Credit Risk-y Business

buy_buy.png Its been a crazy two weeks in the financial markets, let’s recap:

– SocGen announces a USD 7.1 billion fraud in plain vanilla Euro indexes
– Euro markets fall on Jan 21-22, maybe due to SocGen unwinding those positions
– The Fed reacts to the falling European markets with an emergency 75bps rate cut before the markets open on Tuesday (Monday was a holiday b/c of MLK)
– 450,000 homes foreclosed in 2007 (as a reference in 2006, the top 10 homes builders built a combined 250,000 homes)
– 60 Minutes has a segment titled “House of Cards” – describing the subprime mess as one big ponzi scheme
– UBS announced a USD 14 billion subprime write-down
– Another Fed rate cut, this one is 50bps (a total of 125bps in 10 days)
– The monoline insurer MBIA announced a USD 3.5 billion subprime write-down
– US GDP growth was 2.2% for 2007
– Jobless claims surge 69,000, biggest jump since Katrina

Damn…and I’m sure I’m missing some stuff.

Yes, one of the biggest asset bubbles has sadly come to an end. Who is to blame for the bubble? I wish it was easy to pinpoint, but really everyone involved had some blame – homeowners, mortgage brokers, mortgage lenders, investment banks, rating agencies and the investors buying the mortgage backed securities.

However, most of the blame falls on the doorstep of the homeowners. I can partly sympathize with them because between 2004-2006 the only talk in town was about getting a house – THE American Dream. During the summer of 2005 it reached fever pitch and almost unbearable – “renting is stupid, house prices will always go up, tax deductions for homeowners”, etc…

But in the end no one forced homeowners to sign on the dotted line except for fear of missing out on THE American Dream – which like everything else in America is built on credit.

What is $7.14 Billion?

socgen_logo.gifThe amount that Soc Gen should have told analysts was due to write-off’s related to subprime loans. Instead Soc Gen CEO Daniel Bouton insisted the USD 7.14 billion fraud was due to a single trader using “plain vanilla” hedges on European stock-market indexes, whatever.

Personally, if they would have said subprime losses it would have sucked but this just makes it worse. You mean one guy can rack up over USD 7 billion in losses and not one person noticed within Soc Gen?  Maybe the risk managers were too busy evaluating risk on CDO squared products.

What’s even funnier about this whole situation is that Risk magazine (yeah, about as exciting as watching paint dry) just award Soc Gen as the Equity Derivatives House of the Year for their risk management.

UnBEARable India

marketmeltdown248.jpgBy now, I’m sure you’ve seen that the Indian markets are getting knee-capped and it ain’t fun. It’s part of the global sell off that is happening as we speak.

When the Sensex opened on Tuesday at 9:55am it was halted within 35 seconds by then the markets fell 10% – which is around 1700 points. When it reopened it fell another 600 points.

But that’s not the point of this post, it’s more about the talking heads on CNBC and the level of hubris being shown. Let’s rewind back to Monday:

Monday morning:
Markets: Sensex down 600
CNBC: What’s happening in the US doesn’t affect India so people should continue to buy on this dip (what happened to the world is flat concept?)

Monday evening:
Markets: Sensex closes down 1395 points
CNBC: Several major Indian brokerage firms (including Enam, Edelweiss and Motilal Oswal) were telling investors to buy (why? oh I’m guessing it has something to do with commissions)

Tuesday morning:
Markets: Before the Sensex opens, all of Asia is down
CNBC: Now is the time to buy as the fundamentals have not changed, just cheaper (whatever)

Tuesday after the open:
Markets: Sensex is halted after falling 10%
CNBC: Indian Finance Minister urges people to buy, as the India story is fine (please can someone re-tell me that India story)

Tuesday during market hours:
Markets: Market is more volatile then Mike Tyson at a beauty pagent
CNBC: People should buy, since the markets are off their lows of the day

Tuesday after the market closes:
Markets: Sensex is down 875
CNBC: 36% of the people polled feel the bottom is here (and sample size of the poll? 11 – yes eleven frikken’ people)

Bottom line, I would NOT buy, just hold tight and wait for more carnage to follow. If I’m wrong, big deal you might miss a 4-6% run.

p.s. The post of the title is a play on the Indian Tourism Board marketing campaign – “Incredible India

Stan O'No Neal

stanoneal.pngStanley “Stan” O’Neal joined Merrill Lynch in 1986 and after various positions took he over as CEO and Chairman of Merrill Lynch in 2003. Net profit for each year he was CEO:

2003 – USD 3.8B
2004 – USD 4.4B
2005 – USD 5.2B
2006 – USD 7.5B
2007 – USD -7.8B (yes, that’s a rather large negative)

In the 4 years he ran ML he racked up USD 20.9B in net profit, which is very commendable. Then came 2007 and the year of the subprime. Stan blew a massive negative USD 16.7B hole in the balance sheet for write-down’s related to subprime loans. ML ended 2007 with a net loss of USD -7.8B.

Stan decided to exit ML after the subprime debacle. His compensation for 2007 was USD 161.5 million.

2008 Mumbai Marathon

2008_mumbai_marathon.pngI’ve been training for about 10 weeks for the half marathon (21km) in Mumbai. I’ve jogged over 170km over those 10 weeks mainly on Marine Drive. I ended up finishing the half-marathon in 2 hours and 16 minutes, which is exactly the same time I had during the 2006 Mumbai Marathon.

After finishing the race I met several people from Chennai, Bangalore and Delhi and they all said the Mumbai Marathon was the most fun to run. Not sure if they were just being polite but they all mentioned the same thing: the residents of Bombay that lined the streets cheering runners on made it worth the effort.

Click here to see the route of the half-marathon via Google Maps. Pics of me.

Incredible Power Offering (IPO)

Wow, is all I can say. The Reliance Power IPO was fully subscribed in 60 seconds, around USD 3 billion was snapped up in seconds. As of Wednesday night the over subscription is running at 14x. The average retail investor is expected to get around 40 shares at Rs 450, for a total cash outlay of Rs 18,000 (USD 450).

They have run a full blown ad campaign taking up billboards all over Bombay, TV ads, lighted balloons on Marine Drive, etc. Check out the ad above, seconds into it you see instructions to download the “Power IPO” song as a ringtone. I’ve called a couple people who actually have their ringtone set to this, yet more advertising for Anil and Co.

Power On – as the ad campaign says.

Business Ideas

s0105150_enl.jpgAfter being in India for a couple of years, I tend to look around and notice things that potentially might work from a business angle. Although many of the things I’d like to see are around efficient process flows, below are several ideas that are not necessarily game changers but still have large appeal.

1. Consumers Union, publisher of Consumer Reports, which does independent testing of products and services. Currently everything is driven by PR firms and product placements, there is no objective way to find the benefits of a product/service unless talking to people.

2. for Bollywood. Currently the media and Bollywood have a cozy symbiotic relationship. I’m not a fan of Bollywood and I despise how they drop into the media whenever they are pimping their new movie. Every time Shahrukh gets on TV you can bet he’s releasing a new movie. This country salivates over two things: Shahrukh and the Sensex.

3. Office products chain (Office Depot/Staples). All the major big box retailers are talking about entering India, but the government is in indecision mode about foreign direct investment in retail. Starting an office products chain would be under the radar and serve the market well. In addition, it would allow a company to iron out all the delivery and supply chain issues for a potential full blown retail play.