17-Aug-2007

What Fun

Do the financial markets conjure up!
First, you take a bunch of shaky and risky subprime mortgages and repackage them into residential mortgage backed securities (RMBS); then you repackage these RMBS in different (equity, mezzanine, senior) tranches of cash CDOs that receive a misleading investment grade rating by the credit rating agencies; then you create synthetic CDOs out of the same underlying RMBS; then you create CDOs of CDOs (or squared CDOs) out of these CDOs; and then you create CDOs of CDOs of CDOs (or cubed CDOs) out of the same murky securities; then you stuff some of these RMBS and CDO tranches into SIV (structured investment vehicles) or into ABCP (Asset Backed Commercial Paper) or into money market funds. Then no wonder that eventually people panic and run - as they did yesterday – on an apparently “safe” money market fund such as Sentinel. That “toxic waste” of unpriceable and uncertain junk and zombie corpses is now emerging in the most unlikely places in the financial markets.

Second example: today any wealthy individual can take $1 million and go to a prime broker and leverage this amount three times; then the resulting $4 million ($1 equity and $3 debt) can be invested in a fund of funds that will in turn leverage these $4 millions three or four times and invest them in a hedge fund; then the hedge fund will take these funds and leverage them three or four times and buy some very junior tranche of a CDO that is itself levered nine or ten times. At the end of this credit chain, the initial $1 million of equity becomes a $100 million investment out of which $99 million is debt (leverage) and only $1 million is equity. So we got an overall leverage ratio of 100 to 1. Then, even a small 1% fall in the price of the final investment (CDO) wipes out the initial capital and creates a chain of margin calls that unravel this debt house of cards. This unraveling of a Minskian Ponzi credit scheme is exactly what is happening right now in financial markets.
Wow, truly is the US the land of opportunities!

Two Styles

It's getting difficult to take Rajdeep Sardesai seriously, on TV and especially in print. Especially when he writes like this.
The Left opposition to the Indo-US nuclear deal must again be seen as part of its attempt to impose its ideology on the country’s political agenda. This is not about the details of the 123 Agreement any longer, not even about a robust discussion on the country’s energy needs, this is simply now about the unseen “dangers” of forging a closer strategic relationship with the “Evil Empire” in Washington.
No, not "unseen" dangers - seen dangers of aligning with the evil empire. Instead of comparing the Left to a child that needs to grow up he should have seen that it is the US which is the selfish, petulant child with none of the innocence of childhood. The US is like a spoilt kid that will not stop till it gets what it wants - oil, markets for its military-industrial complex, geo-political power.. And it will be the same which ever party comes to power - Democratic or Republican.

All Rajdeep needs to do to know that it is not 'unseen' dangers is read this piece:
Consider the negotiations themselves. Right from the first day, or rather the eve of the first day, the government has been beset by bitter battles over the limits of what was acceptable to India and what was not. In Washington on July 17, 2005, the Department of Atomic Energy had to fight for the right to redraft a statement that the Ministry of External Affairs had already negotiated with the American side and which it considered final. It was only thanks to this eleventh hour internal battle that the strict reciprocity of U.S. and Indian commitments in the July statement was established. What happened that evening set a trend for the next two years. Invariably, these internal battles became more serious on the eve of difficult decisions: the anti-Iran vote at the IAEA in September 2005 (when a tightly argued note by Secretary Rajiv Sikri recommending abstention was overruled at the highest level); the contours of India’s separation plan in January and February 2006 (when some senior officials pushed for putting the fast breeder reactors into the safeguarded list); and the ‘right of return’ and reprocessing in the 123 talks — when the Government’s Apex Group on nuclear matters was forced, as recently as May 2007, to overrule a weak draft that the MEA thought was acceptable.

At every stage, the government was divided into those who felt it was easier to submit to U.S. pressure and those who argued India had nothing to lose from sticking to its principled positions. And it was not always that the latter prevailed. If a negotiating process that went through so many dubious twists and turns still managed to produce a reasonable 123 agreement, this was largely because India finally realised it pays to stick to one’s guns. But the country as a whole remains sceptical and the onus is on Dr. Singh to dispel this scepticism.

Now that is an article that relies on actual facts and presents evidence for its arguments. Much better Rajdeep sticks to TV- there the moment passes and one forgets.