Sub Prime Crisis

Sub Prime Crisis...

My Supply of information on Sameer's demand:

Markets are driven by Supply and Demand.If there is demand of anything,supply for it will automatically come.
So what is the demand in this case?Borrowers with less Credit worthiness-either defaulters on their previous loans,higher risk with lower income or poor credit history.
They need money rite?Even if they haven't paid on their old or have bad reputation on previous debts.They are not getting from anywhere else.
Hence a market is created for such lendings.

Here comes into picture the Lenders who lend/loan money to these people.
Whats the catch???
Of course there is risk involved.But you charge them high interest rates.So you will make money.

Sub prime name---not Prime i.e. not lending to Primary Borrower.

Now the situation has various angles:

There's packaging of loans in good incentives when you are attracting people to take loans from you.
You are required to pay only the interest.
Theres a term ARMs(Adjustable Rate Mortgages)...Initially there's a low interest rate which gradually rises or get adjusted.

Now we have borrowers with poor credit history, lenders who are giving them loans in better packaging schemes.

In financial markets,risker the scheme,more returns it may return.
Same concept here.
So now if my borrower is defaulting again on his loan,only a few lenders/financial institutions who give Sub Prime Lending should suffer/be in losses.But as we all know,its a global crisis.How???

MBS (Mortgage Backed Securities)...In market,you can sell anything...ANYTHING.
So what these Sub prime lenders do?They spread the risky portfolio.
Again good packaging,SIV(Special Investment Vehicles) are created and these mortgages are sold to banks,Hedge Funds,financial institutions.:)
Now you are beginning to understand all this.Rite?

Big Financial Institutions,Investment Banks,Banks,Private Equity Firms all buy such things as Insurance Policies,Mortgages,Loans,etc so that they get to have benefits.(Its a profitable investment business...think about it)...

The problem...

High interest rates led to bursting of US Housing Bubble.
Defaulters on loan again.Though sub prime lendings form only 6.8% of total housing lendings,the foreclosures were > 40% for this.
Falling Housing Prices also added Ghee to the Fire.You cannot actually refinance on a depriciating asset.(Or can you?)
Panic.Of course...

Many Sub Prime Lenders file for bankruptcy.And the effect was cascaded.Where ?To all the banks,hedge funds,investment vehicles...and eventually Stock Markets.
Banks started selling these mortgages at throw away prices.
Around $80 billion losses so far have been recorded.
N its just the begining.Remember I mentioned ARMs....Now the rates are going to be adjusted to higher levels...

Don't you people worry.
The situation is dreary.But the Govts are also awaken up to this Crisis.
New bailing out options have been there....

But the times are to be cautious...And big no to Sub Prime Lending at least for the present time...


~Rajan












Disclaimer:I have tried to be as simple as possible for non finance back ground.
If you want to know more about it,ping me and I may respond back.:)

Luxury Brands and 'Made in India'!!!

Whether Luxury Brands accept 'Made in India' Tag?

An article appeared in Business Standard today discussing the luxury brand's negative bias towards India.
Recent denial by Orient-Express luxury Hotels to collaborate with Tata's Indian Hotel Company and issues with the Land Rover/Jaguar Deal involving interested Indian parties has led to this conclusion that India still has to travel a lot to be a name in Luxury Brands.

Branding means adding appeal,meaning and value to products and services.Luxury Brands have been a forte of Western Europe with not even US and Japan able to penetrate no matter how hard and how good products they manufacture.
India is seenin the globalized world as a cost saving IT services destination.
Mass scale back-end services is very different to manufacturing luxury products.

'Made in India' tag as of now does not project the image luxury brands project.Consumers demand premium brands whereas luxury brands comamnd the consumer.

The brand faithfulness is deep penetrated in the minds of its consumers.Mercedes is still ahead even after better offerings from Lexus.

Brands have huge value.Around 30% of global wealth is in form of intangible assets such as Brand Value.
Phillips Morris bought Kraft for about 6 times its annual earnings.More than company and its products,it wanted its Brand.

Acc to Unilever Pears Soap is the first commercial brand in the world.

As far as India is concerned ,Global consumer firms outsourec -Manufacturing,design and distribution to India but keep the brand and earn huge margins from it.


India will have to wait to earn its place in the luxury segments.

SEZ-Special Economic Zones in India

Here's my 2 cents on this issue.

At the time of independence,India's share of world trade was around 2.4%.
It decreased to a level of 0.5 % in the years that came and was stagnant at this very level for 4 decades.
The main reason was the neglect of exports and the ISI(Import Substitution Industrialization)to protect their infant industries.
The Asian countries like Taiwan,South Korea succeeded in exports with their cheap products.
The going was tough for India.
But of late the govt has started taking initiatives in this direction and first EPZ(export processing zone) was set up at Kandla in 1967.Later Export Councils were also set up.

China too took steps in this direction and 6 SEZs were set up alongwithg 120 free trade zones there.
The Chinese Economy is now for everybody to see as these zones alone attract $60 Billion of investment which is 10 times that to total foreign investment in India.

India took lesson from the great Chinese success story and SEZs are also being set up here.

Advantages:

a.)Indian Govt does not have long term funds to develop industries of its own.
   Some kind of private partership is highly needed.
b.)To attract Foreign investments.
c.)Giving tax rebates is only a way to attract the investors.
d.)India has many targets to achieve--reducing poverty,creating more jobs,GDP growth of 9% or higher.
All this can be achieved and SEZs are a wonderful tool to do this.

e.)Massive industrialization can be done by this way.


Disadvantages/Issues:

a.)There is controversy on Govt's policy of acquiring farmers' land for developing SEZs.
It has resulted in the Real Estate developers getting large chunks of lands at a throw away prices.
And the farmers are agitating on not adequately compensated for their lands.
The possible solutions can be:
        a.1)Non fertile or at the max lands with one crop only should be acquired for SEZ development.
        a.2)Let the private companies approach the farmers directly and pay the market rates.Govt can act as a facilitator.
        a.3)The farmers whose lands have been taken should be given employment in the SEZs/training in the required skill sets for the same.

It should be a win-2 situation for all the parties.

b.)There is talk and comparison of India again going the imperial way.Like in the past,we had Rajas and their riyasats.
This issue if valid,Govt can have regulatory authority over the SEZ functioning.

Most of the times it is the political leaders who are against the SEZ just to generate enough propaganda and gain some political milege out of this.
People should be made aware of the benefits which they will get out of this.
But then again that needs a political will to set the things right.


In this case,I would say that the wheel has been set in motion.And this is the wheel of progress which will lead India as a power in the Global World.Let it keep rolling!!!