How India Avoided a Crisis

How India Avoided a Crisis
By JOE NOCERA
MUMBAI

How could USA has brought so much trouble on Americans, and the rest of the world, by acting in such an obviously foolhardy manner?
Didn’t USA banking system understand that they can’t lend money to people who lack the means to pay it back?
Like most Americans, I didn’t have any good answers. It was a bubble.

Chandra Kochhar, ICICI
“In India, we never had anything close to the sub-prime loan,”
“All lending to individuals is based on their income. That is a big difference between USA banking system and ours.”
“Indian banks are not levered like American banks. Capital ratios are 12 and 13 percent, instead of 7 or 8 percent. All those exotic structures like C.D.O. and securitizations are a very tiny part of our banking system. So a lot of the temptations didn’t exist.”



Deepak Parekh, HDFC
“We don’t do interest-only or subprime loans. When the bubble was going on;
we did not change any of our policies.
We did not change any of our systems.
We did not change our thought process.
We never gave more money to a borrower because the value of the house had gone up.Citibank has a few home equity loans, but most banks in India don’t make those kinds of loans.
Our nonperforming loans are less than 1 percent.”

So why did the Indian banks stay on the sidelines and avoid most of the pain that has been suffered by the big American banks?

Cultural Reasons:
1. Indians are simply not as comfortable with credit as Americans.

2. A lot of Indians, when you push them, will say that if you spend more than you earn, you will get in trouble. Americans spent more than they earned.

3. Savings are important as Joint families exist. When one son moves out, the family helps them. So you don’t borrow so much from the bank.

Banking Regulation:
1. Even mortgage loans tend to have down payments in India that are a third of the purchase price, a far cry from the United States, where 20 percent is the new norm.
2. But there was also another factor, perhaps the most important of all. India had a bank regulator who was the anti-Greenspan.” Dr. V. Y. Reddy, The governor of the Reserve Bank of India.

Sense of Duty:

Mr. Reddy, who took office in 2003 and stepped down this past September, it had exactly the right man in the right job at the right time. “He basically believed that if bankers were given the opportunity to sin, they would sin,” For all the bankers’ talk about their higher lending standards, the truth is that Mr. Reddy made them even more stringent during the bubble. Unlike Alan Greenspan, who didn’t believe it was his job to even point out bubbles, much less try to deflate them, Mr. Reddy saw his job as making sure Indian banks did not get too caught up in the bubble mentality. About two years ago, he started sensing that real estate, in particular, had entered bubble territory.
Attack on Land/Real Estate Loan:
One of the first moves he made was to ban the use of bank loans for the purchase of raw land, which was skyrocketing. Only when the developer was about to commence building could the bank get involved — and then only to make construction loans.

Restriction on Derivatives:

Then, as securitizations and derivatives gained increasing prominence in the world’s financial system, the Reserve Bank of India sharply curtailed their use in the country.

Restriction of Off Balance sheet Adjustments:
When Mr. Reddy saw American banks setting up off-balance-sheet vehicles to hide debt, he essentially banned them in India. As a result, banks in India wound up holding onto the loans they made to customers. On the one hand, this meant they made fewer loans than their American counterparts because they couldn’t sell off the loans to Wall Street in securitizations. On the other hand, it meant they still had the incentive — as American banks did not — to see those loans paid back.

Increase in interest rate and other measures on Real estate Loan:

Seeing inflation on the horizon, Mr. Reddy pushed interest rates up to more than 20 percent, which of course dampened the housing frenzy. He increased risk weightings on commercial buildings and shopping mall construction, doubling the amount of capital banks were required to hold in reserve in case things went awry.

Capital adequecy Norms:

He made banks put aside extra capital for every loan they made. In effect, Mr. Reddy was creating liquidity even before there was a global liquidity crisis.

Did India’s bankers stand up to applaud Mr. Reddy as he was making these moves?

Indian Bankers Opinions:

Of course not. They were naturally furious, just as American bankers would have been if Mr. Greenspan had been more active. Their regulator was holding them back, constraining their growth! Mr. Parekh told that while he had been saying for some time that Indian real estate was in bubble territory, he was still unhappy with the rules imposed by Mr. Reddy. “We were critical of the central bank,” he said. “We thought these were harsh measures.” “For a while we were wondering if we were missing out on something,” said Ms. Kochhar of Icici. Banks in the United States seemed to have come up with some magical new formula for making money: make loans that required no down payment and little in the way of verification — and post instant, short-term, profits.

Outside India Manager's Opinion:

As Luis Miranda, who runs a private equity firm devoted to developing India’s infrastructure, put it: “We kept wondering if they had figured out something that we were too dense to figure out. It looked like they were smart and we were stupid.” Instead, India was the smart one, and we were the stupid ones.

Now what they Says :

Ms. Kochhar said that the underlying risks of having “a majority of loans not owned by the people who originated them” was not apparent during the bubble. Now that those risks have been made painfully clear, every banker in India realizes that Mr. Reddy did the right thing by limiting securitizations.
“At times like this, you tend to appreciate what he did more than we did at the time,” said Mr. Kapoor.
“He saved us,” added Mr. Parekh.

The ultimate Result:

1. As the credit crisis has spread these past months, no Indian bank has come close to failing the way so many United States and European financial institutions have.
2. None have required the kind of emergency injections of capital that Western banks have needed.
3. None have had the huge write-downs that were par for the course in the West.
4. As the bubble has burst, which lenders have taken the hit? Why, the private equity and hedge fund lenders who had been so eager to finance land development. Us, in others words, rather than them. Why is that not a surprise?

Mr. Kapoor, Yes Bank: on “what had happened in the United States then” , he replied:
1. “We recognize it as a problem of plenty.

2. It was perpetuated by greedy bankers, whether investment bankers or commercial bankers.” 3. “The greed to make money is the impression it has made here.”

4. “Anytime they wanted a loan, people just dipped into their home A.T.M.”
5. “It was like money was on call.”
6. So it was. And USA regulators, unlike Indians, just stood by and let it happen.

lesson Learnt:

The next time USA moving into bubble territory, perhaps they can take a page from Mr. Reddy’s book — sometimes it’s better to apply the brakes too early than too late. Or, as was the case with Mr. Greenspan, not at all.

उसकी टोपी इसके सरपे - अमेरिका का सबसे बड़ा फ्रौड़

What do George Carlin and Bernard Madoff have in common?

The late comedian immortalized oxymorons, those absurd word pairs like "jumbo shrimp" and "military intelligence." Mr. Madoff just put the silliest of all financial oxymorons into the spotlight: "sophisticated investor."

The accounts managed by Bernard L. Madoff Investment Securities LLC reported gains of roughly 1% a month like clockwork, with nary a loss, for two decades. Why did that freakishly smooth return not set off alarms among current and prospective investors?
Of all people, sophisticated investors like Mr। Madoff's clients should know that if something sounds too good to be true, then it's not. But they believed it anyway. Why?

Mr Madoff emphasized secrecy, lending his investment accounts a mysterious allure and sense of exclusivity

The initial marketing often was in the hands of what one source described as "a macher" (the Yiddish term for a big shot). At the country club or another exclusive rendezvous, the macher would brag, "I've got my money invested with Madoff and he's doing really well."

When his listener expressed interest, the macher would reply, "You can't get in unless you're invited...but I can probably get you in."

Strategy : A triple-threat combination. :- Influence: Science and Practice
Makes investors feel that it is

==> The inherent domain of people who know more than we do.
==> This uncertainty leads us to look for social proof: evidence that other people we trust have already decided to invest.
==> And by playing up how exclusive his funds were

==> Hedge fund shifts investors' fears from
==> From risk that they might lose money
==> To the risk they might lose out on making money.

==> If you did get invited in, then you were anointed a member of this particular club of "sophisticated investors."
==> Once someone you respect went out of his way to grant you access, it would seem almost an "insult" to do any further investigation.
==> Hedge fund manager also are known to throw investors out of his funds for asking too many questions, so no one wanted to rock the boat.

==> This members-only feeling blinded many buyers of Manager’s funds to the numerous red flags fluttering around his operation.
==> When you are in an exclusive private club, you do not go rummaging around in the kitchen to make sure that the health code is being followed.

Here we have the biggest dirty secret of the "sophisticated investor"

Last year, the Greenwich Roundtable, a nonprofit that researches alternative investments, conducted a survey of consultants. It's hard to imagine a more sophisticated crowd.

==>One out of five investors in the survey reported that they "always follow" not a formal checklist or analytical procedure, but rather "an informal process" of due diligence.
That's for sure.
==> One out of four investors surveyed will write a check without having studied the financial statements of the fund.
==> Nearly one in three will not always run a background check on fund managers; 6% may not even read the prospectus before ever committing money.

"Due diligence, is the art of asking good questions." It's also the art of not taking answers on faith."

If you invest with anyone who claims ;
==> never to lose money,
==> reports amazingly smooth returns,
==>will not explain his strategy,
==> Refuses to disclose basic information
==> discuss potential risks, you're not sophisticated. You're an oxymoron.

Two years ago, at a hedge-fund conference in New York, attendees were asked to name some of their favorite and most-respected hedge-fund managers. Neither George Soros nor Julian Robertson merited a single mention. But one manager received lavish praise: Bernard Madoff.

Folks on Wall Street know Bernie Madoff well. His brokerage firm, Madoff Securities, helped kick-start the Nasdaq Stock Market in the early 1970s and is now one of the top three market makers in Nasdaq stocks. Madoff Securities is also the third-largest firm matching buyers and sellers of New York Stock Exchange-listed securities.

New potential victims emerged of Wall Street veteran Bernard Madoff's alleged giant Ponzi scheme, with international banks, hedge funds and wealthy private investors among those sorting out what could amount to tens of billions of dollars in losses.
________________________________________________
New York Mets owner Fred Wilpon, GMAC LLC Chairman J. Ezra Merkin and former Philadelphia Eagles owner Norman Braman were among the dozens of seemingly sophisticated investors who placed money on what could prove to be history's largest financial scam.
Giant French bank BNP Paribas, Tokyo-based Nomura Holdings Inc. and Neue Privat Bank in Zurich are also exposed, according to people familiar with the matter.

And at least three funds of hedge funds -- which raise money from investors and farm it out to hedge funds -- may have significant losses. Fairfield Greenwich Group and Tremont Capital Management of New York placed hundreds of millions of their investors' dollars into funds overseen by Mr. Madoff. On Friday, Maxam Capital Management LLC reported a combined loss of $280 million on funds they had invested with Mr. Madoff.

"I'm wiped out," said Sandra Manzke, Maxam's founder and chairman. The Darien, Conn., fund of hedge funds will have to close as a result of the losses, she said.

Mr. Madoff was arrested and charged Thursday. Prosecutors allege that the 70-year-old Mr. Madoff hid losses, paying certain investors returns using principal he received from other investors. (Iski Topi Uske sirpe)

Prosecutors and regulators have yet to determine how much has been lost, or the amount in assets still held by Mr. Madoff's business.

The alleged fraud has "swept up some of the most prominent and wealthy Americans, along with many people who thought they were embarking on a comfortable retirement and have now been left destitute

Seeger Weiss LLP represents more than 30 investors with losses they believe could total more than $1 billion.

In criminal and civil complaints, Mr. Madoff is quoted as saying the losses could amount to $50 billion.

Details emerged Friday of how Mr. Madoff ran the alleged scam, fostering a veneer of exclusivity and creating an A-list of investors that became his most powerful marketing tool. From New York and Florida to Minnesota and Texas, the money manager became an insider's choice among well-heeled investors seeking steady returns.

By hiring unofficial agents, tapping into elite country clubs and creating "invitation only" policies for investors, he recruited a steady stream of new clients.

During golf-course and cocktail-party banter, Mr. Madoff's name frequently surfaced as a money manager who could consistently deliver high returns. Older, Jewish investors called Mr. Madoff " 'the Jewish bond,' " says Ken Phillips, head of a Boulder, Colo., investment firm. "It paid 8% to 12%, every year, no matter what."
As his reputation grew, Mr. Madoff gained the trust of prominent businessmen, including ex-Eagles owner Mr. Braman, who owns a chain of Florida auto dealers. A voicemail message left with Mr. Braman's office was not immediately returned.

Mets owner Mr. Wilpon, who also owns real-estate investor Sterling Equities, often raved about Mr. Madoff's investment prowess and invested tens of millions of dollars of both his own money and the team's with his company, say financiers who have worked with him.

Mr. Madoff handled investments for the Judy & Fred Wilpon Family Foundation, which distributed about $1 million a year in 2005 and 2006 to charities, according to its most recent federal tax returns..

Mr. Wilpon's Sterling Equities said in a statement: "We are shocked by recent events and, like all investors, will continue to monitor the situation."

Mr. Merkin, the chairman of former General Motors Corp. financing arm GMAC, which had $1.8 billion under management as of Sept. 30, had substantially all of its assets invested with Mr. Madoff.
Mr. Merkin said he had personally "suffered major losses from this catastrophe."

Mr. Madoff tapped social networks in Dallas, Chicago, Boston and Minneapolis. In Minnesota, he attracted investors from Hillcrest Golf Club of St. Paul and Oak Ridge Country Club in Hopkins, investors say.

One of them estimated that investors from the two clubs may have invested more than $100 million combined.

One of the largest clusters of Madoff investors was in Florida, where losses could be substantial. Mr. Madoff relied on a network of friends, family and business colleagues to attract investors. According to investors and agents, some of these agents were paid commissions for harvesting investors. Others had separate, lucrative business relationships with Mr. Madoff.

"If you were eating lunch at the club or golfing, everyone was always talking about how Madoff was making them all this money," one investor says. "Everyone wanted to sign up."

Jeff Fischer, a top divorce attorney in Palm Beach, says many of his clients were also Mr. Madoff's clients. "Every big divorce that came through my office had portfolio positions with Madoff," he says.

Two of his investors said that among his clients, Mr. Madoff was considered a money-management legend; they would joke that if Mr. Madoff was a fraud, he'd take down half the world with him.

Richard Spring, a Boca Raton resident and former securities analyst, says he had about $11 million -- or 95% of his net worth -- invested with Mr. Madoff. "That's how much I believed in him," Mr. Spring said.

Current Recession

5:18 PM
Uday : U tell me sir how the life is going & how u cn visalise next 2 yrs time period overall ?
Me : see everything is good, for that particular point of time, Today is good and tomorrow will be too, for me ... everyday are fine ...I’m little bit recession and inflation proof, as my desire is limited but coming days are tough for those who were greedy in nature.

5:21 PM
Uday : anhhhh ..
Me : and the era has not yet started I foresee 4 years in row like this

Uday : 4 yrs ????????///
Me : till 2012 see every country says they have bailout falana ..dhikana...but money is virtual money not real ... it depends on the volume how much real money comes in the hands of people who are ready to spend again ...on the goods and commodities.

5:24 PM
Uday : yes
Me :this is a very joking situation where the world's economist do leads the world to. These steps are not fruitful in near future. It will take at least 3-4 year to bring the result.
These are very liberal steps taken to help those who have given political contributions to the parties in the first instance. Public will get benefited from these steps later on provided these people decides to pass some of the benefits to the public.

5:30 PM
Uday :I got it ... its all a game.
Me :somewhat
Uday :and people are befooled in name of rescue packages .
Me :yes, This happened only due to uncontrolled economy which western country insisted through several International agreements... “Greedy Capitalism”. It was true that when you are following capitalism then strictly follow it. You should not bailout those who have been hanged out due to their Greediness.

Uday :Yes, last month in our board meeting the former president of Munich stock exchagne, Germany informed us the same thing that there are two things that guide this world .. greed and fear ..

Me :Why Govt. should spend money to rescue them as if they were the savior of the world.
Uday :that’s true
Me :Till today, in every economist book for capitalism, there were no topics of Bailout for industry. Else there were assumptions that economy itself react and world believed in its own mechanism. It is their fault and let them suffer, otherwise world will never able to write correction chapter to the capitalism, a chapter missed till days.

5:35 PM
Me : From the day one, Capitalism had this limitation. It never accepted the fact that people are greedy. Hence nobody had written a chapter to save economy from the result of such greediness.
Uday :Now, so it is the time to witness its effect to the full extent and hence we can write a true chapter to save the world from capitalism.
Me :No dear, there is no necessity to save the world from Capitalism, else it is time to remold it. But I fear, I doubt the true intension of the great leaders of the great countries. They are feared for their political contribution from the industry and hence will not follow the capitalism itself and shall write a biggest white corruption chapter of the mankind history instead. Ok Dear , I have to leave C U.