Success and Excess II

Somehow success and excess always seem to go hand in hand. A while ago when the China - Arunachal Pradesh conflict was at its peak, the visa issue, the rock painting fiasco and so on, elicited 'Power, Politics, Success and Excess'. A talk about ethics and transgressions and how you always have a choice came out in 'How much is too much'. And today, again, on the topic of where to draw a line, here are some thoughts.One of my professors mentioned a very interesting trend in hedge funds . He said, "Some firms are engineered to blow up." He spoke of LTCM and Bear Stearns' 2 funds that were forced to fold. LTCM failed in a macro sense because of a black swan that no one expected. No one dreamt that Russia, America's cold war nemesis and erstwhile feared superpower would default! But one can always argue against such exigencies and ask why risk management practices weren't more robust to prevent even the rarest of rare events from causing damage. Then when we speak of Bear Stearns that broke because of massive exposure to subprime lending and the subsequent drying up of credit markets, one asks again, isn't it a manifestation of excesses? Why didn't people stem the exposure long before the situation went beyond salvage? Take GM. Why do entities need to blow up to 'bailout size' and then justify bailouts saying that they are too big to fail?

Take hedge funds again. We came to know that John Merriweather of LTCM, recently floated his third or fourth fund after busting subsequent funds! Who would have lent him money, you ask? Well, every fund makes some money for some (to the tune of several millions) and loses money for some others. Those who make money, do so thanks to discerningly or luckily removing their money from the fund at the right time and they will lend to these fund managers in their new escapedes, despite the previous fund's having folded! They get the guts to lend again, thanks to the confidence built by having several million dollars of disposable income! The poor, loyal, unsuspecting bunch end up on the left tail of the bell curve, and these are the scapegoats who bear the brunt of irrational exuberance displayed in excesses by successful managers, or they are unfortunate souls who think that their pot of gold just needs an ounce more ! And these people, well, many-a-time, aren't able to reach even 50% of their starting baseline level of affluence! And the story goes on and on.

So more often than not, success leads to excess and this excess can catapult some to untouched heights, while thrusting some others into the chasms of lonely failures. So is regulation the key? Now apparently there are thoughts of regulating some hedge funds by a central authority. Being a strong proponent of efficient markets and classical economic theory, all I can say is - entities that have thrived through self regulation are better off being left alone. Humans never interfere in the laws of the jungle, but somehow, a justice system exists and functions (more efficiently) in the wilderness. So we are better off observing the beauty of self-regulation, Darwinian theory of selection, machinations of the wheels of fortune and the extremes of successes and excesses playing out in front of our eyes, rather than pillage the same with concrete barriers that can destroy this beauty.

Such are the ways of the world. Every black has a white, every God has a satan, every right has a wrong and every winner has a loser.

Boxing Week 2008

It's Boxing Week. Well, all along, I thought that Boxing Day (day after Christmas) held some historical significance in terms of the sport called Boxing, and hence is celebrated as such! Only later did I learn that Boxing day is when Christmas presents are to be unopened and kept / exchanged / returned. The 'boxes' represent the 'Boxing day'. Simple? Oh yeah! This whole week is Boxing week. All malls, shopping places run deals, good deals. Loads of discounts, since this week traditionally invites shoppers in hordes! There have been stories about stampedes outside malls on Boxing day, that apparently even killed a store employee! Now, people spend a lot before Christmas. They spend to buy presents for everyone. And Boxing week is like a bonanza, more like a ritualistic shopping expedition, as a means to add cheer to the white holidays. Basically, Boxing week is like shopping week, in a greater part of the Western World.

This year though, the story has been slightly different. Given the economic slowdown, analysts, economists, retailers have all been speculating on how the mood would be this year. Given the fact that people need to spend in order to boost the economy, the economy watchdogs were actually 'watching'. They wanted to see where the consumer would go, whether he would head to the shop or whether he would hide money under the mattresses. To lure customers almost all major shops advertised 50 - 70% discounts. They advertised freebies, and what not! Just to make the consumer come out and spend.

This time, with loads of people being laid off, mounting debt, lack of free funds to spend coupled with a general sense of uncertainty over where the economy is heading and when the bear would hibernate giving way to the bull, people were not really in a mood to splurge. No stampedes at Wal-Mart, only marginal queues. To make the crowds look bigger, some cash registers were closed off. Many people said that they had exhausted their budgets buying Christmas presents and so, did not wish to spend more in Boxing week. Some were prudent to keep aside buying a much wanted item like a pair of shoes or a bag for Boxing week, just because of the favorable deals. But that's it. No splurge shopping. Some were restrained because they did not feel right shopping when so many people were being laid off or were facing the brunt of the economic slowdown. The only contrasting report however was about Amazon reporting 73 deals per second on day 2 of Boxing week. Heartening to know. But a conspiracy theorist inside me asks whether this was a media byte to boost consumer confidence.

While some actually took pains to go and buy something, some others chose to window shop, for sake of the ritual. So Boxing Day actually took on the significance I first thought it to hold - Boxing... Only this time, fighting the urge to splurge in favor of a bit of prudence......

Bail out to sail out....How much is too much?

Help!! SOS!!! Bail me out! These words resound all over the place. A month ago, the biggies of Investment Banking - Bear Stearns was the first to buckle. Then, Lehman, Merill Lynch and JP Morgan, saw the red. Black rock became DSP Black Rock. AIG was 'rescued'. Lehman became 'Nomura'. It was a massive bloodbath - so to say, with other global biggies clamoring to devour the spoils. There were talks of people wanting to purchase the hardware assets of Lehman - the servers, routers, cables, et al. Understandable, since IB needs a robust infrastructure, and so decidedly these 'assets' would fetch a lot more. Clearly that was true, since all said and done, these were tangible assets, unlike the banks' prized high priced assets called Collateralized Debt Obligation instruments - which actually brought about the mayhem. The economy showed signs of collapse, recession - of global proportions. The pillars of economic boom crumbled like a pack of cards. And before one could blink, the symbols of growth and economic prosperity were gone! At the threshold of B school, people dream of a job at Lehman or JPMC. And now, those entities are gone without a trace. The feeling is akin to that felt by one who flew out of NY on Sept 10, 2001 and came back on Sept 12, 2001.

So the banks are down and out, people are seeing the value of their real estate assets plummeting earthwards, the stock markets that hold a greater part of the Western World's hard earned money are going through negative uncharted territory, people are losing jobs, uncertainty prevails. Human nature - when it is uncertain whether I would have a job tomorrow, I wouldn't wish to go buy Jimmy Choos! Oh, well, I may wish, but I wouldn't get myself to go buy em! So no one wants to invest in investment bank funds and portfolios. They demand capital protection. They do not want 'negative' ROI - at least. So, when no one buys, who buys? Uncle SAM!!! The result - bailout packages for AIG, nationalization of Freddie Mac and Fannie Mae, 700 Billion dollars worth of taxpayers' money forms the Herculean backbone against which the crumbling pillars of the American (I'd rather say Western - Barclays was rescued as well) economy. Citigroup is the newest entrant into the 'Bhikmangoo' group, screaming, "Rescue me, I messed up!!" At the end of it all, it seems like Lehman and JPMC were not favored! But how long can the government condone 'overdrives', mismanagement and a gross lack of prudence?

Incidentally I seem to have overshot my credit card limit while I was busy being fascinated (read enchanted) by Louis Vuitton, and Jimmy Choo. Can the government bail me out as well? Please?