Summer heat in October sky

Tankes and Rollers: Two types of people in any B schools. All others get crushed in between them.
Placement is like shit, and Constipation is a major problem...
The factors which matter for placements:
Acads? Are u kidding me!!
Good looking girl, girl, acquaintance with Placement committee, good looking boy, Jack, acads, knowledge and relevant work ex...errr…in that order.
ok ok. My status? Here it goes.
I have all (G)ot (S)et to (K)iss the world and am preparing to be a (C)arrying and (F)orwarding (A)gent.

One thing, I don’t know why……….in the end…. it doesn’t even matter!—Linkin Park

N.B.:
Poetic licenses have been used where ever necessary.
GSK and CFA are global brands.
Cryptic language have been used keeping in mind the sensitivity of the topic.
Brickbats (sexist, chauvinist, Cryptic language) and bouquets (??) are welcome.

The Collapse of Wall street

The articel was published in IIM Shillong finance Magazine Niveshak August 2009 edition (page 52).

Introduction

The current financial crisis has been described by many as unprecedented in living memory. It was so sudden and so powerful that many were caught unaware. Many tumbled and could not climb back up. The “golden period of finance” is said to have come to an end. A new world order is emerging from the ashes of the old one. But who was responsible for it. Was it due to the bozos at investment bank or the louts among the regulators or were it the nimrods in the banks who played with our lives. Lets go back and find out.

Lessons from 1929 collapse

Stock market crash of October 1929 still inspires political and economic debates. "Many people blamed the crash on commercial banks that were too eager to put deposits at risk on the stock market. " We can’t be sure if it was a credit inspired economic bubble which burst. But we know that it very quickly sucked out huge amount of consumer credit and they instantly stopped spending. The collapse of Wall Street might have acted as the precursor to the great depression.

The banking industry was divided in two segments, lending firms and brokerage firms i.e. investment banks. To rein in the stock market, the uptick rule which prevented the short sellers driving the bear market further down, was implemented after 1929 crash. It also inspired Keynesian economic which says that Governments should spend the money they don’t have in order to save capitalism.⁶ It is this theory which emerged as saviour of world economy in 2008.

History of USA policy

After WW II, international monetary policy revolved around USA as it agreed to make dollar convertible to an equivalent amount of gold. Subsequently dollar emerged as the reserve currency of the world.  In early 70’s USA failed to honour its promise and this system came apart. However dollar remained as the reserve currency of the world due to lack of other currency options.

From 1960s USA adopted a strategy of diverting its attention from core manufacturing to Finance, Insurance and Real Estate (FIRE) sectors. The economy became overly dependent on services sector. The savings rate of US consumer declined from 11% in May 1985 to -2.7% in Aug 2005.¹

"In two generations it seems that we've lost the culture and habit of savings," says Nancy Register, of the Consumer Federation of America. Federal Reserve Chairman Alan Greenspan warned that the low savings rate is impairing the nation's long-term economic prospects. An improved savings rate would provide investment money for businesses, which would create jobs, he said. ² Hence the absence of diversified economy placed it on a high risk of finance and real estate markets collapsed.

USA engaged in military driven trillion dollar expenditure instead of concentrating these funds in high end manufacturing and technological advancements. The domestic market was ignored and the power shifted from Detroit to wall street.³

Bursting of housing bubble and credit crunch

The nadir of Soviet central planning was supposed to be a heap of left shoes without any right pair to match them. The housing boom of USA which started in late nineties witnessed a series of empty houses in 2008 without any buyer for them. Many people were lured into buying home with “teaser rate mortgages” and “Adjustable Rate Mortgages (ARM).” As interest rates climbed up, they found it difficult to pay interest as the instalments rose substantially. This resulted in increased home loan foreclosure rate.

“One in six mortgages is upside down, and 50 million families can’t pay off their credit card bills. Last year one out of seven households was called by a debt collector. More than a million people declared bankruptcy. Foreclosure has reached levels unmatched since the Great Depression.” ⁷   Washington was forced to bail out two of the biggest US mortgage banks, Fannie Mae and Freddie Mac, to prevent the American home loan system from collapse. Lehman brothers which had invested most in the American real estate of all banks saw its portfolio shrink very fast and could not sustain in the end.

As economy first began to stall, the underlying problem of consumer and corporate indebtedness in USA totalled about 380% of GDP, nearly two and a half times the level at the beginning of the Great Depression.

Market collapse and decline of organisations

The financial market witnessed a lot of consolidations. J P Morgan chase bought Washington Mutual and Bear Stearns. Merrill Lynch was bought out by Bank of America. Citigroup acquired Wachovia. Lehman Brothers filed for bankruptcy. Investment Banks like Morgan Stanley and Goldman Sachs converted themselves from securities firm model to financial holding company model i.e. commercial banks.

Thus ended the last of five standalone investment banks in Wall Street, marking the end of an era which has started with the Glass-Steagall act of 1933 when investment banking was separated from street banking. Bill Isaac, a former chairman of the Federal Deposit Insurance Corporation, said “They are the only two left and the handwriting was on the wall, It's a shame because this country was built, in part, on risk-taking by Goldman and Morgan and by a whole bunch of firms before them.”

The conversion allowed them to take public money but bought them under regulatory scrutiny. The risk which their traders could take was severely limited and the amount of money which the firms could borrow was severely restricted.

Many countries in the world including El Salvador and Iceland suffered. The depreciation of krona along with the exposure of the large banks of Iceland (the total assets of banks is 10 times the GDP of Iceland)⁸ to huge foreign debt and high inflation created major problems for the country.

Ordinary citizens saw their investments melt away in front of them. The borrowers had no access to credit. The unfortunate participant in pension fund scheme saw his/her life’s savings evaporate because a trader in some distant place decided to take too much risk.

Huge stimulus packages were announced all over the world to suck up toxic underperforming mortgage-backed assets. IMF says that world has already spent $11.9 trillion to fight the financial crisis. That comes out to be 1,779 pounds per person on this planet. British government led by Mr. Gordon Brown started nationalising financial institutions such as Northern Rock, Bradford & Bingley etc  which was followed all over the world. Britain witnessed its first bank run case after 1870s. We again saw the resurgence of state capitalism.

Rise of new world order

Voices are being raised to replace dollar as the reserve currency. The Commission of Experts of the UN has suggested a gradual move from the US dollar to the SDR. It wants to increase the share of SDRs in total international reserves in a gradual manner starting from an issue of $ 250 billion. Hong Kong is issuing bonds denominated in renminbi (currency of China). Countries are starting to use their currencies in mutual trade instead of dollar (China and Brazil). USA would be having harder time financing its trade deficit. Would China be the next superpower? Only time would give a definite answer for that.

The shop till you drop attitude of Americans is showing signs of change with personal saving rate rising to about 7% from less than 1% a year before. With increase in savings, spending is less. As consumer spending accounts for 70% of USA spending, the economy is going to contract in short term due to increased saving rate. Leading economists call it “the paradox of saving”. The new America is going to inherit more from the “savers” which would spur investment of long term nature in the American economy, thereby reducing trade imbalance.⁹

Current condition and outlook

The financial results of the recent quarter show that few things are getting worse and many are getting better. However the consolidated sales of the companies are still below what it was last year. Banking sector credit in India grew at 27 % in 2007-08, 18%in 2008-09 and is expected to grow at 12-14% in 2009-10 as per Crisil.

Financial products have been brought under great regulatory control now. Hopefully like foods and beverage, financial consumers would be having greater options and protection. When the market picks up, the consumer is likely to look for one thing in any financial product-‘trust’, thanks to Mr. Bernie Madoff.

Kabirdas, the famous medival saint said “Kadli seep bhujang much, swati ek gun teen.” When the first drop of rain falls on the banana tree, it forms camphor, in the oyster’s mouth, it forms pearl and in the snake’s mouth forms venom. It is our choice what financial system do we want to gift to future generation, venom or pearl.

Sadhbhavana Week speech

Kiss of the $treet

From AC room to dust and dirt of street: experience of an MBA student selling toys in Mumbai street during the annual college marketing event MANDI.

The first day of classes at NITIE, Mumbai: Three professors enter at classroom at the same time. One is an OR prof (Dr Mandi), another is from marketing (Prof Dhume) and the last one from communication studies (Dr. Mehta). The Profs gets a standing ovation. Everybody recognises him from the previous day’s introduction session. What a session! But this session unlike previous one was on a bit serious tone. The professors discussed about MANDI, an annual event in NITIE when students had to get down to Mumbai $treets to sell toys for an NGO. They kept addressing the class one after another, analysing the situation from different prospective, different dimensions and different angles. The observations from my classmates were none the less revealing. It was like being in august company! I thought “Wow. I have heard about case method of pedagogy in Harvard, role plays in Kellogs. But this is different!”

And surprises continued. For the next one month, we designed product literatures, made designs and demos from toys we were supposed to sell, analysed Mumbai market, talked to sponsors, took care of logistics and all sorts of things. We had sessions on how to identify potential customer types and how to sell toys to them. At 4 am one night, I was thinking how to prepare eight different sales pitch for eight different types of customers, for the same product! And the insights I got next day in class from my classmates and professors, opened some uncharted avenues to me! I was loving it!

Well, I was sure I would never be able to sell those toys in Mumbai $treet. I was apprehensive regarding my selling abilities from day one. The day before MANDI, I visited the nearby ATM and took out some money, just in case. I took a piece of paper and made a list of people whom I would gift the toys.

We decided to target Andheri West. My partner took some toys in his bag and I carried the rest along with the models which we had made the night before. The auto rickshaw carried only three persons, so my partner and I split up. As soon as I got out of auto rickshaw in Andheri, I saw a lady looking intently at the models I had made out of toys. Not to miss the first opportunity, I approached her with all my enthusiasm and vigour. “Now, She is going to be my first customer!”, I thought.  Alas all I got was a smile and thank you. I too thanked her for her time and moved ahead. But I could hardly move. Spider webs besieged my mind. The whole of Kotler came crashing down. Ego states changed. I checked my wallet again for the money I would have to give in the evening. Thank God, It was all safe there.

Never the less, I moved on to Andheri station. But the same thing continued there also. After three more failures, I found it difficult. Was there some fundamental wrong? I remembered Will Smith saying in The pursuit of Happiness “There are no free lunches in this world.” Well Well Well. Let me check with my friends! No one had yet sold anything yet. That brought a smug smile on my face. The feeling that whatever happened is natural and I am not the only one struggling gave me immense energy to start afresh.

Well this time the way I talked was different. I remembered Kishore Biyani (Future Group) saying that Indian customers want to touch and feel the product. Well. So be it. Soon I found my first client. That guy from Microsoft bought stuff worth Rs. 280. Those were the most precious currency notes I had ever earned. The $treet has finally kissed me! Selling after that was a cake walk. I soon ran out of inventory (because most of that was with my partner!) and had to turn down customers. So I approached my friends who were kind enough to make me in their group. As Sherlock Holmes fans would have said “Gregson and Lestrade (the official detectives) will get the credit, but we have the fun.”

A hawker approached us asking for the details of the NGO. He wanted to make a living selling these toys. An architect apprised us of the ways in which the JODO toy can be used to teach architecture. A school principle wanted to buy us out so that he can use these toys in his school. We advised him to contact the NGO directly. A lady called us and bought two sets of tanagram (another of our toys) for each of her kids, without any sales pitch, without any demonstration. These however do not discount the “other” kinds of experiences we had. We were driven from the front of a mall by the mall manager. Hawkers did not like our face. Police came asking what we were doing there.

In spite of all this we were sold out in 2.5 hours, without any advertisement, without any promotion what so ever. Then we went on to help our friends with their stuff. And when everything was over, it was time to celebrate our new found confidence. We had a small party (or was it a well deserved lunch which we had skipped). We headed on to Juhu beach to commemorate our first kiss with the $treet! I checked my purse, it was intact, all the notes stacked inside nicely. With a sigh of relief, I headed into the sea with my friends. I had a piece of paper which I needed to throw away in the sea.

The Great Indian B school dream

This was the year of vengeance. How can someone, mark the questions wrongly in answer sheet? After all CAT is held once a year. So CAT had to be cracked this time. But what if 60 days before CAT, you had an accident? What if you had to spend seven days in hospital and spend the next 40 days confined in your flat? What if you missed all the CAT mock tests and classes? What if doctors wanted you to be seen nowhere near your laptop/TV/books because it would strain your already spectacled eyes? What if everybody said you should give CAT a miss this time? Well I was in no mood to give in. On November 5, I palliated on Ashu’s (my flatmate) bike to the doctor’s clinic. At the end of that 300m journey, I was panting! Somehow, I coaxed the doctor to give me a “fit to join certificate”. I did not join the company but that played a part in convincing my parents to allow me to go for CAT this year!

Nov 15: This time I decided that I would not take CAT too lightly. As usual we had some chit chat in the flat and then I retired to bed early, with one book in hand and slept. However that privilege was short lived. I could not sleep long and spent the night turning around in the bed till 4 am. I work up late and by the time I was ready, my friend was honking like anything. We managed to reach the center just in time, wandering what IIMs had in store this time. However IIMs decided to go for an easy paper this time. When Rohra Sir (my CAT mentor) heard about my number of attempts, he told me “Check with TIME solutions and call me back immediately. I can’t wait to hear that you would be a BLACKI!” It turned out that I had goofed up big time in DI with some clumsy overwriting. The “crossing of tick mark” in DI paper made all the IIMs virtually cross my chances of any IIM calls. I ended up in high 98%tile with calls from all other top b schools except IIMs.

Then started the GD/PI sessions. You keep meeting the same set of people all over again. In the process you also make some really good friends. You have those soul searching sessions with your friends. Some forms really make you think who you are! You get to know yourself better. And at the end of it, you get to know your result!

One fine day, I got a call from Aashu (another flat mate), saying that I had made to one of the dream colleges. A sigh of relief and then everything changed. Not office, no late night phone calls, No client call! The feeling took some time to sink in.

Some people told you should be going only to IIM A, B or C. Why don’t you try next year? I was a little apprehensive. What if I have another accident just before CAT? What if I again mess up during marking the answers? I decided not to go again next year. I have hope from my b school. As the architect told Neo in Matrix:"Hope, it is the quintessential human delusion, simultaneously the source of your greatest strength, and your greatest weakness."