Friday, November 30, 2007

Words unspoken

Have you ever listened to a person talk and wondered – “What the hell is he talking about”.

As I was growing up, English was not the most popular language among kids. However, I was never a local of the city I resided in and so most kids had to talk to me in English. Even with their limited knowledge (and admittedly my own) of the language we never had a problem exchanging ideas and thoughts. We used expressions, sound effects and many other modes of communication in addition to the language to express ourselves. Yet everything was crystal clear to each other.

Fast forward to today. Over the last few days I have been noticing someone I interact with very closely doing the very same thing we used to do as kids. His mind seems to be moving faster that his tongue and most of his thoughts are left unspoken. He uses obscure sounds and half sentences to put together a thought and at the end of it all it makes only partial sense. So I am forced to ask for an explanation again. I am certain that he believes that all his thoughts are being framed into words and sentences as he speaks but really only a few of them get translated and the listener is left wondering what it all means.

I hope I do not suffer from the same problem. If I do I hope someone would tell me. I remember many years ago my father told me that I should slow down while talking because I was swallowing words.

It was okay when I was telling the boy next door about the interesting thoughts in my head.

Monday, November 19, 2007

Falling apple

I watched my dad iron his clothes one by one. From the time I could remember, he has enjoyed ironing clothes. As he ironed there were two stacks forming on the bed, one had his clothes and the other had everyone else’s. That was really unacceptable to me. After all I was more like my dad, I thought. My clothes belong in the first stack. I protested, and in a very deliberate manner I moved my clothes from the generic pile to the other stack. I said “Like papa”.

I was probably eight when that happened. I have always wanted to be like my dad. He always seemed to have a very reasonable explanation for the things he did. When we were commended or punished it always came with a clear explanation. So I always tried real hard to be a lot like him. Starting from the mock episodes of shaving where I applied his shaving cream to my face and used a stick to scrape it off to the time when I started driving and copied every single driving style of his, it was always about doing it the way he did it.

Over the years I have lost that obsession. I guess moving away from home and living far away for several years probably did that to me. I assumed that the similarities might have waned off. On the contrary, when I pay attention to some of my mannerisms, as I grow older, I realize that I have become even more like my father. And this time I was not even trying. These similarities are hardly as superficial as the way I shave or drive but rather more to do with my mannerisms and approach to life. Even when I deal with day to day issues I come to the pleasant realization that most of it is a mirror image of his life.

Its funny how I have become more like him when I was trying the least. I guess the apple doesn’t really fall too far from the tree after all.

Friday, November 09, 2007

The Settlement

Merck is settling with a bulk of the Vioxx plaintiffs for five billion dollars. Now, on the face of it might seem like a lot of money. After all Citibank got hammered for reporting a write down of 8 billion dollars the other day. But when you consider that the amount being talked about four years ago was fifty billion, the new number sounds a lot better.

The clincher however is the way they went around getting to this settlement. When the Vioxx warning came out and Merck pulled the drug off the shelf and everybody who had anything to do with the drug sued the company. There were thousands of plaintiffs and everyone clamored to consolidate it into a class action lawsuit. People dreamt of the days when Altria was slapped with a 250 billion dollar fine. They could all see the millions.

So Merck did the honorable capitalistic thing to do. They started working on a divide and rule strategy. First they made sure that the lawsuit did not get a class action status. They then began defending each case individually. The high paid lawyers at Merck started picking off one plaintiff after another. Four years later they have won two thirds of the cases that saw the day in court.

Now you have worried plaintiff lawyers who think that they might be the next to lose the case. Wolla! Settlement on the table. The fifty billion comes down by one zero and we are back down to five billion. A lot more palatable for the investors and true to the idea the stock is up once again.

So what about the poor customer? What about Merck's accountability? Who cares right? Capitalism YEAH!!

Friday, November 02, 2007

Unstructured Investment Vehicle

It was a regular weekday morning. I woke up and headed straight for the microwave. I needed the adrenaline rush from the coffee before anything would make sense. I picked up the Wall Street Journal and browsed through it. The anchor on “Morning Call” was talking about a funny instrument that the markets have been seeing off late, “SIV”. I looked up from the paper. What does that mean, I wondered?

It begins with the mortgage lenders. When you and I go out to buy a house we obviously do not have the cash to pay for it. So we head to the nearest lender. They do a background check on you figure out that you are a worthy borrower. So the lender gives you a loan which you repay through regular payments including an interest on that loan. So it is easy for you to see that the lender makes money through the interest that you pay.

But how does the lender get the money to lend? Ok, so the lender obviously doesn’t have all that money. So he goes around shopping for people who would buy the assets that he holds on his books. The assets meaning the houses for which it has already leant money. Ah ha! So another company comes into the picture. Let’s call him company X. So X agrees to buy a bunch of these assets from the lending company thereby providing the lender with more money as capital to continue lending to you and me.

Hey wait a minute; X doesn’t print cash, so where does X get the money to buy the assets. Okay so I forgot to mention that X sells corporate notes into the market to raise capital to buy these assets. These notes are short term debt notes which promise to pay a flattering rate of return to the holder.

Ok, but that doesn’t explain why anyone would trust these “no name” companies with money. Well that is because these “no name” companies are being managed my behemoth banks that you hear about everyday. So they manage the selling of these notes and the buyers feel safe that these notes are backed by the “big name”.

So why cant the banks do this without X? Simple, because this is a high debt business and nobody likes debt on their balance sheet. So the banks let X keep the debt and charge a management fees to manage the fund. That way they get to keep the cake and eat it too. The investors of the banks do not see this debt risk on their balance sheets and obviously see the earnings from the management fees.

So what’s the problem again? Well the problem is that the assets that X holds today is not quite as precious as they were few months ago and no one wants to buy new notes issued based on these assets. So X is left holding the asset and the old debt with no capital to continue their work. Oh dear.

So let them go down in flames! Well can’t allow that either. When X goes down in flames, it will sell its assets at 30-40% of its “true” value and then banks have a serious problem on hand because the assets they hold gets hammered too. So to stop the stampede all they can do is to move those assets on to their books. Dude, come on. I thought the whole purpose of “managing” them was to stay away from getting it onto your books. Well too bad I guess. And by the way, the assets are going to be written down in value since they are not worth as much.

Wow this is really messed up. Good thing I am not involved in it. Ah ha! Think again. Where do you think your money market accounts make their money? The money that they need so that they can pay you that incredible interest rate that you were so attracted to. That’s right. Guess who bought those notes that X issued in the first place. And by the way, if you happened to buy bank stocks, say goodbye to positive cash flow and hello to high debt ratios. Suckers!!

And so the wheel goes round. Nothing “structured” about this investment vehicle now is there?