Saturday, May 29, 2010

CAREless ratings, selling and screwing the investor

Shriram Transport came out with an issue of loan, which sold like hot cakes, due to a high coupon. Every bank sold it aggressively, hiding facts.

I got a marketing mailer from my bank broker for subscribing to a NCD of Shriram Transport Finance. Going through the mailer, a few things were very disturbing. It is more to do with how things are marketed and a point of view on a rating agency.

o The secured portion of NCD issue is rated “AA+” and unsecured portion of NCD is rated “AA” by CARE. STFC will create appropriate security in favour of the Debenture Trustee for the secured NCD holders on the assets to ensure 100% asset cover for the secured NCDs. “
The above is an extract from a bank that markets a NCD of Shriram Transport Finance. I do not have the time nor patience to read through a 511 page offer document. Also, I am not sure I will understand it. Going thru the offer document I find that the issue has two rating agencies. Below is an extract:
The Secured NCDs proposed to be issued under this Issue have been rated ‘CARE AA+’ by CARE for an amount of upto Rs. 50,000 lacs and ‘AA/Stable’ by CRISIL for an amount of upto Rs. 50,000 Lacs vide their letters dated April 19, 2010 and April 27, 2010, respectively and the Unsecured NCDs proposed to be issued under this Issue have been rated ‘CARE AA’ by CARE for an amount of upto Rs. 50,000 Lacs and ‘AA/Stable’ by CRISIL for an amount of upto Rs. 50,000 Lacs vide their letters dated April 19, 2010 and April 27, 2010, respectively.

The bank that is marketing the issue is strangely (and unethically) silent on the second rating, which is identical for both the secured and unsecured one. (See below for my views on this)
Below is an extract from the company website:
Our products (pre-owned and new) offerings to Small truck Owners (STOs) and First time user (FTUs) includes:

Commercial Vehicle Finance
Passenger Commercial Vehicle Finance
Multi Utility Vehicle Finance
Three wheeler Finance
Tractor Finance
Construction Equipment Finance
Tyre Loan
Engine Replacement Loan
Working Capital Loan
Co-Branded Credit Card
Freight bill discounting

The ‘security’ is going to be from the above asset class, presumably. And the security is ‘to be created’ out of the moneys that will be lent in future from the money raised! And security cover will be 100 percent! Wonder whether 100 percent is based on loan amount or on asset value? Nothing is clear, unless one bothers to get the offer document or the rating rationale.
Given the nature of security, I am stunned by a rating differential in the ‘secured’ vis a vis the ‘unsecured’ portion! Wonder what the rating agency saw? The security is absolutely useless in ensuring any timeliness of payment which is what the rating agency opinion is supposed to convey. It is apparent that a higher rating has been engineered to make the asset eligible to be bought by mutual funds, trusts, provident funds etc.,
In any case, whilst lending against a truck or some such vehicle, the lender will of course have a charge on the vehicle. If he does not, he should not be in business. So, if the cover is just going to be 100 percent, i.e. the best case is that every rupee of the NCD used for lending is backed by a rupee of loan (which should have more than a rupee worth of asset backing it). Where is the question of ‘unsecured’ money, unless it is not going to be used for lending?
And, in a credit rating, ‘security’ has no impact on a credit rating unless there is a financial escrow linked to it. Here, there does not seem to be any. Under these circumstances, how can there be two ratings for the same business? I am ignorant about this, but maybe CARE has some logic behind the split ratings.
Rating agencies ought to best understand that in India, ‘secured’ is a meaningless term. The corporate default graveyard is full of such corpses. “Secured” is a myth foisted on innocent people. Yes, it will have a meaning if a specific loan is secured by an asset that is exclusive to that loan and is readily saleable (like a commercial building or freehold land and NOT plant and machinery).
Investors can take advantage here. To me, secured or unsecured, makes no difference. If at all I have to invest in this paper, I will choose the unsecured one as it would give a higher return. If there is going to be a default, both will default.

Sunday, May 16, 2010

Wall Street's Fortune Teller

No one on Wall Street has been as prescient about the economic crisis as Nouriel Roubini. He talks with Tunku Varadarajan about his new book, Crisis Economics, why Goldman Sachs is wrong, and the future of England.

Posted using ShareThis

Just saying 'no' to stocks -

Just saying 'no' to stocks -

Posted using ShareThis

Saturday, May 15, 2010

Greek Tragedy.. The irresponsibility of nations

The profligate Greek are being bailed out by a world that is worried about biting the bullet. A trillion dollars plus is being lined up to preserve financial peace in the world. The amount of the bailout is more than three years of GDP of the country! Change one alphabet from Greek and it becomes greed. The financial tragedy that is being played out, has a varied cast of players that include global banks that have lent moneys, the Euro currency that is at risk, and a general fear of the unknown that has prompted the IMF also to step in and undertake an unwarranted bailout. Whilst it is being bandied about that the sorry Greek will sacrifice a lot in future (like the proverbial naughty kid promising to be good from tomorrow), I am fairly confident that it will not happen and that the wicked ways will not be forgotten by the Greek. Domestic politics will not permit a lot of ‘promises’ or ‘undertakings’ to be fulfilled. Greece violated the EU's Growth and Stability Pact budget deficit criterion of no more than 3% of GDP from 2001 to 2006, but finally met that criterion in 2007-08, before exceeding it again in 2009, with the deficit reaching 12.7% of GDP. If one takes in to account that the population of Greece is around 12 million people, the magnitude of the bailout stands out as something of a monstrous aberration!
Greece perhaps got lost in its desire to catch up with the fellow Eurozone countries, who have a higher per capita income. With budgets getting unbalanced, friendly bankers helped out with borrowings. Now, it is payback time.
The tragedy here is that Greece left the world with a Hobson’s choice. Ignore them and the contagion spreads. Help them and it will only embolden other countries to continue with their wayward fiscal habits. The global banking system has taken the approach of pitching in, hoping that it will resolve the problem.
The relief is apparent if one looks at the manner in which the stock markets round the world cheered the news of the bailout, with a relief rally of immense magnitude.
To me, Greece is but one of the problem countries. In many parts of the world, domestic governments are throwing fiscal discipline to the winds, in order to ensure short term survival of those in power. Greed does not pay. Printing more money has its own consequences.
Stock markets today get daily cash flows of a magnitude not ever seen before. So, expect huge volatility to hit markets again and again. Whilst it is true that our Indian economy is less vulnerable to global economic conditions, our stock markets are not. Global funds are the driver of our stock markets. The way they move will be key to our markets.
If we assume the higher end of stock market analysts and assume the FY 2010-11 EPS for the Sensex to be at 1100, then the markets are already discounting it by nearly sixteen times. Surely, that is not a value buy. And, if we all agree that the Greek bailout is good for the world and that the world will heal, watch out for higher oil and commodity prices.
European economy and many other countries are still sitting on mountains of debt. A few more bailouts and the flight to safety will become pronounced. Safe havens will be commodities and gold. Emerging market borrowings will become costlier. In the next twelve months, eyes will be on Greece to see how they bite the bullet. Any let off and the country’s economy will match its ancient ruins.
India and Indians have a big lesson. Debt helps you to reach your aspirations sooner. The trick is to know when to stop. It is difficult to stop when you have global bankers who thrust ‘deals’ down your throats, hoping to make their commission and walk.

Medical Council of India- Corruption unlimited..

The above article and many other articles about Ketan Desai, makes me angry. The extent of corruption is so wide that one cannot accept that such a thing could have happened without the involvement of many more people.
Apart from corrupting the education system in a field like medicine, one also gets the reasons for the poor quality of doctors being thrown out by the present system. When medical seats are sold and examinations system has been corrupted, the result is a calamity.
The MCI has now been taken over or replaced by a 'panel' with 'independent' experts(?) for a one year period.
However, the cleaning has to go beyond this. Re examine all the medical colleges in the private sector medical colleges. Close down those that do not make the grade and take away the land given to them.
As regards the gentleman in question, not only death for him, but confiscation of all property / wealth belonging to his kith and kin should be the minimum.Letting the b****** live after this, would be a travesty of justice.
Alas, none of this will happen. The gentleman in question will get the kid glove treatment, because there are higher ups involved. They will work overtime to let this guy get off scot free. One more evidence that the system is so corrupted that there is NO hope ever for my India.

Thursday, May 6, 2010

Snowball- Life & Times of Warren Buffett, the Money Machine

(This review was written in Feb 2009)
The name ‘Warren Buffett’ stirs a wide range of emotions in people. From envy to disgust to pity! I have seen the entire range. The only thing common is that the name also seems to evoke one common word that each one associates with the name.. WEALTH.

“Snowball” is the ‘authorised’ biography of Warren Buffett, written by Alice Schroeder, an investment analyst. The book is a big boring read, spanning across more than 70 years of WB’s life almost in a chronicle like fashion. Unless you are a big fan of WB, it is unlikely that you will ever be able to finish the book in your lifetime, unless you are stuck with writing a review on the book. The author has a style of using more words where few would do. You wish that the book were about one third the actual size it is.

After you read the book, you do not know whether to like the man or hate him with a passion. To this extent, the author has done a splendid job by not taking sides and trying to present facts (of course as narrated by WB and his circle of contacts) without any bias. After reading the book, the picture that emerges is of a pitiable man, who has spent his entire life accumulating wealth for wealth’s sake. The end result is that you see a pitiable man, who lost all touch with human beings and identified only with Benjamin Franklin who grinned back at him from the greenback. The feeling one gets after reading the book is that if you have an obsession for money, then do not ever get married and do not have any relatives or friends. Once you make them, you will have your choices.

A man who spent near over seven decades accumulating wealth, without ever putting it to any use and hoarding it to the point of denying family members any pleasures of the unearned wealth, finally perhaps saw the pointlessness of wealth accumulation and has decided to give it all to charity!!

He lived in an era where compliance was lax and inside information were within the purview of law. However, the fact is that the same window was open to everyone else. He alone made the wealth that he did. Whilst one does not dispute his money making abilities, surely in today’s environment, it is going to be virtually impossible to replicate his success. There is also some speculation as to whether the compound gains in the future are going to be anywhere as spectacular.

One important lesson to be learnt from the life of WB is that if you want to invest money in to stocks, do it with money that is “spare” and will never ask any questions. And to make serious money, it is not enough to buy a few hundred shares. You have to own decent chunks of a business. And find them with the right people, trust them and let them manage the business. And do not invest in financial services business. WB has obviously missed the bus on Salomon Brothers since management in such companies is typically focused on own greed rather than shareholder gains. No wonder he has taken a very cautious step on Goldman Sachs.

The biography is unfortunately silent on the scandal of his insurance company that got entangled with ethical issues in the AIG affair. To that extent, the writer is less than honest in terms of purpose. The book also chronicles virtually every one of his ‘deals’ or investments. The author skips most of the uncomfortable issues, whether it is the matter of WB ditching his wife for someone else or his ignoring every one in life unless it meant making money. There is also no comment about his younger days shoplifting or gambling habits.

The final act of giving away his fortune to be managed by someone else, is one that could perhaps have done with some more explanation and analysis. What comes home is the point that charity is serious business and that it needs a focus that is equal to one that is needed for making money. This one act of giving, to me, is the ultimate act of courage by an extraordinary man. I do hope that people pick up this lesson and we become a nation of ‘givers’ rather than accumulators. And it is best to keep the giving to the family members a ‘token’ affair. That is what has made America a great nation. The habit of the Indians to leave behind everything for their children is what makes India a small nation with many people in the Forbes list and also the highest number living in poverty.

In search of a Financial Advisor..


The actions of SEBI with reference to the mutual fund industry and its battle with IRDA over regulation of ULIP’s has far reaching implications on the way the distribution of financial products is being done. So far, the customer was being chased and the distributor was getting paid by the producer (the amc or the insurance company) who in turn used to dip in to the investors’ pocket. The fact was that the consumer got a feeling that the distributor provided him with a ‘free’ service. Given the Indian mentality of not wanting to pay for professional advice, when it comes to mundane things like finance, this system was convenient for the distributor. The entry load, the NFO charges were all seemingly charged by the producer. In reality, the distributor took away every last penny of these kinds of ‘extras’ that the producer was levying on the investor. Of course, the insurance industry took it to the highest level with ULIP’s.
Now, hopefully, the spat between the regulators (though I believe that IRDA is only an insurance club, headed by retired people from government service) will reduce the opacity in the ULIP. It is too utopian to wish away ULIP’s in toto.
Now, the distributor has to do a big rethink. The trail commission that will get from mutual funds, will not be sufficient to cover his costs. Most IFA’s will have to seek alternate careers. If the ULIP commissions come down to mutual fund levels (which it could) we can see a lull in the industry. Mutual funds and insurance are products that have to be ‘sold’. The only way out is for distributors to levy a charge on the investor. Most investors would be loath to pay one, but unless they reconcile themselves to paying, they stand to suffer. What is a ‘fair’ tariff, will be decided by market forces.
The distributor also has to mend his ways. For instance, a mutual fund distributor never shows you all the funds. He is today an ‘authorised’ stockist for a select few fund houses, based on the money he gets from them. No distributor or IFA will show you all the products available in the industry. In insurance, it is worse. You get to see only one company product. This means that you have to do all the hardwork or fall in to the trap of the distributor.
Paying for advice is going to be the way ahead. There is no option for the distributor. In this fall out, there will be the unfortunate ‘small’ investor who will be left out. No one will want a thousand rupees investor. In fact, I think that the threshold will shift to investors who can put in at least a few lakh rupees. If I am a distributor, I would have a minimum ‘revenue’ ticket of at least a few thousand rupees for spending time with an investor. So, the ‘small investor’ will be left to the mercies of self education and small time hustlers. . For the ‘small investor’ there is no hope but to do the hard work himself. Economically, he does not make sense as a business proposition. Today, when the AMC gives ‘per application’ incentives, the small investor is sought out. Once these incentives are not there with the distributor, he will ignore them.

The sad fall out is that penetration will surely drop and there is no incentive to reach out to underserviced centres. I think that the number of investors will not increase. Perhaps, it could decrease further. This is the real damage that the regulators have done by micro managing. If LIC had not paid the kind of commissions it did, it would not have penetrated the smallest town in India. Now, the regulator is making an attempt to make mutual funds and insurance as a ‘white collar’ ‘anglicised’ industry. This, to me, is the biggest backward step which is an outcome of mindless regulatory action. The recent moves by the regulators have adversely impacted distributors as well as the producers. An SMS floating around is very apt. “SAVE THE MUTUAL FUND INDUSTRY. ONLY 38 LEFT”.
The distribution industry has to make deep changes. Once they start charging a fee, they become accountable to an investor. They have to stop employing kids in their diapers to render advice. As an investor I would expect someone with experience to handle my affairs. It is debatable whether there is quality of people available in numbers in our markets. I would make the following a kind of laundry list of ‘minimum expectations’ from a distributor who wants a fee from me:

i) Qualified and experienced person to talk to;
ii) Show me the complete range of products;
iii) Talk to me when the going gets bad;
iv) Give me periodic MIS as well as updates on my portfolio;
v) Tell me when to sell;
vi) Tell me what he gets from the producer as a selling commission;
vii) Provide me a periodic assessment of the investments;
viii) Assist me with all documentation, pre and post investing; and
ix) Give me his advice and assumptions in writing.
As an investor, a good thing that has happened is that you can change your distributor at any time, without disturbing the investment. This is a powerful tool and use it well to ensure that the distributor provides advice and service.
Expect to pay a fee that is typically a percentage of the investments that you make. Soon, we should also see the emergence of pure financial advisors, who do not sell any products. They will only discuss strategies and financial goals with customers and charge on hourly basis. That would perhaps ensure truly unbiased advice. I would like to see the advisor being divorced from a seller. However, to render this kind of advice, I would expect very high quality and at least ten to twenty years of experience. I would hate to go seek advice with a young kid who has not seen any complete business cycle at a professional level. It would become very much like going to a doctor for advise and a chemist for the medicine. Here also, I would urge the distributor to outline his strategy and assumptions in writing so that the client can check back with him. This will also curb the general tendency of the sales people from making exaggerated claims which often fall in the realm of dishonesty.
Till the advisory services evolve, the investor is going to be on a roller coaster and perhaps a guinea pig in a financial lab, providing experience to financial advisors.
Of course, you will have your banker chasing business from you. It is surprising that your bank abuses the relationship to target you for marketing of their other businesses. Many banks will try and sneak in charges without being explicit about it. In the papers you sign, the banks will hide away a clause whereby it would appear that you are giving them permission to debit them for services such as helping you in mutual fund investments. Do not give in. Most banks try and sell you products where they get high fees and do not show you the full suite of available products in the market. It is none of the distributors’ business to adopt arbitrary bases to ‘short list’ products. Also, I dislike banks in financial service, because there is generally no continuity and most of the persons who come to you seem quite inexperienced. And, every year, the person keeps changing and the new person will change your portfolio simply in order to meet his revenue target.
It is going to be difficult to choose advisors. It will take time for the industry to evolve. However, I think that Indians have to learn to pay for advice and the advisor has to become accountable. We will see the evolution of standards on advice. Mis selling will be legally punishable with penalties and more. Once there is a written advice, the onus would be on the advisor to ensure that the advice he renders is in line with the risk profile and financial standing of the investor. Distribution game has to change significantly. Investors have to also change their mind set. A new order is under way.