-at-risk models have robust credit and risk management policies in place. (full testimony)

That was Paulson’s statement back in 2000 to allow banks to take on more leverage.  So in 2000 he asks for more leverage, then 8 years later it blows up and now is asking to clean it up.

That would be similar to an executive of a large alcoholic beverage maker asking to lower the drinking age, allows advertising on college campuses, sponsor parties, etc…Then realizing kids are getting drunk and doing things they shouldn’t be…Then hiring that executive to clean up it via legislation. Only in America.

So why do I call it the Harvard Plan because the 4 most powerful men right now in this economic blow-up all attended Harvard:
George Bush – MBA ‘ 75 
Henry Paulson, Treasury Secretary - MBA ’70
Ben Bernanke, Chairman of the Federal Reserve – BA ’75
Christopher Cox, Chairman of the SEC – MBA ’77

A little humor, check out this website for Strategery Capital Management

Several of my friends were in town this week for a real estate conference and I got a chance to catch-up with them and get the real deal on the Indian real estate market. They said most of the conversations at the conference went like this:

Developer A – We are okay, we didn’t grow too fast but Developer B is screwed
Developer B – We are okay, we started early but Developer A is screwed

The build out for the retail segment is a complete disaster, malls are empty and the ones operating have occupancy rates from 25% to 80%. In many instances the malls cannot be reconfigured, case in point the Crossroads Mall in South Bombay was converted to an office building after an extended and expensive renovation.

Residential is set for a large fall since many of the new projects were bought by investors looking for a quick flip. With rates going up, people will end up bailing on these units and add to the overall supply.

This past week the equity markets were not kind to the Indian real estate sector including some of the companies I track. HDIL (down 87% from peak, click the above image for a chart), Orbit (-83%), Parsvnath (-84%) and Sobha (-82%) are all near their all-time lows, of course most have only recently listed on the exchanges. HDIL is the Bombay based property kingpins run by the Wadhwan family. This research report from ENAM covers HDIL, the report is good if you want a macro view on the Bombay real estate market.  ENAM had a price target of Rs. 712 when it published the report on Aug 18, 2008, on Sept 26, HDIL closed at Rs 190.35. I might be a bit jealous of HDIL as they have one of the largest collection of sweet rides in Bombay, most notably the Rolls Royce Drop Head Coupe.

Shame on you
Fool me twice
Shame on me.

Ben and Henry (Benry???) as I blog are pleading their case to the Senate Banking Committee. It’s almost like a repeat of the justification for the Iraq War – If we don’t do something about weapons of mass destruction (WMD) the US is toast.  This time the WMD’s are derivatives as Warren Buffet so accurately predicted back in 2003.  

This is a complete sham, they should be focusing on the homeowner – cut them a check and hope they don’t default.  Instead, their theory is to help the banks and people holding these toxic instruments and make them whole and in turn that will trickle down to the homeowners.  Awesome theory, I believe the theory about the Iraq war was that it would pay for itself once we start pumping the oil…we all know how that is going. Iraq is costing taxpayers close to USD 10-12 billion a month with no end in sight.  They want USD 700 billion for this bailout, I’m sure that figure will easily exceed USD 2 Trillion if they get this passed in Congress.

I’m not sure what will be more valuable – Monopoly money or the US dollar?

While countries like Hong Kong are lowering taxes and attracting MORE business the locals in Bombay feel the opposite works. In yet another attempt to drive people out of the city the Bombay Muncipal Authority (BMC) is debating whether to tax rental rates at 41.5%.  The way they are planning to tax people is the following:

Rs 100,000 - Residential rent
Rs 41,500 – The additional amount someone has to cough up and pay as the BMC Tax
Rs 33,000 –  Income tax paid by the lessor on the Rs 100,000

The gross rent would be Rs 141,500 and after taxes the net amount to the landlord would be Rs 67,000, a staggering 53% tax rate.  You can be the judge on how many people will actually end up paying this amount.

In HK you actually get something in return, but in Bombay that ain’t the case, below are some of the services offered by the BMC:

• Building and maintenance of streets and flyovers – Been to Bombay? Then you know there is more turbulence on the roads then the airspace
• Public municipal schools – scary, NO ONE I know sends their kids to these schools
• Water purification and supply – EVERY house has their own water purifier
• Hospitals – if by hospital you mean a place to get urgent care, then don’t visit a BMC hospital
• Street lighting – drive from Bandra to Mahim at midnight on the main road
• Maintenance of parks and open spaces – What parks are they talking about?
• Sewage treatment and disposal – right into the ocean
• Garbage disposal and street cleanliness – HAHA

Anyways, you get the point. 

I keep referring to the BMC but in reality the name was changed several years back to MCGM (Municipal Corporation of Greater Mumbai) but 99% of the population still refer to it as the BMC.  Either way the acronyms have their own meaning:

BMC – Badly Maintained City
MCGM – Maharashtrians Can’t Govern Mumbai

And where does the head honcho of this organization stay – Carmichael Road (aka M.L. Dahanukar Marg).

People use the newspaper as a source of information but if you were looking to buy property in Bombay the papers were of no use. Below are two recent front page headlines:

Friday, May 2nd (Times of India) – Flat prices frozen till Diwali
Saturday, May 3rd (DNA) – Property prices head south, fall of 15-20%

The Times of India article indicates that an informal agreement was in place between the local builders to keep rates at current levels.  The undertone of the article is “buy now, why wait till October because the rates will be the same” if people really believe that they have no clue what is happening in the global property market.  Rates will fall in Bombay, the question is how much and how quickly.

Pujit Agarwal of Orbit Corporation the company behind the Arya building shown was quoted 24 hours later in the DNA newspaper. He said rates have fallen 15-20% in certain parts of Bombay such as Lower Parel and Santa Cruz and as much as 30% in places beyond Kandivli and Borivli. 

Amazing how quickly things turn in the Indian property market…or more appropriately how useless the local newspapers are for anything.

I wrote about Mukesh Ambani’s monster home called Antilla back in June 2007.  At that time I mentioned the house was “estimated at USD 1 billion dollars – that figure is definitely way off.” I was right, in the latest Forbes magazine there is talk the house (if you can call it that) will be closer to USD 2 Billion (Rs. 8,000 CR) not the paltry billion dollars.

The renderings in the Forbes article of Antilla are pretty cool looking, based on some pictures I took over the past week the structure is ONLY 50% complete as compared to the renderings. 

Click for pictures of the current status of Antilla as it’s being constructed.