CURRENT FINANCIAL CRISIS – HOW WE SCREWED UP

It’s tale worth telling. The whole affair ended in recession of a scale unheard in human history. So, how it started? Who is to blame? What now?
I think there were two stories that ran in parallel, and they met to form an epic. Or shall we say two sides of a coin? It is an age-old story pertaining to human greed. But, then greed is also the stepmother of innovations (euphemism??) in trading. On one side are the investors across the world flushed with ready cash who were not too happy with the returns offered by the investment avenues available in the market. Investors realized that the available options like investing in developing countries are not as promising as they initially sounded; also lock in period was too long (kaun jeeta hai tere julf kesar ho jane tak). We want instant gratification!!! They were looking for the avenues, which can provide greater returns (easy target??). So, the only choice left was the great USA economy; and as always happens, everybody jumped to bandwagon. Now lets see what USA has to offer. It is a developed country; how come one can get greater returns out of it? Obviously it needed a booming sector; which came in the guise of real state (as the generation of baby boomers retired). Which in turn allowed Wall Street whiz kids to do wizardry and attract larger amount of funds from across the world.
Where did it start? It started when banks in USA started betting on real state boom. Banks pushed their sales teams by setting blue-sky targets. Sales guys in turn were driven by their commissions; so they hardly cared who got the mortgages. Result was a hoard of sub prime customers (whose credit rating is below par) got the housing loans. Banks turned blind eye to whole affair as they were expecting real state boom and thought if anyone defaults than they can recover more than their investments by selling of the property. But banks faced the issues of bad credits in their balance sheets and higher capital requirements due to regulations (as required capital is tied up to credit rating of the counter party). Here came in the Wall Street whiz kids they have on one-side investors looking for higher returns and other side banks flushed with bad credits in their balance sheets. They offered a trick in the guise of CDO where by forming a SPV banks can offload the bad credits from their balance sheets and convert them in bonds. CDO is essentially a mechanism of pooling up debts and then dividing them into tranches; where each tranche size is a fraction of the pool (tranches sum up to total pool size). The pool receives the monthly mortgage payments and distributes it to different tranches on priority basis. Lets take an example of simple CDO structuring; suppose the size of pool is $100 M. And we divide it in three tranches A, B, and C. Where tranches A, B, and C’s sizes are $30M, $30M, and $40M respectively. Now we say that mortgage payments will be distributed in the priority of A to C; so, tranche A has highest priority. The defaults have reverse priority so defaults will be borne by C first, then B, and A at last. One can see that each tranche is very similar to a corporate bond; where A is least risky, B is riskier, and C is very risky. Also, if SPV buys insurance for tranches he can get AAA rating for tranche A, and may be BBB for tranche B; which means your returns are guaranteed if you invest in tranche A. In other words CDO is able to convert a fraction of bad loans (the pool) into a real good loan J. Now Wall Street dudes sell these bonds (tranches) to different customers and keeping tranche C with them, as it is difficult to sell (though provide very high returns). Investors buy different tranches based on their risk preference. A municipality in USA may buy tranche A if it is looking for safer and better returns.

As expected many of mortgage owners defaulted and unfortunately real state went down. Banks were flooded with bad loans and due to real state bust recovery goes very bad. Lets see what is happening with CDO; pool is flooded with defaults. Even tranche A guy is not receiving his monthly coupons. He calls up the Wall Street guy who tells him that its real bad they did not expect so many defaults and as real state has gone down so they can’t recover the money. The investor questions but my tranche have AAA rating; Wall Street guy says rating agency screwed up too. Then he pleads my tranche is insured; “are you kidding me, no way insurance companies have this much money, they screwed up too” says the Wall Street dude.
Morale of the story “ crap will remain crap no matter how you package it” and “ There is no difference between a real smart gambler and real stupid gambler”

Where did the money go? Whose failure is this? Left to reader.

Must Read Blog Of Paul Krugman

http://krugman.blogs.nytimes.com/

A trip to beautiful and unexplored Kumaon Hills

Recently three of us; I, Raturi, and Dabral(friends from B Tech Days in Pantnager) went on a road trip along the hills of Kumaon. In this trip, I wanted to show my friends the places, where I was born and brought up. I was revisiting these places after a hiatus of 8 years. In between, I lived around the world, either because of my job commitments or persual of higher studies. The point I wanted to make here is; I wanted to see things objectively. With time, and with lot of travel, as Rahul Sankrityayan has beautifully underlined in his classic essay “athoo ghumakadoo zigyasa”, I am hoping to have overcome my natural biases towards my birth place.
The route we choose was Delhi – Tanakpur - Champawat – Lohaghat - Pithoragarh- Chaukori – Almora- Nainital – Delhi. The idea was to show and surprise my friends with the heavenly beauty my native area offers. The route we took is the greenest area in the hills of Uttrakhand. Tankpur, our first stop, where my family stays, is a small foothill station a la Haldwani. We had to take a detour to Champawat via Bhimtal as Tanakpur-Pithorgarh high way was closed due to landslides. We stopped at a place called Khetikhan and checked in a KMVN rest house. 20 KM away from Champawat, Khetikhan is amazingly beautiful place, one can see a large scenic valley and view of Himalayas is breathtaking from here. Then we drove to Champawat, on our way we stopped at my native village, could not muster courage to track to my House, as it stands on a hill top 1 KM away from the road. Champawat is named after Champa, a Chand dynasty queen, is one of the most beautiful towns on this route. One must see the group of temples in the Champawat called Baleshwar. The temple surprises you with its South Indian temple architecture and stone carvings. Also, the temple is of mythological importance, and is related to Ghatotkach and Bali. The Archaeological Survey of India (ASI) has declared Baleshwar temples an Indian National Heritage Monument since 1952. In Champawat, one can also see a "cement board" marking the spot where the Jim Corbett killed the famous man-eater tigress of Kumaon (read Maneates of Kumaon by Jim Corbett for more details, the tigress holds the record for the most people killed by any large animal(436)). Then we moved to Lohaghat. Three places one must visit in Lohaghat are Mayawati Ashram (belongs to Rama Krishna Mission), Abbot Mount, and Banasur Ka Kila. The 8KM detour to Mayawati takes you along the densest forest in the hills. We were really surprised at how Swami Vivekananda reached here on foot from Almora in the year 1901. Abbot Mount is on a hilltop and can be a great camping site. One would see the wonderful sunrise and breath taking view of snow peaked mountains. Banasur ka Kila, as name suggests belonged to Banasur, stands at a hilltop. From a distance it looks as if a top of a hill has been chopped off to make the fort. One has to climb thousands of stairs to reach the Banasur ka Kila from the near by high way. One interesting place one must stop, and try to talk to local people is “Khuna” 5 KM away from Champwat, on the way to Lohaghat. Now why Khuna? As the legend goes a Muslim family was hired from Firozabad by the local king to make bangles for the queen Champa. They were given a place to stay in Khuna; where they set up a bangle factory. Over time this family grew up and became a village. Khuna is wonderful example of hindu muslim social integration and coexistent. The Khunaites speak a language that is queer mix of Pahadi and Urdu. They also actively involve in local Hindu festivals and present offerings to local Hindu temples.
Our next stop was Pithoragarh. Pithoragarh was the surprise packet of the trip. Both of my friends had a different idea of pithoragarh, assuming it to be a small hill station. Pithoragarh now is the largest hill town in Uttarakhand by area. The recently laid airstrip is being extended to accommodate bigger planes. Pithoragarh has tripled in size since I was a high school student at GIC Pithoragarh. If one has been to Katmandu, then Pithoragarh will remind one of the Nepali Capital. Must visit places are Chandak, Budhha temple, Kamaksha Temple, and route to the village Badabe. The view of Pithoragarh vally from Chandak is something one has to see to believe(both at dusk and down). One would need two days to cover Pithoragarh. We roamed around in the areas covered by district of Pithoragarh. Next stop was Chaukori, where we traveled via my Eza’s (mother’s) village Bungachina. One can almost touch the snowy mountains from here. Chaukori underlines the unique propositions of the Kumaon hills; they are unexplored and unspoiled (virgin). If one has been to Europe one can appreciate what these Hills have to offer in comparison to the highly commercialized European mountains. Chaukori is almost deserted, hardly three four shops and KMVN rest house. A new resort has come up, where one can rent a tent for a night.
On our journey’s end we passed through Almora and Nainital, which helped us in understanding the contrast between these two towns and Pithoragarh. Every one of us was surprised at why Pithorgarh is not a known place. Few things we thought and discussed about Pithorgarh:
§ It is self contained town, unlike tourist places like Nainital, it’s economy doesn’t depend on tourism. The economy of Pithoragarh is known as “postal order” economy, as most of the locals are employed in Indian army, and send money home every month end. District of Pithoragarh suffered highest number of casualties in Kargil War. It has a unique character of its own, and is environmentally aware and progressive in nature. Polythene uses are banned completely in Pithoragrh.
§ Pithorgarh is also a culturaly active town. It hosts many festivals like “Chaliya Mahotsav”, “Hill Zatra” , “Sharad Mahotsav”, and excellent “Ram Lila”. These festivals can be used to bring touritst in, a la “Dadiya” festival in Gujrat.
§ The biggest hurdle is, how to reach Pithoragarh. From Delhi it takes 14hrs. Unlike Almora and Nainital the route from foothills to Pithorgarh is not a national high way. It tells story of its own. Shows political apathy towards Pithoragarh as traditionally most of political leadership in Uttrakhand has come from either Nainital or Almora. Making Tanakpur-Pithorgarh route a national high way will cut short the time of journey by 3-4 hrs. It would be a better proposition, as people would not like to drive more than 10 hrs to reach a hill station from Delhi.
§ Needs to be connected by air very soon, which is being taken care of.
§ Pithorgarh is growing exponentially so would need a ring road around the town to decrease traffic congestion.
§ A helicopter ride that gives a tour of snow peaked mountains would be wonderful idea.
§ Needs a face lift through advertising, its too good a place to be ignored for long?
§ Having said that it should keep intact its character; as an economy which is not dependent on Tourism. Tourism should be one more avenue for revenue.

I will post some snaps pretty soon

Good Site on Wall Street News