Credit Bubble in a Slum ?

Far away from the credit boom of USA from 2004 - 2007, both in distance and in time.

A front page article in the Wall Street Journal states that the micro-finance push maybe creating a credit bubble in India. What started as a social initiative, caught the eyes of investors due to higher returns. Micro-finance loans have interest loans to the tune of 24% - 39% and are generally given to women (more than 90%) who are supposed to be better repayers. Apparently the RBI (Reserve Bank of India) does not regulate interest rates in this market except for advising organizations not to charge too high rates.

Today the number of lenders offering micro-finance has jumped almost 400% from 50 in 2004 to more than 200 in 2008. NBFC (Non Banking Financial Companies) have entered the fray. The loaned amount has grown from less than 0.5 million to 2.4 million. As a result, atleast in some towns and villages there are too many lenders are chasing few good borrowers and - funds loaned for starting business are being used to buy TVs or spent on marriages. Apparently in some over-crowded markets - lending practices are lax; it is often difficult for lenders to cross-check with each other or to verify the utlisation of funds. I just hope the stories of Ramanagram are not being repreated across the country.

This is not to the say that the credit needs to Rural India are being met. Rural Indian economy has very few sources of funds and an even lesser understanding of financial products. I know this by virtue spending an year scaling my organization's distribution beyond metros. It will be really unfortunate if poor lending practices deprive the region and the people their chance for development.

The article published on August 13, 2009 written by Ketaki Gokhale is titled - A Global Surge in Tiny Loans Spurs Credit Bubble in a Slum. You can read it at the WSJ website, but a subscription is needed

The Talibanization of Pakistan-I

Read my take on the past and the present of the Talibanization of Pakistan published here. The next article in this series will explore what future may mean for the country.

Book Update : Gone with the Wind (Margaret Mitchell). I had always wanted to read this one. A wonderfully written love story against the backdrop of the old south, the Civil War and the abolition of slavery. A tale of survival and determination. The perspective is slightly tainted, through the eyes of rich white landlords. Nevertheless, it does capture the pain and hardships war caused in the Southern states of America. Having read it my only regret is why didn't I read it earlier. Imminently inspiring & re-readable over and over again.

Global Financial Crisis : Coach Buffet, politicians & accounting

By the looks of it Warren Buffet is playing the role of saviour, an angel investor in quite a few big companies today. 

The Washington Post article compared Buffet to the man who saved the Wall Street in 1893 & 1907 & also loaned Gold to the US government, J P Morgan.  The world's richest man (Buffet) provided $ 3 billion as new capital to GE (now it strikes me GE was actually founded by JP Morgan) on ofcourse very sweet terms. He earlier showed his faith in Goldman Sachs. Interestingly the article also mentions the Buffet as the coach, guiding the US treasury secretary Henry 'Hank' Paulson. Buffet also backed the  $700 bn mentioning that it was such a great deal, he wants one percent of it, provided the troubled securities are bought at market price.

Think he puts 'the words' to assuage the concern and the take care the interest of ordinary tax payer. If you could convince (& ensure the corresponding action) that the troubled assets would be bought at right price, this proposed 'Bailout'-please-call-it-by-other-name actually becomes the great investment of 'American tax payer money'. All consequences of the 'bailouts-please-call-it-by-other-name then actually look good. Financial institutions are ready do business with each other and the with the consumers. Companies, banks & individuals are able to borrow money at reasonable rates for short periods (not at current levels which probably are the highest in decades). Government & taxpayer make money while we have liquity in this system. Lets face it we are used to faith & trust and the use of a currency. To think of going back to the barter system is just not possible.

This brings to me another of the much debated 'MTM'  rule.  Quite a few of politicians want me to believe that the 'mark to market rule' is the cause of all failure. That all problems of the world will go away if we pretended that they weren't there. Just ask financial institutions to showcase their assets through some tinted lens that makes them look healthier. If only we could make all of them sit in a Finance & Economy class. Ok its difficult to mark assets to market when there is no market but the fact of matter is an accounting 'fix' will furthur deepen the crisis of trust. It will send the institutions deeper into our current credit contraction because the balance sheets will be even farther from the truth than they are today.

As a matter of fact, financial institutions hold a lot of their assets for investment and hence do not mark them to market. The percentage varies for example in the case of failed Washington Mutual ,  75% of the assets were not marked to market. A WSJ article this morning analyses this well but the online content is only accessible through a subscription. Hence not posting here.

The Washington Post articles are here & here

Back home, there was a run on ICICI Bank's stock & the chairman KV Kamath, RBI , Indian finance minister quickly moved to control the damage after the stock fell 22% in one week to reach the price at which it issued equity almost three years ago. The interview by KV Kamath in Mint is here. ICICI BANK - Kamath sees agenda, says bank is safe

Books Update : 1984 by George Orwell 

Weekend Casualities : The Historical Credit Crisis

The Wall Street Journal headline this morning

Crisis on Wall Street as Lehman Totters, Merrill Is Sold, AIG Seeks to Raise Cash

For an investment banking firm thats more than 150 years old & survived the great depression that history in the making. Recording Lehman's history from its website, not sure how long the website would continue henceon,

All the material below has been taken from Lehman's official website here. The content is here just for record. And I guess another tab would be added on .

September 15, 2008
Lehman Brothers Holdings Inc. Announces It Intends to File Chapter 11 Bankruptcy Petition; No Other Lehman Brothers' U.S. Subsidiaries or Affiliates, Including Its Broker-Dealer and Investment Management Subsidiaries, Are Included in the Filing.

1840–1859
The history of Lehman Brothers parallels the growth of the United States and its energetic drive toward prosperity and international prominence. What would evolve into a global financial entity began as a general store in the American South. Henry Lehman, an immigrant from Germany, opened his small shop in the city of Montgomery, Alabama in 1844. Six years later, he was joined by brothers Emanuel and Mayer, and they named the business Lehman Brothers

1850
Henry, Emanuel and Mayer Lehman founded the Firm in Montgomery, Alabama.

1858
Cotton was the cash crop of the time, and the Lehmans accepted it from the local farmers as currency to settle accounts. The brothers traded the cotton for cash or merchandise, becoming brokers for buyers and sellers of the crop. In 1858, they opened an office in New York, which was the commodity trading center of the country.
Read more

1860–1869
The Civil War disrupted the Lehmans' business. When hostilities ended, the brothers moved north and concentrated their operations in New York, where they helped establish the Cotton Exchange.

The post-war period witnessed the rapid growth of railroads, sparking the transformation of the nation from an agrarian to an industrial economy. At the time, Lehman Brothers' future merger partner, Kuhn, Loeb, was underwriting much of the financing for railroad construction. Railroad bonds represented a significant advance in the development of capital markets. Their affordable price attracted a great number of individual investors and Lehman Brothers, recognizing a trend, expanded its commodities business to include the sale and trading of securities. The Firm also moved into the area of financial advisory, which provided the foundation for underwriting expertise.

1880–1889
During the vigorous economic expansion of the second half of the 19th century, Lehman Brothers broadened its expertise beyond commodities brokerage to merchant banking. Building a securities trading business, they became members of the New York Stock Exchange in 1887. Setting the stage for future global growth, Jacob Schiff, a Kuhn, Loeb partner, led the Firm to establish investment-banking relationships in Europe and Japan

1887
The Firm acquires a seat on the New York Stock Exchange

1889
Lehman Brothers underwrites its first stock offering

1900–1909
At the turn of the century, Lehman Brothers was a founding financier of emerging retailers, including Sears, Roebuck & Company, F.W. Woolworth Company, May Department Stores Company, Gimbel Brothers, Inc. and R.H. Macy & Company.

1920–1929
In the 1920s, Robert Lehman perceived dynamic changes occurring in the nation's economy, and focused the company on rapidly developing consumer industries such as retailing, airlines and communications. Lehman Brothers was a strong supporter of the entertainment sector and advised on the consolidation of major movie theater chains. Start-up ventures, including film studios RKO, Paramount and 20th Century Fox, benefited from financing arranged by the Firm. Triggered by the stock market crash of 1929, the Depression placed tremendous pressure on the availability of capital. Lehman Brothers was one of the pioneers of innovative financing techniques such as private placements, arranging loans between blue-chip borrowers and private lenders. These loans offered strict safeguards and solid returns for lenders, while enabling borrowers to raise much-needed capital

1929
The Lehman Corporation is created, a prominent closed-end investment company

1930–1939
The 1930s witnessed the explosive growth of radio and experimentation with a developing technology called television. Lehman Brothers underwrote the initial public offering for DuMont, the first television manufacturer, and helped fund the Radio Corporation of America, known as RCA. Beginning in the 1930s, the increasing demand for oil set off waves of wildcat drilling in search of the resource. Companies like Halliburton and Kerr-McGee relied on Lehman Brothers for capital to fund their activities

1940–1949
The end of World War II ignited an unprecedented era of prosperity, fueling the growth of consumer industries such as home appliances and auto manufacturing. Lehman Brothers became an important financial advisor and underwriter for many growing companies and established a number of long-term relationships that are still active today.

1949
The Firm establishes its 10 Uncommon Values® Portfolio

1950–1959
Economic expansion accelerated in the 1950s with the dawn of the Electronics Age, and Lehman Brothers arranged start-up financing for companies such as Litton Industries. The Firm also lent its expertise and advisory skills to Burlington Mills, Schenley Industries and American Export Lines.
This period was also the beginning of the computer era, and Lehman Brothers provided IPO underwriting for industry pioneer Digital Equipment. The Firm later arranged the acquisition of Digital by Compaq. The travel industry benefited from the sustained economic growth of the period, and Lehman Brothers sponsored the IPO of Hertz Rent-a-Car. The focus on transportation and travel continued into the 1960s, with Lehman Brothers advising Ford Motor Company, TWA, American Airlines and Continental Airlines.

1975
The Firm acquires Abraham & Co.

1980–1989
In the 1980s, Lehman Brothers played an important role in the dawn of the Information Age, helping fund such companies as Intel and new technology businesses of the period, which later became the leading players in the high-tech revolution. During the robust merger and acquisition activity of the 1980s, Lehman Brothers advised companies such as Chrysler, American Motors, General Foods, Philip Morris and Hoffman-LaRoche on expanding domestic and international operations. In the mid-1980s, breakthrough research in the life sciences introduced the biotech era, revolutionizing the healthcare industry. Lehman Brothers assisted a number of new businesses in obtaining the capital needed to fund research and development. A leading advisor to the healthcare sector, the Firm worked with major pharmaceutical companies during the international consolidation and globalization of the industry.

1984
American Express acquires Lehman Brothers and merges the Firm with Shearson.

1990–1999
American Express divested Shearson in 1993, and the independent Firm once again became known solely as Lehman Brothers

1994
The Firm becomes independent through a public stock offering and Lehman Brothers Holding Inc. common stock commences trading on the New York & Pacific stock exchanges. Lehman Brothers opens an office in Tel Aviv, Israel, building upon its long-term presence in that country. At this time, consumer-driven companies such as General Foods, Campbell Soup and Philip Morris turned to Lehman Brothers to help finance the growth necessary to satisfy burgeoning demand for their products.

1995
The Firm earns recognition as "Global Bond House of the Year" by International Finance Review.

1998
Lehman Brothers joins the S&P 500 Index and establishes its 10 Uncommon EuroValues portfolio

1999
Lehman Brothers establishes its first venture capital fund and celebrates the 50th year of its 10 Uncommon Values® portfolio. Lehman Brothers establishes an alliance with Bank of Tokyo-Mitsubishi for Japanese M&A.
The Firm passes the $1 billion mark in annual net income for the first time.

2000+
Lehman Brothers celebrates its 150th year anniversary. The Firm joins the S&P 100 Index and its stock price hits $100 for the first time. Lehman Brothers becomes the first firm to underwrite corporate debt on the Internet. The Firm launches LehmanLive®, a Web site that offers clients around the globe access to a vast array of services and proprietary information 24 hours a day.

2001
The Firm resumes fixed income trading two days after Sept. 11 and equity trading when U.S. markets open.
Lehman Brothers brings the first IPO, Given Imaging, to market after Sept. 11. The Firm buys 745 Seventh Ave. for its new global headquarters in Midtown Manhattan and purchases additional space in New York City and New Jersey. Lehman Brothers becomes a member of the Amsterdam Stock Exchange.

2002
Lehman Brothers moves into its new global headquarters in Midtown Manhattan. The Firm establishes the Wealth and Asset Management Division*. Lehman Brothers executes the largest financial services IPO in history for CIT Group, and the largest European leveraged buyout in history for KKR and Wendel Investissement. The Firm lead-manages the largest-ever U.S. dollar denominated debt issue for GECC.
Lehman Brothers acquires Lincoln Capital Management's fixed income business*. * In 2005, the Wealth and Asset Management Division was renamed the Investment Management Division and Lincoln Capital Fixed Income Management Company, LLC was renamed Lehman Brothers Asset Management LLC.

2003
Lehman Brothers acquires Neuberger Berman, positioning the Firm as an industry leader in the wealth and asset management business. The Firm moves to its new European headquarters at 25 Bank Street in Canary Wharf. Lehman Brothers acquires The Crossroads Group*, expanding the Firm's private equity fund investment management business. Moody's Investors Service raises the Firm's long-term credit rating to A1 and the LBI broker-dealer credit rating to Aa3, representing the third ratings upgrade in the last four years.
* In 2005, Lehman Crossroads Investment Advisers, LP (d/b/a The Crossroads Group) was renamed Lehman Brothers Private Fund Advisers, LP

2004
Lehman Brothers moves to its new Asia headquarters in Tokyo's Roppongi Hills. The Firm advises on two of the top five announced Mergers & Acquisitions transactions worldwide: Cingular Wireless' acquisition of AT&T Wireless Services; and Sprint's acquisition of Nextel Communications. Lehman Brothers executes the largest capital markets transaction in the history of the U.S. utility industry for Pacific Gas & Electric and the largest IPO globally in 2004 for Belgacom SA. The Firm posts record financial results, including best-ever net revenue, net income, and earnings per share. The Firm increases its dividend by 33%. Assets under management at the Firm's Investment Management Division rise to a record $137 billion.

2006
Lehman Brothers achieves record net revenues, net income and earnings per share for the third consecutive year based on record results across all business segments and regions. Ranks #1 in the Barron's 500 annual survey of corporate performance for the largest companies in the U.S. and Canada. #1 dealer on the London Stock Exchange by trading volume. Advises clients on the three largest global M&A deals announced in 2006: AT&T's acquisition of BellSouth; Gaz de France's merger with Suez* (pending); Endesa's defense mandate resulting from E.ON's takeover offer** (withdrawn). The Lehman Brothers Centre for Women in Business officially launches at the London Business School. All transactions appear as a matter of record only.Source: Thomson Financial, 1 Jan 2006 - 31 Dec 2006* Advisor to the Republic of France, Gaz de France's majority shareholder** Also acted as advisor to Endesa on a consortium's (Enel and Acciona) subsequent takeover offer in 2007

2007
Lehman Brothers ranks #1 "Most Admired Securities Firm" by Fortune. Achieves record net revenues, net income and earnings per common share (diluted) for the fourth consecutive year based on record results in all three business segments. Acts as financial advisor on largest-ever M&A transaction in financial institutions sector: $98 billion acquisition of ABN AMRO by a consortium of the Royal Bank of Scotland, Santander and Fortis.* #1 dealer on the London Stock Exchange by annual trading volume for the third year in a row.
Creates the Lehman Brothers Center for Global Finance and Economic Development at Spelman College, the #1 ranked institution among historically black colleges and universities by U.S. News & World Report.
Establishes the Council on Climate Change to bring together leaders from industry, policy and academia to facilitate constructive dialogue regarding climate change policy formulation and its impact on business.
*Financial advisor to ABN AMRO