Sunday, February 24, 2008

Not Such A Rock Anymore!

It’s been three weeks since I posted the last one. The past weeks have seen lull in capital markets In India followed by a slight rally. The budget is a bit of red herring really; I am still punting on a non-populist budget; (there is another one next year before the Country goes to polls, I reckon the populism would be saved for then!)
Across the frontiers, the world of finance especially Banking is passing through quite a turbulent time; what with trouble brewing both sides of English Channel!
On the English side the saga seems to be nearing completion with the Chancellor taking the decision to nationalize the troubled Rock.
Such nationalization is quite rare in England that has taken pride in its Darwinian traditions and in the past has let the most prestigious symbols of British finance to die when it became clear that their death would not have any systemic effects; (remember Barings). Two issues need to be high lighted.
Firstly does Northern Rock have a claim over the assets it hived off to Granite via a securitisation deal?
While nationalization undoubtedly hurts the shareholders ( it should), if the nationalized institution does not have strong portfolio, it pinches the tax payer as well. (In the case of Northern Rock, the Government is all along maintaining that the mortgage lender has a strong asset base- A Claim that might not stand scrutiny. In fact, the bank has hived off its best assets to SPV Granite through securitisation. Which means that entity is bankruptcy remote and it cannot be affected by the bankruptcy of Northern Rock, the originator). If its a true sale, (such transactions generally are) the entire port folio is lost; although technically, the SPV has no assets to manage and is a mere conduit. Equitable doctrines might thus fetch Northern Rock its strongest portfolio.

There is an additional perspective to State intervention, the one having anti trust implications- If Northern Rock is going to run by the state, this acts as an incentive for the depositors to park the funds with it. This has anti competitive effects and tends to create a monopoly for the bank as the “ State Run” tag acts as an implicit Credit enhancement. Clearly other mortgage lenders are not amused. To my mind, it does look that the Authorities might find themselves foul of the “Promote Competition” covenant of EU law.

Clearly we are not through yet. Watch this Space!

Sunday, February 3, 2008

Is YV A Party Pooper?

Hmm, I am posting this a good 13 days after the last post. So, there is a lot to talk about. In the meantime, "Big Bull Bernanke" has cut interest rates ( confirming that the United States is indeed in a recession cycle), Y.V. Reddy has maintained them steady; Societe Generale has been given a lesson by " Leeson II"; and the UK treasury is considering a law that will obligate Bank Of England to provide secret liquidity to Banks in the red so that any possibility of a bank run is foreclosed.

This post am goin to talk about the recently unveiled review of monetary policy of the Reserve Bank. The policy came " against the run of play" so to speak, everone including the Finance Ministry wanted the Bank to cut rates and many punted that YV would go the "Big Ben" way. But as with most central Bankers, the Governor is a cautious man. There was no rate Cut; instead the Bank adopted a policy of moral suasion to convince Banks to lend more.( at present excess liquidity that Banks have is invested in low yield low Risk government securities).

The message is clear enough.Inflation is low because of the artificial suppressing of oil prices. Inflationary tendencies and curbing them is topmost priority. With the OPEC indicating thst it would oppose any demand for more oil in the markets, oil prices will continue to spiral and money would be required to service that.

In the process, the central Bank also underlined its autonomy from pressures of the Finance Ministry ( populist measures like Rate cuts will win you votes and Brownies, but "its the Economy stupid!"that is more important) and its emphasis to fashion itself based on Indian conditions. Yours truly also thought that the Bank would take a leaf out of fed's book but was (thankfully) proved wrong.

That does mean lull in Realty and Banking stocks. ( these are rate sensitive industries) hitherto the former has been providing momentum. But this is small price to pay for a more stable financial system in the long term.

So, is YV the party pooper? Only a fool would say that.