Raja Beta Banega Neta!

No, this is not a rant against dynastic politics. Only an ostrich, or your Congressi blessed with archetypal thick skin, would have missed its disastrous limitations. Fact is that India of the present pretty much makes the case for misfortunes that result when power is thrust in the hands of those with credentials mostly limited to parentage. Thankfully, though General Elections are a year away, but the writing seems to be on the wall for sundry dynasts and their brazen sense of entitlement.

My pitch today is almost the opposite. For our polity to step up, more of our bright young things ought to be encouraged to don the political mantle. This, however, is a long walk from current reality. Quiz any Indian schoolgoing child about career ambitions, and it would be difficult to transcend familiar doctor-engineer-civil servant territory. Yes, MBA has gained some coinage as a livelihood option in the last decade or so; and there will the occasional interest in bijness (often running in the family); but you can bet the barn against finding anything more than the odd aspirant for public life.

Yet, at many levels, politics is the top of the pyramid. Take a country like ours, and it is easy to argue that professionals of all ilk actually have to defer to the neta class more often than any other. Apart from an undeniable power to do good, it is not as if there is no economic upside either (and that is without perforce resorting to UPA my-kursi-is-my-ATM style moral degeneracy). Despite this, politics as a career somehow continues to be considered lowly and fit only for 'the scoundrel'.

Of course, this is in stark contrast to democracies housed in the more developed nations of the West. Politics is right up there with Medicine and Law as career choices for the nation's bright minds. Sure, there are jokes on the neta as much as, say, on a banker, lawyer, movie star, or any other. However, there is no sustained scorn or uniform vilification of the kind we see locally. Thus, talent does enter, and often from the unlikeliest of quarters. In the US, for instance, from a Lincoln to an Obama, politics has accorded means for the the proverbial outsider to rise to the very top by dint of merit (and some timing; but such is true in all walks of life). Must we be so very different?

The mostly commonly profferred hypothesis for this dichotomy seems to be the vintage of those democracies. Somehow, barriers to entry are lowered as the democratic model matures over time; and (eventually) the cesspool of politics becomes less murky. However, in this respect, our record of the last few years has been rather uninspiring. One does not have to look farther than the principles that were IAC, to the compromise that is Kejriwal, in order to understand this gap.

Thus, the AAP's apparent descent from the promise of breathtaking change may have ramifications beyond the obvious. Will similar future efforts be equally torn asunder by the fallibility of a few? Were they felled in trying to do much too soon; and is that all we must guard against? Or must we be willing to tread the longer path by galvanizing from within, centred around the two national parties? With the Congress seemingly intent on self-destruction, at least part of the answer is clear. That time is now.

Karnataka 2013: What Next?

It may not have made a monumental difference to its result. Yet, I did not enjoy being 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 feel to be among the disenfranchised.

As it turned out, the contest was even more one-sided than expected. The incumbent BJP dispensation, battling misgovernance and corruption charges as much as a widely perceived disconnect with the electorate, was always faced with an uphill task. Perhaps it would have weathered the storm better. However, a three-way split in its vote left it with no chance. A beleaguered Congress, stung nationally by a second summer of scandal (and 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 Opposition party would have been happier if not pipped to #2 status by an HDK led JD-S. Equally, they rightly worry about the ground ceded, not only to a resurgent Congress but even the JD-S, in the usually more discerning urban vote. Yet, the saffron dream had gone sour in their fabled 'Gateway to the South' a lot earlier. Naturally, their spokespersons tried their feisty best to minimize airtime on Karnataka results, and focus 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 perhaps; but that is another story.)

Does the Congress have enough to rejoice in its Vidhan Soudha victory? I would call it a mixed bag. Faced with a possibile rout in Andhra and expected reverses in TN, the UPA is desperately looking at states to make up its losses. As things stand, it comes up woefully short. That, incidentally is the reason behind the unashamed wooing of a Nitish in Bihar despite a 'committed' Laloo ji who remains Barkis-is-willin'. One hears of a personal subtext too in Shri Chidambaram's new-found bonhomie with the Bihar CM; a fact that Congress High Command may be unwilling to admit publicly. At any rate, gains in Karnataka help, but must be seen in 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? It is clear that they have their work cut out. For starters, the 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 resolved.

At one level, the BJP's predicament is understandable. It is difficult to see the party cross 200 minus Narendra Modi at the helm (so the cadre believes). Truly, no figure polarizes the debate in India today more than he. That so few folks in our polity tread the middle ground when it comes to NaMo, must count as a significant achievement of post-2002 Congress strategy. Of course, a wide section of the media sympathetic either directly to it, or to the 'secular' cause, has willingly played ball. The last word on this remains to be said though; I am sure this will occupy centrestage over the next few months.

Coming back to Karnataka, it is do-or-die for the new regime to consolidate the vote ahead of LS elections next year. Fact is that 2014 remains a tough call. Can the UPA get its governance mechanism back enough to perform an unlikley hat-trick? Shall the BJP and-or NDA get its house in order, politically and electorally, to get third time lucky? Or will an unfortunate nation be subject to a post-poll Third Front-led ragtag coalition as many pundits currently postulate? Lets keep watching.

Corruption: Obelix and the Magic Potion

There is much in R-Day celebrations to tug at the heartstrings. Its crowning moment is the parade: rich in nationalistic appeal, celebration of valour, and pride in the achievements of a republic but a few score years old, and culture thousdands of years young.

In addition to patriotic fervour, R-Day is also just occasion for solenn contemplation. In thus ruminating over the state of the nation, one can't help but rue as to what ails its fortunes. Today, the most prominent such malaise is corruption. The affliction is hardly new, but has become so endmeic at the top, so brazen in its extent, that it has become morale-sapping and threatens the very fabric of our motherland.

This is not scare-mongering. Take black money, which has a deeply symbiotic relationship with corrpution. A few years ago, the Swiss Banking Association reported that banks in Switzerland had around $1.5 trillion in deposits from Indian nationals. Compare this illicit stash to the size of our formal economy, especially one that is strapped for investment to spur growth, and you wonder at the possibilities.

Of course corruption is hardly the preserve of those with access to Confoederatio Helvetica (or Bahamas, the Caymans, BVI, or other similar global money-laundering havens). Enough exists around us, in form of the friendly neighbourhood policeman, sarkari babu, driving licence agent, and so on. However, when the Central Govt gets as mired in it as UPA-2 has, then the nation starts to lose its moral compass. After all, what deterrence is to be expected when not a day goes by without headlines screaming obscene amounts and prominent names neck deep in graft. It appears almost no part of Dilli sarkar is left untouched.

With the stench in Raisina Hill reaching unimaginable proportions, one looks for answers. The mind goes back to a UPA-2 corruption headline of a different kind. A year or so ago, then CEA Kaushik Basu, had offered a striking formulation (endorsed amongst others, interestingly, by INFY co-founder Narayana Murthy). Shri Basu spoke of legalizing bribe-giving so as to encourage reporting, thereby improving incidence capture.

As solutions go, perhaps we need something similarly drastic to shake us off our slumber. This idea though, however innovative, is a slippery slope. It can easily degenerate from honest reporting, to wilful entrapment (lessons from news channel sting operations that have bred their own format of corruption). Stretch the point and one could start offering bribes by default. If caught, you are protected since it was only civic duty, trying to unearth the corrupt. Rinse, repeat, till a pliable babu is found. Voila.

My other bone with such legalization is how it shifts the onus of catching the corrupt to whistleblowers, thereby diluting the ownership of the relevant authorities. Like it or not, it is the government's job to identify and nab the dishonest. Outsourcing it to sundry 'citizen journalists' of potentially dubious intent and zero oversight, sounds ominous to say the least.

Much as the heart would wish otherwise, but there is no magical solution. Very little in the proclivities of the current government thus far suggest that a different, deep-rooted attempt to counter corruoption is likely to be made soon. It may take a regime change for the requisite political will to surface, and perhaps thats what one must pin hopes on, this 26-Jan.

Shape-shifting Monster

Being a toddler-parent means toys of assorted shapes and sizes are an inveterate part of existence. I have one of either gender, and would like to believe that neither is overly pampered. Yet, there moments when I am at wit's end as to how so many trinkets make their way into the house (my childhood benchmarks clearly don't apply, outnumbered 1:16 or so). At the same time, I cannot but marvel at the ingenuity and imagination that powers many of these. Colour-changing cars and shape-shifting beasts fall in this category.

It was such an object of fantasy that offered the perfect metaphor during a fevered discussion the other day. The conversation went somewhat like this: my friend, part of the domestic Insurance industry, was trying to argue for more instiutional indulgence (government, courts, banks etc) to support the fledgeling sector. At some point in the evening, the conversation went to ULIP, one of my pet peeves, (as I have written earlier), thereby prompting the monster reference. I don't know how the tete-a-tete ended (some Dalmore was involved!); but perhaps a few notes from it bear repitition.

In a nutshell, that India is under-insured is in no doubt, but there's more to the picture. We ought to know too that, other than bank deposits, Insurance is the most popular financial product in town. It has a legacy that goes back decades: LIC in its present avatar itself is about 60 years old; National started in 1906; and there were companies in this business in most of the 1800's. So the industry is no babe in the woods.

Cut to the present as well and data shows 20% of household savings going into insurance (all of Equity including MF is at a paltry 5%). Likewise, take AUM: Insurance is 10X of equity MF, with ULIP alone being more than double of Equity MF at last count. Insurance, therefore, can hardly claim not to have felt the love.

This brings us back to the point on ULIP. Just the last 10 years have seen the industry peddle them aggressively to a gullible public, with disingenuous advertising and aggressive distributor incentives. The opaque nature of ULIP performance reporting and high exit costs were common knowledge, perhaps even deliberate. Certainly they did not speak to any genuine effort to serve the Great Unwashed.

The IRDA did (belatedly; and perhaps only driven by turf war) attempt to rein in the monster. Fee structures as well as rudimentary visibility levels were mandated. Yet, even after 2010, the most notable message we heard was ‘new, improved’ plans accompanied by significant switching cost. Shape-shifting right there!

In truth, glancing beyond ULIP at traditional plans too show up the industry as pretty lazy. Despite lofty goals of under-insured India etc, these products (term cover is a particularly glaring need) are sold with terms mired in complicated legalese, unfriendly surrender and claims processes and overly high sales commissions. Once again the IRDA has attemped some fixes, but these are arguably half-hearted or too late.

Summarizing, it is not difficult to posit that the Insurance industry has itself to blame for much of its ills. If only the Indian investor was a tad more discerning (and not perplexedly averse to equity), the heat on them could, in fact, have been worse. For now though, the monster lives to see another day.

The Son of Cash

Cash is King. Or, in the context of our government's benefits structure "cash is leaking". We have known about this for a while: I vividly recall having dissected the ills of India's subsidy framework as part of Economics curriculum in College in the 90s; and it was a well-worn fact then. Commentary focused on flaws in the mechanism and mushrooming of vested interests that were mooching off it. Indeed, the latter had gotten so well entrenched, and critical voices so muted, that the infirmities had became part of the accepted, expected ways of working of mai-baap sarkaar.

Little wonder then that, far from being shown the door, the framework has continued to prosper to this day. Sample this: the GoI spends an estimated INR 3.65 for every Rupee of benefit to reach its intended target. The resultant fiscal burden across the 3F's (subsidy categories: food, fuel and fertilizer) is clearly unsustainably high already. Yet, there is every indication from our government, reeling under the influence of NAC-chhaap Welfare State model, that the economic cost shall escalate further.

Before casting our eye to the future, it may be instructive to take a look at the design and delivery challenges that plague our mechanism today. First, the design is inherently faulty. For instance, food subsidies are run via PDS, pivoted around identiication of BPL (below-poverty-line) needy. This tagging has been a corruption magnet. Inability to pay bribes for BPL ration cards means large swathes of true beneficiaries remain denied benefits, while the subsidy bill for the government continues to grow.

Next, lets talk about delivery. Staying with the food example, there is little control over diversion of subsidised grain (meant for BPL households) to open market by ration shopowners wanting to make a quick buck off the price differential. Likewise, practices like adulteration, false BPL cards, or stockpiling lead to leakages. Upstream too, we have distribtion losses in acquistion, storage and transport due to substandard quality and potential for corruption. Finally, the government spends a packet in administrative expenses to keep this massive rig afloat.

Now, the mammaries of our welfare state are expected to grow (the GoI seems serious about the Food Security bill). This makes the case to entirely overhaul the benefit distribution process even more compelling. Simply put, the need of the hour is to replace the corrupt and convoluted PDS with direct cash transfers to the target population. Life changes dramatically at the consumption end, with a pronise to empower the needy; bid goodbye to the ration-wallah's corruption and coercive power; and incentivize quality supply. Likewise, the government's unproductive (administrative) subsidy burden gets a haircut from dismantled PDS, reduced sourcing & storage expenses and tech-enabled planning & monitoring.

One cannot, of course, expected it to be a walk in the park. The most critical element is target identification. UID is trying to solve this tagging problem multi-dimensionally (technolgy, process, controls, change management). Helmed by Nandan Nilekani since last year, one should expect a good outcome here. Next, the farmer lobby would need to be managed: anything that is seen as encroaching on MSP and government's grain offtake, is a political hot potato. It remains to be seen how much will UPA-2 has to tackle this. At another level, the availability of cash (and presumably an increased amount) in lump sum has been called out as a cultural problem. Fears are that menfolk would drink this 'windfall' away. Not only for this reason, but as broader social empowerment or financial inclusion move, the GoI would do well to contemplate transfers to the Lakshmi, the woman of the house instead. And so on.

Cash, in any event, is likely to see a return, if only in a new avatar. Even if not perfect (and we don't know all the questions yet, far to speak of all answers) it cannot be but an improvement from the mess we have today. Much of this will be played at the level of policy, even more in execution; we have seen UPA botch up both umpteen times. Yet, for the high stakes here, let us remain hopeful.

2B Or Nought 2B

A degree in Economics and early years trading commodities mean that the 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 margin speculation 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 was an obscene $2B (frankly, my imagination runs short when faced with such astronomical sums, for reasons not entirely unrelated to my humble circumstances)! I hear too that many believe the actual hole to be at least twice that ungodly number (phew).

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 last, in a long line of operators whose avarice or ambition (but almost never ineptitude) delivered similar shocks. Indeed, the trail of destruction in their wake often had more than a fair share of the humble investor in addition to institution in question.

Naturally, it begets the question as to how organizations of considerable repute come to such massive grief. These are not easy to reconcile with the high quality of internal talent either (case in point: Jamie Dimon has been a star in an industry under intense public scrutiny of late). We ought to know of process or technology inadequacies that resulted in failure to detect and correct the situation.

In the current instance, for starters, let us rule out that Options as a financial product itself is an issue. Arguing this is like blaming steel for knife-wounds in ghetto crime. That out of the way, the picture is no less messy, with mismanaged hedges at JPMC's London Treasury at its core. The sequence went thus:

JPMC, like any commercial bank with funds in its charge, needs to optimize returns (invest in high quality, long term bonds) vs liquidity (via overnight money market, at near zero interest in a QE world). Too much liquidity lowers the spread between investment returns and what the bank pays depositors; too little risks it running out of cash. Bond investments need protection too, since prices vary inversely with interest rate. When rate moves up it is a double whammy for the bank: its investments erode in value, and it coughs up a larger 'share' of returns due to increased interest outflow. Naturally, banks hedge such exposure, including through Credit Default Swaps (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 limitations of the original CDS 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, this had rung alarm bells within JPMC too. 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, presenting 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.

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, it is worthwhile to note too that this was not a case of i-banking excesses that have fired up public imagination and invited lawmaker attention lately. 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 throwback to GFC, but that's about all (or an 'ought-to-regulate' lesson 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.

NCTC - Intel Inside

By all accounts, Shri P Chidambaram, our Home Minister, does not take kindly to fools. Nor, can stakes be higher than on Terror, with multiple strikes over the few years highlighting our extraordinarily vulnerable national security status. Yet, when GoI shared a "50 Most Wanted" dossier with Pakistan a few months ago, it was a disgrace (two on the list were in India). That very fortnight, CBI's pursuit of Kim Davy (Purulia arms drop notoriety) in Denmark ended with egg on the face owing to an "expired" extradition notice.

Those 'bureaucratic gaffes' were, of course, only the latest in long history of ignominy (Kargil, 26/11, David Headley, Red Corridor being but a few of its more sordid chapters). Questions were asked of Indian intelligence, or the lack of it. In response we were told to think beyond the CBI, NIA, IB and RAW, all under our venerable Home Minister's charge, to NATGRID, his pet project. NATGRID would allow 11 security agencies access to 21 linked databases covering financial, travel, immigration, asset ownership, telephone and internet usage information for individuals and entities in the country.

Arguments had been made against a NATGRID style response. There were concerns around diffusing focus away from building good ol' Hum-Int with a grandiose but potentially ineffective programme. For instance, it may not raise any alert for an American citizen with Caucasian looks, no cellphone or financial records in his name (save, perhaps, every itinerary with return via Pakistan; an obvious need to brief ISI-LeT) thereby missing Headley. Equally, the potential for assault on personal liberty and data privacy with Government's power to obtain sensitive information without warrant or consent, bred its own share of D Thomases.

Resolution to these, naturally, lay in a well-considered approach. Last week's order notifying the creation of NCTC, alas, displays none of this sure-footedness. In typical PC fashion, it managed to raise hackles all over instead. Opposition-ruled states are up in arms, for one, when Center-State cooperation would be ideal for seamless execution. Likewise, we have conflicts within GoI's own framework with RAW (external intel); NTRO (collection and analysis); and NIA (investigation and prosecution), all of whom have mandates broader than counterterrorism. Nesting the NCTC under the IB, a body sans parliamentary sanction or oversight, too reeks of shoddy legal formulation, if not downright empire-building on part of the Home Min.

PC apologists may point out that feedback has gone into the current notification vis-a-vis his original plan (IB centenary endowment lecture; Dec 2009). This had the NIA, NTRO, NCRB and NSG under the NCTC; as also the counter-terror work of RAW and CBI. Yet, even if watered-down, NCTC remains deeply flawed, most notably in its lack of separation of analytical and operative powers. Add lack of governaceto that, and we can put the US miliatry-industrial complex to shame in its reach. I hope sense prevails soon, with a better design that helps our counterterrorism effort acquire effective teeth. No terrorism-frontline State (for we are unmistakably one) worth its salt should settle for any less.