A Cypriot Tragedy

Tragedies are usually associated with Greece - a tribute to the richness of its theatre in the 5th Century BC. Over the weekend, you could be forgiven if you changed your tastes to a Cypriot tragedy. For that's exactly what has happened - albeit in the more prosaic world of economics.

 

These are the facts. Cyprus is another Eurozone country in deep trouble. It needed a bailout. So far, nothing unusual. A bailout was duly announced over the weekend. It was the terms of the bailout that sent a jolt reverberating through the world of economics. The EU is bailing them by about €13 bn (chickenfeed by the standards of bailout). But the conditions of the bailout are that all bank depositors would be levied a tax of between 6.75% and 9.9%. That means on Tuesday when banks opened, all depositors would lose that amount instantaneously.

 

The genesis of the problem is, alas, not new. Cyprus is a very small country. In boom times, it went berserk pushing its financial industry, positioning itself as an island finance centre. That's fine, but it just went way over the top. Cypriot banks had made loans to outsiders equivalent to 8 times the country's GDP. Worse still, a lot of those was to Greece its neighbor. When Greece began to go under, Cyprus was given an almighty whack. The bailout was then a question of when, and not if.

 

Another actor muddling the issue is Russia.  Of the € 68 bn bank deposits which are going to get a "haircut" (the tax referred to above) , a full € 21 bn comes from Russian companies. We shall not speculate where from this close affinity of Russia came from - let us just say that the word "money laundering" comes to mind. Now the Russians will instantly lose € 2bn. Enter Vladmir Putin. He is howling against the "$%^&* Germans who are the orchestrators of the bailout.

 

What about Joe Public in Nicosia. Even if you had say € 100 Euros in the bank, tomorrow it is only € 93. If ever there was a recipe for street riots, this is it.

 

And what about nervous bank depositors in other troubled countries - say Spain or Italy. Tomorrow it might be their turn. Only an idiot will keep his money in a bank anymore if you are an European. Take it out IMMEDIATELY. Dig a hole and bury it in your backyard. Keep it under the pillow. But don't deposit it in a bank even if a gun was pointed at your head.

 

What a mess. The world badly needs a new economic order. Fire all economists. Go back to the basics of countries balancing their budgets. Living within their means. Curbing the excesses in the banking and finance industry ruthlessly. It will be a prolonged period of pain. But when the clouds disperse, it will be a saner and fresher world. 

 

This, of course, is a Utopian dream - which leader is going to tell the truth to his voters. And even if he did, which voter is going to accept it. We shall stumble along from one crisis to another.

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Oh no; Not again

This blogger is rather vain about his English. And yet he was completely flummoxed when he spotted the headline "JP Morgan loses $2bn in egregious error" . He has to sheepishly admit that he did not know the meaning of the word "egregious" and had to look it up in a dictionary :( Trust a banker to come up with an unintelligible world - at least unintelligible to one "master" of English :). It sums up the problem neatly. The financial world has gone so bonkers in dreaming up structures of incredible and ununderstandable complexity that we cannot sit by and watch this go on anymore.

JP Morgan is a well respected bank. Its governance is top class. It should be one of the models of all that is good about the financial sector. In  Jamie Dimon, it has one of the finest Chief Executives in the world. It has superb risk management systems, strengthened even more in the wake of the financial crisis of 3 years ago. And what happens - it manages to lose $2bn in  one quarter on credit derivatives trading. An "egregious error".

This casino has gone gone berserk and has to stop. Enough is enough. Here is this blogger's remedy which is an extreme extension of the Volcker Rule.

• Commercial banking must be made a boring business. No proprietary trading. List of what they can do is made boringly small and strictly regulated by a super Ramamritham. All bankers have to come to work wearing only a panchakacham (man) or madisar (woman) - the logic being that anybody dressed like this can't be a punter.

 

• Commercial banks continue to enjoy the implicit sovereign guarantee. They are not allowed to become too big. After a certain size, they have to break up into two; somewhat like an amoeba.

• This is a free world. So the downright crazy casino is allowed; but at only two places in the world - Las Vegas and Macau. If Europe makes too much noise, Monaco can also be let in.

• Any idiot who enters any of these three places is required to sign a pledge that he clearly understands that he is committing suicide. Before he starts punting, he has to get a license, which will only be granted after he spends one night in the ward meant for the dangerously criminally insane.

• No bail outs for the punters in these three cities. If they lose their shirt , or something worse, it is their funeral. The state may helpfully construct a 100 floor tower with a fast lift to the top so that those who want jump off are easily facilitated.

Period. No more discussions or engagement with the financial community.

PS : If you are still wondering what "egregious" means, Dictionary.com defines it as " extraordinary in some bad way; glaring; flagrant"

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Lie Down Mr Goodwin

Arise Sir Fred, the Queen of England said in 2004 after tapping the kneeling Fred Goodwin lightly on the shoulder with her sword. This archaic ceremony is the conferring of knighthood by the Queen of England. If you are a citizen of the UK or one of its dominions then you can call yourself  "Sir".

Fred Goodwin was the CEO of the Royal Bank of Scotland in its boom years. An unknown, middling bank in Scotland (where's that for Gods sake), he took it to become one of the largest banks in the world. First the acquisition of Natwest, a big British bank much bigger than RBS. And then the mega takeover of ABN Amro, just as the financial crisis was unfolding. The bank was growing wildly through mega acquisitions and was cheered on by all and sundry - the shareholders, the market and even the government, including Gordon Brown, the then Prime Minister of the UK. Hence the knighthood. Sir Fred could do no wrong.

Of course the party couldn't last. It came crashing down with the financial crisis. Sir Fred was axed after the bank reported a loss of £24 bn - the largest in UK corporate history. The UK government had to inject £45 bn to bail out RBS. The public was baying for his blood. He compunded his misery by trying to keep his £16m pension pot - for the years of service he had rendered. Public outcry forced him to give up part of this, although that's an unfair step - if you have to give up your accumulated PF because of a mistake you made, how unfair would it be for you.

Now the UK government has decided to withdraw his knighthood. This is very rarely done. He has for company, Anthony Blunt (a spy), Nicoale Ceausescu, the notorious dictator of Romania and Robert Mugabe, the tyrant of Zimbabwe who were all knighted and the knighthood subsequently withdrawn when it was realised what scoundrels they were. Fred Goodwin is however no scoundrel. The withdrawal was the result of a baying mob (otherwise called the British tabloid press) just wanting to inflict its own brand of punishment.

Fred Goodwin wasn't the first, and certainly won't be the last, to mistime a huge acquisition (ABN Amro) and get killed in the process. He made a bad misjudgement of the extent of the financial crisis - after all who didn't. But he did no crime. He hasn't even been charged, let alone convicted of any wrong doing. If business misjudgement was a crime, each one of us is a criminal. At that time, the shareholders of RBS enthusiastically supported his every move. There are many others who have been conferred knighthoods and were equally in the mess of the financial crisis.

The British are justifiably famous for their sense of honour and fair play. In this instance however, that noble quality seems to have deserted them. Punishing Sir Fred, with Mr Goodwin isn't cricket, old chaps !

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Bailout or Bonanza ?

Mr Vikram Pandit
Chief Executive officer
Citigroup Inc.
New York
United States of America

Dear Mr Pandit

You are probably used to receiving hate mail, but here’s a letter that you might be very pleased to read.

I read in the Wall Street Journal that the United States Government is planning to sell its 27% holding in Citigroup over the next few months. It is heartening to note that US tax payers are expected to make a profit of $ 7bn from their original “bailout” money that they gave to Citigroup. You have not only paid back the entire amount, but also let the taxpayer make a profit of $ 7 bn.

Yours was the last bank from which the government is completely recovering the money it lent under the Troubled Asset Relief Program, more popularly called as the bank bailout. The US government invested a total of $165bn in all the banks and in the end it has made a 14% return ; not bad considering that if the tax payer had invested in the S&P index at the same period he would have lost 3% by now.

This is of course only the banks – the government has lost money on the support it gave the auto companies like GM and Chrysler, insurance companies, like AIG and of course Freddie Mac and Fannie Mae. But then these are not banks. Public perception has been that the bailouts were some sort of a dole for bankers and aroused all the attendant anger against bank bonuses. The truth is that the bankers actually made a whopping profit for the tax payer , which the tax payer would not have otherwise earned. I would therefore suggest that the bankers be awarded extra bonuses !

Killjoys such as Simon Johnson, of the Massachusetts Institute of Technology have said that “it's baloney to say we've made money off the bank bailouts", because the banks actually survived only because of the government largesse to AIG who then paid back their dues to the banks. But that’s like saying that businesses make a profit only because government built the roads on which the companies can move their materials. The reality is that the “bailout” of the banks has gone incredibly well for the tax payer . Can you fail again please, so that we can once more bail you out and make these profits all over again ?? Only half joking.

I am well aware that you were summoned before the US Congress’s House Finance Committee in Feb 2009, when things were looking bleak, and you were railed at by pompous Congressmen. If they have any sense of fair play, they should be summoning you to the House again and showering you with praise. Of course, such magnanimous behaviour cannot be expected of elected representatives, so I suggest that you derive vicarious pleasure by cocking your nose, sticking your tongue out and saying “Boooo” to them while making a face.

I am also aware that while you achieved all this, you have taken home a salary of $1. The taxpayer has made money; the shareholders have made money, the customers have been protected and for all this, you are being rewarded an annual remuneration of $1. This is a crying shame. I propose that you be awarded a bonus of some $10m for outstanding achievement.

Yours sincerely

Just an ordinary Joe

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And now, Cash for Refrigerators

A few days ago I posted on the Cash for Clunkers scheme that is just closing in the US (Click here). In the post, I jokingly asked the question – “Why not cash for clunkers for TVs, washing machines, dishwashers, or for that matter, kidney machines”.

It turns out that this wasn’t a joke. Or else somebody in the US administration is reading my blog (Ha Ha). There is such a scheme coming – Cash for refrigerators. Usual rubbish being given on improving energy saving. Cost ? Some $300 m.

It IS becoming a joke. What next ? For some prosaic speculation, click here.

Where will this all end ? The wallet is empty. You are borrowing from your children. And then recklessly spending like this . When the history of our generation is written, it shall be said of us – that was the most irresponsible, reckless generation in all of human history; a generation that committed the unpardonable sin of bankrupting its children before they were born.

The United States Constitution is the one of the most durable of them all. It shall have been in existence for 222 years in a few days. In all those years, it has been amended only 27 times, of which the first 10 were the Bill of Rights. I propose a 28th amendment to the US constitution – “Thou shall not spend what you have not earned”.

India’s Karunanidhi, who doles out free colour TVs as a sop to get votes, is in elite company !

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Cash for clunkers - a bad idea

Germany started this and other countries picked it. The US had its “cash for clunkers” programme this month and is closing it on Aug 24 after “a wild success”.

Cash for clunkers, is a dole the US government gives Americans for trading in their old car and buying a new one. The subsidy that Uncle Sam is willing to give could be as much as $4500 per car. The US government has just spent $1.9 bn on it.

In Germany, it was “successful” in that auto sales went up by some 20% or so. It is estimated that it cost Germany some $ 3.5 bn and it is claimed that it saved “thousands of auto jobs”.

The moral justification under which politicians have sold this idea is that carbon spewing clunkers will be replaced by fuel efficient cars and that this is helping the environment. Balderdash. They are doing this because its wildly popular as everybody loves a subsidy, if its given to them. And in car crazy countries like Germany and the US, that's pretty much everybody.

I can’t fathom the economic rationale for throwing money like this. Why is the auto industry so special ? Why not cash for clunkers for TVs, washing machines, dishwashers, or for that matter, kidney machines (Readers of Yes Minister will understand this allusion) which are all suffering similar declines of demand themselves. And how will this help ? A three month increase in demand is going to save “thousands of jobs”? Really ? And what do you think will be the demand in the next three months, pray ?

The problem with tinkering with an ecosystem is that you can hardly predict what the effects would be. Even in the auto industry, car repair shops have been severly hit by this programme. In Germany, general retailers have complained of falling demand - while people bought cars, they scrimped on buying groceries. So, is it the government's role to ensure that the car manufacturer benefits and Helmut Schmidt who runs the neghbourhood garage closes down ?

Governments spending money by investing , in say infrastructure, during times of recession is understandable. Governments lending money to prevent bank collapse (these moneys have to be repaid you know) is also understandable. But just doling money out to help “scared cow industries” ? When massive deficits are being run ? Taxpayers’ money is not meant to be spent like there’s no tomorrow, you know.

I’ve heard the argument that governments cannot sit idly by and let the recession ride. Sure it cannot fiddle while Rome burns. But equally, following the “politicians’ logic” (from that masterpiece Yes Minister), is downright foolhardy. Sir Humphrey, explains the politicians’ syllogism as follows – Something must be done. This is something. Therefore this should be done !! Cash for clunkers seems to be a scheme Jim Hacker would be proud of.

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No bailout for Air India

Air India is lobbying furiously for a massive bailout. Most airlines around the world are sick; so its no surprise that Air India, which is a particularly badly run airline, is in deep trouble. The mood these days is in favour of bailouts of whoever shouts loudest or scares the most. But look at what Air India is reported to be asking

- They want Rs 15,000 crores ($ 3bn plus)
- They want foreign airlines’ “sixth freedom rights” – the right to operate to multiple destinations in India to be reviewed (read stopped)
- They want capacities of foreign airlines to be frozen to give Air India “breathing space”
- They want to stop private Indian airlines from operating to areas like the Gulf so that Air India can “gain”.

All in the name of “public interest”.

Hello ! The cheek to even make such a demand. Air India – do you think the tax payer and the poor flying customer are idiots ? You guys just don’t get it – you are in business to serve a customer, not to screw him.

Just look at yourself in the mirror. You are a bloated, inefficient, organization. Granted its not all your doing – politicians and bureaucrats have long pillaged you. Unions have ensured that you cannot succeed. But the fact is that you are an airline no one wants to fly in. Millions of Indians travel abroad, many for the first time. They would love to travel in a familiar Indian environment. They don’t particularly like foreign airlines, many of whom treat Indians condescendingly. But it should tell you something that no one would willingly choose you over even Air France.

The government should not succumb to the temptation of playing Sir Galahad to an ugly crone. Take Air India into bankruptcy. Force it to restructure and come out leaner and somewhat resembling an airline rather than the employment agency it is now. Make it sell its bits and pieces. If an icon of America, General Motors, can go through this, so can Air India, which is no icon. If Air India can do all these things, help it along. If it can’t, or won’t, shut it down.

I am a consumer and a taxpayer. I am not prepared to do charity for Air India.

JRD Tata must be turning in his grave.

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Bailout for Charities – Right or Wrong ?

Yesterday, the British government announced a bailout for charities of about £40m. Every group is now clamouring for a bailout. Where will this end ?

The argument of the charities is simple. If the government can give £500bn to the bad boys in the banks, they can give something to us. The charities asked for £500m, were prepared to settle for £100m, and got £40m. They have promised to come back and ask for more.

The justification for asking for the bailout was that donations had come down by 13% consequent to the financial crisis. If they did not get the money, they would have to lay off staff. Hence bailout.

Am I missing something here ? Charities are supposed to be funded by voluntary donations. The operating word – voluntary. Does a 13% decline warrant a bailout when most industries routinely handle declines of this nature ? Have the charities really explored all avenues of cost reduction and revenue increase ? For example, Oxfam is reporting that sales of its products is increasing as consumers downtrade. And are layoffs in not for profit organizations somehow worse than layoffs in for profit ones ?

The charities say that lack of funds precisely at a time when the public needs more of their services is disastrous. Charities associated with counseling people who have lost jobs and those that deal with the elderly are at the forefront of this argument.

I think the queue of industries and sectors that are lining up for the dole is because governments lost the PR debate in the case of the assistance to banks. In fact it was a gross PR debacle to allow the assistance to the financial sector to be called a bail out. It was not a bailout and governments should have explained better what they have done. They has provided assistance either as loans (with high interest rates) or picked up shares in banks or even outright nationalized them. Even where they will pick up the dead assets of banks ( (the “bad bank”), they are writing off loans to individuals who can’t pay; not giving cash to banks. When things settle, governments will offload all these investments at a profit. The tax payer is not likely to lose a penny. No free money is being given to evil bankers for them to pocket as bonuses. Governments should not have allowed the media to get away with terming this as a bailout . Economics is never an easy subject and governments failed in explaining to the people what exactly they are doing.

Having lost the PR debate, it is but natural that everybody is claiming a bailout. After all it is easy to make the case that any sector is more deserving than the fat cats at banks. The auto industry in the US claimed it on the grounds that they employ many more people. The charities in the UK are demanding it on the grounds that they perform a more noble task.

There are nearly 170,000 charities registered with the Charity Commission in the UK. Most of them do great work in helping those they have taken up as their cause. They deserve every support. Those who can, should continue to support them as much as possible. But there should be no bailout.

And governments should tell every other sector that wants to knock on its doors. No bailouts. Loans yes, support yes, bailouts NO.

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