Economic Crisis: A reflection

Following is my reflection on risk taking that led to the global economic crisis during 2007-2010

The current financial crisis has taught us many lessons. However, the enduring one that has clearly struck in my mind is the one spelled out so clearly by former Fed chairman Allan Greenspan. The current crisis is neither the first nor will it be the last for it is “human nature” at work in each one of them.

Two millennia ago Gautam Buddha, while laying down the principles of Buddhism said, “Desire is the root cause of all evil”. Gordon Gecko in the movie Wall Street turned that age old wisdom on its head when he proclaimed “Greed, for lack of a better word, is good. Greed is right, greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed, in all of its forms; greed for life, for money, for love, knowledge has marked the upward surge of mankind”. This notion of greed not just at Wall St but throughout the value chain is what one can attribute as the prime reason for the economic crisis.  This greed was manifested in the form of hefty bonuses for bankers, who, in order to make them, created loans with teaser interest rates to trap the not so innocent homeowners, who claimed false income proofs to get bigger homes that they could not afford. Banks never sold these home loans themselves, instead relying on equally greedy agents who got a fat commission for selling home loans. The bigger the home loan they sold, better the profits they made. Banks’ assumption that home prices never fell led them to believe that their investment could never go sour. In their endeavor to make even more profits, they, in some cases ended up disbursing 100% of the loan amount. In the meantime, banks created complex instruments based on these loans and sold them to greedy international investors who wanted to make more money. Greedy ratings agencies, without much clue of the underlying securities gave good credit ratings to these financial products and got away with their share in the pie. Greedy insurance agencies insured these financial products without understanding them and under the assumption that they would be alright: after all the ratings agencies had rated them, so they had better be good. While the going was great initially, it was never meant to last too long. It was too good to be true. The end was strong and fast. Higher inflation and rising floating rates triggered home loan defaults and everything fell like a pack of cards. The entangled economies of the entire world suffered a shock and proved that no market is completely decoupled from the other.     

Thus, this crisis is a reminder for us. It makes us to analyze and question not just the role of intermediaries but also that of the investors under whose pressure banks took excessive risk and brought many countries to their knees. Deep crisis in Iceland, Ireland and Greece are grim reminders of excesses by banks, financial institutions and investors in general. Big bonuses to bank chief executives whose pay structures incentivized them to take excessive risk has been much talked about in the world, but it is strange that everyone is waking up to this so late. Complex derivative products, dubbed as the “financial weapons of mass destruction” by Warren Buffet, are understood by few and yet have grown into a trillion dollar business. Excessive leverages by storied Investment banks and their inadequately back-tested mathematical models based on very few years’ worth of historical data is another reminder of the risk of “unknown- unknowns” and what-ifs of a worst case scenario. To complete the picture is inadequate regulation of financial instruments which has led Governments around the world to “Privatize the profits and socialize the losses”. Further away, huge trade surpluses and exports by high saving economies like China and Japan on one hand and ever consuming import hungry credit card economies of US on the other has led to huge trade imbalances in the world. The world has to address all these issues soon.

To sum up, I think there are many lessons to learn from the financial crisis and we will have to apply them again, for as long as greed prevails, this will not be our last financial crisis.

4 Movies and a Book

One of my biggest weaknesses has been my incapacity as a "social" person, a "people" person, an "empathetic" person. I have been dubbed as "emotionless" or rather as an "unemotional" person. If I were to analyze the reasons behind it,  a lack of exposure to good movies and books would be couple of them. I haven't been good at either. While I regret missing out on both these in my early life, I think the opportunity cost of not seeing  movies might have been slightly lesser of the two. There are a few reasons for that, one being  that I can still try and fill up my backlog, because unlike books, watching films consumes a fixed quantum of time no matter who sees it. Books on the other hand requires you to spend much effort and time, especially when picking it up as a hobby in later life.The other reason for lesser opportunity cost of not watching films is also the extremely poor quality of movies in the late 80's and most of 90's. That was the decade of decay of Indian cinema. If I were to analyze and measure the cinematic excellence in India, I am sure, cinema of this period would stand out as the worst on all parameters of creativity and entertainment value. It was as insipid as a wrinkled cucumber on a cold frosty winter day. While I am no expert on films, I do have a modest sense of art. The boy meets girl, running around trees, rich girl poor boy movies showcased the lack of rigor,imagination and freshness in an industry which thrives on novelty of storytelling if not  novelty of stories themselves. I concede that there could have been a big underworld influence, however that is  no reason for such a poor show. I remember having a discussion with my friend in my 2nd year hostel room. Overlooking the famed peepal tree which had our holi shorts still dangling from its branches, I asked myself "Why is Govinda such a huge star?". Hero No. 1 or some such  Xth   generation "No 1" movie had just been released few days before and had been dubbed as a huge success. In my opinion Govinda is one of the sloppiest actors in Hindi cinema and his movies certainly devoid of any sense. I was complaining that he should be dumped by the audience for producing such movies. What I did  feel at that time however, was that there was a huge audience who wanted to see his movies.  Surely, such movies were being made because there was a demand for it. If Altaf Raja could sell 65Million copies of "Tum to thahere pardesi", success of Govinda or Rajnikanth should have been no surprise to me. It is here that my current reading of marketing and strategy concepts comes in handy. To me this is something  akin to Ford's assertion of "Any car as long as it is Black in color". I was reading a book by Rama Bijapurkar titled  "We are like that only". I see a lot of similarities in the two. In many ways than one, we were in an era where people did not have any choice. They consumed whatever was being dished out to them. With liberalization things changed dramatically. Consumers started rejecting old wine in new bottle. There was a wave of new cinema from RGV and many a nouveau chef d'orchestre who challenged and destroyed the decaying movie making "template". Consumers started lapping up their offerings instantly. They wanted value for their money. If you are still wondering, what the heck is my point, all I am trying to drive home is that, in my pursuit of to reduce my cinematic timeshare deficit I watched 4 movies this week, each of them wonderfully well crafted and meaningful. The movies I watched were

1) "Barbarians at the gate" based on the LBO takeover saga of  RJR Nabisco.

2) "Black Friday"- For me one the best Indian docudramas ever made..... period.

3) "Reservoir Dogs" - Quentin Tarantino... need I say anymore

4) "3 Idiots" - Another masterpiece from Hirani and superlative performance by Aamir Khan.

Lastly, I also increased my intellectual "book value" by reading half of "We are like that only".  The book gives  some insights into changing tastes of Indian consumers. The success of good quality movies and rejection of the old formula is an endorsement of the point made in the book about Indian consumers.  I can cite numerous bollywood movies in the last 4-5 years that I have thoroughly enjoyed watching.  Movies like "Munnabhai MBBS", "DevD","Sarkar", "Swades", "Lagaan", "Black" etc to name a few have been outstanding.

Those were the last 4 days of my life for you. A chirstmas holiday well spent on the good things in life : sleep, movies and books.