Saturday, May 25

Karnataka 2013: What Next?

It may not have made a monumental difference to its result. Yet, I would have like it better if not forced to watch the recent state elections in Karnataka entirely from the sidelines. I had little choice though: our move to India's IT Capital was far too recent for us to have a vote, and I got a taste of what it would have felt to be among the disenfranchised.

As it turned out, the contest was even more one-sided than expected. The incumbent BJP dispensation, synonymous with misgovernance, corruption and a widely perceived disconnect with the electorate, was any ways faced with an uphill task. Perhaps it would have weathered the storm better, but a three-way split in its vote left it with no chance. A beleaguered Congress, stung nationally by a second summer of scandal (and an intervening winter of discontent), had some reason to cheer with a clear mandate in the State.

I don't know if many in the BJP were surprised by the result. Sure, India's principal national Opposition party would have been happier if they hadn't been pipped to the lead Opposition status by the JD-S. Equally, they rightly worry about the ground ceded not only to a resurgent Congress, but even the HDK-led JD-S, among the usually more discerning urban voters. Yet, the saffron dream had gone sour in their fabled 'Gateway to the South' a lot earlier. Naturally, their otherwise feisty spokespersons tried their utmost to minimize airtime on Karnataka results, focusing debate in national media on the scam-battered Centre. (That a bumbling UPA-2 continues to provide grist to these windmills, has more to it than meets the eye; but that is another - and far more sordid - story!)

Does the Congress have enough to rejoice in its Vidhan Soudha victory? I would call it a mixed bag. Faced with the possibility of a rout in Andhra, and reverses expected in TN, the UPA is desperately looking at key states to make up its losses. As things stand, it comes up woefully short. That, incidentally is the likely reason for the unashamed wooing of a Nitish in Bihar despite a 'committed' Laloo ji with his Barkis-is-willin' messages. One hears of a personal subtext too in Shri Chidambaram's new-found bonhomie with the Bihar strongman; a fact that the Congress High Command may be unwilling to admit publicly. At any rate, gains in Karnataka help, but need to be seen in the context of its relatively small 28 MP size in Lok Sabha arithmetic.

How does that leave the BJP (in itself a complicated call, it seems too much to prognosticate on the NDA overall) in 2014 battle stakes? I would venture to say that they have a lot of work cut out. Their fixation with the leadership question is almost reminiscent of the erstwhile Janata party; as if the electoral contest was in the bag and this was the only issue left to be solved for.

At one level, the BJP's predicament is understandable. It is difficult to see the party cross 200 minus Narendra Modi at the helm (at least so the cadre believes). Yet, it is even more difficult to find a more politically incendiary figure in India today. In fact, that so few folks in our polity tread the middle ground when it comes to NaMo must count as a significant achievement of Congress's post 2002 strategy (aided no doubt by a wide section of the media sympathetic either directly to it, or to the 'secular' cause). The last word on this remains to be said though; I am sure this will continue to occupy centre stage over the next few months.

Coming back to Karnataka, for the Congress's sake (and mine, given clear infrastructure gaps in namma Bengaluru itself, among other things), I hope the new Karnataka regime does enough on the ground to consolidate the vote ahead of the Lok Sabha elections. As things stand, 2014 remains a tough call. Can the UPA get its governance mechanism back enough to perform a hat-trick? Shall the BJP and-or NDA get its house in order, politically as well electorally, to get third time lucky? Or will the nation be unfortunately subject to a post-poll ragtag Third Front led coalition as most pundits currently postulate?

Lets keep watching...

Tuesday, June 5

2B Or Nought 2B

A background in Economics and early years trading Commodities mean that stock markets hold me in an enduring thrall. I mostly restrict my passion to delivery trades though; F&O action is rare. Equally, those that I talk equities with are folks that classify more as investors than traders. This means that even margin trading is around the fringes of my stockpicking existence.

I was, however, greatly intrigued with JP Morgan Chase's losses on account of derivatives trade last quarter. For one, the amount involved is an obscene $2B (I admit that my imagination runs short when faced with such astronomical sums - for reasons not entirely unrelated to my humble circumstances)! I am told too, that there are many who believe the actual hole to be at least twice that ungodly number.

Of course, markets are replete with instances of mindnumbing losses. I was in College when Nick 'I'm Sorry' Leeson brought down Barings - he was neither the first, nor the last. This begets the question as to how organizations of considerable repute come to such massive grief. Equally, it is not easy to reconcile this with the high quality of their internal talent (case in point: Jamie Dimon was easily a star in an industry under intense recent public scrutiny; or at least till now). We also ought to know if 'mere' avarice is at play, or process or technology failures to detect and correct the situation too.

For starters, let us rule out that the core issue is Options as a financial product itself. Arguing this is like blaming steel for knife-wounds in a ghetto crime. With that out of the way, the picture is no less instructive. At the core of the mess are mismanaged hedges at JPMC's London Treasury. The sequence appears thus:

Like any commercial bank, JPMC had to optimize returns (investing in high quality, long term bonds) vs liquidity (via overnight money market, paying near zero interest in a post-QE world) from funds placed under its charge. Too much liquidity would lower the spread between what the bank got from investments and what it paid depositors; too little would risk it running out of cash. Bond investments need protection too, since their prices vary with interest rate (inversely; if rate moves up, bond prices go down for effective yield to be in line). For a bank, this would be double whammy - their investment erodes in value, and they have to cough up a larger 'share' of returns due to increased interest rates. Naturally, banks hedge such exposures, including through Credit Default Swaps (CDSs are bankruptcy-protection instruments).

By all accounts, JPMC's Treasury at London was running huge positions. This forced them to trade massively in a relatively small, illiquid CDS market as a hedge strategy. This created price skews that drew hedge funds (and others) seeking arbitrage opportunities. Continued aggression from 'London Whale', however, meant that the distortions grew larger (valuations changed an-unheard-of 50% in three months). Pressure on CDS market players mounted - the game was too expensive and prolonged. They were angry, but could do little in an unregulated market with the Whale running amok.

If this was bad, it soon turned worse. Perhaps realizing the limitations of the original CDS market hedge strategy, Whale & Co devised new plans. Defying logic, they got into related but riskier instruments, with further exposure to volatility. Hedge funds started to sense the desperation and waited for the nut to crack.

Meanwhile, within JPMC too this had rung alarm bells. Reinforcements from the core i-banking unit were sent to London Treasury. It did not take them long to figure out how untenable and inherently risky JPMC's position was. They wanted out; and thus presented the perfect revenge opportunity to hedge funds and CDS market punters. To liquidate the trades, these players wanted their price. $2B, or more, is this pound of flesh.

Given market dynamics, perhaps I am guilty of over-simplification (for more gory details, refer an excellent article on the Whale at Seeking Alpha ). Regardless, the episode throws up a few conclusions. The most critical is the need to regulate such specialized (and illiquid) markets. Another lesson is the limitations in deploying narrowly defined, fixed technical strategies to mitigate risk.

In an Occupy Wall St backdrop, however, it is worthwhile to note that this was not a case of i-banking excesses that have so fired up public imagination and invited lawmaker attention (in fact the scene of crime at Chase commercial bank Treasury in London, is far removed from JP Morgan i-bank). Of course, the starring role for CDSs is a true throwback to GFC 2008, but only partly so (teaches regulation at max).

Unless you own JPMC stock, therefore, the pall of gloom and hyper-suspicion is somewhat ill-founded. A sigh of relief too, may not be out of line. Until, of course, the next quake strikes.

Saturday, July 30

Bihar: A New State of Mind

I have been meaning to stay a lot more connected to my hometown. Despite intention though, physical visits have been few and far between. Thus, it was a direct call to action when the W alerted me to my expected housebound status for the next few weeks. I planned a trip in a jiffy, managing to cover Patna, Muzaffarpur and our ancestral village - all in the space of one weekend.

Hurried as it may be but the trip's mood was ponderous; and overall much upbeat. In fact I came away with my intent to travel Patna-wards markedly stronger. This reinforcement, admittedly, is partly on emotional counts. Yet, Bihar's almost unique socioeconomic theatre too contributes to my renewed resolve.

For the record, I have long believed my beloved native state (often including Jharkhand in the bargain) to be a microcosm of India at large. Indeed, a solitary trip to its fertile Gangetic plains or mineral-rich badlands could be all it took to appreciate firsthand a quintessential paradox: penury-amidst-plenty. In Bihar, like in India, nature's bounty fought and lost a daily battle with the grime and toil of life in poverty. Equally (and perhaps inevitably), beyond the obvious despondency and squalor, a subterranean strife constantly tested the overt social detente, the undercurrents often erupting in murderous class wars.

Talk history and a microcosm argument is actually an understatement. Bihar's leadership - in thought or wordly terms - is sans parallel. Yet, some years ago, an otherwise discerning (non-Bihari) friend had scoffed at my assertion that Patna (Patliputra) was capital of 'India' longer than any city but Delhi. For Doubting Thomases such as he, try google the following to get a sense of what I say: the Buddha, Mahavir or Guru Govind Singh; Balmiki, Vishwamitra, Aryabhatt, Panini, Gargi, Maitreyi, Vatsyayan, Banabhatt or Chanakya; and certainly the Guptas, Mauryas, Ashoka or Sher Shah! (The list, incidentally, is by no means complete.)

I believe too that there was more to my aforementioned friend's mirth. The unfortunate but undeniable truth was that Bihar had simply lost the plot over the years. Always in news for the wrong reasons, it was tough to associate glory or excellence with the state. Appreciate too that through the 90s and this millenium's first few years, the Indian nation was burying its Nehruvian policy overhang in favour of globalization and free market. As sarkari sloth made way for private enterprise, the air was rich with the promise of prosperity, not hollow socialist shibboleths. In this period, the land of Nalanda and the Lichhavi republic was going the other way. As if under a sorcerer's spell, Bihar turned a family's fiefdom, discovering new heights of lawlessness, negative growth rates, and wanton polarization of an already fractious society.

At another level, with liberalization, cable TV had come to town. Likely looking for comic appeal, the media lapped up Shri Laloo Prasad and his country bumpkin caricature. Bihar's strongman readily obliged too, with bytes or antics more befitting a Bollywood wag than resolute leader. This was, arguably, deliberate: playing-up his rustic roots for a lowest common denominator appeal. Regardless, he made a virtue of the ludicrous. This, with his visible development-is-anathema stance (clearly discordant with rest of India) and longevity in power, perpetuated a rather sorry image of Biharis: buffoons who wouldn't know (or didn't deserve) any better.

For most of this peiod, I was still deeply rooted in Bihar, yet spent significant time outside the state. At its worst, I felt my compatriots had given up hope; that the pithy but patently unfair caricature had grown larger than life. Bihar had gone from being a state to become a state of mind.

I hoped too, that some day, regardless of the dispensation's colour, my home-state's fortunes would rest with a believer in progressive political agenda. Bihar would then feel the difference, reward the change, and break the defeatist psyche. On this trip, driving on a new rural road as alternate route to my village, I felt my idea's time had come (much better than merely talking of Nitish Kumar and Elections 2010; equally hope that having reaped benefits, the NDA regime will push for more in Round 2). Its zindagi mili hai dobara!

Thursday, June 23

The Real State of Real Estate

I plead guilty to mentioning the Real Estate sector in less than laudatory terms in recent posts. This comes partly from personal experience: some investments where I was promised the Moon have yielded negative to negligible returns. At the same time, I understand the caveat emptor argument – perhaps my ventures were ill-advised, risk-reward are proportional etc. It could equally be sour grapes – my being unnerved by the boom-bust cycle during the last ten years, or simply priced out. Yet, beyond the math, there remains the truth that a lot of us are wary of the sector and its general functioning in our country.

Logically, things should not have been in such a bind. The dictum of being in money when investing in mitti had been common wisdom for ages. Further, India's long term housing needs was a story with many takers a decade ago. As it transpired, friendly interest rates and burgeoning household incomes fed core demand, pushing realty rates north. Investor sentiment, attracted by visible short-term price upswing (perhaps more than long run potential) and overseas liquidity, added to the momentum. Landowners made fortunes selling ancestral holdings in New India’s cities (NCR, Hyderabad, Bangalore, Pune etc). No less was the killing made by those on a 'buy pre-launch sell pre-possession' strategy (while a few risk averse or financially constrained folks like I sat and fretted on the boundary!).

This is where it began to get a bit crazy. Developers overleveraged themselves using every avenue under the sun to raise money – domestically via banks, IPOs (and buyers) as well as cross-border ECB, FDI and PE etc. Yet, unlike in most parts of the world, the bulk of these were not utilized to fund projects or construction. Instead we had a mad race to build ‘land banks’ and continuously launch new projects, with realty valuations feeding off every cycle. End-users were entirely relegated to the sidelines and investor mood swung into highly speculative zone. Fly-by-night developers sprung up dime-a-dozen in urban India, more than a few of them clearly headed towards a debt trap.

Enter the 2008 Great Financial Crisis. Liquidity dried up and demand, speculative or otherwise, took a hit. In the resultant mayhem, the worst off were buyers - New India was abuzz with protests against project delays, or worse, defaults (unlike the Govt of India, I shall desist from claiming credit for avoiding the mess purely by earlier inaction). Even the most well-known realty names saw dharnas and court cases, neither was their response much to write home about. It could actually have been much worse, but for the government virtually leaning on banks to go easy on real estate loans.

Today, we seem to have come off the larger crisis. Realty rates too have regained their peaks, or almost, last year (though 2011 seems generally flat). I am not sure, however, that the core issues in the sector have been fixed for good. In fact, there is more than meets the eye in what I have recounted above too, like much else in our beloved country. The realty multi-layered reality runs thus:
  • fundamental demand has existed for long, a good chunk of it unmet, and can be expected to increase over time – for population and prosperity reasons (the good part);
  • there is massive scope for corruption – not just Money Matters borrower scam variety, but in land acquisition, clearances etc, exploited to the hilt by both the sarkari as well as real estate operator types (the not so good part);
  • high cash dealings make realty a black market haven – Shahid Balwa is ample testimony to its attractiveness to those seeking to launder dirty money, neither is he the last, hence a vested interest for the all powerful: neta, naukarshah, or businessman (the worrying part)
Clearly, the only way out of this jalebi-like intricate mess is reform. Like some issues mentioned earlier on these pages, this is important – for wannabe investors like I; those looking for basic roti-kapda-makan solutions; and those desiring more upmarket addresses. Mid-week, hope is at a premium – yet I set some aside for this. And may be rethink those Noida Expressway SMSs again :)

Thursday, June 16

Keep It Simple Son!

History repeats, or almost. The story starts many moons ago, in a conversation between two highly unequal individuals. The first of them was first in many respects. An idol for many, he had chosen to strike out on his own despite not-so-humble moorings. Starting from scratch thus, he had risen through the ranks by virtue of sheer grit and effort, never compromising his values in the face of hardship or temptation. He would achieve a lot more in the years to come, but even in the times we speak of, was widely quoted as an example of integrity, determination and commitment to professional excellence.

The other party to the conversation was young; in fact too young to have any worldly standing. Imbued with the precocious confidence of youth, he ventured an opinion on the quality of the elder's published output. Of course he had no credentials whatsoever to comment on its technical or pedagogic merit. Neither did he have any justifiable claim to pontificate on the literary value. In fact, the little exposure he had to the Queen's was due to a love for the word, engendered and facilitated by this very conversation-partner!

Fortunately, the older man was characteristically large-hearted. He understood the recklessness of youth. Perhaps he gave some leeway to the chastity of the boy's intention too. As it turned out, he took the cheeky attempt to critique his body of work in his stride. Notably, the advise ran thus: the language ought to be simpler, the sentences shorter and words commonplace! History has it that the elder smiled and the young boy came away feeling on top of the world, an emotion of exaggerated self-importance of the kind one experiences on making an unexpected contribution in a chain of events.

The years rolled by: the boy turned into a young man and more, though the elder remained first. One day, the historical conversation was relived. The not-so-young man asked for the elder's opinion on his limited ouevre. The shoe, as they say, was on the other foot! Yet, with usual humility, the older man read through the younger's outpourings, half-smiled and nodded. Presented with what was clearly mild approval at best, the son took recourse to boyish petulance, and pressed for more pointed feedback. The father replied: "It is good, but you may consider making it an easier read, lest the message be lost in the medium". It was not a comeback, just the truth, resonating with what many others had said earlier; but that one moment had turned the idea to an important actionable!

Thank you and happy 16 June :)

Sunday, June 12


I would stop short of calling myself a gadget geek. I do, however, have a deep-rooted belief in Technology's game-changing abilities - at work and otherwise. This, coupled with a proclivity towards things new, often leads me to play early adopter to techie products and concepts. One such acquaintance I made in the late 90s was text messaging. In fact, I evangelized its discreet convenience, referable memory etc, compared to here-and-now voice calls to anyone who cared to listen (in context, it helped that it was free vs steeply priced airtime!); and remain an above average user to this day.

I must add that I did not register in the first wave of DNC, even if sympathetic to the indignation on unwanted calls. My reasons were largely professional. At its root, the credo of open communication (read taking calls from unknown numbers) was an occupational hazard. In reality, it was a goldmine of information - it helped me get bad news (the variety you want to know ASAP) promptly more than once, plus rudimentary competitive intelligence; not to forget insights best derived from listening to the occasional irate customer! All of this strengthened my resolve to stick it out amidst the onslaught of sundry telemarketers.

Unfortunately, it seems to be going from bad to worse. It is almost an incipient reality of modern life that text-messaged advertisements carpet-bomb your Inbox every day. Pesky calls too, after an initial decline, have reared their head again. The vanguard is clearly SMS though, and the biggest violator real estate firms and agents: I am subject to a dozen messages daily, in complete disregard of my tenuous pecuniary state! The bulk of these supposedly fantastic property deals are in assorted parts of Delhi NCR; but interspersed are offers from Jaipur's Tonk Road, plots in Uttarakhand hills, down to faraway Mysore and back-of-beyond. It makes me wonder if only geographic bounds have been transcended or those of sanity too. Or perhaps it is my middle class upbringing that limits me to imagine an investor class that takes large realty investment decisions basis an SMS exchange!

The uninvited texts wear other colours too. In fact had it not been for the glaring segmentation error (maybe they score intention, not ability, explanation for ignoring my financial position) in real estate ads, or those ridiculous friendship helplines, I would have thought a grand design in peddling me travel packages, hairfall cure (ouch) or zero-effort, fat-removal therapy (I even got one for 10 yr US visa in 10 days/10K from some arbit Churchgate agent last week)! Frankly, if only less prolific, it would have been funny.

Think a broader context and the seeming helplessness of the Indian consumer to overcome this mess does add to general scam-season discontent. True to form, an irresolute, blundering UPA-2 has little to tell beyond a revised-twice-yet-missed 31 Mar deadline. With public attention on other more ignominious spectacles, they have actually been able to get away without saying almost anything. In fact, with declared intentions to snoop on all voice-data exchanges in the country (recall the BlackBerry tangle), the Government can hardly argue that policy formulation or erecting filter infrastructure are insurmountable asks. Likewise, alloting a special telemarketing code for landlines, or cracking down on rogue telecom companies that continue to sell bulk SMS deals should not be too tough to execute. Yet, the ongoing specatcle of DoT-TRAI ping-pong on the issue inspires little confidence in their appreciation for the task at hand or seriousness of their commitment to it.

No one, of course, can fault the Government if it avers that implementing a foolproof DNC (or do-call) registry, including critical security pieces, is a complex exercise. I am just not sure why it should remain open-ended and a shifting goalpost (which sounds counter-intuitive in the context of technology). The nation needs a quantifiable plan. Or perhaps Mr Sibal needs to be text-blitzed to know this...

Monday, May 23

Of Dreams and Skylines

Urban infrastructure in Delhi NCR is a question-mark that lurks behind corners, like a sly predator waiting to ambush you in an unguarded moment. Step into Gurgaon where I live, and it will be clear what I mean: global and gobar are concurrent realities that, despite the paradox, coexist peacefully in Millennium City. Its tall office towers with imposing green-glass facades, or glitzy spoilt-for-choice malls, may not be engineering marvels, but veritably showcase New India's ambitious dreams. Soar high in their alluring promise and you are up for a rude awakening: the grating sound of your car's underbelly being tested on sludge-filled, potholed dirt-tracks that often pass off as the city's roads. The contrast is telling; the Government's criminal apathy in a revenue-rich district is obvious. Yet, it also betrays the resigned compromise its denizens have made with sarkaridom's contempt for its upkeep.

This dichotomous backdrop made a piece in HT Comments (Our Forbidden Cities, Francesco Giavazzi) on Monday especially interesting. Its moot point was that youth (bigger dreams, more energy to realize them) provide the power; and urban infrastructure the vehicle for development. The logic virtually anoints cities as playgrounds for progress, with benefits that ultimately accrue to large populations. Giavazzi argued that such transformation is difficult but achievable, predictably citing Shanghai's example (I say ‘predictably’ without malice – a visit back in 2006 had convinced me that anyone struggling to grasp the meaning of ‘economies of scale’ merely had to spend a day in China's showpiece city). The part left almost unsaid was how India did not really have much of a choice in the matter - at risk is our much vaunted demographic dividend itself.

Going beyond Shanghai, better utilization of scarce urban land can have significant economic and social benefits for our country too. This is true in the sense of upgrading our Tier 2 and 3 towns as well as replacing haphazard growth in larger cities with more planned and sustainable one. On the first, consider how amenities (or even look and feel) in city #100 in the US compares with NYC (except scale) and see the gaping hole between merely Delhi and Patna. I say this not simply enamoured by downtown skyscrapers in any American city of note, but the economic realities that support such growth, and quality of life for citizens that results from it (including but not limited to impact on curtailing migration that seems to so upset the Sheila Dikshits and Raj Thackerays of the world, if they actually believe in their flawed diatribes).

Suggestions abound on the second aspect too, namely making the most of our larger cities. For instance, consider replacing Sarojini Nagar's ubiquitious sarkari structures with modern high-rise apartment complexes. An important point is that this model benefits not just yuppies or the moneyed: its erstwhile civil servant occupants too would enjoy (at marginal cost) facilities they often bemoan 'overpaid MBA types' for accessing. Similarly, better intra-NCR connectivity can do more for Noida's realty prices than sending a highly-leveraged me twenty SMS offers a day (last I checked, the much promised KMP Expressway was set to miss its fourth revised deadline; nor is such lackadaisical execution a hallmark of the national capital alone - Mumbai's pride and joy, the Sea Link, is grossly over budget and timelines, and only half complete).

No doubt there are other larger, more contentious issues. Land policy, subject of a typically token recent demonstration by the ruling party's Gen Secy cum PM-in-waiting, is prime among them. Or the need to stamp out corruption in implementation that has similarly hogged headlines. Yet, Gurgaon is living proof of the inadequacy of our urban planning policy (either non-existent or hopelessly delegated to private developers) to support growth of infrastructure, far less stimulating it; and an educated citizenry's failure to propel the Government to action. I hope for our sake, and our children, that at least one of these changes soon.