Random Thoughts

Derivatives are in the news once again! This time they are threatening the stability of a country – Greece. And perhaps Germany and a few other European economies that have loaned Greece money!

I wonder whether it is the stupendous greed of the creator of these “creative” financial instruments that is raking this havoc world over or the stupidity of the people who buy into the use of these instruments (“somehow, it will work out”). In case of Greece, perhaps it is greed on both sides – greed of the bankers on one side and the politicians on the other.

I also hear a lot about how the bosses of these bankers never understood what their traders were doing with these “exotic” financial instruments. Really??? Or, they did not want to understand them? Ultimately, it also converted into the multi-million dollar bonuses for all!!

Financial derivatives are not something that these Ivy-league schooled bosses of global Banks can’t understand!  Let us home-cook one of these instruments right now! Say, you don’t like your long nose and I find a guy with a shorter nose of your liking, who won’t mind exchanging his nose with yours … I “intermediate” a deal between two of you … I guarantee both that these noses would fit well on your faces. We just created a kind of “exotic” instrument … you only need to replace “long nose” with “long-term loan” and “short nose” with “short-term loan” and don’t forget to pay me a multi-million dollar fee!!! Now, when you replace “nose” with “loan”, you do have to do some interest calculations – but that is not what the Bank bosses are incapable of doing … what they actually are incapable of doing is keeping their greed in check!

And speaking of Greece, what on earth has gone wrong with such great warriors who had conquered a good portion of the known civilized world just a few centuries ago?? Why are all these great civilizations of the world seething in corruption today? It is sad. Shouldn’t they be the leading lights of the world?

This nexus between politics and finance reminds me of a remarkable example from the history of another great civilization and my birthplace – India. I read a few years back that Shivaji (‘ShI’va:jI/), a secular Hindu King born in 17th Century, revered by one and all for his rebellion against the then “foreign occupiers” – the Islamic rulers, had famously looted the treasury of a Muslim King for … repaying a past-due note that he owed to the British-owned East India Company!  The East India Company (that had entered India to trade and not play politics!) then owned and occupied a tiny bunch of islands in Western India, now known as Mumbai.

Mumbai, the financial capital of India, too has been looted several times by the greedy brokers and bankers! First in 1861-65, when USA was fighting its Civil War (by a banker-cum-broker who played up Bombay Stock Exchange citing cotton shortage in England due to American Civil War), then in 1995 and then again in 2000. And I have this eerie feeling that it is happening once again right NOW! Most of the times, gamblers met in their club called “Bombay ( or Mumbai) Stock Exchange”. This time, the weapon of looters’ choice is the real estate! Bombay is seeing an unforeseen boom in real estate that is also very unreal. Why would otherwise a city with infrastructure deficit have realty prices as high as in any developed economy Metro? India has grown handsomely in last decade (@ an average annual rate of around 6%). However, Bombay realty values are growing at 4 to 5 times that rate since last few years! This exuberance is sustained by the “gamblers” by convincing the gullible public that “these realty value would never come down!” (I had heard this about Indian stock values when a couple of years back Mumbai Stock Exchange was gaining 1,000 points in a single day of trading …. Only to crash later) and pubic continues to borrow heavily to buy properties at sky-rocketing prices. Numerous reasons are cited – Mumbai has limited land-mass (so is the case of New York and London), Indian Economy is growing and there is a lot of foreign Investment flowing in (if it is to gamble on asset value rather than building businesses,is it good or bad?), so on and so forth. People who have bought the properties also live in this “unreal” wealth perception. How similar these stories have been globally since the “tulip-mania” in Holland many decades ago! I am very scared (Warren Buffet had said “be scared when others are greedy, be greedy when others are scared!) because when Mumbai is looted, India is looted!!

And I had read that realty prices in many other Emerging Economies had seen or are seeing the same trend. Perhaps, a subject of research and another Blog!