Thursday, September 25, 2008

India, When it Can't Get Any Worse

In a previous article titled, "Indians are Bad for Indian Business," I wrote about how local farmers are protesting to keep Tata Motors from building the world's least expensive car (the Nano), and giving the locals good paying jobs. Makes sense, right? Keep yourself chained to dirt farming and forget about improving your life and the life of your family.

Well, it gets worse. In the 23 September issue of The Times Online, there was an article titled, "CEO Murdered by Mob of Sacked Indian Workers." The company, Graziano Transmissioni, is an Italian firm making parts for the Tata Motors Nano, that was to be built in Singur (see previous article, link above). From the article:

Lalit Kishore Choudhary, 47, the head of the Indian operations of Graziano Transmissioni, a manufacturer of car parts that has its headquarters in Italy, died of severe head wounds on Monday after being attacked by scores of laid-off employees, police said.

Further, from the article:

It is understood that Mr Choudhary, who was married with one son, had called a meeting with more than a hundred former employees who had been dismissed after an earlier outbreak of violence at the plant. He wanted to discuss a possible reinstatement deal.

So, if you get fired, and the boss is looking to re-hire you, your best move is to beat him to death, leaving a widow and young son. Brilliant! Murder is a great way to garner sympathy.

Who would advice this course of behavior or promote this attitude? Well look no further than Oscar Fernandes, Minister of Labour and Employment. From a linked story in the Times, "...declined to criticise the attack, saying it “should serve as a warning for management”. "

If Indian wishes to remain a second-class citizen in the world of commerce, it will continue to elect and promote politicians like Fernandes who promote violence and Marxist labor principles. Violence has no place in an orderly society. While workers deserve fair treatment and the dignity due all people, management deserves not to have their lives threatened over working conditions. Who do these guys think they are, Teamsters?

Friday, September 19, 2008

Financial Crisis Primer

**Make sure to read Part II, here.**

While I have written posts about the Freddie/Fannie mess as well as the collapse of Lehman and Bear, I found an excellent synopsis of the situation in the Sept. 19, 2008 print edition of "The Wall Street Journal." Cheap? No. 100% Free. Trade stocks for free on The Free Trading Community.

On page A21, Todd G. Bucholz writes in the Bookshelf section an article titled, "The Woe on Wall Street." The article is a review of David Smick's book, The World is Curved. Here is where I found this gem of knowledge:

"The real problem running throughout the system was not a lack of new regulations. It was a lack of skin - that is, skin in the game. Mortgage brokers turned into fly-by-nighters, immune from the effects of reckless decisions. Local bankers, securitized loans and packed them off to some naive investor or to a rating agency manned by analysts who weren't sharp enough to get a job at Bear Stearns or Lehman. Homebuyers who put nothing down or lied about their income could pack up and run off, leaving no skin behind. The entire housing sector began to look like a motel renting rooms by the hour, as johns and hookers snuck out during the wee hours."

Phew, in a paragraph, that's it. Each player had a part to play. In each case, there was a lack of fundamental risk management. Mortgage brokers were setting up loans to folks who shouldn't have had them. The banks lent the money anyway, and sold off the loans to those who didn't have the skill or desire to evaluate them properly. Investment houses saw low interest rates as the sole risk premium, ignoring all that they had learned at Wharton or Harvard. Protect your Medical Identity with TrustedID. $1,000,000 Warranty & Great Customer Service

While I don't wish to understate dishonesty or chicanery, I can't speak strongly enough of proper risk management. I invite all those who study or have studied such things to go back to your Finance books. Look at the sections about risk management. Its worth the read. And to think, I only got my MBA from a state school.

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Thursday, September 18, 2008

Solar Doesn't Make Sense in Dubai

Of all the places in the world for solar to work well, the U.A.E would come to mind. Gulf states have very little rain fall, uninhabited tracks of land, modern infrastructure and plenty of cash.

Dubai, the most well-known of the Emirates, has a "green" building code and is pushing ahead with environmentally friendly buildings.

However..., in a recent article in, Nakheel, the Dubai real estate development company found, "The use of solar power in construction is not economically justifiable right now..."

It turns out that the costs to store solar energy are just too expensive. Additionally, the technology is still too novel to make it profitable. From the article, ""We had a case recently where I wanted solar panels to be used in one of our projects, but after looking into it we discovered that this would have added US $3 million (AED11 million) to our project costs," he said. From a business perspective, we can't justify using solar power right now."

While I think or would have thought that solar would be a no-brainer for Dubai, it just isn't. Additionally, the technology won't make it economically efficient for some time. What bothers me more, however, is the following quote: "People are realising that economics isn't going to be the only driving force for green technology," he said. "The focus on sustainability will actually drive this market."

So, we are to substitute a nebulous concept known as "sustainability" for a known metric, economic efficiency. If anything makes people not buy in to the environmental agenda is that it just doesn't make sense. You may feel good about it, but it hurts you in the pocket. Yikes.

Tuesday, September 16, 2008

Winners and Losers

It is very easy to consider the free market as nothing but a vehicle to decide winners and losers. However, it is more than that. It is a vehicle to restore order and balance, insuring that the fundamental principles of economics are obeyed.

In the events of the past weeks, we have seen stalwarts such as Merrill Lynch and Co., Lehman Brothers, Bear Sterns, Freddie Mac and Fannie Mae all begin to fade into obscurity.

As this is the political silly season in the U.S., politicians are quick to point blame at each other, some of which is well deserved. However, the current troubles are the result of violating basic economic principles. Yes, I repeated the phrase, because it bears repeating.

Companies in the U.S. can safely take on debt (leverage), if their cash flow permits it. Additionally, debt can be used to lessen taxes. However, with debt comes risk. Failure to properly evaluate risk can result in being over leveraged and unable to pay back the debt. That is exactly what we have seen in this current economic situation.

Individuals took out mortgages well in excess of their ability to pay. These mortgages were bundled, chopped into pieces (tranches), and sold. Lehman, Merrill, etc., bought these seemingly low-risk securities and then used them as collateral for new debt. In both the individual and corporate cases, they were over-leveraged. People have been missing mortgage payments. The tranches with bad mortgages have lost value. That value which was used as collateral is now insufficient to pay back corporate loans. Badda bing, badda boom, companies go out of business.

Let this be a lesson, conservative risk management rewards in the long run. Bank of America, JPMorgan and Goldman Sachs, while taking it on the chin in the short run, are well positioned to weather this storm. The market is correcting the excesses and that's exactly what it is supposed to do.

Wednesday, September 10, 2008

Ken Lewis Cleans Up

Its good to be the king, or CEO of a major bank. Ken Lewis, the CEO of Bank of America, is looking quite smart.

Forbes did an article about the whole Freddie/Fannie mess call "BofA's Bailout Benefit" on September 8th.

The article calls out how Mr. Lewis was panned for his purchase of Country Wide, the large and failing mortgage company. Many thought BofA was chasing good money after bad. However, with the bailout of Freddie Mac and Fannie Mae, he is looking crazy like a fox.

From the article: "The Ladenburg Thalman analyst (Dick Bove) argues that Bank of America, and Countrywide, have the existing infrastructure to start buying and securitizing loans on a large scale. He even said in a phone interview that Bank of America's capital levels would allow it to guarantee mortgage payments. This promise to pay has been Freddie and Fannie's traditional role in the U.S. housing market."

Naturally, one questions if a company like BofA can handle the securitization and guarantee of mortgage payments, do we really need Freddie and Fannie anyway?? Arguably, the answer is "No." In my previous post "Taxpayers Cover Freddie's Fannie," I state the bailout is a done deal, but what to do with the Freddie and Fannie is an open question.

It would seem that a market solution may be the best solution after all. Yes, you can hear me grinning, as that is a common theme of mine. Although widespread home ownership is valid policy objective, let's keep the government out of it to the greatest extent.

Again, from the article: "“I would be shocked if Bank of America isn’t happy about how this worked out. For years, banks have been asking for Fannie and Freddie to be cut back in size because they have they an unfair advantage," said Bove.“The government says Fannie and Freddie handled 80.0% of the market this year and someone has to handle that market share.”

There you have it, companies such as BofA are well positioned to handle a piece of the hopefully dismantled Freddie and Fannie. The next question is whether other banks of similar size have enough capital to do the same. If Citi, JPMorgan Chase, and Wachovia can get their capital coffers refilled, then maybe this will be a reality. However, if they can't get their collective acts together, expect to see more Barney Frank (D-MA) and government intervention.

A Word about Copyrights

It has come to my attention that a person has stolen my material and claimed it as their own. All works found on this blog are copyrighted, which, from is: Unabridged (v 1.1) - Cite This Source - Share This
1.the exclusive right to make copies, license, and otherwise exploit a literary, musical, or artistic work, whether printed, audio, video, etc.: works granted such right by law on or after January 1, 1978, are protected for the lifetime of the author or creator and for a period of 50 years after his or her death.
2.of or pertaining to copyrights.
3.Also, cop·y·right·ed. protected by copyright.
–verb (used with object) secure a copyright on.

[Origin: 1725–35; copy + right]

cop·y·right·a·ble, adjective
cop·y·right·er, noun Unabridged (v 1.1)
Based on the Random House Unabridged Dictionary, © Random House, Inc. 2006.

All of the work on this blog is original, and written by me. As this is my work, I guard it jealously, and will take all necessary actions to protect it. I attribute all source material. All pictures are the work of the artists.

If you wish to cite this blog, include the URL of the post, as well as the article name. Thank you for your consideration.

Monday, September 8, 2008

US Taxpayers Cover Freddie's Fannie

The US taxpayer is going to insure the financial solvency of two public companies. Sounds a bit odd. So odd, that Jim Rogers of Rogers Holding proclaims, " (the U.S. is )more communist than China right now."

According to the Wall Street Journal Print edition ("US Seizes Mortgage Giants", Sept. 8, 2008, A1)

"In its most dramatic market intervention in years, the U.S. government seized two of the nation's largest financial companies, taking direct responsibility for firms that provided funding for around three-quarters of new home mortgages."

What is person to think? Should the government be meddling in a publicly-traded company's solvency? Is it right to have the government backing the fortunes of shareholders? Is there some greater good at stake to make this more palatable?

Freddie Mac and Fannie Mae are federally-chartered, publicly traded companies. Both companies' missions are to make home ownership more affordable, as well as making financing more reliable. Sounds good, right? Ah, but the catch is that when government is in the business of making things "more affordable," it presumes that the market can't do that effectively, thus creating constraints and other conditions not present in the market, which may or may not increase risk.

While millions of Americans have benefited from home ownership, and world financial markets have benefited from the buying of mortgage-backed securities (until recently), it would appear that these businesses have been a success. However, with flood of loose mortgages and the collapse of the credit market, maybe these "affordable" mortgages weren't such a good idea.

But they were! When the government chartered the businesses, it assumed the risks via the conditions placed on Freddie and Fannie. While there has been considerable legislative debate over their existence, they have provided the financing for millions of mortgages. However, it is time to pay the piper, and that is just what the government did, step in and put US taxpayer money on the line to pay for a system set up over four decades ago.

Right, wrong, or indifferent, when the government proposes interference in the free market, it is up to the citizens to either approve or disapprove of the action. US taxpayers should view this situation with great concern and think long and hard about the value of these two institutions.

I don't presume to have an answer, but I am willing to hear the arguments for both sides and would like to see more detailed analysis to make an informed decision.

Wednesday, September 3, 2008

Indians Are Bad for Indian Business

*Make sure to read the update, "India, When it Can't Get any Worse" found here.*

Huh? In today's The Wall Street Journal print edition, there is an article titled, "Protests in India Push Tata to Stop Building Car Plant." (03 Sept. 2008, A8).

Tata Motors has a design and wants to build the world's cheapest car, the Nano. Priced around $2500, "...the minicar has been touted around the world as revolutionary." It is revolutionary mainly because of its price point, but also because of its Indian construction for global consumption.

However, some farmers near the proposed "...plant in Singur, in the eastern state of West Bengal, about 25 miles from Kolkata..." are upset that they have "lost" their land. Lost is a relative term. Tata purchased 1000 acres from farmers, though some decided not to accept the money. Instead, they are organizing with other farmers and politicians to demonstrate against the plant.

This is only the beginning of the incongruity. From the article, "...Tata is known as one of India's most powerful, yet socially responsible employers." Additionally, the building of the plant brought over 4,000 jobs to the depressed area. The total investment was about $345 million, and 60 suppliers were setting up to support the plant and production. All of this was promoted by the local ruling party, the Communist Party of India (Marxist).

Confused yet? A benevolent corporation, setting up shop in a poor area, with good jobs (close to 20,000 new jobs), supported by the Communists (of all people), is seriously considering closing their plant because very poor people (subsistence farmers) want to stay poor. Of course, local politicians are in on the action, "... to portray the Communists as insensitive to the interests of small farmers and local constituents."

It gets better. If Tata pulls out, it is almost guaranteed that no new investment will come into the state, leaving Mitsubishi Chemical Corp the loan survivor. Breathtaking, isn't it? By far, this has got to be one of strangest stories I have read in a long time. Communists are trying to improve the economy with private investment. The poor want to stay poor. A car made for poor people won't be made because the poor are protesting a factory and 20,000 new jobs.

Good job, protesters in Singur! Enjoy poverty!

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