Wednesday, October 22, 2008

I Got There First!

Thenewgegrotius on October 13, 2008 had advocated that the ECB Norms be eased; well, the revised and liberalised ECB policy is out and there is secular raising of the "All in cost" ceiling. For borrowing from 3-5 years, the raise is by 100 Bps; For the mezzanine slab that is from 5-7, the raise is 150 Bps and the longer maturity slab too has been upped by 50 Bps to 500 Bps.
Now you know why it should help to read me more often. Cheers!

Friday, October 17, 2008

The Curious Case Of "Going Forward"

You hear this phrase when you tune in to CNBC often, Dont you? "Going Forward Mr..... Where Do you see the Market Bottoming Out?" Or may be, "Going Forward, we see a lot of opportunities in ........ space";
My guesstimate is that "Going Forward" and "Upfront" could be the most used terms daily in the Business Circles. So, this post musing about these peculiarly "Finglish" term... " Going Forward"

Let me like put up a list at why " Going Forward" could be so frequently used one.

(you sure know that there is no lack of these "Heuristics" for a finance guy. Take your pick from " Corporate action", "Deal" etc etc.)

1. Think "Going Forward" gives the person a sense of security amidst volatility; When you are uncertain about the time, When the interviewer asks you to take a directional call and you have no clue, you invariably say, "Going Forward...." So, in Structured finance parlance, its like "hedging" yourself against uncertainty ( Much like you buying Options, a volatility product)!

2. It has a lot of strategic sense; generally, you will find this term in MDA section; where the management is tryin to comply and yet not comply :) ( you know, that can be done, So, this is not an Epigram)! So, you want to fool your owners and yet not be held laible in Derivative suit litigations, you use "Going Forward".

3. It is suitably democratic! in the sense that, even if you are a journalist who has little or no exposure to finance earlier but still want to sound as one of the gang, you blurt, "Going Forward. to my mind......." basically, going forward ensures that you have safe haven to park your ignorance in and yet sound meaningful as a prophet.

Gtg Now guys! Bye 4 now... BTW, Going forward, it does look like a lotta posts are coming your way from thenewagegrotius....

Tuesday, October 14, 2008

By The Way....

Dani Rodrik makes this interesting point in his October 12 post and places the cause of recent Credit squeeze at the doors of the United States treasury not bailing out Lehman Brothers Holdings. Rodrik contends that the treasury should have bailed out Lehman as immediately after that decision Short term paper spreads rose beyond reason and credit markets seized up. Rodrik cautions there is another "Perfect Storm" coming our way. the whole piece can be read here.

Monday, October 13, 2008

ECB Norms Should Be Eased

hmmm.. thenewgrotius believes another 50 basis point rate cut is in order so far as the CRR is concerned...Anywayz, given that we are still on course for a 7% growth this fiscal, and given that there are little concerns for the real sector as such, think its high time that the RBI and the Finmin take tweaking the ECB " All in cost" seriously. At present, the " All in cost" ceilings are pegged at too low a level to make the ECB window meaningful for Corporates;
The ECB all in cost for a borrowing with a Average maturity of 3-5 years is pegged at 200 basis points above the six month LIBOR. And the same for the Average maturity bracket of 5 year onwards is pegged at 350 basis points above the Six month LIBOR. As we know the ECB end-use includes acquisitions overseas. With recession looming in US, Inorganic growth options have opened up for EM Corporates. But Given the global liquidity crunch, Borrowings have become dearer with the result that it is difficult to peg the "All in Cost" (which besides the Coupon payable, includes all that is foreign exchange expenditure including fees to keep the Credit lines open and other fees payable in foreign exchange).
What that means is opportunities of inorganic growth westwards are denied in times when valuations are dirt cheap! It is time to increase the "All in cost" to make it in sync with the global realities and facilitate domestic expansion and overseas acquisitions...

Friday, October 10, 2008

In The Mean While....

A full 100 basis point cut! Surely if this does not expand demand, nothing will! Anyway, For all those who have exposure to ICICI stock, my commiserations! But am told the stock has not seen bottom yet. Must say the RBI measure of cutting CRR might shore it up; For now, Chanda Kochhar's assurance yesterday seems to be of no avail.

Should The RBI Cut Rates?

The TOI today carries an interesting poll question; Should India follow the US and the EU and cut rates. I am not too sure the ayes and the nays generated from such polls carry any weight, but the question is nonetheless thought provoking. Should we follow suit? Here are a few reasons why we should NOT FOLLOW SUIT;
1. For starters, the real sector in India is not facing recessionary expectations as the real sector in the US is; the US is hardly keeping up to its 2 % GDP growth whereas we are relatively beter off even with the revised conservative estimates of say around 7%. Rate cuts make sense in a recessionary universe to try and up the growth; Our real sector (with the exception of Realty, where prices were due for correction anyway) are doing well.
2. We should be vary of inflationary pressures; yes, even with crude showing a downward bias in recent times, we are not out of the inflationary rut. Inflation demands monetary tightening to the extent possible , because injecting liquidity in the market means more money chases limited supply of goods, we are better off without the rate cut for now. the CRR cut of 50 basis points ( that will be effective from the week starting October 11th), is good for now. Indirectly, it creates liquidity and therefore incentives demand and that has positive implications for growth. Think this should be enough for now.
3. We should be conservative so far as financials are concerned for now; rate cuts might make the Share holders of the ( battered) Banking Cos. happy and a HDFC or an ICICI scrip may look up, but that might lull the banks in to lending aggressively ( in order to cover up the earlier losses), that way the Economy risks accumalation of bad debts in the longer run. We are nowhere nearer to having a good bankruptcy law in plac; So it is better to play safe than sorry.
4. The Fed Res policy of cutting rates has more to do with bridging the trust deficit that has manifested in recent times than with sound fundamentals; the catch is, if they dont do anything about the meltdown, Bernanke would be "Nero who fiddled while Rome burned"; So, they should be seen to do something to shore up growth. On the other hand, the Fed Res has only limited space in manipulating this policy tool ( the threat of Inflation rules out cuts in the 0- sub zero range). Its more to invoke a " At least they tried" response from the tax payer, who is ultimately goin to bear the burden. We are better off without following this inarticulated measure; (the truth is, the Fed Res should sit back and let the loss lie where it should. The FDIC and not the Fed Res should be more of a player these days in the US).
Let us see what the new Governor does; He is not seen to be as conservative as Mr. Reddy was; Am punting on a status quo though
Ciao for now!

Wednesday, October 8, 2008

The Sub Prime Primer
Visit the link aforementioned. Its an amazingly lucid take on the Sub Prime saga.

Friday, October 3, 2008


Hmmm... Its been a long long time since I posted the last one; which was around the time Bear Stearns had fallen; Now Wall Street has seen another biggie fall and Another taken over yet another nationalised. Reason enough for the newagegrotius to wake from his Slumber. The newagegrotius sadly notes the end of an era at Wall Street and let us hope some sanity is restored in this new ( hopefully more regulated! ) era.

As Always then the Big Bear Buffet has the last laugh. In his letter to the shareholders of Berkshire Hathaway, he had labelled financial Derivatives "Weapons Of Mass Destruction" and how true his words were! I am sure a lot of you might want to decode the info on CLOs and CDOs and CDS. But random Googling will only lead you to jargon and more jargon; Thenewagegrotius believes in Democratizing the World Of Structured Finance and so this attempt to explain the logic behind the jargon that CLO, CDO, CDS has become in plain English!
Let us take the simplest first:
CDS aka Credit Default Swap:-
This is innovation on the Standard Securitisation Structure with one diffrence in that the reference asset is not transferred from the books of the originator and the risk of the asset defaulting is transferred merely; the buyer of Protection pays a premium to the seller of the protection. ( A bit like Insurance, this solution is, with one major diffrence that is the buyer need not have any " insurable interest"in reference asset he is buying). The "Insurance" is brought on a notional principal and the premium is paid thereon. On Default ( the trigger event could be liquidation, reorganisation bankruptcy of the reference asset ( in plain English, the Borrower Co.). , the buyer sells the reference asset to the seller of Protection or the seller pays the loss to the buyer.
These Swaps are a good portfolio diversification device and also a way to work around regulatory capital requirements. This may be illustrated as follows:
Say Financial Institution has heavy exposure to Steel and wants to increase its exposure to another space, say retail loans ; it simply sells protection to the FI active in the retail loan Space and itself buys protection on its Steel heavy Portfolio. It transfers its risk on the Steel space and hence does not have to make provisioning for that space; Since it is selling protection on the retail loan space, its like synthetically creating exposure in the retail loan segment. Thus it has now to provide for the loan default on the retail loan segment. In effect therefore, the portfolio is no longer comprising merely of Steel Sector, it is inclusive of retail Space as well. Thus the FI has achieved portfolio diversification without actually lending to the retail Space. Also note that since the loans in the Steel sector are already provided for, ( the risk of default is transferred to the seller ofProtection), the provisioning for the same need not be done. this frees regulatory capital and allows the FI to create more assets. This is the way a vanilla CDS functions. more exotic versions exist; but this is the most used Credit Derivative.
CDO aka Collateralised Debt Obligations:-
A CDO issues securities to the investors and itself invests in a portfolio of assets. This portfolio is called the reference portfolio and may comprise of basket of reference assets like Loans, bonds; ( if the underlying is loan, it is termed "CLO");Sometimes the reference asset may be a CDS ( what this means is that the CDO will sell protection to the buyer for a receivable ; as we saw earlier this is the " Premium"). The receivables on the portfolio are used to redeem its own Securities and to pay coupon on them. So, a CDO is not unlike a bank that lends long , borrows Short and pockets the coupon Difference.
Generally, the Manager of CDO will slice the securities in different classes ( called " tranching"); Senior, First Class, Second Class and the last equity layer. the higher layer security holders are protected and get a correspondingly lower coupon and the later tranche holders carry a proportionately higher coupon to compensate for riskier exposure that they take. The reference asset(s) are a basket that should ideally have low Co relation ( Co relation signifies the probability that one reference asset will default given that one reference asset has defaulted; Obviously, if the reference basket has assets from same sector or related sectors, there is high probability that if one defaults, the other defaults; therefore Ideally, the reference basket should be diversified. It is clearly inferred however that the equity tranche holders will prefer high Co relation because of the higher coupon that it carries as High Co relation port folios are more volatile for obvious reasons and the senior tranche holders will prefer low Co relation).
More on CDOs will follow but for now the newagegrotius will take your leave!