Book Review: The rise and fall of Bear Stearns

This is the biography of Alan Greenberg and also of the investment firm he did run, Bear Stearns. The credit crisis of 2008 led to collapse of Bear Sterns and it was taken over by JPMorgan. Bear Sterns was already eight decades old company by then and it had survived many crisis Wall Street had seen including the dot com bust. But the sequence of events and the situations they got into during the crisis of 2008 made the executives of Bear Stearns run out of options and watch helplessly fallout of their company and market capital of their firm melting away into thin air.

The first few chapters are about the childhood days of Alan Greenberg growing up as a sportsman, and learning business fundamentals from his father. A small town boy ends up in Wall Street with a grand plan and rises to the position of CEO and Chairman of Bear Stearns. Later chapters are about the nuances of investment world. He also takes digs at the people he worked with at Bear Sterns. And the final portion of the book is about the downfall of Bear Stearns. Even though he was retired from the post of CEO during the time of crisis, he makes every attempt to keep the firm afloat but they do not yield expected results.

This is a straight through and honest assessment of the company, industry and the people he worked with. And the book has lots of common sense lessons about risk management and human behavior.

Book Review: Cotton – The Biography of a Revolutionary Fiber

A thousand years ago cotton clothes were the visible differentiation between a civilized man and a nomad. Even today, practically everyone on earth are wearing cotton or using something made out of it. This crop was domesticated first in Asia, Africa and South America and took its prominent place in the journey of human civilization.

Cotton textiles were the major export of Indus valley civilization and were exchanged for grains, spices and other goods. An English traveler called the cotton plant a “Vegetable Lamb”. Traders and travelers spread the usage of cotton and made it a valuable crop. Cotton processing mills were at the center of industrial revolution. Mahatma Gandhi’s cotton spinning wheel became a political symbol in India. In a way, biography of cotton is a reflection of human evolution. So the biography of cotton cuts across centuries and circles around the globe.

Author Stephen Yafa has done extensive research of tracking the history of cotton, its evolution and adoption. He provides lots of insights and reveals fascinating facts to the reader making the biography of cotton no less interesting than the biography of human beings.

Book Review: Rajmohan’s Wife

In this story, Rajmohan is a villain. His wife Matangini is the victim. Matangini has a sister and who has a loving husband in Madhav.

Rajmohan is at the service of Madhav but teams up with dacoits to help them loot Madhav and get a share out of it. Overhearing Rajmohan’s discussion with the dacoits, Matangini warns her sister and her sister’s husband and avoids the tragedy. But the furious Rajmohan attempts to kill Matangini. She manages to escape and takes shelter in the house of Mathur Ghose, a zamindar, who had a secret liking for Matangini and was looking for opportunistic moment to begin an affair with her. Matangini refuses this proposal but gets confined to indoors of an unoccupied house owned by Mathur. Mathur was also in gloves with dacoits and was a beneficiary of their plan to loot Madhav.

As the situation develops, dacoits surrender to police and confess their plan to loot Madhav’s house and the involvement of Rajmohan and Mathur Ghose as beneficiary. Police arrests Rajmohan but Mathur commits suicide. Matangini leaves the place to live with her father.

This short novel was written 150 years ago by Bankimchandra Chattopadhyay. This was his first and the only novel he wrote in English. He further chose to write in Bengali including the epochal Anandamath and the verse ‘Vande Mataram’, which became the national song of India.

Book Review: The Biography of A Dollar

The first effort of industrialization and making the globe its market was championed by English but their currency Pound could not remain the global currency after the world wars. USA emerged as protagonist with the next wave of industrialization, economic growth with size and strength. And the Dollar began to gain prominence. Detaching the value of Dollar from Gold did hurt it initially but paved a grand way for it to become the reserve currency of the world. 

Today, 61% of the forex reserves held all over the world are in Dollars. This money running into trillions of dollars is a loan to the Govt. of US without any interest. Since most of the commodities are traded in Dollar, US does not have to incur forex costs and can trade with very lean forex reserves. This is a privilege for the home country of a dominant currency. US Govt. can borrow massively, run huge deficits, central bank can expand balance sheet without affecting the value of its currency. This is an advantage for US but it is a form of a global tax for rest of the countries who use dollar even when they are not trading with US but as an international currency.

Dollar is accepted everywhere, but how and who made this happen? What makes emerging countries maintain higher reserves of dollars? Will the dollar remain unchallenged, even after a potent competitor is born in Euro? If dollar is going to lose value, US won’t be the lone loser, all countries who hold dollar reserves too will lose. It is in the best interest of global commerce to have a single dominating currency. But faith in dollar does mean faith in the US economy. Will it retain the trust when the US appears to be living beyond its means? While the scenarios are changing, trust in dollar is slowly fading but yet dollar is going to remain a dominant currency for some more time to come is the essence of the book.

Opinion: Are interest rates set to fall in India?

While RBI is looking at inflation numbers before reducing the benchmark interest rate, there are many developments which are directed towards reduction in interest rates.

• Reducing SLR: While RBI left the rates untouched during its last meeting, it reduced SLR (Statutory Liquidity Ratio) by 0.5%, this would mean increase in liquidity at banks or little more money to lend. And RBI had expressed its intentions to slowly do away with SLR that would enable banks to lend more freely than put the money into Gold & Govt. securities like they have to do now.
• Ending oil subsidy: Diesel prices are being raised 50 paisa a month thereby reducing the subsidy outgo. This is reducing the subsidy slowly and surely. When this subsidy ends, it would mean the necessity to borrow to fund these subsidies by Govt. or OMC will come down. Oil marketing companies were the biggest borrowers and when these subsidies are gone, it would leave more money on the table of the lenders. If LPG, Fertilizer, and Food subsidies also get reduced, call money market would flush with liquidity. Bankers will be able to borrow money from call market at a lower rate than RBI has set.
• Stronger rupee and softer metal prices to slow down inflation:  While subsidies reduce, deficits narrow down and help to avoid the weakness Rupee has seen in past few years. Fed getting out of QE taking out the air in gold prices. Slowing China has a lesser appetite for metal commodities. Except oil, we are importing deflation. Trends show possibility of trade deficit turning into a small surplus. This is set to make Rupee stronger. It helps our imports costs come down, which reduces fuel bills, so lesser contribution to inflation. Except food items, inflation would moderate in other components of CPI. That would set stage for RBI to act.

There are some probable factors, if and when implemented will help to ease the interest rates.

•  Tax incentives to boost savings: The new Govt. is looking into revise some of the policies aimed at boosting savings. This would mean availability of long term capital at a lower rate for the industry. Those infrastructure companies who are credit starved can reduce dependency on commercial banks for loans. And banks with surplus capital may want to lend at a lower rates. When the corporate bond market develops further it will have similar effect as both lenders and borrowers will have a platform thereby reducing the load on commercial banks to provide for long term capital needs.
•  Tax amnesty schemes: While it is not certain if an amnesty scheme will be rolled out to convert black money into white or bring back stashed cash from abroad, but if implemented it will increase liquidity in the system greatly. And the competition to lend will intensify and offer relief to borrowers.

Risks to assumptions:

Like every assumption has its risks, this too comes with its bag of risks and adverse conditions.

• If food prices go up due to insufficient rains and thus increase inflation, it may tie RBI’s hands or even make it raise the rates further.
• Govt. adopting populist schemes and giving fiscal discipline a miss, this risk looks remote in the given scenario but events like drought, war may force Govt. to consider that.
• If interest rates in US and other developed markets rise significantly and trigger a reversal of FII inflows beyond a point which cannot be supported from the forex reserves built by RBI.

Conclusion:

All in all, given the data and trends, interest rates are more likely drop than stay flat or go up further. Individuals will see relief in their EMI burden and Corporate see expanding earnings. But which sectors will benefit most? Will it be infra and real estate?