Stalking the markets : Why it no longer be ignored.

Words like slaughter, butchery, Carnage, tsunami, were flying fast & furious on 21st & 22nd January. An unsuspecting reader would have been forgiven to think another familiar communal riot was on. Riot it was, but not communal. Bears were on rampage after having been mauled by the bulls in the big bad jungle of Stock Exchanges around the world. Kissing the 21,000 mark just a week earlier, the bellwether Bombay stock exchange Sensex had been dismembered to below 17,000. Since market economy waltzes around the stock market indices, everyone needs to know how it affects our lives. Just 3 commentaries will do to provide the sense of Indian media.

“The Economic Times : Market mayhem: An analysis. India’s five richest lose over $45 bn in 7-day meltdown.

Financial Express : Markets crash, Sensex falls 1408 points.

The Asian Age : After the deluge, What?.”

Doomsayers all!, one would imagine. Hyped & melodramatic certainly they are, but soothsayers definitely not. Crisis has been brewing for a long time now. Blame it on any one now, but everyone had adopted an ostrich attitude & fervently hoped that storm will blow away. Writing was on the wall. Sample these warnings.

“Warren Buffet reportedly said in 2002 : Derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”

Robert Kuttner’s testimony before USA House Financial Services Committee on 02 October 2007 : Heading for a Crash? à Here he draws parallels between the crash 0f 1929 that preceded the great depression and the present crisis of sub prime mortgage.

Business week story of 11 October 2007 : Bear Stearns’ Bad Bet à Two Bear Stearns hedge funds soared by specializing in exotic securities and unorthodox practices. Then they imploded.

The Christian Science Monitor 16 October 2007 : Banks move to rescue debt market à Bank of America, Citigroup, and JPMorgan Chase said Monday they had reached an agreement in principle to create a new fund called the Master Liquidity Enhancement Conduit (M-LEC). The fund, which could be as much as $100 billion in size, will initially purchase what it terms high-quality assets. The M-LEC plan is reminiscent of the government bailout of the savings-and-loan industry in the late 1980s. A government-backed fund, called the Resolution Trust Corp., acquired the assets of thrifts that had failed.

The Economist of 28 October 2007 : Is Merill the tip of the iceberg? à The most striking (and overlooked) aspect of this was that it involved mostly securities that only a few months ago had been considered platinum-plated: collateralised-debt obligations (CDOs), or tranched pools of mortgage-backed securities, that were not only rated triple-A, the highest level, but had also received extra credit enhancement, making them “super senior”.

The New York Times of 5 November 2007 : Banker’s lesson from mortgage mess à Merrill and Citigroup were the biggest issuers of C.D.O.’s in the first half of the year; together they put together more than $61 billion in deals, or about 20% of all debt obligations.

The New York Times of 8 November 2007 : Markets & Dollar Sink as slowdown worry increases.

Business Week of 12 December 2007 : UBS Loose a few Billion & inject a few Billion.

The New York Times of 17 December 2007 : The Tightening of Credit Market à Chronology of Warnings ignored.

The Sydney Morning Herald of 18 January 2008 : Wall Street Gurus collect US$ 33 Billion in bonuses à The Wall Street gurus who presided over the subprime mortgage crisis currently shredding global sharemarkets have awarded themselves bonuses totalling $US33.2 billion. In a concession to the crisis – which has forced America’s largest banks to write off billions in bad investments and raise billions more to shore up their capital reserves – the bonuses were down nearly 5 per cent on the previous year.”

The pundits & stock market intermediaries either overlooked the portents in their euphoric state or were scared to be the bearers of bad news. Whatever the truth it would be educative to see what one of them was commenting in last 3 / 4 months.

India through Sensex 11 October 2007 : “The market has been mercilessly optimistic, reflecting the underlying companies that are ruthlessly cheerful.” “The new big picture of the Indian economy is strong and fast growing. It is not only a productivity-led growth but is also based on structural changes. It’s like speeding on a newly constructed national highway at over 120 km per hour. At that speed, you don’t look at the rear view mirror to see what you’ve left behind, it’s dangerous; you only look ahead.” “Nine months ago, it was a cautious market reacting to a Sensex 14,000 on January 3, 2007. But despite the caution the market expressed then (experts said don’t expect it to rise more than 15 per cent during the year), the Sensex has already risen 30 per cent. The same experts are now touting the 20,000 mark as touchable. I believe they need to be more confident about their forecasts than flitting around with volatility.”

You need not fear market volatility 18 October 2007 : “Doomsayers looking for a correction have been disappointed so far — they’ve been looking for it since Sensex 9,000 and the intensity of that search has only multiplied at Sensex 19,000. That is not to say that the Sensex will rise tomorrow.”

Today, respected journals find that the malice runs deep.

It’s rough out there 24 January 2008 : Economists had to say this about the federal reverse cut of 75 basis points, unprecedented for timing & size. “That is a dangerous path for a central bank to tread. Its success will now be identified with short-term movements on Wall Street. Indeed, as the stock market shrugged off the latest rate cut, the Fed’s authority already looked diminished.”

Society General humbled 24 January 2008 : “….the biggest rogue dealing fraud in history, in which a single young trader triggered a $7 billion loss under the noses of top executives.” “The bank said a junior employee on its derivatives trading desk earning less than 100,000 euros a year had carried out a sophisticated fraud….” “Societe Generale will probably not be the only case. We’ve seen this already with the big American banks who, by deregulating control systems, have allowed abuse,” said Alain Crouzat….”

Should everyone be interested in this? All this bad news appears to be about USA & Europe, why should it bother me? That luxury of insulated living is no longer available. If we reap the benefits of globalization, then we have to suffer the pain coming out of it too. Capital now moves in and out of countries following global clues & reacting to global threats & opportunities. It can easily destabilize markets & has impaired ability of financial authorities to manage them locally. Many will say, “I do not invest in stocks”, it doesn’t really matter which way the stocks are headed. Those who have not been ‘coupled’ with the market economy (rural poor) may take such disinterested view. All others, especially those staying in urban centers, better start knowing about the basics of the markets, which have the power to affect their lives in profound ways whether they are investors or not. Moreover, the contagion is not limited to investor community. Investors in turn borrow from banks & banks are often investors themselves. Union Bank of Switzerland, Barclays, Royal Bank of Scotland, ABN Amro, Society Generale, Bank of China, etc. ( all non USA banks) have all bled in the sub prime crisis. Credit rating agencies are deeply involved too when instruments rated by them carrying platinum or AAA+ investment grading are later discovered to be high risk speculative gambles. Financial system no longer respects national boundaries. Without regulation it does not heed prudence either.

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3 Responses to “Stalking the markets : Why it no longer be ignored.”

  1. aristotlethegeek Says:

    The thing to note is that scams keep occurring in spite of a thousand different regulators in the regulation business. When a regulator is present, people become carefree. Nothing will go wrong. It is the regulator’s job to manage the risk. Why should I bother? – is the normal line of thought. And in my opinion, this line of thinking is not restricted to the man on the street, but includes bankers as well. Today, if a major bank fails, governments have no choice but to save it, either by pumping the tax payers’ money into it or ‘advising’ other stronger banks to take over the assets. The consequences of not doing such a thing is a wrecked economy. And banks know that.

    It is time to go back to the way banks did business in the early 20th century, since the Federal Reserve, SEC and their clones no longer have control over the situation. It is time to leave the risk to the people and the banks. Let them know that if they create a mess, no government is going to come and save them. That alone will guarantee prudence. Installing a regulator and paying obeisance to it while doing one’s own thing behind its back doesn’t work, as we have seen a multitude of times. And with this, governments should also stop the financial jugglery that they indulge in time and again by ‘pumping in’ funds to revive the economy. Where is the money coming from – some secret stash?

    Regulation hardly makes people prudent. On the contrary it lulls them into a false sense of comfort. Let those who own the money worry about how to spend it and keep it safe. Why should those who had nothing to do with it pay for it from their pocket? Those who take the risk expecting a reward for the same should also prepare for the shock when the risk does not pay off.

  2. Sadanand Says:

    In theory I hold the same view. Caveat Emptor in that sense should inform all actions. In practice though the view requires modification. In theory the underlying implicit assumption is that there is “Information Symmetry”. All participants have same information or have equal access to it. In practice it is our experience that is not the case. Many systemic, historical, and operative distortions exist that put many individuals at a great disadvantage. Regulation therefore is required. Fact that Regulators fail or are the cause of scams, is no reason to abandon regulation. It means correctives in regulatory mechanism are needed.

    Otherwise we may end up reaching the same conclusion on law & order. Since crimes keep happening, why have the police? Once the false sense of security is dispelled, everyone will do more for her or his own safety. In a very piquant way it is already happening now : the state & citizens outsourcing the public safety function to private agencies. Jhar khand saw the Salawa Judum outfit take birth with politics acting as midwife. In Bangalore & Pune, police commissioners have advised BPO & IT outfits to hand out employee security to SPOs ( Security process outsourcing).

    Sadanand

  3. Ranjit Jatar Says:

    Caveat Emptor or ‘let the buyer beware’ was a latin term in ancient times and it is as much applicable now as it was then. If you notice, it was the F&O traders who lost heavily in the sensex crash in India last week –and pulled down the market for everyone because of their inability to meet commitments in a falling market. But the market will bounce back because the ‘internal combustion engine’ in India is strong.

    One should note the sophisticated controls in India, whether by SEBI or by the Finance Ministry. No longer knee jerk and much better transparency than during Harshad Mehta. SEBI quickly putting 100% margins on shares will help ensure no more spikes and troughs for some time. Greed will take a backseat as traders lick their wounds . And sanity to the rise of the sensex will emerge which had started getting insane in 2007.
    All it needed was a scare from the US markets. So market dynamics of the great capitalist system are alive and kicking and the spread of information systems and regulations in emerging economies like India will help as we develop. Yes, regulations are critical to help small investors who want to participate in financial instruments but are not drivers of the same.

    Ranjit Jatar

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