“We’ve got the right people in place as well as good risk management and controls.” — E. Stanley O’Neal, CEO Merill Lynch 2005

Auction Rated Securities

“We remain convinced that auction market preferred of closed-end funds are a conservative’s conservative security with respect to credit Risk” – Merrill Lynch& Co, December 2007.

This is just a sample. We might have seen lot of bluff like this from corporate honchos even from India. We might have seen complete denial from real estate CEO’s stating that liquidity is not a problem without knowing that no financial community would respect them for what they’ve been bluffing to make them optimistic in public.

Candor is the best policy. Unfortunately most of the CEOs are thinking that by denial they’re optimistic. Because leaders should always be positive and they should always deny even if there is any trouble in the system.

This is what our FM did when press questioned about financial crisis and its impact to India. These guys deny because they use to have vested interests with them. Mr.FM is denying because it could possibly affect his image in the public about his efficiency in managing the ministry.

I’d like to write this brief by giving examples about different segments. How top level guys are behaving in order to safeguard them against others. These are guys who want to hire ethical people without following any ethics in their business. Sound funny! Just read further.

Layoffs: I think I could get consensus by talking about this issue. This is one of the foremost problems that have been faced especially by IT, Financial Services and real estate sector and this could spread across other sectors. Layoffs are now common in this sector.

We could have heard about massive layoff that has been done by Citibank, Goldman Sachs and other big IT companies. Believe me, top level employees of Goldman enjoyed atleast $5 billion dollar in bonus by just making paper profits.

Dick Fuld, CEO of Lehman Brothers, continuously denied the problem and he blamed short sellers for fall in share price. You could be surprised to hear that Former CFO Ms.Erin Callen of Lehman didn’t have any knowledge about finance. She has been hired because for the sake of having a CFO of a company. Our prestigious IIMs once upon a time queued to place their students with Lehman Brothers.

I was always surprised to see mathematicians hired for the job of picking stocks for funds. What these folks are doing there to pick stocks. Unfortunately I’m not qualified enough to understand the situation where buzzwords like Stock Analytics, Trading system have been talked and discussed in corporate corridors across the world. Nobel Laureate Myron Scholes Stunned the world when he busted LTCM (Long Term Capital Management) by taking what we call stupid leverage of ( leveraged $4 billion into $100 billion in assets. This $100 billion became collateral for $1.2 trillion in derivatives exposure. even mediocre like me know this is shit, but Nobel winning person surprisingly doesn’t know this) more than 300 times exposure for 1time of real money, in simple English Rs.300 exposure for Re.1 capital, which is horrendous, obscene and you name it, it deserves. Actual capital $4billion leveraged upto $1200billion which is near to 300 times. Not surprisingly his fund exploded due to Russia defaulting its debt on 1998 (surprisingly its Lehman which was one amongst others to provide fund to bail out LTCM)

Logic behind this Nobel Winner strategy – Markets are rational in its action- What a laughable strategy? Do you know what happened after he swallows $4billion? He went on to start another hedge fund and now he freezes his fund (Platinum Grove Asset Management LP in Rye Brook, New York) which could prevent his investors to redeem their investment from the fund. Do you know what he would do after this? No money for guesses – simple, he would start another fund for the simple reason because he is Nobel winning person and great intellectual.

Now coming to our Indian Mr.Vikram Pandit, Prestigious CEO of Citibank. Once upon a time he ran a hedge fund called Old Lane partners that has been sold to Citibank for millions of dollars. After joining as a CEO, this same CEO Mr.Pandit ordered to close Old Lane partners which he sold it to his present employer, because business is not making money for Citibank. Just imagine intelligence of these guys. They themselves sell their business and afterwards they’d order to close it and no one should question them, because they’re from best institutions, they’re top level guys and ofcourse they have years of experience behind them.

Now coming to Indian Scenario. Our telecom giants refuse to take Forex losses to their balance sheets despite Institute of Chartered Accountants of India, asking them to follow accounting rules that has been monitored by them. Despite knowing this our analysts would ask you to buy them for xx rupees to make xx profits. These guys now come in public and speak about ethics and transparency in the system. What a pity?

As a citizen of India, I’d like to know how RBI has been using its cash reserves to stabilize banks and other financial institutions by providing liquidity. Would RBI make this entire funding process transparent to public so that I could be aware which bank or which institution has borrowed and at what rates? This is really a tricky situation. I don’t have faith in the system, because our system rewards only riches, well educated from reputed institutions, head honchos of blue chips and it clearly lacks transparency. Make no mistake our system won’t take care of small business, since these businesses are not at all given respect since independence. But these folks use to speak about working on setting up exchange for small business.

FOR THE PEOPLE, BY THE PEOPLE, OF THE PEOPLE – Which is supposed to be real democratic set up, here in our country it is “For the Vested interests, By the vested Interests, Of the vested interests “– This is the reality.

There are numerous instances like this. Space won’t be available to write this. I’d come up with another article.

Part II continues.