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February 19, 2010

Wanted: Lucid, clearheaded thinking

Muddleheadedness can be costly, particularly when it obscures a clear view of the economy.

Consider this: Most business- and world- leaders, eminent economists and thought leaders failed to foresee correctly the recent upheavals in the global economy - the financial crisis of late 2008, the recession and the subsequent recovery.

However, neither the recession nor its end should have come as a surprise. I've presented detailed evidence of this claim, in a guest column in CEO World magazine last week. As I show there, the surprises happened because signals in plain sight were resolutely and repeatedly ignored !

Considering the overriding importance of the macroeconomy - it affects the livelihood of millions of people, the business prospects of thousands of companies, and often the survival of governments - this collective foresight failure is puzzling and quite unforgivable.

The good news is that, I believe, improving on this foresight deficit needs neither magic nor math (as in complex mathematical models). It doesn't need clairvoyance or crystal ball gazing. Most often a crystal clear view of what's happening in the real world, and a clear eye to discern relevant signals that are often in plain sight are good enough. But those are precisely what's lacking - obscured by siloes of professional specialization, cognitive biases, flawed 'conventional wisdom', predilections of various kinds and so forth.

I will present a more detailed analysis of the reasons behind this lack of foresight, and how a more clearhead view of the economy can be fostered in a future post.

Read the guest column, The recession has ended and other surprises.

July 2, 2009

Differentiate ERM program via responsive risk culture

Lots have been written on risk management malfunction behind the present crisis and the blame mostly has been to poor risk processes, risk infrastructure, models and resources etc. During this unprecedented market turbulence, industry has seen the collapse of some of the mighty names as well as lesser ones. Though process, control, management are key to strong risk functioning, but the GOD of all is something else. I had the opportunity attending & participating on one such session on "ERM Backlash" in capital market industry recently, the outcome of that session could clearly white-line the mother of all reasons behind poor risk function- "risk culture".

Continue reading "Differentiate ERM program via responsive risk culture" »

May 15, 2009

Bank Stress Tests - Not so Stressful?

Released last week, the long-awaited results of the “Stress Tests” conducted under the direction of the  US Treasury Secretary, Timothy Geithner,  have since been picked, prodded, lauded and criticized.  Pundits from the right, left and the center have unleashed a torrent of mixed opinions into the media and blogosphere.  With a week gone by, I thought I would table a few questions which I envisioned might strike up a lively debate:
·         Were the Stress Tests stringent enough?
·         Rather than a true test of bank health, were the Stress Tests instead a means to boost confidence in the banking system?  
·         Will the U.S. Stress Test model be emulated by other countries, especially in Western Europe?

Continue reading "Bank Stress Tests - Not so Stressful?" »

April 27, 2009

Oracle's Sun Buy: Eclipsing the Competition?

As a mammoth union changes the technology landscape, a few things to watch for

By embracing Sun, Oracle gains huge heft and extends its shadow to cover a wider swathe of the technology industry. The two companies clearly have significant synergies. But where do these synergies lie, and how will Oracle capitalize on them? Here's an analysis of a few elements of Oracle's strategy, and some implications for the industry, that any observer of the technology industry should track over the next year or two.

 

Oracle's Server Strategy

The buy gives Oracle an entree into the server business, a space where it lacks a footprint. However the server business has been getting increasingly commoditized, and this trend will accelerate as Cloud Computing gains traction. This is because Cloud Computing (CC) is inherently a large-scale operation, and CC service providers tend to be behemoths that buy up servers on a humongous scale. Oracle's server business will thus see its customers' bargaining power grow, and watch its margins being squeezed. These dropping margins and Oracle’s inexperience in the hardware business have prompted several observers to speculate that Oracle will jettison Sun’s server business. However Oracle is unlikely to do any such thing. In fact, this is where Oracle can exploit one synergy : its flagship product, the Oracle database has for long been tightly integrated with Sun's Solaris, which Larry Ellison calls "the heart of Sun's business". Oracle will need an astute bundling of servers, OS (Solaris), database and Apps to pull back margins somewhat in the non-CC market.

 

Oracle's Cloud Computing strategy

Oracle may also perhaps become a Cloud Computing provider itself, although there is no indication of such a move yet. Sun has a fledgling CC service called Sun Cloud (a title that appears oxymoronic until you realize that Sun, with characteristic flair, has given it the ingenious tag line, "Behind every cloud, you'll see the Sun" !! ). Oracle may choose to develop this service, but will have to reckon with the formidable Google, Amazon, IBM and Microsoft which are already striding this space. If it does decide to throw its hat into the CC ring with Sun Cloud, Oracle may have an advantage in that Sun Cloud is touted as being much more open than rival CC services. This will help assuage the concerns that many prospective CC customers have, of being locked-in by CC vendors. However this openness may sit uncomfortably with Oracle, which has neither shown much predilection nor strategic commitment towards openness thus far.

Ironically, buying Sun may be sending Oracle deeper into the clouds. But a strong foray into Cloud Computing may be what it takes to put the competition in the shadow.

Oracle's strategy for MySQL

Continue reading "Oracle's Sun Buy: Eclipsing the Competition?" »

April 16, 2009

The World Economy: Clear Skies Ahead?

Why we should be optimistic about the prospects for an economic recovery

Note: This piece was written on April 16th, 2009. Subsequent developments in the world economy have substanitally borne out the assertion made here that "there will be concrete signs of recovery as early as July". See details in the July 19th update at bottom of this piece.

How soon should we expect the world economy to be back on a growth trajectory? I've been following statements from a varied set of economic gurus and masters of world destiny, and have found the overall sense of pessimism quite remarkable.
Jan 13th, 2009: President Bush said in a press conference that his economic advisors believed that the economic situation could be worse than the Great Depression.
Jan 23rd, 2009: Steve Ballmer, Microsoft CEO said, “The economy could remain in the doldrums for "a year, two years..”.
Feb 14th, 2009: the G7 meeting of the Finance Ministers of the world’s most powerful countries in Rome declared that "the severe downturn will persist through 2009".
Feb 18th, 2009: The US Federal Reserve warned that “the crippled U.S. economy is even worse than thought, and would deteriorate throughout 2009”.
Mar 16th, 2009: Federal Reserve Chairman Dr. Ben Bernanke, in carefully hedged remarks on CBS 60 Minutes, said the recession will “probably” end in 2009, provided the US government’s efforts to stabilize the financial markets bore fruit.
Mar 19th, 2009:  the IMF said the world economy will shrink by 1 percent in 2009, lowering its own forecast of 0.5 percent decline made in January 2009.  It said recovery would begin only in 2010. 

While the above assertions come from people and institutions with gold-plated credentials, I believe they are overly gloomy – far more so than warranted by the evidence. There have been ample reasons to believe at least since late December that the US (and world) economy will be on a strong recovery path well before the end of 2009, and there will be concrete signs of recovery as early as July. What are the reasons for this optimism, which appears at odds to much of the expert opinion expressed by the Gurus above?

To be sure, enormous problems remain - imbalance between savings rates in the US and other countries notably China, continuing insolvency in major industries including banking and automobiles, some divergence of opinion between major powers as to how the financial crisis is to be tackled. Yet a clear-headed look at the world economy today shows a wide array of factors that give much cause for hope:

Continue reading "The World Economy: Clear Skies Ahead?" »

January 18, 2009

Good Bank - Bad Bank

What a turbulent three weeks of the New Year it has been! It began with the hope that major stock markets around the world (led by the US Dow Jones Index), were beginning to thaw. But what promised to be a sneak preview to a turn-around, rapidly changed course; over the past week, the US Banking system teetered on the brink of collapse for the third time in four months. Citi finally accepted the fait accompli that its days as a Universal Bank  were numbered. Bank of America’s much vaunted acquisition of Merrill Lynch almost came unstuck!

The US Treasury and Federal Reserve (along with the FDIC) have made multiple attempts at resuscitating the credit markets. After the TARP approach of investing in Banks’ preferred stock and (subsequently) using the back-stop guarantee mechanism, the latest thinking among US Government bureaucrats is to segregate the “bad” assets on Banks’ balance sheet from the good ones or what is popularly being termed the "Good Bank – Bad Bank" model.

Sheila Bair, Chairperson of the US FDIC , has mooted the idea of a “Bad Bank”, which would aggregate and consolidate the toxic assets on all US Banks’ balance sheets (read here) - an idea that was earlier espoused by US Federal Reserve Chairman, Ben Bernanke and is also gaining support among President-elect Obama’s economic advisors. Across the Pond, the UK Treasury Chief, Alistair Darling and his team of policy makers have been discussing a similar option, in the face of Bank stocks getting hammered on the London Stock Exchange.  UBS actually put the concept to test in November 2008, when it spun off about $ 60 Bn in toxic assets into a separate entity with $ 6 Bn in equity (the jury is still out on the efficacy of such a move – write back to me if you have more insights).

Is creating a Bad Bank the solution to the crisis? Will this help focus Government recovery efforts like the Resolution Trust Corporation (RTC), which helped tackle the US Savings and Loans (SnL)  crisis in the late ‘80s? The Washington Post has a very interesting article on the subject and suggests adopting the Swedish Bank rescue model of 1991.

Personally, I am not a very enthusiastic supporter of the Bad Bank proposition. The Swedish Bank crisis or even the US SnL disasters were events of much lesser magnitude. The US ultimately lost only about $ 150 Bn in the RTC led SnL rescue. As of today, about $ 350 Bn of TARP funds have already been deployed in battling the credit crisis, not counting the Citi and Bank of America asset guarantees of almost $ 400 Bn!

Nobel Prize winner and Economics professor at Princeton University, Paul Krugman, who is also a noted columnist for the New York Times, has made a good point about the lack of clarity around the proposition (read here). 

I am keen to hear your views, as this debate livens up next week, even as the US is preparing for a historic Presidential inauguration amidst an even more historic and unprecedented economic crisis!    

 

October 15, 2008

Bail Out Blues

I was teaching my 6 year old a new nursery rhyme the other day, in keeping with the times…!

Baa, baa, Paulson, have you any bail out?

Yes Sir, Yes Sir, 700 billion of tax payer loot

Some for the Big Banks, some for Wall Street

And some for the Congressmen (and women)’s gravy train

But none for the poor man (and woman) who foreclosed down the lane!

Seriously speaking, the US Treasury-led bail out has generated very lively debates across academics, economists, columnists and the entire political spectrum. The fact that there is a Presidential election looming in less than 3 weeks adds to the fireworks!

When the Emergency Economic Stabilization Act of 2008 (a.k.a the "bailout plan") was signed into law on October 3rd, reaction was mixed.  Various opinion leaders (notably Warren Buffett and George Soros) had differing viewpoints—many of them critical of the plan’s ability to achieve the intended goals.  The market didn’t react as hoped and what followed was a massacre that the global stock markets had not witnessed (especially, the Dow Jones Industrial Average in the US) in a generation  

Following UK Prime Minister Gordon Brown’s lead, on Tuesday October 14th, the Bush Administration changed course and announced what was tantamount to a partial nationalization of large U.S. banks - essentially forcing nine of America’s largest banks to accept funds in exchange for an equity stake.  The markets around the world anticipated this coordinated action and responded by opening the week with one of the highest single day gains in history.

I think that the biggest conflict facing the implementation of any bail out plan is really the toss-up between protecting tax payers’ interest and the need to thaw the credit markets by freeing up the Banks’ tangle of toxic assets! I am probably reducing the challenge to a very simplistic proposition, hence I am keen to hear your views.

I have also put together a links page, polling opinions of noted economists, columnists and academics.  If you have the time, click to read the extended entry below and let me know what YOU think about the bailout plan, the nationalization of banks around the world and the future of the global economy. Of noteworthy mention is Economics Nobel Prize winner, Paul Krugman’s column in The New York Times on Gordon Brown’s "equity injection" plan.

Continue reading "Bail Out Blues" »

September 30, 2008

The Shotgun Wedding Planner on Wall Street!

Subsequent to my post couple of weeks back on the subject of Universal Banks, rapidly unfolding events in the US have catapulted JP Morgan Chase, Citi and Bank of America as the top 3 banking institutions in the country. With a leadership position across business parameters like Branch network, Deposit base, Credit Cards issued and hmm, Mortgages originated and serviced, these Banks carry an onerous responsibility on their balance sheets now and cover almost the entire US population in their collective footprint! 

The unsung hero of all the hectic parleys that culminated in the Universal Bank proposition is the FDIC! This venerable 75 year old institution, a by product of the Depression-era legislation, has played a critical catalyst role in averting a banking crisis for the person on the street. While the more high profile Treasury and Federal Reserve arms of the Government have been publicly making attempts to get consensus on the bail out proposition, the FDIC has been proactively working behind the scenes to identify fissures in the banking system and diligently negotiating with the larger banks to take over their weaker brethren in what the market terms as "shotgun weddings"!

Bank failures can be very expensive, apart from causing an irreparable crisis of confidence in the economy; the ripple effects can cause immense stress to small businesses and individuals, by putting their lifetime earnings at risk!

Read more about the FDICs round-the-clock efforts (and the final 4 am Monday morning deal!) in the most recent Citi - Wachovia merger here.

And do you realize that, in this deal, there is already an implicit bail out package? The Federal Government, through the FDIC has agreed to absorb any losses beyond $42 Bn in Wachovia's $312 Bn asset portfolio, in return for preference shares in Citi. So much for the "noise" around bail outs!