Financial "Weapon of mass destruction" by Buffett

It was not so long ago when the Oracle of Omaha, Warren Buffett described derivatives as ‘financial weapons of mass destruction’ and warned against the extraordinarily high risks hidden in those instruments. He rightly said that those who are holding derivatives hardly understood the risks, a fact that was very evident during the recent credit crisis. That was when financial derivatives were not even a fraction as popular as they are now.

Having said that, we would have expected Buffett to stay clear of derivatives. But, contrary to popular wisdom, Buffett is not all that risk-averse – the stock portfolio of his company Berkshire Hathaway is very concentrated, for example. Unlike others, he is quite clear about the risk he is taking and that is the major reason for his superior and consistent performance. In other words, better risk awareness helps him prevent the huge losses others suffer once in a while.

Given that, markets were quite surprised when Berkshire declared a huge $1.6 billion loss on derivative contracts for the first quarter of this year. Most of these losses were on account of put options on the S&P 500 index. It seems Buffett was a bit too bullish on the markets! Credit default swap, which protects bond investors against default by issuers, contracts accounted for the rest of the losses.

Then again, these are non-cash losses and Buffett is unruffled. In his letter to shareholders he says he is not ‘bothered by these swings even though they could easily amount to $1bn or more in a quarter’. Since the end of the quarter, Berkshire is said to have recovered close to $0.5 billion of the non-cash losses as stock markets have recovered since April.

Clearly, derivatives, F&O, are something which has a huge amount of risk. And it requires lot of experience to understand and structure your positions so that the risk exposure gets reduced. One must not just jump in the F&O segment just by looking at the potential gain it can give.

IPOs - Relief to investors.

Investors no longer have to wait for weeks for refund of their IPO application money.The application money earmarked for an IPO will now remain in the applicant’s bank account till the allotment is finalised, thus eliminating the refund process. This means that the money marked for the IPO will not be used for any other payment obligation during that period. At the same time, the applicant will enjoy the interest payable on the amount.This would also reduce the burden on registrars and merchant bankers. But bankers to the issue can no longer enjoy the floating interest. Most important of all, investors would not have to wait for their refund money. It also ensures that a liquidity crisis such as that of January 2008 does not occur again. At that time, many investors were unable to buy scrips which were at attractive lows, as their money was locked up in the Reliance Power and the Future Capital IPOs.

Still a lot of reform work is required in primary markets.

Naam mein kya rakha hai bhai!

A couple of days earlier Shiv Sena's student's wing, Bharatiya Vidyarthi Sena (BVS), targeted establishments that still have Bombay in their names, including the city's prestigious school, Bombay Scottish, a Bombay Dyeing showroom and offices of The Times of India, whose city supplement is called Bombay Times.

Now, the list also includes Shiv Sena's demand to remove Bombay from Bombay Stock Exchange.

Every party wants some fancy issues rather than solving some existing serious ones. I dont want to take a political stance here, my views are completely objective. On one side Mr. Raj Thackeray and his followers try to be in limelight by targeting Amitabh Bachchan. And now Shiv Sena is trying to cook some irrelevant issue of Bombay versus Mumbai. How are the farmers of Maharashtra going to be benefited out of this ? Or is it going to solve the power problem of the state?

Bombay Dyeing is a corporate entity, a company registered under Company Act 1956. Now, why should a company change its name, just because of change in the name of the city, whose name matches with part of its name? Two years hence, politicians in UP or Bihar may not allow the company to open its stores there, just because it doesnt say "Patna Dyening" or "Lucknow Dyeing". It really sounds funny. I wonder what the advisors to the politicians do?

BSE has created a brand for itself over a period of time. Now it is a globally recognised name. What's the point in changing the names?

My serious suggestion: Politicians should focus on issues like primary education, good health and medical facilities, sufficient power, infrastructure, farmers and farmer loans problem and also check the crime in the state.

Cashing the real estate!

Chennai-based Indian Overseas Bank is planning to sell its properties to self-promoted special purpose vehicle, thus realising the entire profit and then ploughing it back to its Tier-I capital. IOB will do a leaseback deal of properties that it had sold to the SPV.
According to the bank's estimates, the prices of its property has appreciated nearly 200 per cent over the last couple of years.

IOB has sought the approval of the finance ministry for implementing the idea, according to a top bank executive. If approved by the ministry, the government-owned bank's profit will soar by Rs 6 billion and the amount will be ploughed back to its Tier-I capital.

Banks are allowed to use 40 per cent of the rise in assets valuation to accrue to their Tier-II capital. In the current case, however, the bank will show the transaction as a sale and not revaluation. Hence the entire value of the property is accruable to its Tier-I capital.

The move followed a substantial depletion in the bank's capital adequacy ratio in the previous financial year as it had to comply with Basel-II norms. The capital adequacy ratio of the bank was 11.13 per cent as on March 31 compared with 13.27 per cent in the same period a year ago. The Tier-I capital stood at 7.31 per cent. The decrease in CAR of IOB has happened as Basel-II norms includes attaching higher weights to various risky assets.

So net net the bank would make profits virtually and make its balance sheet look healthier just by doing some paper work. Kudos, Ye hai India meri jaan.

Sources: Business Standard

News in pics.

A revisit on what the sub prime lending fallout and real estate bubble burst has done to people in US and parts of Europe.

Housing drought hits sales of multi-million pound homes in London as consumer confidence hits four-year low. Almost half of all consumers surveyed believe the economy will worsen further in six months time, twice as many people showing pessimism than a year ago.

I believe this was due and expected and this event will have far reaching effects. One should not expect that we will be out of it very soon!

Is the world jealous of Indian middle class prosperity?

The US President George W Bush, on 2nd May 2008, sought to put the blame of the rising food prices on increase in demand of better nutrition from the burgeoning Indian middle class. Earlier, the Secretary of State, Condoleezza Rice, had also made a similar remark on the rising food prices, wherein she argued that improvement in diets of people in India and China has been responsible for this.

Explaining the reason for rise in food prices to a Japanese-American who posed a question to Bush on this issue at a function in Maryland Heights in Missouri, the US President said: ''Just as an interesting thought for you, there are 350 million people in India who are classified as middle class. That's bigger than America. Their middle class is larger than our entire population.''Bush said: ''When you start getting wealth, you start demanding better nutrition and better food, and so demand is high, and that causes the price to go up.'' He, however, did not subscribe to the notion that ethanol is the main cost driver for the food prices going up. In fact, besides Bush and Rice, during the past one week, several similar statements have emanated from US leadership in which they have tended to attribute the rising food prices to the increase in food demand from India and China.

In response to such serious allegations, Chandrajit Banerjee, director general, CII, in the statement, "The entire issue of food prices needs to be seen in a global perspective and not just seen as an issue emanating from specific countries. There is a need for greater flow of global information on food production and consumption and cuts in food wastage."

I think Bush should concentrate more on war related issues rather than such economic issues. Or is he worried of US being over thrown by India and China, as world's greatest economies? Suddenly, people subscribing to such opinion forgot that there are several world events happening causing food prices to escalate. There was a drought in Australia, production has reduced in several European countries, grain stocks has reduced in many countries including India and China. Exporting countries as diverse as Argentina, China, India, Russia, Ukraine, Kazakhstan and Vietnam have placed additional taxes or restrictions on exports of grains, rice, oilseeds and other products. By reducing supplies available for world commerce, these actions has led to an incraese in global commodity prices. This is in addition to the jumping crude oil prices and worldwide weather production problem. I would say it was a careless statement made by Mr. Bush and Indian politians are too busy in forthcoming domestic election, to comment on such issues.

Vodafone - Can this bring a new revolution in the telecom industry?

Vodafone is offering unlimited internet access as a standard feature of its new monthly mobile price plans, driven by an increasing amount of people accessing social networking sites and e-mail from their phones.
The Newbury-based group is the first mobile phone operator in the UK to offer the unlimited deal with all its monthly tariffs, although O2 currently offers an unlimited deal for its iPhone customers.

Vodafone hopes the new flat rate policy will fuel use of the internet on mobiles, as operators search for additional ways to generate revenue in a saturated market.
Earlier this year the group announced it was cutting 450 middle management jobs and hiring nearly 500 sales and retail staff as it attempts to increase its share of the competitive mobile internet and broadband market.

Take up of internet on mobiles has been hampered by complicated pricing structures which limit the amount of data you can download. Because few people know what a megabyte actually means in terms of internet usage, customers have been nervous about wracking up hefty bills through browsing.

The launch of the iPhone towards the end of last year saw a surge in mobile data traffic, with Google confirming in February it had received 50 times more searches from the iPhone than from any other mobile handset. Apple’s new 3G version of the iPhone, which could be launched as soon as next month, is expected to boost mobile internet use further as it will provide access to the faster 3G network.

Al Russell, head of mobile internet and content services at Vodafone, said: “Many people already have phones that can browse the internet so they don’t need to buy new ones. A lot of people are worried about how to use the internet on their phones. Our staff will put the phones in their hands and show them how to do it in two minutes. And they don’t have to worry about the cost.”
Vodafone, the world's largest mobile phone company by revenue, said internet access would be automatically bundled in with all its new pay plans for no extra charge, with prices starting from £25 per month. Until now customers had to buy an additional internet bundle for £7.50, with a cap of 120 megabytes per month.

However, Vodafone’s “unlimited” package does in fact have a limit: it is subject to a “fair usage policy” of 500 megabytes per month. Users will not be penalised if they overstep the limit but the company said excessive abusers would be contacted.

The top three internet sites on Vodafone Mobile Internet are Facebook, Google and the BBC, while the top three searches by customers are Facebook, Bebo and eBay.

With this new offer, clearly Vodafone is sending signals to the industry that it is ready to take up the competiton aggressively. Can this change the face of telecom industry. Whatever may be the outcome, customers, surely, are going to smile the way.