The Hindu Business Line : Stock market woes

Terrible, terrible times for the stock markets. Around the world, markets are falling so fast that even the exchanges in places like Canada and Australia are plummeting, so as not to feel left out.

Of course, I am sure all of you out there in the financial sector have already got your lengthy e-mails and missives. I am talking about those heavy, serious documents produced by in-house research, economic studies or business intelligence units. The se documents are usually very technical, extremely well researched and full of statistics and nice multi-axes line graphs. And so, young managers like you open these e-mails and, when no one is around, immediately delete them to avoid having to discuss them in public fora all over the company:

Boss: “Did you read the e-mail about all the stuff that’s going on in the sub-prime mortgages markets, scary stuff eh? What do you think? Is this volatility going to be around for much longer? Liquidity crunch around the corner you think?

And what the hell are these central banks doing pumping all these billions of dollars into the market. Good money after bad according to me…”

Young manager: “I didn’t get the e-mail.”

Well done.

However, it will be useful to understand some of the forces that are behind this most recent violent market crash.

The original article I wrote for this fortnight disappeared minutes ago along with the boot sector of my laptop. This way, I can just pick up stuff from the newspaper. Okay, the story behind this crash begins long, long ago when the first civilised hominid discovered that living under a roof had several benefits over living in the open.

The roof kept out the rain and sun, they had greater protection from wild animals at night and there was some hope that a few years down the line, the Maharashtra government would regularise them.

However, this was many years before early hominid discovered the concept of “wall”. In management terms these early roofed hominids would have been called “early adopters” and laughed at by the other hominids:

Hominid: “Is that a roof?”

Early Adopter: “Yes it is.”

Hominid: “Pshaw! What will you think of next? A wheel? Ha ha ha…”

Early Adopter: “Hmmm…”

Fast forward several thousand years to a little town in rural America. I introduce you to Mr George. Our country bumpkin can’t keep a straight job, has no employable skills whatsoever, lives off government largesse and often has to depend on his family and his father to support him.

However, our friend succumbs to the innate human need to have a roof above his head. He can’t explain it, but it is instinctive.

Now, in a normal world, banks would listen to his request for a loan, laugh heartily, get his contact details and then throw him out. After which, now that they have his contact number, they would call him several times every day offering him every perceivable service except a house loan. But not so in the US.

Over the last few years, banks have started extending loans to people who have no realistic way of paying back these loans. To the extent that they even have a category called ‘NINJA loans’. (I am not making this up.)

NINJA is a word that I always associate with those Japanese martial arts dudes. The epitome of coolness, stealth and extreme attitude. However, in this case NINJA stands for ‘No Income, No Job, No Assets’. In India we prefer to call them freelance columnists!

Anyway, you have all these banks giving loans out to all these broke-as-hell individuals. As a lender bank you have to be nuts to sit on these loans because most of these people, including our friend Mr George, clearly have no intention or capability to pay back these loans in the long-term. This is where we bring in a sub-species of human beings who are capable of converting anything into a sellable commodity — the investment banker.

What this friend of the financial sector does is pick up all these hundreds of highly-suspect loans and break them up into several individual tradeable securities.

Warning: Things will get a little technical now

The investment bank then goes on to steal the pants off buyers. People lap up these securities and feel good for themselves because the returns are high and people like Mr George are thrilled with their new home.

But before we move closer to the crash itself, let us spend a few moments with Mr Bush the Ninja. He needs to furnish his new home and buy utensils and electronic goods and plasma TV and the works. Mix his consumerism with a dollop of globalisation and bang, you have international trade, the world is flat and all that.

And now he is getting all his friends to buy homes as well. Lend. Borrow. Securitise. Buy. Lend. The Joy! The Joy! This is when you notice something strange: the humour quotient in this article is dropping drastically. So, remember that scene from Munnabhai MBBS with the Japanese tourist?? Hilarious, no?

After that laugh interlude, we comeback to see that the housing bubble in the US is beginning to burst. House prices fall. Loans become too expensive. People begin to stop paying back loans. Suddenly, these investment-bank-made securities need to be off-loaded. But how? No one wants to buy. And to make it worse, some people have borrowed money from a bank to buy these securities. Turmoil! Chaos! Lots of people with big, big losses.

Owner of these securities: “Hello, I think there is a problem with these things you sold me! Help! Help!”

Investment Banker’s Phone: “The person you are trying to reach is currently on holiday as he made a large bonus from selling someone a whole truckload of worthless securities. Please try again later if you still own a phone.”

And before you know, the FTSE falls, then the NYSE falls and then the Nikkei goes for a toss, and minutes later the Sensex is down.

Now, the important thing to remember here is this: Never go by anything you hear anywhere when investing, especially when you know that I flunked in both my finance papers in business school!

(The writer, an alumnus of IIM-A, was a management consultant before quitting to work as a freelance writer, author and general handyman. He blogs at www.whatay.com)

More Stories on : Stock Markets | Financial Markets | Credit Market | Sid Says

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Stock market woes