Ref: 10-003 of 19-Jan-2010 by Kalidas PDF Download from ScribD

READ or watch any media report in Uncle Sam’s America – newspaper, magazine, Business channels on TV or any interview of senior executives of large corporate. They talk about only Top Line and Bottom Line. Top-bottom, top-bottom, top-bottom……… they go on lecturing for hours using above words in different contexts. In the process, the body, the substance, is lost.

What happens when a person with blood group A+ is on operating table and is in need of blood. Will any other group of blood be acceptable? Of course not. He will die if he is injected with different blood group.

Same thing applies in the field of finance and economy. Those of you who has read my book “Sub Prime Resolved” and the primer series “How to Invest into anything…” would have known that “Long term assets should be financed by long term liability which could be in the form of capital such as Equity or Preference shares and long term borrowings from banks, financial institutions, public issues in the form of Term Loans, Bonds, Debentures or perpetual instrument.

Thus, if you grant a loan on 10 year basis, it should be financed by either equity or 10 year long term borrowings. The borrowings have to necessarily match the maturity profiles of the financed assets. If a bank or Mortgage financing institution is granting a fixed rate mortgage on 30 years basis, he should have capital or borrowing on matching terms and maturity, those who finance the long term assets with short term liabilities are bound to fail sooner or later.

This is what is going to happen in America. The banks and mortgage institutions, with a view to boosting stock prices of their company, lent mortgages at incredibly low rates, often not exceeding 3 or 4%, and financed them from short term borrowings from Fed under Federal funds rate program or in discount windows at near zero rates. In reality, they were arbitraging between short term borrowings and long term lending rates.

THIS WAS SUICIDAL

Let us take a concrete example:
Suppose Banker A grants $ 250,000 Fixed Rate Mortgage loan @4% repayable in 30 years. The rates are fixed, without recourse (unique in America) and without escalation clause. See the stupidity of the American banker. How could they take the view of Interest rate for 30 years? How could they lend on such incredibly low rates for 30 years?

LENDER IN HEAVEN
He does not have enough capital. He borrows short term (monthly rollover or Libor based) either from Fed or inter-bank market. He pays at the most 0.25% and lends at 4% netting interest differential of 3.75% or $ 3,750 per $100,000 per borrower per year. It is his net profit with least maintenance cost. The stock price goes up, his stock options become more valuable asset and he also earns fat bonus at year-end running into millions of dollars. That is his performance. His colleagues and neighbors consider him as “Smart Ass”

LENDER IN HELL
Now, what happens when the interest rates rise? Well, until the rates rise by 2% to 3%, his profit margin merely narrows down. Instead of earning arbitrage interest differential of 3.75%, he would earn 1.5 to 2% or $ 1500 to $ 2000 per $100,000 per borrower per year.

However, when the short term interest rate rises to 3.5%, and above, he will have to visit Wash Room often. He is losing in every case. Being a fixed rate mortgage, he cannot pass on extra cost to his borrower. If he tries to under other Alt-mortgages, the borrower will come to him, hand over the key and say, sir, enjoy your property. He becomes “lender in possession” with no recourse to the borrower. In short, the banker is now in duress.

If interest goes to say 8%, he will have shell out 4% from his own pocket or $ 4000 per $ 100K mortgage per borrower per year. If he has granted $ 300 billions of such loans, he would lose 4% or about $ 12 billions from his bottom line. NOW, his bottom line becomes bottom less pit.

There are about $5.5 trillions of mortgage loans in United States. In the event of massive rise in interest rates, the banks would be losing $ 220 billions for rise in interest cost by 4%. In other words, the lenders would lose @ 55 billions for every rise in interest rate by 1%. If the rates rise to say 24% as it happened in early 80s, the bankers and mortgage lenders will lose over $ 2 trillions ($ 2000 billions) per year.

We are not counting derivatives that run nearly 6 to 20 times the above amount.

There will be catastrophe. The borrowers will not be affected because they have fixed rate mortgage. But when his lender gets bankrupt and gets sold to some third party, what happens if the said third party annuls the agreement on the ground of equity (it is possible legally) and fair play?

At the moment, thanks to four musketeers – Hank Paulson, former Treasury Secretary from Goldman Sachs, Timothy Geithner, incumbent Treasury Secretary, Ben Bernanke, incumbent Fed Chief and Alan Greenspan, former Fed chief for over 18 years. They are the “Destroyers of America”

The rates are about to rise. China has already expressed intention not to buy any more T-Bills that has infuriated the United States. A vicious propaganda is launched to the effect that China bubble is about to burst. They are trying to squeeze Chinese nose so that their mouth and purse open up.

But then, they do not know the Chinese.

When the rates begin to rise, all the banks and mortgage lenders will come under severe squeeze. The double “dhol” (an Indian musical drum) with Bernanke on one side and Geithner on the other, will make such noise that the markets would be rattled to the extreme.

Several banks will fail, in thousands. Several trillions will be lost again. The Fed will find difficult to print more and more $ notes. FDIC will be busy taking over banks day in day out with no funds in the kitty.

President Obama with no cash in the kitty, printing press closed, no majority in Senate to pass mischievous Health Care bills, will be pushed to the wall. His popularity will go down below 30 from 46 at the moment.
Hell will break lose again in the financial market. Will it happen and so early. It all depends at what speed the rates rises. It is not the question of “whether” but “when”

Ride the rally in the stocks and bonds for the time being. A financial earthquake, more severe than Haiti, is in the waiting. I could hear the simmering sound, I could smell the faint smokes, what I do not know is the precise time when this volcano and earthquake will burst and with what intensity.

Kalidas (Anil Selarka)
Hong Kong, 19th January, 2010 Ref: 10-003

Personal Blog: http://anilselarka.com
Book Web : http://www.subprimeresolved.com

Ref: 0908-031A of 21-08-2009

In the days of Kings, Queens, Sultans, Moguls and Rajahs, there were only two currency denominator with reference to which a person’s wealth was measured. – Gold and Silver. Other units used were the number of sheep’s, goats, horses, cows and buffaloes.

However, these objects were relatively scarce, and hindrance to trade development. When paper was invented, especially Security paper, the concept of bank notes was introduced. It revolutionized the coming century. A time came when Alan Greenspan was spoken of more than the Jesus Christ.

Having seen the investment medium of Gold (Silver and Palladium will be discussed later), let us see how a person should build wealth that is liquid, earning and transferable. East and West followed different philosophy, thanks to many Nobel Laureate Economists who invented number of theories understood either by them only or some small fraction of so called professionals who brought the financial ruin as you witness today.

WEST followed the policy of “Spend first, Save later” and used plastic money (credit or debit cards) with gay abandon. Paper and Plastic were the two numerators of proof of wealth. When I went to USA a few years ago, I tried to pay them with greenback, that is, $ 100 green dollar bills so much loved by the Asians over here.  They love dollar more than their wives and children. The counter clerk asked me “Sir, don’t you have credit card?  We can not accept this note” I asked him for reasons to which he replied, we do not know whether it is genuine or fake. WOW, we Asians go mad after dollars, and these Americans do not trust their own currency!

EAST followed the policy of “Save first, Spend later”, diametrically opposite of western philosophy. This is why Asians prospered, and West was brought down to knees. After contracting debt via credit card, if the consumer can not pay, the remedy was easy – go bankrupt!

Look at the following table, how much consumers gain or lose in following West and East policy.

We compare two countries – USA and INDIA for simplicity.

Let us say, an American bought a few items for US$ 10,000 via Credit Card, paying interest @ 12% on average (it varies between 7% earlier to 16% to 24% now) for say, 3 years. An Indian saved the money for 3 years earning 9% interest and then decided to spend it. The cost of the items is worked out as under:

MORALE:

1. If Debt via credit card is used for consumer item, it is irrecoverable expense. The item also depreciates over 3 years, so that realizable value also diminishes.
2. If no debt is used for consumer items, but savings resources were used instead, the cost of the item is reduced by interest income on savings.
3. Debt is useful for a businessman because he employs the amount for earning. Though he pays interest, he also earns income or profits. His loss or gain is the difference between the two. It is“two way traffic” for him.
4. For an employee, having no other income than salary, he loses on contracting debt, because no income is created out of debt. It is a “One way street” for him – loss only.

This is why the East is asserting on West now. America is technically bankrupt with years of consumer spending financed by Credit cards. Eastern countries like China, India and other Asian nations have acquired wealth due to their reliance on savings rather than debt.

Make your First Million by Savings (very difficult), Subsequent millions are easy.

Making first million in any currency anywhere in the world is extremely difficult. One makes or loses continuously, learning all the time. The balance so accumulates make the million after long time, may be 3 to 8 years.

Once one has made real one million in the currency of his country, he has sufficiently learnt the art of making a million. If he is able to hold on that million for at least 3 months, making of further millions become relatively easy process. There is a saying that “Money attracts More Money”. It works both ways – once one begins to lose, the lost money attracts more money from the holder, compounding the losses. Similarly, when one has made a million, the chances are the money that he holds will attract more money inward to make him rich.

So let us make our first million in the currency of your country. A million is a million, regardless of any currency. The PPP or Purchasing Power Parity operates silently in every currency to make the above idiom true.

Bank Deposits vs. Bonds;  Currency Risks, Capital Risk and Exchange Risk

Each country has its own products for savings. For instance, it is easy to buy Treasury bonds in USA, howsoever small amount may be. In a country like India or Hong Kong, the availability of Treasury bond is limited to large amount, often 250,000 minimum. An ordinary saver can not handle such amount. He is not millionaire yet. Now again, I remind you of the difference between “Savings” and “Investment”.

• When one makes a deposit in the currency of his country with assurance to return the same currency in same principal amount (plus interest), it is called “Savings”. Example, one takes out bank deposits for say 100,000 in currency “X” with interest @ n%, with assurance to return the money on maturity in same currency with interest, it is Savings. (He gets X100,000 + n% interest)
• Where one makes deposit in the currency of his or other country if his local currency is convertible), with no assurance that same amount will be returned to him later on maturity, it is called “pseudo Savings cum Investment”.
  • He is assured here the same amount of foreign currency on maturity + Interest, but he is not assured the same amount in his local currency. He takes exchange risk that may give him increased or reduced return. This is the first level of risk he undertakes.
• If one buys the Treasury Bond, in his currency or foreign currency, he takes on one more risk – the interest rate risk. If the interest rates go higher/lower, the capital value of the bond reduces/increases during transit time (until it matures). On maturity, he gets the same capital value in respective currency.
• If one buys corporate, municipal bond or state government bond, then he takes one more risk – the credit risk of respective corporation, municipality and state government.
  • For instance, in USA, many of the Municipalities or state governments face severe liquidity strains or nearly bankrupt.
    • The federal government in USA is not kind enough to guarantee the bonds of state government or municipalities (FED would stupidly guarantee $306 billions of Citibank bonds, but not even $ 25 billions of the State of California)
    • A country like India is more responsible. The Central government always comes to the rescue of the state governments or local semi government authorities

Having seen the difference between Savings and Investment, let us dwell on the specific products and their variations.

BEFORE that, please note that if you do not understand any investment products, simply say NO. In investment world, there are many conmen or crooks that are out to reach your pockets with innovating scheme or theme. They get paid liberal commission by the issuers. You must therefore be prepared to say firm NO. These two letters will save your life’s savings.

Also, when you are talking of the savings, do not include “investment” or “credit risk” profile. Savings must be Savings – totally risk free – returnable to you intact on maturity with interest on maturity. Here are some principles of how to save in bank deposits:

Fixed Deposits: (with Banks)

In centers like USA, Japan, Hong Kong and other dollar block countries, the interest rates are near zero. It would be stupid to invest in such deposits on long term basis. Use the following guide:

If interest rates are very low, follow the table as under:

Remarks :

• Do not lock up your money for long, if the rates are not so favorable
• Until rates rich 9%, do not lock up for longer period. Eat interest every quarter.
• By rule of thumb if the interest is over 10%, one may lock in yield for 12 months to 36 months. Make it cumulative, so that you earn interest on interest. That is, your effective interest rate is 11% (10% regular + 1% (10% of 10%) = 11%)
• DO NOT make single large deposit. Make 3 to 5 units minimum. The reason is if  you need the money for any emergency, you can break the deposit (withdraw before maturity, paying some penalty).
• If you are making deposits for 3 years or more, do as under to maintain continuous cash flow. Say you have X 500,000 to keep as bank deposits, keep 100,000 each maturing on expiry of 36 months, 38 months, 40 months, 42 months and 44 months.
  • This will ensure that after the expiry of 3 years, you have cash flow of 100,000 every two months.
  • Further, if you need some amount earlier, you need to break or withdraw premature only one unit without disturbing others.
• CHECK the maturity value before leaving the counter. Most people presume that banks are always correct. It is not so. The clerk who is servicing you may make clerical error and write wrong amount.
• USE the following Interest calculator – one of the best tools around. It is free software which works out interest and cumulative amount on loans, deposits, recurring deposits etc.
  • It has small limitation. It uses 360 days per year which is international standard for Bond market, not Fixed Income market like Deposits where they use 365 days per year as standard. (In India and Hong Kong, for instance)
  • This tool is very useful in planning your savings. Fixed, Savings, Recurring Deposit (very powerful concept discussed later)

While opening Fixed Deposit account, please ensure that –

1. You are opening jointly with some member of your immediate family, say spouse, if your own age is 55 or more. Make it “Either or Survivor” (E or S) if you trust your named partner.
2. In some countries like India, nomination facility is available where you can nominate non-depositor but your immediate family members like son or daughter, should anything happen to you or your spouse. This will avoid all legal formalities like will, probate, letter of administration etc.
3. One may avoid nomination by including one more name after his name, say of Son or Daughter, but limiting operation in account as “Former or Survivor” which means that one will get the payment on maturity, not other beneficiaries. Former means you. If one makes a mistake in writing his Children’s name ahead of his own, then they will get the money on maturity, not he. Other beneficiaries will get if only original depositor dies.
4. If you are 55 years or older, NEVER EVER give away your entire wealth to your children,. They will take care of you only when they know that money will be theirs when you are no longer around. Otherwise, you may have to wash dishes in their homes and reduce your status to that of a house servant or even worse. Money always talks, remember that always.
5. In liberal countries like USA, where marriages often do not last long enough, it will be advisable to keep deposit in your own name without the knowledge of spouse. Such confidentiality will avoid substantial payment or alimony in divorce proceedings.

1. Many frauds have been reported in India, when a Non Resident Indian (known as NRI) remits large amount without taking adequate precaution.  Note the following example (Illustrative)
   1. A NRI remitted US$ 100,000 by wire or TT to a small town branch of a nationalized bank with request to open the Cumulative Fixed Deposit (CFD) for 3 years in favor of the depositor and his wife. Since the online account opening facility was not available, he requested the Branch to send him the “Account opening form” for his signature and documentation. This was perfectly normal.
   2. The Branch Manager was not honest. He sent the FD Acct. form to the depositor with specimen signature card. At the same time, he issued the FD in the name of same depositors and attached the signature card with fictitious signature.
   3. On very next day, he created a loan in favor of third party and pledged the FD duly discharged by him and also signing necessary loan documentation forms.
   4. Meanwhile, the depositor sent him the Account form. The Branch Manager sent him another FD with similar particulars. Since the FD was for 3 years, and interest being cumulative, he did not know of this fraud for 3 years until his FD came for maturity and he wanted to cash it out.
   5. The Branch Manager was changed. He informed the depositor that third party had defaulted on loan, so the deposit was adjusted against the loan. No further amount was payable.
   6. The depositor then complained to his Regional Office, who instead of investigating rehearsed what the branch said. When he approached its HO, the Inspection department conducted the investigation and the entire fraud came to light. Meanwhile the original Branch Manager had taken voluntary retirement and absconded from town.
   7. It took for more than 6 months for the depositor to get his claim settled, and that too, without additional interest for extended period from maturity.
   8. If the FD was non cumulative, the depositor would have known non payment of quarterly interest into his Savings account, and the fraud detected early. Alternatively, the depositor may ask for “Certificate of Non Encumbrances” from the Regional Office sending them a copy of your FD received.
   9. The best course is to maintain account only with large branches or Main Branch where the chances of such irregularities are almost non existent.

SAVINGS ACCOUNT:

Same as above.  However make sure that you know the bank’s Minimum Balance requirements, Otherwise they go on debiting your account every quarter with Rs 750/quarter. I have bad experience with Axis Bank in Mumbai, India. I opened NRI-PIS account with them with one ordinary NRE where I was maintaining decent 6 figure balance and another sub account for stock purchases. They disabled my Internet access on some fictitious ground. After a year and half, I realized that my account was debited 6 times with the bank charges of Rs 750/Qtr or Rs 4500 over 18 months. I tried to close my account, and lodged a strong complaint, that my relationship balance was 20 times their minimum balance required. But no one listens – you have to press 1, 2 4 5 6 and what not and finally told that it was a call center.

A new Manager assured me proper service again and refunded Rs 1500 only. Again, for last quarter, I was debited with Rs 750 again. I am going to close down my all accounts with such glossy electronic banks who do not know the basics of banking. (I was a banker for 19 years, so I know what is called Banking!)

The purpose of referring above episode is to help you understand that banking is not what it used to be 10 years ago. Modern day MBA bankers are too procedural to meet the requirement of ordinary depositor. Make it a habit to check your bank account regularly so that no charges are improperly levied.

CURRENT ACCOUNTS:

Same as above.  This is non interest bearing account, so avoid keeping large balances. Instead, keep major portion of your balances in Savings account so that your deposit earns some interest.

MANDATE FORMS

Some banks, especially in India, have a facility of “Mandate Form” under which you may authorize signing powers to known third person (mostly in your family) without executing complicated Power of Attorney document.

As far as possible, try to avoid joint bank accounts with some third person with only intent to authorize him to operate your account for sundry purposes. Use Mandate form instead, which can be cancelled at any time, if you find inconvenient or your account is not properly administered.

There is a legal risk too in opening Joint account with third person for only operational purpose. By opening joint account, he earns the status of being joint owner or co owner of the funds. If he runs into financial problem, your account could be subject to court seizure or attachment. If he holds “mandate power” nothing happens or could happen to your account. He is merely authorized signatory, not co-owner of the account.

RECURRING DEPOSIT ACCOUNT – Sure way to build wealth:

This kind of facility is only available in India, not in advanced countries (they are not that advanced). This account is the most important savings instrument available to individual investors on long term basis. This is like an Imprest system under which you contribute some amount every month and receive lump sum at the end of contracted period.

This account helps you manage the following:

1. One can lock in higher interest rate for 5 to 10 years with meager sum.
   1. Example: Supposing one is in era of high interest rates, say 15% on long term deposits. The rates have stopped rising and may fall.  One wants to lock in such rate with minimum cash outlay. He can open 5 different RD account with maturity of 5,6,7,8,9 or 10 years contributing say, 1000 per month. He has to pay just Rs 5000 every month for which he can give standing instructions to debit his Savings account monthly. Now look at the maturity scenario:

Simple Yield = {Interest Gain / (Average Investment) %} divided by No. of years

(Average Investment = Initial Investment (=0) + Final Investment /2)

1. It will be observed that current yield of 10% become compounded yield of  12% to 14%
2. Above method ensures steady cash flow after 5 years in greater proportion every year
3. If you plan from the age of 51, to retire after the age of 60, you will have steady cash flow every year from 77000 to 205000 per year, enough to pull on without much external support. This is your self made Provident Fund on which you have total control
4. You can vary the amount in multiples of 5 or 10 to make larger sum available to you at later age.
5. You can also open separate RD account for each activity, Children’s college education, wedding or purchase of property. Say in above case, you contributed Rs 10000 for 10 years for your children’s education, you will get Rs Rs 20 lakhs after 10 years, when they are about to get into higher education. No more educational loans at that time which will reduce your net worth. This will enhance your net worth…
6. In 1992 to 1994 FOREX crises in India, one bank offered very long period RD (for 20 years). By depositing Rs 5000 per month for 20 years @ 13% interest rate, one would get   5,619,929 against total investment of 1,200,000 (240 x 5,000) netting simple yield of 36%.  Longer the period, higher the simple yield. The average investment is worked out on this basis: Initial Investment is ZERO, Final Investment = Installment x no. of Months in a period. Divide it by 2 to have average investment over the period.
7. In short, if you plan your cash flow from early age, you will have worry less future, be it education for your children, their wedding, purchase of property or own retirement.

How to use Recurring Deposit (or Remittance) to avoid Exchange fluctuation?

While living in Hong Kong, I came across hundreds of instances from local people who always complained about exchange loss due to currency devaluation against USD. They also tried to time the remittance, and always failed. I used to tell them to send the remittance periodically taking out advantage of weaker destination currency. See the following example (we used Indian Rupees for illustration purpose. You can replace it with your national currency.)

Say, you remitted USD 10,000 @ Rs 50, 46, 44, 39, 43, 48, and 49 on seven occasions.  The average works out to Rs 45.57, marginally lower by 7% over 7 years or just 1% per year.

The people always average down, never average up. This is where they lose profitable opportunity.

Anil Selarka
Hong Kong, 21^st August, 2009

Ref: 0908-031A          For PDF file Download from SCRIBD

Document Statistics: (without this block)
Pages 7; Words 3,633; Characters (no spaces) 17,284;
Characters (with spaces) 20,794; Paragraphs 181; Lines 398

Another article SR 05  on Bonds (Zero Coupons) in continuation of series ” How to Invest into Anything? “will appear on 31^th August.

Do you know why almost all coins in the world are Round shaped? Because money always roll.  That is the nature, function or character itself. If a coin does not roll, it is not money.

The coins – from dollar to dime – are always Round. They have to roll. If they don’t, they stop and with that the life of all citizens comes to a screeching halt.  That is what is known in modern parlance as “Stoppage of Economy”.  Some call it Recession; some call it Depression if the stoppage is prolonged.

Some call this activity as “freezing of liquidity” or “Credit Freeze”. The money becomes in short supply, its real demand increases, the real supply does not match the demand, and it’s borrowing cost increases. The FED tries to revive the economy by pumping in trillions of dollars where only 5% would have been enough. But it is not. Fed’s disbursement is not target specific.

With interest rates narrowing to zero only on paper, no money is available in the market place. Even Goldman and GE borrow $ 8 Billions @ 10% from Warren Buffet.

The banks remain open with cash drawers closed. Jobs are lost; so the workers do not get recurring wages to spend. The whole nation comes to a standstill.

Where the money has gone? With over $2 trillions being printed by bearded Bernanke, the question arises where have they gone?  They do not know the answer.  Here is my explanation.

The liquidity is not only the quantum of money or Mass alone. It has speed, also called “Velocity”. When they get together, it is called “liquidity”.

If $ 1 million rotates or changes hand from one to another 12 times a year, the liquidity is $12 Millions. Instead, if $12 Millions are printed, but they remained in banks vault, or do not circulate, the resultant liquidity is Zero.

The first lean and mean $1 Million is more powerful than the subsequent fat and obese $12 Millions.

In short, Mass (Money in Quantity) x Velocity (the speed at which it changes hands) = Liquidity

If there is…… $    1 Million (Mass) x 12 Velocity (Money’s speed)………… = 12 Units of Liquidity
If there are …$ 12 Millions (Mass) x 0 Velocity   (Money is stationery)… =   0 Units of Liquidity

The recent mass printing of $ 2 trillions by reckless Bernanke has no effect. They have become a dead inventory.  It has no storage cost, however. It is not real money which is called “legal tender” – they are electronic money or plastic money, changing not hands but the accounts in which they are credited. They are mostly book entry money.

If Bernanke had printed $ 2 trillions in physical paper, over 6 lanes High Way 500 Miles long would have been covered by $ 10 notes lying neck to neck or in bumper to bumper traffic in auto terms.

For over 2 decades, the “Physical Money” has been increasingly replaced by “Electronic Money “or what we call the Plastic Money. ATM Card, Credit card, debit card, insurance card, travel card, or name anything you like. While the real money or legal tender is issued by the Federal Reserve, the plastic money is being issued by any Tom, Dick and Harry bank.

Bernanke’s largesse of $ 2 trillions or $ 2000 Billions is sort of “blotter money” similar to “tissue papers”. There is so much of red ink in the large banks’ balance sheets, that the moment the Fed gives them these “Blotter Billions, they soak up the “red ink” in their balance sheets and become instantly useless. The new Bernanke and Paulson brand money act as “butt wiper” and goes down the drain.

Often you may have experienced the car skidding into a wet ground. The wheel rolls, but the car does not come out of the ditch. You need 2 or 3 persons or simple tricks to place a wooden plank in the front of the wheel and then need a gentle push from behind. There you are – the car is out of the ditch on the road again. The economy needs such deft handling.

Both Bernanke and Paulson are the greatest dumb heads America has ever produced. The universities that awarded them degrees should seriously consider recalling them from these mutt heads for causing chaos in the money markets with utter display of lack of common sense.

Look at these mutt heads. They would give $430 billions of assistance to bankrupt Citigroup, who then fires 75,000 employees, $127 Billions to AIG and billions of dollars to worthless banks or brokers. However, they would not give even $ 34 billions to Auto makers, who provide millions of jobs to the employees of auto industries, dealers and distributors.

How to disburse credits to needy and get the economy moving again?

1.      Disqualify the commercial banks from receiving aids from Federal Reserve if they do not use at least 80% of new credits for new lending.

2.      Make target specific reimbursement of credit needs of the banks as under:

a.       Say, FED will lend $100 Millions to the banks @ 3% (or any rate FED may chose) for incremental housing credits. That is, if their housing finance increases by fresh lending, only that portion will qualify for refinancing at lower rates subject to Home Mortgage rates not to exceed 2% over FED refinancing rates. This will ensure that the benefits of lower credit costs are passed on to the consumers.

b.      Say, FED will lend $100 Millions to the banks @ 3% (or any rate FED may chose) for Auto Financing in respect of incremental Auto financing line to the borrowers who buy the NEW automobiles made by 3 troubled Auto makers subject to Auto Financing Rates do not exceed 3% over FED refinancing rates in respect of incremental credits to Auto finance sectors.

i.      This will serve two purpose – one, it will ensure cheaper Auto finance to the consumers direct

ii.      And two, it will generate demand for new automobiles made by 3 Auto manufacturers who are facing sagging demand for their vehicles. This will save jobs in auto industry, ancillary industries, dealers and distributers ends.

c.       Say, FED will lend $ 100 Millions to the banks @ 3% (or any rates FED may chose) for incremental credit in the form of fresh credit card advance subject to charged interest  rates do not exceed 3% over FED refinancing rates for regular credit card advance and 5% over irregular credit card advance.

i.      This will encourage fresh lending to consumers who are the backbone of the economy.

ii.      Good borrowers with regular repayment records are encouraged by limiting interest rates to 3% over FED refinancing rates.  If FED rates are 3%, the interest to consumers will be limited to 6% only.

iii.      Worsening borrowers who are not able to repay in time, will be discouraged by making them pay higher rate of interest by extra 2% (or more). However, their outstanding under Credit Card do not get inflated by usurious rate of interest or hidden charges levied by the bank. This will serve as “automatic control” on bank’s lending practices.

iv.      Defaulting borrowers, who are not able to repay their debt under credit card may be asked to pay higher rates than normal. Such defaulters take lot of management time of the lender. They should be compensated for carrying potentially bad advance. Exceptions may be made by the lender to convert the advance into MIL or Monthly Installment Loan if the borrower had lost the job  and searching for new one.

3.      Make target specific reimbursement of credit @ 3% of all incremental fresh credit lines to

a.       Large corporate borrowers by way of direct loans, trade financing, bills discounting subject to such loans bearing interest rates 3% above FED refinancing rates.

b.      Large corporate borrowers by buying their 180 days to 270 days commercial papers subject to interest rates not exceeding 3%, 4% and 5% above FED refinancing rates to A, B and C category borrowers.

c.       SME and other smaller companies @ 3% provided the  bank makes any kind of incremental loans, overdrafts or Cash Credits, secured or unsecured,  at rates not exceeding 2% and 4% over FED refinancing rates for secured and unsecured portion of financing.

4.      Extend the existing Mortgage loans period by 5 years by law on following basis:

a.       Extend Interest only mortgage loans by 2 years on existing rates.

b.      Extend Interest + Installment repayment by 3 years on existing rates and rework the installments

1.      This will ensure that those facing Interest reset clause will be able to continue existing interest only loans by additional 2 years without inviting installment payment along with interest amount. Thus, there will be no pressure on borrowers to default. It is expected that in 2 years the economy will be on four cylinders again.

2.      By extending overall mortgage period of repayment from say, 30 years to 35 years, the monthly installment amount will be brought down. This will reduce the probability of default.

5.      Extend the funding to the State and Local Governments, who are in severe monetary squeeze, as under:

a.       Buy new Bonds from SLG sector @ 6% on monthly basis to help them refinance the maturing obligations. Such bonds may be bought subject to monthly limit of 70% of their monthly deficits. This will keep the SLG moving and continuing to provide local services without causing major interruptions.

b.      Such funding may be continued for 15 months only from Jan 2009, so that the state may raise other resources from the market when the credit market gets moving again. 15 months will be a cushion period.

c.       Such bonds may be collateralized by future taxes or revenue of the concerned state as “last resort.”

i.      This will inculcate some discipline into the SLG sector and a fear that if they default on these bonds on maturity, the local tax revenue will be paid to the federal government in discharge of their obligations.

ii.      The “last resort” proviso ensures that Federal government will not interfere into the State affairs so long as the SLG honors its obligations on regular basis (such as Interest Payment on quarterly basis).

iii.      The SLG may be required under the Debenture terms to set aside appropriate portion towards “sinking fund” as a measure to build its reserve on ongoing basis so that it does not face redemption pressure near expiration basis.

6.      With all credit needs of Consumers, Small Businesses, Large Corporate, Industries, Commercial markets, and State and Local Government funding needs addressed, and also reducing burden of current Mortgagors by extending loan period under the law by 5 years, the credit freeze will start melting, and the economy will start flourishing again.

Of course, the entire range of problems of CDO, CDS and CLN may continue to haunt for some more time, there will be no further accumulation of new or existing credit related problems. There is no reason why should not this approach work. It will work with 100% guarantee.

Kalidas, Hong Kong

http://www.anilselarka.com

Ref: 0902-025 of 2009/02/19

Like a potential good stock that could yield profit and dividend, Americans trusted Barack Obama and elected him as President on his promise of “Change”. In stock market, the investors usually buy on rumor and sell on fact. That rule still applies to the President elect. Barack Obama is beginning to recede on his promise to change.

He is no longer a dashing flawless speaker. He is intermittent, evasive, confused and disenchanted. Instead of adopting change that he had promised, he is following the same beaten path as his predecessors, counting on old guards in Clinton Administration for his new cabinet. It looks like that Bill Clinton is having paramount influence on Barack Obama. Will he be the proxy of Bill Clinton the way George W. Bush was for his mentor father, former President George Henry Bush?

Change? What Change? Obama is beginning to ask himself while facing hard reality.  Mr. Obama, you had a safe journey in the space so far. Now face the hostile home for a change. Welcome back to this planet.

From whatever we hear and see from his utterances in print and media, he seems to be making startling beginning. It seems that he was during campaign guided on economic front by Robert Rubin, former Treasury Secretary, now with Citigroup, who is the most dangerous man around in the United States.

Rubin was wholesale destructive. He destabilized and eventually destroyed the Glass Steagall Act, 1933 during Clinton Administration. He saw it as an impediment to the merger of Citi Bank and Travelers group. Rubin therefore unduly influenced or advised  President Clinton to approve the abolition of the 65 years old law that finally sow the seeds of today’s sub-prime related crisis, where banking, securities and insurance businesses could be conducted by a single institution.

This was what exactly opposed by the Glass Seagall Act, 1933 formulated  under President Roosevelt Administration that separated the business of Banking, Insurance and Securities for common good to avoid the conflict of interest. The integration of Commercial banking, Insurance and Securities business earlier had caused massive stock market crash in 1930s and saw closing down of over 4000 Banks, Security houses and Insurance companies that resulted into deeply recessed depression. Had that act survived today, we would not have seen today’s crisis in Banking, Investment banking (securities) and Insurance world.

Almost all these troubled banks, brokers and insurance companies today are engaged in concurrent banking, insurance and securities business. No one knows who should control whom. SEC would consider banking as FED job, FED will consider derivatives as SEC job and SEC will consider banking default as FDIC job. It finally turns out to be no one’s job. Rubin also objected to CFTC (Chicago Futures and Trade Commission) role to oversee the “derivative trades” and legally removed their authority with the help of Alan Greenspan, then FED Chairman. These very derivatives are the crux of the present day problems.

Rubin created the web of non accountability, a specialization of his parent firm – Goldman Sachs. Paulson, also from same firm, recently followed it up while seeking $700 billions from the Senate on one condition – he would not be accountable or obliged to make any disclosure.

Non-accountability has gained momentum – from a few billions to $ 700 billions. Bernanke perfected it with massive $ 2000 billions or 2 trillions of infusion in the name of easing credit crunch!

Is it not silly that while both Paulson and Bernanke were soliciting Senate’s authority for $ 350 billions of TARP funds in first installment, Bernanke alone was distributing largesse of $ 2 trillions ($2000 billions) without seeking any authority from anywhere! When Bloomberg asked for the details of the distribution, the Fed did not even bother to reply under the weil of secrecy and national security. Now Bloomberg is filing a lawsuit under Freedom of Information Act.

Even the husky voiced Senator Barney Frank expressed dis-satisfaction at the use (or misuse or abuse) of $ 350 billions that evaporated in just under 30 days. California fire, my dear Barney, California wild fire!

President Bush was non-plus. In 8 years, he knew only three things – Iraq (Saddam Hussein), 911 (Twin Towers) and Afghanistan (Osama Bin Laden). In his quest for Middle East and Afghanistan, he forgot the map of the United States. While he went on terrorizing Middle East with Patriot missiles, his financial team of Paulson and Bernanke invented and practiced home grown terrorism on the Senators, Representatives, Senate, the House Banking Committee, the President and the American people.

It was a classic act of “Green” blackmail. “You do this else these terrible consequences will follow. Don’t blame us we did not warn you.” was the kind of address they gave to the Senators who were stunned as if they were observing a few minutes silence in deferential respect to the departed soul.

LTCM was destroyed by John Meriwether, former executive of Salomon Brothers. Rubin therefore started hating the Russians who brought about LTCM debacle. LTCM (that lost $1 trillions in derivatives, officially $ 4 billions as its own capital) was covertly encouraged by Rubin with remote control. This is why he helped organize its rescue when so many skeletons were about to come out in the open.

Warren Buffett, who took over Salomon Brothers in 1987 with great fanfare as great financial bargain, finally got rid of it when it was sold to Travelers Group in 1997. Travelers Group then merged with Citi Bank to become a Citigroup.

In similar fashion, he was seen to fondle Enron to manipulate the oil and gas prices in the world market through paper trading. Citigroup and JPMS actively supported him by financing Enron’s oil and gas related deals. When he saw the oil bets going against, he quietly resigned without attracting any notice.

No one asked him why did he resign? Not even his ardent admirer, Bill Clinton, then President, who crowned him as the greatest Treasury Secretary ever since Alexander Hamilton. (1789~95)

All bad companies promoted or rescued during Rubin’s regime, finally converged into Citigroup. Rubin then eased himself out of his position as Treasury Secretary into $115 Millions a year job at Citigroup to cover his tracts relating to dubious assets followed by newly developing bad asset – Enron. Citigroup and JP Morgan Chase (JPMC), who financed Enron, sold everywhere its spurious bonds similar to sub prime bonds and CDO/CDS derivatives of today, and got into hot trouble losing several billions. 

During  his tenure at Citigroup, he managed to settle Enron related lawsuits by defraying $ 2 billions to Investors in 2005 followed by recent settlements of $ 1.67 billions claim of the creditors. He also oversaw the $2.5 billions of Worldcom related settlement by Citigroup to irate investors and creditors. In short, it appears that he deliberately went there to cover all his tracts at fat fees of $ 100 Million plus per year.

In less than 5 years of Rubin’s Co-Chairmanship, after eating almost $500 Millions of salary as a parasite, Citigroup lost $ 70 billions in cash ($50 billions before + $17 billions in the from of taking over liabilities of its subsidiaries in the form Structured Investment Vehicles). He also forced (persuaded) the Fed to guarantee its lousy and worthless portfolio of $ 360 billions, presumably in the form of CDO (Collateralized Debt Obligations) CDS (Credit Default Swaps) or CLN (Credit Linked Notes). In short, he managed to persuade his compatriot Hank Paulson and Ben Bernanke to spend $ 430 billions of known figures to finance Citigroup. How many of $ 2 trillions additional largesse was given away by bearded Bernanke are still not counted.

And what did the Citigroup do with $430 Billions? It fired 75,000 employees. In short, the Fed and Treasury gave away $5.74 million to Citigroup for firing each employee. It will cost the State additional $4.5 billions towards unemployment allowance and lost taxes of $ 1.5 billions had these employees remained employed and paid taxes.

Rubin followed the doctrine or mantra of strong dollar policy to manipulate the world market. He was in fact strongly suspected to be instrumental in causing Asian Crisis when Euro was about to be borne. He did not want Asian nations to shift their reserve lying with FED to Euro. He therefore appear to have destroyed Asian currencies with the help of two renowned Hedge Fund managers – George Soros and Julian Robertson. What you see today of strong dollar in spite of gigantic troubles are the “ditto” measures adopted by him during Clinton Administration. This time, his other colleague from Goldman Sachs, Hank Paulson is doing that dirty job.

Rubin was clever enough to remain always in the background, allowing pawn players to do the dirty jobs on the foreground. In the event of troubles breaking out, he was always there on crime scene like a forensic expert searching for clues with intent to search and destroy whatever remaining hints floating around that might point fingers at him later.

Obama was looking at the same old Rubin during campaign for economic guidance which was the first disastrous mistake he was making in the dressing room before going to play his first game at the White House on January 20, 2009.

Obama appointed his formidable opponent Hillary Clinton as Secretary of State. She is a hawk whereas Obama himself is a Dow. There is no matching chemistry. She will wage war with anyone – a female replica of George Bush – completely opposite character of her affable spouse Bill Clinton.

The internationally acclaimed and a rational person could have been former Secretary of State – Gen Colin Powell who is highly respected by almost all leaders, friends and foes, around the world. Obama missed him in his first baseball shot. He sacrificed Gen Powell in an act of balancing colors to avoid pointed fingers – his first grave mistake on foreign policy front even before he took over the office. It may be argued that Gen Powell was ineligible as Republican. However, Gen. Powell voted for him and also officially endorsed his candidature. There are no official restrictions to such appointment except in party politics,

Just as President Bush inherited the caucus team of Dick Cheney (Vice President), Don Rumsfeld (former Defense Secretary), Greenspan and other dumb heads from his father Sr. George H Bush, President elect Obama is following the same pattern by inheriting the legacy of Bill Clinton. Change? What Change? There is no change – same dud and dirty politics.

And here comes another firm. Goldman Sachs. Entire Fed and Treasury buildings are infested with the mammals from Goldman Sachs. Robert Rubin belonged to that clan. Hank Paulson also belongs to same clan. Neel Kashkari also comes from same place. It is Goldman who is calling the shots for over 15 years of America’s mismanagement of economy. Many of the Anchors of business channels have GS stamp on their butts.

The entire policy appears to be conceptualized in Goldman HQ, politicized at the Treasury, monetized at Fed, and finally sold like Sub Prime assets through massive publicity in perfect harmony and orchestration via business channels manned by trusted friends who were once upon a time were with Goldman Sachs. 

Obama is now trying to pump in another $ 1 trillion into infrastructure spending, after massive $ 2 trillions influx into the system by the gang of Bernanke and Paulson. He is also hell bent on reducing taxes on individuals.

Never did he answer nor did anyone ask, how was he going to bring in income while spending on all fronts and destroying America at the speed of Katrina.

The whole nation has become a typified New Orleans where stupefied corpses are found every where in immediate aftermath.

Obama has given first glimpses of his carefully nurtured personality. When the “red blood” is oozing through the main street and Wall Street, he is talking nonsense about the “green air” exhorting all 3 Auto manufacturers to invent green cars.

It will be years before those Auto makers would turn their cars green, provided they exist. The immediate priority is to take them out of deep trouble and rejuvenate demand for their products by any means. For instance, He could announce impending immediate policy directive to all government departments to use only those vehicles made by 3 US auto makers for about 2 years temporarily.

That will give breathing time to Auto makers who need demand for their goods, not bail out funds which will be exhausted in no time if there were no demand for their vehicles. They could restart the plants and job firings will be halted immediately. In fact, it will start creating jobs in auto sectors and its ancillaries sending positive feelers all around in the period gloom and doom.

His currently reflected priorities are not of the becoming of a great leader about to sit on the coveted throne at the White House. He has demonstrated so far that he is neither a leader seeking “Change” nor a “Santa Clause” willing to part acceptable gifts – JOBS – to American Citizens on the eve of Christmas. Only a day before, an unemployed youth started firing in California and killed 9 peoples on the spot. This is only a beginning.

The only thing that changed during last 52 days of post election process is - his name. He has decided to use his middle name while taking oath at the White House. He is now Barack Hussein Obama about to stride into White House (Obama is a Christian, not Muslim). What is he trying to do by changing his well known name by including “Hussein” in the middle? Pacify Arabs and Islamic nations that a mixed secular name is going to lead America in future? If he had used “Hussein” as his middle name during campaign, I am 100% sure that he would have lost the election in most disastrous fashion. He does not have the mandate from the people to use his “Hussein” brand.

If name change were to usher in the dramatic change in the economy, George Bush would be left wondering why not he thought of it while facing disaster after disaster at home and overseas during 8 years of his ignominious presidency.

Obama is therefore showing the sure sign of just another “mediocre” at the White House!

The crisis is so acute that there were reports that “US military was preparing for domestic disturbance”  Click here for Newsmaxx Report. With guns being freely licensed through out the United States, the nation is sitting on a huge volcano about to erupt. After years of practice of firing billions of bullets in other countries during last 60 years, US Military Commanders will have uphill battle back home for the first time firing for a change at their own people.

Will Barack Hussein Obama be the last ruling President of the beautiful nation once upon a time called “United States of America”? Don’t be surprised. It happened to USSR in recent past. It could happen again, this time in America for a change. Is this the CHANGE he was talking about? 

And the distraught investor, Warren Buffet will be awaiting the final verdict from his city – Omaha, after investing $ 8 billions in Goldman Sachs and General Electric at the instance of Hank Paulson, who will no longer be around after 20th January, 2009

Obama, Osama and Omaha – what a rhyme in the American politics and finances!

Let us prepare ourselves for the “Great Royal Circus” in Washington. The curtain will be lifted on 20th January, 2009. It will be a battle royal in the far flung Afghanistan and Iraq – Obama vs. Osama.

Poor Lady Liberty must have been tired holding the torch for so long in the middle of the sea. It is time to find new home, she must be murmuring. Where, she does not know.

Kalidas, Hong Kong
Ref: 0812-020 of 2008/12/26

http://www.anilselarka.com