Tuesday, 25 March 2008


>Estimated deployment of 30000 troops and $30bn.
>Actual deployment of 150000 troops and approx $600 bn till now.
>The most liberals estimates of the subprime crisis expect write downs of only $300 - 400 bn.

1907 - 2008
J.Pierpont Morgan rallied the Bankers and Trust institutions in 1907 to withstand the onslaught of recession. The write downs amounted to around $18bn. By coincidence it was J.P.Morgan,the bank, that bailed out Bear stearns in 2008 March.
After a series of rescue measures in 1907 , The Federal Reserve was formed, most prudently, in 1913 as a regulator. Will we see the establishment of another, equally far reaching, institution now. A Federal Mortgage Crisis Emergency Reserve perhaps ?

Thursday, 20 March 2008


Its interesting to follow the concerted moves by the US Federal Reserve using different measures, monetary as well as the policy measures to combat the spreading sub prime problem. Its a gripping battle. Though I dont understand much of it , its gripping all the same to read about the battle thats on.

When first Ben Bernanke cut the the overnight window rate in last September (2007) it almost went unnoticed, except for the huge upswings in the Indian equity markets and some mumblings in the background about recession , slow down etc, largely it was accepted as a matter of routine monetary policy. Then followed a series of aggressive rate cuts finally resulting in a total of 3% cut in just under 6 months, which is phenomenal by any monetary policy standards.

Even till recently the desperation in the rate cuts were not understood properly, not only by the world but in the US too. This is evident from the statement by President Bush that one (read FED) should not over react.

That was before Bear Stearns caved in.

Until then subprime was yet another new topic of financial management. Reaction and over reaction was a matter of opinion.

The overnight caving in and the subsequent Fed orchestrated (and $30bn guarantee too) buy out , albeit at dirt cheap price, of Bear Stearns by JP Morgan heightened the public sensitivity to the subprime issue. Dramatically instead of cautioning against over reaction, the clamour for aggressive rate cuts was more audible. The sub prime "problem" in the public opinion had become "crisis".
The quick , clean and crisp handling of Bear Stearns issue brought to highlight the maturity of the US financial system a well as the preparedness of the US FED.

The FED was not stopping at that. They had an action plan. A plan for an onslaught on the demon of subprime crisis and also simultaneaously to spur the economy out of a possible recession. It came out with a $168 bn action plan , with a multi pronged approach and not just monetary policy measures, a part of which was used for the JP Morgan take over of Bear Stearns.
One of the recent measures the FED came up with was the capital reduction of the govt. sponsored housing companies, Fannie Mae & Freddie Mac, from $30 bn to $20bn. The measure is expected to inject an additional $200bn in to the US housing loan market. The plan will assist new home buyers to take up loan (read decrease in non-saleability of US home loan foreclosure auctions) and existing home loan owners to refinance using cheaper motgagaes (read better repayment leading to better saleability of Mortgage Backed Securities).
A few other measures have been initiated as part of the package deal in combating the subprime crisis. The temporary cap on mortgages the company (Fannie & Freddie) can purchase or guaratee in high cost markets have been increased from around $0.42 mn to around $0.75 mn. Also the combined cap on mortgages for both the companies put togather which was at $1.5 trillion has been lifted.
The FED by these measures is trying to induce liquidity in the US housing loan market which has almost but dried up. The measures are not a day early, and as for the US financial institutions we all hope it may be just enough to help them start their climb back to the edge of the subprime pit.
As for the present US FED and Ben Bernanke , the evidence is out that they have emerged from the shadows of the Greenspan era and cut a path for themselves in the books of financial history.

Sunday, 16 March 2008


As the story of the global subprime crisis unfolded, last week we yet again found another name to scare us. Bear Stearns the US investment Bank was the latest one to hit the head lines with it facing a sudden cash crunch due to the piling up of unsaleable mortagage backed securities. Fearing the massive possible repercussions in the US finanacial markets especially , a federal Reserve orchestrated move saw JP Morgan, Bear Stearns rival, lend cash to Bear Stearns for 28 days on a secured basis. Has it been bailed out? Is the issue put to rest once and for all?

Probabaly no. The unsaleable papers do not transform to saleable ones in a months time. Hence follow up action can be almost certain from the Fed and JP Morgan is likely to lend a helping hand yet again.

In all probability we may witness a take over of Bear Stearns by JP Morgan. Atleast it seems to be a strong possibility as the heated weekend meetings suggest between Bear Stearns, JP Morgan & JC Flowers , another US bank which may make a bid for parts of the Bear Stearns business as it does not have the where withal to take over the entire business of BS unlike JP Morgan which can.

Its attractive looking from JP Morgan side too. Bear Stearns which was trading at $160 per share last April is at $36 now. In all probability JP Morgan is likely to offer a price not more than $15 per share. What helps them further is that S&P recently down graded BS to "BBB" from "A" ,which is now just above the junk bonds. The down grading further ensured that the market may not touch BS even witha a barging pole making its operations difficult, for a while atleast. Also JP Morgan may not lend much credence to the BS book value of $80 per share. The icing on the cake might probabaly be the swanky BS buliding in New York, much liked by the JP Morgan CEO Jamie Damon, as compared to the austere surroundings at the JP Morgan building around the corner.

Probabaly those who had the hardest bump of all were the BS employees. Not that they will face retrenchment. Infact many of them will be inevitable if JP Morgan is to run the show. The bump is hard simply because they own 25% of BS and most of them have their net worths already eroded significantly. Each one of them must surely be ruing the failure to cash in on time and take early retirement and instead are sprucing up for more hard work ahead.

Yet another set of losers may be in the New york Metro area, where the Highly paid , High Net worth BS employees, including BS CEO Allan Schwartz, will be found with tighter purse strings.

Monday, 10 March 2008


The price of crude having held on to its long term support of $88 per barrel, except for a brief period recently, it resumed its move toward its eventual target of $125 per barrel. Tracking the strengthening crude and a weakening USD globally (against all major currencies) gold shot into limelight and crossing $965 an ounce. Not having retraced from there it is still remaining strong.

Crude continues its march, and Ben Bernanke in all likely hood is ready for another round of rate cuts to fuel his economy, which is in the grips of a probabale stagflation.

Is it time we got out of the equity markets and entered gold atleast now? A few indicators may help us make a decision albeit a speculative one at that.

1. To insulate their economies against a dipping dollar some of the Asian countries, the Russians & other petro dollar countries converted some of their reserves into Euro. The Euro Zone saw an inflow of around 200 billion Euros in the first half of 2007.

2. Vladimir Putin has advised the Russian Central Bank to increase gold reserve portion by 10% and other countries may follow.

3. The Asian economies and Petro $ countries are sitting on $6.6 trillion of reserves. A small shift from them in to gold will have telling effect. Will the shift happen?

4. The strengthening rupee in the previous year increased the domestic demand for gold by 72% and India is the largest market for gold. Will the demand be sustained?

5. Demand from Gold ETF are on the rise, as also the demand from Middle East and China too.

6. The supply side of Gold is shrinking as also the demand, as the price rises. The Indian demand for gold fell by around 62% in the 4th quarter of 2007.

7. The global supply is also shrinking due to power problems in China & South Africa and also because the mines are yielding less.

8. Gold is unique in that, almost 90% of the mined gold is still in existence, so they can always be shifted as per the regional demands.

Will the gold move towards the eventual technical targets that some analysts are forecasting i.e from 1200 per gram to almost 4800 per gram on the back of further weakening of USD and rising crude? Or will the US economy start picking up causing strenghtening of the USD thus taking the sheen off Gold prices? Do I sell what I have and make a killing on a right sell call? OR do I accumulate further and make an almost 400% return on again a right call but on the buy side. Do i follow the herd and buy into gold or does it ring alarm bells in me that yet another crash is on its way - this time in gold markets.

Its not my wish to make decisions for u but to remind u that the decisions and also the P/L are entirely yours.