Missing poetry

When as a child, I wrote poetry,

An inspiration moved me forward,

Life showed me omens regularly,

My hand worked my mind laggard;

And stories I thought of wars,

Of a beautiful woman but a retard,

Nature and skies said in my ears,

It's your world, it's your boulevard.

I am asked why I don't write now,

Inspirations shown to me around,

Takes no time they say; the Will, how,

Is nowhere around, misery surround,

Love hidden somewhere, somehow,

It needs to be brought out; joys abound,

In the hearts of those, they show;

Love inspires the world to move round.

Sub-prime Crisis and Financial Innovation

Back after a long hiatus! This time with a topic of world interest these days: Finance and Economy. Let us try to understand what exactly was the role of investment banks and financial institutions (and, if possible, the government) in bringing about the current economic crisis.

Financial innovation is a process of introduction of new financial products, for investors and for people seeking debt capital. If used in an apposite manner, they bring about increased efficiency and options to their users - ATMs and internet banking for example. Some financial innovation is specifically adopted to avoid or circumvent regulation. In the case of MBS (Mortage-backed Securities... Yes.. You have heard this term before), possibly that might be the case.

Let us take an example to understand what an MBS is. Suppose Kolya clears his MBA in two years [:)], gets a good job in the USA [:))] and gets an amazing salary [:D] (Highly unlikely given the current economic scenario). He gets married to his beautiful girlfriend [:O] and wants to purchase a home. He goes to a Government sponsored enterprise (GSE) like the Federal Home Loan Bank Corporation (Freddie Mac.. A famous name that went bust in the crisis - though it got bailed out by the US government, and is currently placed in conservatorship of the US government: US taxpayers' money used to bail out a privately owned institution - yes, it is a GSE but it is a private institution after all), and asks for a loan. Now what is the process through which these loans are generated? The general public (let us call them investors) deposit their money with Freddie Mac, to diversify their portfolio of investments, since Freddie Mac is a GSE and considered to expose investors to some (albeit very little) credit risk. So let us suppose Tarantula deposits a sum of 1 million dollars in Freddie Mac and gets some securities called Mortgage-backed Securities (There are many such investors who buy such securities from Freddie Mac, considering that it is considered quite a low-risk enterprise). And Kolya wants a bank loan of 1 million dollars for his home. So Kolya will go to Freddie Mac, show that he is employed and is capable enough of paying his mortgage dues, and will get the home loan. His job goes on well for two years and he keeps his promise. Monthly installments go to the Freddie Mac, which takes some portion of it and passes on the rest of the money to Tarantula as the return on his investment. Say, the loan period is 10 years. If everything goes well, then Tarantula will get his returns by this method each month, while Kolya will get his home loan. Amazing concept.

But this is where the assumptions that go behind this scenario become important. Suppose Kolya goes berserk, and no one wants to give him a job now. He can't pay his monthly bills and can't be expected to pay off his mortgage. Obviously, Freddie Mac would have already considered this scenario and can take possession of the house he bought if necessary and get their loan's worth. There are always some bad loans and this is one such scenario. However, the overall portfolio of Freddie Mac is still well-diversified because most of the people who have taken loans from it are still paying their installments. So all is well and fine. But then, where does the problem lie?

The problem lies in the assumption that Freddie Mac will be able to recover their money from the 1 million dollar house. For that, either its value has to increase over time or it has to remain constant. And this is one assumption that can be considered as the single biggest factor of the entire crisis. Suppose real estate prices come down and the house can only be sold for 500000 dollars. Then what about the rest of the money that is still left? It goes down into the "bad loans" account in the books of Freddie Mac and that is it.

Obviously, in normal days also, such things might happen. But that includes only a limited portion of the loan-takers. In the "sub-prime" case, the people who took the loans did not necessarily have the ability to pay off the loans and the number of such people was very high. The real estate prices go down simultaneously (because of so many defaulters). So Freddie Mac is left with many houses and no money to pay off its investors. The result is obvious.

The question arises: Was it only the assumption of stable real estate prices that was responsible for this crisis? Certainly not. The role of the government is a big issue. At the turn of the millenium, US was growing at a decent pace. Unemployment was quite low and the government wanted to ensure that everybody has a home. A good intention. Hence, the Federal Reserve Bank ensured that there is a lot of money in the system which can be given on credit to the people in need of homes. However, the assumptions mentioned above were not taken care of and the world economy has been brought to the brink of a recession. Somebody rightly said about the crisis: Good intentions do not necessarily give out good results.

While we are at it, let us also consider the role of investment banks. The fixed-income securities (because they give a fixed return every month) that Freddie Mac issues are sold in the market by the investment banks to its clients. So the process goes like this: An investor invests in Freddie Mac, who provides the securities to investment banks in return for funds, which it gives for loans, while the investment banks sell those securities. Investment banks significantly affect demand for these securities. (Let us not consider Structured Investment Vehicles, etc. here... I would like to keep this as simple as possible.. You can read more at http://subprimer.org/node/13). Investment banks, with their trading divisions, make bets using their own money too. Hence, eventually, investment banks also went down with the subprime crisis.

So what could have been done? Till now, everything was fact. What follows is personal opinion. The first thing that comes to my mind on reading everything above is the fact that if the amount of money supply in the market was limited, such that banks and financial institutions did not have as much money to invest as they had, possibly they would have shown a certain amount of restraint in giving money to people without pertinent checks on the ability of those people to repay the loans. This follows from a very fundamental behaviour principle: If I have too much of something, I would have a tendency of not caring too much. If I don't have as much of it, I would use it properly. That does not mean that the Federal Reserve Bank should have sucked all the excess liquidity in the system, but just that the amount of liquidity should have been limited.

The second thing is the role of investment banks and financial institutions. Because of lack of regulation on the activities of these financial insititutions, the money of general public is being played with. Loan providing institutions like banks did not check the credibility of people whom they gave loans to. The investment banks vehemently went on increasing the demand of the highly risk mortgage-backed securities without even looking at the risks involved. Even when a simple government bond is considered, a lot of risks are measured and then a decision on whether to invest or not is taken:
1. Interest rate risk: Effect of changes in prevailing market rate of interest
2. Yield curve risk: Risk according to the maturities of bonds
3. Call risk: Possibility of the application of call option when interest rates fall
4. Prepayment and reinvestment risk: When interest rates fall, prepayments increase which have to be reinvested at lower interest rates
5. Credit risk: Creditworthiness of the issuer
6. Liquidity risk: Whether sale is possible at fair price or not
7. Exchange rate risk: For overseas investors, the exchange rate is a factor
8. Inflation risk: When inflation is high, the returns in real terms might be lower
9. Volatility risk: For fixed-income securities with call/prepayment/put options
10. Event risk: Risk outside the risks of financial markets
11. Sovereign risk: Risk of governmental policies and attitudes towards repayment of debt

If this much is required to be thought of when considering the relatively low return and low risk government securities, it was the responsibility of the investment banks to be cautious about giving recommendations regarding such high-risk securities. Possibly, if there is sufficient regulation, these practices might give way to genuine research before recommending securities.

And last but not the least: Financial innovation. As I said earlier, financial innovation can be a boon by providing investors having different risk-taking aptitudes with different options. However, the effects of financial innovation can be extreme as we saw and hence, there should be a consideration of all scenarios that might result from a financial innovation before going forward with it. For that, possibly each financial institution might have a separate committee which does a scenario analysis and takes into account all complexities and assumptions before going forward with it (I don't know whether such committees exist but it is quite logical to have one). This is necessary because regulators might not have all the necessary information. It is necessary for the financial institutions to regulate themselves in the interest of the overall market and economy as well as in their own interests..

So that was all that comes to my mind about the sub-prime crisis.. It is late night and this is all that I can think of as of now... If there is something else that comes to my mind, I would edit this post.. Ciao..

Children of Heaven: Soul-stirring

"Baby know all manner of wise words, 

Though few on earth can understand their meaning."

"I wish I could take a quiet corner in the heart of my baby's own world."

These two lines from two discrete Rabindranath Tagore poems (though they were written on babies, yet I am extending their understanding to children in general) aptly imply why he has written them, once you see the movie "Children of Heaven".

"Children of Heaven" is a 1997 Persian film. A parable of pronounced moral nature, it is a tale worth watching by anyone and everyone living on this earth, specially in these times when "selflessness" is an apparition of the allegories.

It is a story of two siblings, a brother and a sister, from a poor family, where the father works hard to feed the three children (the third one was just born) and the mother has problems in her spinal cord and could not do even the household chores for fear of making it worse, do most of the household work as well as go to school and study. The allegory starts with the loss of the girl's shoes. While purchasing some grocery, the boy, Ali kept the shoes that he had brought to the market to be fixed up, near the shop. Unfortunately, the garbage collector, thinking the polythene to be garbage, takes them away. Hence begins a story that revolves around those lost shoes, portraying all the virtues that we as children might have had, but have now probably forgotten. 

Because they knew that their father would not have the money to purchase another pair of shoes, they worked out a mechanism by which both of them could wear the same shoes to school, even though it required both of them to run all the way (the girl from the school to home and the boy from the home to school). At times, Ali was late, and gave various excuses to the principal, who would not see the boy coming late to school, but never once did he tell the principal the story of the lost sneakers, not telling him that it was because he was poor and his family could not afford the shoes that he has to come in late everyday, after his sister came home and returned the shoes. (Though MBAs here would make a case of operational inefficiency: The boy could have come to the school when his sister's classes ended. But then MBAs are MBAs.)

The cherubic innocence with which the boy gives various gifts to his sister, including a golden fountain pen that he got from his teacher on getting good grades, to prevent her from telling his father is a joy to watch. The viewer is left spellbounded by the unworldliness of the boy when he asks his father to buy shoes for his sister when his father found an alternative source of earning money, despite his father promising him different things. 

Not only the innocence of the boy but the maturity with which both children deal with the situation is hard to see in an adult. When the girl finds out that her shoes were with another girl in a lower grade, she takes Ali to the girl's house. But on finding that the girl's father was blind, both children quietly go away without bothering for the shoes. And when Ali cries in front of the teacher to get a chance to win sneakers as a third prize for a race (which was announced when he had not reached school in time), it takes your heart away. 

I would not like to spoil the plot by telling the entire story, but the way the story has been handled is majestic. Excellent performances, good direction and a fantabulous plot ensure that the viewer is glued to the story till the end. The story makes you believe that children are really from heaven. Probably, I could tell my Ethics teacher now that if not telling the truth is not ethical according to Kant, then let him watch this movie and then write his theory.

Watch this movie and relive your childhood. Probably the crowning glory would have been an Oscar in the foreign language category in 1998 for which it was one of the films nominated, but I am sure it would have been a very close second. 

Let me end by speaking a few words about childhood.

"Lord, if ye gave me place in your Kingdom,

Let me be a child forever, I plead.

The Lord replies: Ah, ye not need say that,

Only children reside in the Kingdom of Heaven."

The Forgotten Lamp

I am the forgotten lamp;

I am the damp lamp.

I burn; People are happy,

I bring light to their lives;

While I burn, people enjoy

Praise the beauty of my burning.

And when the fire in me dies,

They forget me, abandon me,

I wonder how people soon forget,

I brought light to their lives.

Konnect 2008: Konnecting the hostels of IIMK

Sorry folks.. I wrote this someday and stashed it away thinking that I will post it sometime.. And then I forgot.. Now that I have found it, let me post it.. Here it goes..

It is said that a match is interesting only when equals compete with each other. And so it was, equals competing with each other, some with vigor poured down on them by the seniors, some rare self-motivated souls, but all competing to preserve the name of their hostels. Lots of games were played, lots of skills came out and lots of shy people came out of the closet. After all, that is the impact that a group has on you. The things you would not do alone, you would easily do it if propelled by a group. Maybe that is why governments discourage mobocracy. However, this was a day when mobocracy was encouraged in the Indian Institute of Management, Kozhikode. The event Konnect was spread over a period of 3 days, with different events on all days. 

One of the most spectacular sub-events of Konnect was a tug-of-war contest, where 25 people from each hostel were supposed to pull 25 equally well-built people from another hostel into their half. The event brought out the passions of all the participating teams, with people from each hostel showing their enthusiasm by shouting, encouraging teammates (even while pulling), strategizing during the breaks, and bursting into whelps of joy after winning. Even the losing teams were equally well-spirited; after each round, there would be an informal sledging competition between both the teams, each shouting slogans proclaiming their hostels to be the best.

Contrast a team event like the tug-of-war with an event like Just-A-Minute (JAM) where individual skills led a person to victory. How much an individual can understand and adapt to a situation determined the results. It is obvious that in a game like JAM, it is more beneficial to catch the errors of others rather than trying to speak more. Some people were able to adapt, some were not. And those who were able to adapt won. However, the passion here was visible in the behaviour of the person. Here, a person would not shout at himself for motivation. Rather the motivation comes from inside. And the strategy too. And of course, here you do not have anybody else to blame if you lose. But then, you do not have anybody else to rely on too if you are not playing well. Also, individual victories are not recognized as much as team victories because it is tougher to synchronize a team.

The different skill-sets of the different genders also came out. And some were in stark opposition to the established beliefs. Hence we saw girls beating boys in some physical tasks, while the top three teams in Antakshari, considered to be a feminine favorite, were all boys. Some games like "Who eats fastest?" involved a lot of strategy. While some games like LAN gaming required gaming skills and comfort with the laptop. Some hostels were extremely ecstatic about each game, while some hostels like the K hostel, where no seniors were present, saw an extreme lack of participation, probably because of lack of seniors there, and corresponding lack of enthusiasm.

“Winners don't quit and quitters don't win.” Moral of the story. Period.

(Yours truly also won 50 points for his hostel K.. Ensured that hostel K didn't end up last.. Since these were the only points hostel K won :-(  )