Goodbye, cruel 2008

December 29th, 2008

This year will most probably be remembered for all the bad things – terror attacks, job losses and fall of legendary institutions like Bear Stearns and Lehman Brothers.

In the last thirteen years in my professional career, I have not seen a worse year. While we all knew that the US sub-prime crisis would hit the financial markets sooner than later, none of us expected this mayhem.

The initial crash in January was almost welcome. The Indian stock markets had almost risen to surreal levels and all that decoupling talk was really hard to digest.

But post-June, when financial institutions started closing down or getting sold, the real fear began. Till then, it was a blip or in stock market parlance, a correction that was overdue. Things have really gone bad since then. Stories of job losses and salary cuts have become common now.

The rate cuts and capital infusion by all the central bankers have really not helped. Of course, the effects will not be immediately seen. But banks are quite wary about lending. From indiscriminate lending to no lending, many banks have come a long way.

And to round it off, after Delhi, Orissa and so many other cities… the Mumbai attacks. While critics have panned the media coverage by calling it elitist, I have a slightly different view.

Though floods or earthquakes cause many more deaths, this was something completely different. The number or kind of people were not important. It was simply about the audacity of it all.

While, we constantly hear about terrorists engaging in gun battles with the army in Jammu and Kashmir, we have never heard of a gun battle where terrorists fought the some 600-plus army and policemen for three full days in any of the major cities in India or perhaps, even world. As a Mumbaikar for my entire working life, I am sad to see the state of the hotels where I used to spend hours.

And, of course, the aftermath. Now that Pakistan has conveniently shrugged off any responsibility, India faces the tough challenge of making things happen.

As 2008 comes to an end, I pray that the next year is much better. Lesser terror attacks, fewer job losses and some turnaround in the stock market will definitely make me feel better. Guess, I am asking for too much…

But what is making me really happy is that this year is almost over. Goodbye, cruel 2008

- Joydeep

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FMPs:Too much of a good thing…

December 10th, 2008

In the last few months, when Fixed Maturity Plans (FMPs) of mutual funds were in some serious trouble, I was speaking to a lot of industry experts. The general view was that the product was suffering from a perception problem.

In the last two years, when interest rates were on the rise, FMPs became a big hit with investors. This is because they were giving better returns than fixed deposits (FDs). Plus, there were tax benefits as well.

When the marketing people realised this, they went the whole hog. But as usual, they went for the easier option – corporate money. And to attract those crores in a single deal, fund houses were forced to compete. The result: Each fund house was trying to outdo the other, in terms of the interest rate being offered. No wonder, fund managers found themselves under constant pressure.

In defence of marketing people, once another fund house offered a higher rate, it became a benchmark and both distributors and investors started asking for that rate or even more.

This led to a situation where even a short-term debt fund manager was forced to invest in longer-term or riskier papers to hike returns. And that is a perfect recipe for disaster. “The marketers do not realise that to give 0.5 per cent more, I have to put the entire portfolio at risk,” said a former debt fund manager.

When the going was good, no one complained. But as fund houses have found during the recent run on FMPs, liquid and liquid-plus funds, things can really go crazy when there all corporates hit the exit button at the same time.

There isn’t much of a secondary market for many of the underlying papers of these schemes, especially commercial papers and pass through certificates. And the few buyers would want their pound of flesh and purchase at a hefty discount.

Now, the market regulator, the Securities and Exchange Board of India (Sebi) has tried to solve the problem by introducing a “no exit clause” from FMPs. Instead, they will have to be listed. I do not know whether it will help or not.

But I am sure that FMPs will not stay the same. The rates of return they are offering are already down from 12 per cent in October to 7.5 per cent now. Also, in a lower interest rate regime, gilt funds will always be more attractive. But what has hurt fund houses the most is the overall negative sentiment. Especially, the corporate sector’s sentiment, which accounts for over 60 per cent of the money, in FMPs.

The lessons to be learnt are many. For one, excessive marketing and the rush to increase the asset base can hurt a decent product. Also, over dependence on corporate money can be counter productive. And most importantly, running after retail investors may be costlier but when fund houses lecture investors that money can only be made in the long term… they should be viewing their own business in a similar manner.

Already some CEOs and marketing heads are talking about moving from excessive exposure in debt to equities. Haven’t we heard it all before?

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Signals should be broken, especially by cabs with bombs

December 1st, 2008
Last Wednesday, I went to the Press Club located behind the Times of India building, which is quite usual. What was unusual was that I left it at exactly 10 p m; most days, I hang around till 11 or 12, sometimes later.

But on Wednesday, I was with Raghu Mohan (a scribe with Business World). And he has this unusual habit of leaving at exactly 10 often, even if the drink is half-finished.

As our regular cab driver sped towards Borivali, I received a message from a friend that brought the initial awareness. The message read…” Firing at 4 places in Mumbai. Pl don’t go out. Watch tv”. I was about to respond to him with a “safe and sound at SantaCruz” when there was a loud dull thud.

We could see was a lot of smoke in front of us, a burning tyre was rolling across the street and the fire was spreading with it. But there was no cab in front of us – it had just disappeared – maybe, into pieces. Phones had already started ringing. In-between taking calls, we made a few to friends and offices.

What has stayed etched in my mind is this incident: There was a Toyota Innova besides us and for reasons unknown to me, I told the driver (rather stupidly, perhaps) to put off the engine – some weird thought about electromagnetic waves. The driver just looked at me and rolled up the window.

Meanwhile, a large number of people had started running towards the taxi or whatever was left of it. We decided to walk to catch a train or auto or whatever. On our way, we saw a crumpled piece of metal on the roadside – it resembled a mudguard. Crowds had gathered in other places where either parts of the cab or its passengers had fallen.

We got an auto soon. When informed about the blast, the driver drove like a maniac – we almost had a few accidents and landed up a couple of kilometres away from our homes.

Finally, when I reached home, there were more calls and animated conversations about what happened or could have.

I went to town today (as Bombayites or Mumbaikars tend to call places beyond Dadar). I saw the dark patches and broken windows at the Taj and Oberoi. A few months back, I was at the Taj for the Business Standard Awards. Today, the building stood pleading helplessness.

I remembered Raghu’s call the morning after to inform that he is writing an article about our experience. He just happened to mention, “You know, that cabbie broke the signal while we stopped,”…

Joydeep

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