Tuesday, September 16, 2008

Why banks fail in the US?

If you dont understand the following, here is the pictorial representation of the mess..
Everyone knows that the economy is down and US is not doing great. Scrap the surface and we dont really know what really the issue is. Some initiated may say "its the sub-prime crisis".
After much difficulty I think i understand it now..
Wading through the complex jargon and inherently complicated financial system, what I see is profoundly dumb decisions masked as "investment models" based on one fndamentally stupid premise
"Lend money to someone who cannot repay. Thats the way to make money for everyone"
A lends money to X and charges X a hefty interest (to cover the risk of default by X). B decides that there is a risk-reward premise. Assuming (Ass u me) the default is going to be less, they securitize these mortgages ( "If X pays, banks make money. More such X's pay bank pays more money. So lets issue a bond to an investor by name C, who will make money if X pays A. If X keeps aying, A's mortgage loans are performing well. More people would want to own securities whose underlying mortgages do well)
So mortgage based securities were sold and sought like hot cakes by C's. C's then issue what is known as "CDO (collateralized Debt obligations" - which means "someone took a loan. some one bet a gamble on it. I am gambling on the outcome of that gamble).
So these CDO's were sold to investors like you and me - who thought
X will pay A; A will make money; When A make money, B's bonds will make money because B's bonds perform well if A performs well; If B's do well, C's will do well, if C does well, I will make money.
Contrived? No. Complicated? Yes, because you making money depends on 3 other parties meeting their obligations of which the primary party (A) is a known defaulter (and hence called sub prime).
So what's the big deal if C loses money? C is not you and me as I earlier said. C is multi billion dollar investment banks which hire in IIM campuses.
So are the C's dumb? Yes and No. Yes because they are greedy beyond the limits for non-existent money and No because they insured their CDO's with AIG and other insurers who willfully agreed to insure against defaults of the instruments.
Will it affect India? Yes, because even our insurers, reinsure these insurances!
Will it affect a pensioner in India? Yes, if one of the insurance companies in India go belly up (depends on the exposure levels).
But India being an under insured nation, that front of damage is less. But hey, in many ways our lending institutions have bought US securities. What about them?
Watch sensex. You will know the answer!

Sunday, September 14, 2008

Rain ! Nothing else!

Its raining. Like the battalion that ties its movement to a rhythm, the rain here outside my window is following a painfully organized pattern. Like an auto-looped screensaver, its been raining in the same angle, speed and texture for two days now. Its an unfamiliar rain. One that does not bring the fragrance of the earth with it. This rain does not have colors. No muddy water that forms a river. No kids that make paper boats. No sounds of women running with buckets to collect water from the cantilever pipes. No sound of those plastics.
This rain comes with many riders. This is "Dont drench in me. Your insurance may not pay for your common cold" rain. This is "I am used to being a boring sky to earth passenger with predictability and I always follow the set path to the drain" rain. This is "I am wiped more by your car wipers than the hands of those gleeful kids that wipe me from their temples" rain.
There is no asbestos sheet here in the neighbors house that drums down the rain. This isnt the rain that invites itself into your house. This is the rain that is used to flow elegantly along the glass panes of a closed window. This rain does not even entice the frogs to search for the mates. This rain is not going to be discussed, as in this place no one gets drenched, nor do they have the need to save its water for cooking tomorrow.
This rain is not used to amuzement. It neither makes news nor is it considered an event. Its rain. its just that!

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