Archive for October, 2008

Is India insulated from the financial crisis?

Are we living in an insulated shell? The finance minister is reassuring the public that our banking system is solid and we are not in a crisis.

But is India a closed economy? Are we not interconnected with the world economy? The sad part is that the popular media prints only press releases. There is very little investigative information available. Get on the Internet and see for your self that the financial world and with it all other parts of industry are crumbling. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Can we only take the benefits of globalisation and be protected against the down falls?

Go right ahead and bury your head in the sand. The wake up is going to very tough.

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Financial crisis taking nations under

 

Move over America the financial crisis in Europe aims at being bigger than anything Americans have faced. This crisis is about to take nations under with it.

It is not just the banks but also the countries that are about to declare bankruptcy

Kaupthing Bank hf, Landsbanki Islands hf and Glitnir are highly leveraged, like other now-troubled banks. The banks’ assets reached €100 billion, about 10 times the country’s gross domestic product last year, and their foreign depositors have come to far outnumber the island’s population.

Today, Iceland’s swollen banks are ruined. In the space of a few days, practically the government has seized the entire banking system. The largest bank of all, Kaupthing Bank, was seized Thursday, and trading was suspended on the stock exchange until Monday. The krona has ceased functioning as a currency outside Iceland.

Switzerland – the banking haven is on verge of a break down and the governement cannot rescue it. Here is why…

Switzerland’s gross domestic product totals 512 billion Swiss francs (€332.1 billion). UBS’s balance sheet adds up to 2 trillion Swiss francs (€1.3 trillion) — four times as much. Even Switzerland’s second biggest bank, Credit Suisse, oversees assets totalling 1.2 trillion Swiss francs (€778.4 billion). Together UBS and Credit Suisse have over 640 billion Swiss francs (€415.1 billion) in outstanding loans.

 

Britain is looking at a  bailout package for its banks with plenty of stings attached.

Next to go under seems to be Austria…Germany looks sold as of now but France is on very shaky grounds.

 

BBC has an excellent summary about what is happening in Europe

 

Is cost cutting the need of the hour?

In far too many cases, “cost cutting” is a panic knee-jerk reaction to a situation that only arose because of an abject failure to plan ahead. 

This economic slowdown — or any slowdown that might occur in a business sector or individual company even in more-stable economic times — is a purely cyclical event, albeit exacerbated by the derivative crisis. As such, it should have been on the radar of any alert company, which should have prepared itself in more prudent fashion. Even a derivative meltdown was “always in the cards” and would inevitably happen, simply because it is a lunatic ponzi scheme that was bound to implode. Cost cutting is very common word in the current market scenario. Why does every one look at Cost cutting?When an organization is spending some amount initially thinking that it would benefit. But why the organization is thinking that the same cost is going waste now?

According to me, cost cutting can be done (broadly) in 2 ways. 
1) Cost cutting to reduce additional investments 
2) Cost cutting to optimize the current mode of business. 

I would choose the second one. May be the investment that you are making now may not yield immediate results and the payback period may be slightly longer than usual. Nevertheless, they will be fruitful. 

This economic turmoil can be viewed positively as an opportunity to streamline legacy, redundant operations an organization has. Technology can be used more to automate manual operations thereby reducing longtime costs. If technology is already there, disparate systems can be combined to form reusable capabilities (SOA) to reduce maintenance costs. I guess many organizations have already started doing that. Also, its time for organizations to come out of their cuticles and start looking for cost-effective vendors. So there might be an increase in outsourcing on one side when companies keep scrapping projects on the other side. 

So, advantages are obviously there. It depends on which type of cost-cutting you are making.

So it all comes back to refocusing on the next 5 years of the company’s cash needs, and that might be satisfactorily accomplished, and quickly, without any drastic cost cutting at all. For sure, there will be plenty of “fat” to be found in any company (I could find 10%-20% fat in any business, no matter how lean it thinks it is). But if you cut the wrong “fat”, or remove too much, you run a sever risk of cutting into the “muscle” of the organization, thus weakening it to a far greater degree than a small amount of waste.

Why did the government change its mind about the bail out?

Incase you have been wondering about the yoyo stand of the Americian Governement …I found an excellent post on Dani Rodrik’s weblog

Here it is

 

At first, pundits and analysts were left wondering why 228 representatives chose to “Just Say Nay”. After the eventual approval of the “bailout” (or “rescue”?) package, many have pointed to the tax provisions added by the Senate, or to the renewed persuasion efforts from political leaders, as explanations for the turnaround. But a closer look at the data helps us understand why some of the initially unconvinced were more persuadable than others: extreme ideological positions and the scope of the financial sector in home districts were the key factors.

Much was made of the political pressures faced by different representatives. Those who were most sensitive to their constituents’ antagonistic sentiments towards the bill because of electoral concerns were indeed more likely to reject it. We found that a member facing a competitive race was 30% more likely to say “Nay” than her colleague with a “safe” seat. Also, a member who was stepping down was almost 50% more likely to vote for the bill than a colleague with a seat to defend. But the reelection incentives did not seem to matter in explaining the change of heart: a representative in a “safe” seat who voted against the bill initially was not more likely to switch his vote than his threatened colleague.

A more crucial factor was ideology. While Republicans were indeed more likely to reject the bill, what mattered the most was how extreme the ideological positionof each representative was. This turned out to be the single best predictor of the “Nay” vote, and particularly so for Republicans: an extremely conservative representative – say, an ideological kin of Sen. Tom Coburn (R-OK), the most conservative of all senators – was about 60% more likely to cast a “Nay” vote than a fellow GOP representative, otherwise identical, who just happened to be as centrist as Sen. Olympia Snowe (R-ME).

What is more, ideology was also very important in understanding which representatives had a change of heart. Among those who initially voted against the bill, the more ideologically extreme were significantly less likely to change their votes in the second go-around. Only the less extreme among the extremists proved within the reach of persuasion.

The other crucial factor was the role of the financial sector. Congresspersons representing districts where the financial sector is a more prominent employerwere far more likely to vote for the package in the first round and, if at first voting against it, also to eventually change their minds. This suggests that those constituents who were particularly vulnerable to the rejection of the bill, and to the market reaction after the first vote, were indeed able to make their concerns heard. On the other hand, we could find no evidence that economic conditions such as the prevalence of subprime loans or the unemployment rate influenced voting patterns, indicating how much the current crisis has expanded far beyond local concerns about toxic mortgages in housing markets.

(Incidentally, members of the Black Caucus also played a role. They were indeed more likely to say “Nay” in the first vote, and those who did vote “Nay” were about 30% more likely to reverse their vote in the second round than other representatives – we leave it to the political junkies out there to explain this change.)

In sum, a closer look at the data suggests that the voting patterns were fairly predictable after all – the stunning rejection and the subsequent approval of the bailout package were two sides of a familiar political coin.