NY Times how YV Reddy saved Indian banks

The New York Times thinks that it former RBI governor, Y V Reddy, made the difference between the banking scenario in the US and that in India today:

Unlike Alan Greenspan, who didn’t believe it was his job to even point out bubbles, much less try to deflate them, Mr. Reddy saw his job as making sure Indian banks did not get too caught up in the bubble mentality. About two years ago, he started sensing that real estate, in particular, had entered bubble territory. One of the first moves he made was to ban the use of bank loans for the purchase of raw land, which was skyrocketing. Only when the developer was about to commence building could the bank get involved — and then only to make construction loans. (Guess who wound up financing the land purchases? United States private equity and hedge funds, of course!)

Then, as securitizations and derivatives gained increasing prominence in the world’s financial system, the Reserve Bank of India sharply curtailed their use in the country. When Mr. Reddy saw American banks setting up off-balance-sheet vehicles to hide debt, he essentially banned them in India. As a result, banks in India wound up holding onto the loans they made to customers. On the one hand, this meant they made fewer loans than their American counterparts because they couldn’t sell off the loans to Wall Street in securitizations. On the other hand, it meant they still had the incentive — as American banks did not — to see those loans paid back.

Seeing inflation on the horizon, Mr. Reddy pushed interest rates up to more than 20 percent, which of course dampened the housing frenzy. He increased risk weightings on commercial buildings and shopping mall construction, doubling the amount of capital banks were required to hold in reserve in case things went awry. He made banks put aside extra capital for every loan they made. In effect, Mr. Reddy was creating liquidity even before there was a global liquidity crisis.

Private sector bankers who were harshly critical of Reddy in those days now acknowledge his contribution:

Now that those risks have been made painfully clear, every banker in India realizes that Mr. Reddy did the right thing by limiting securitizations. “At times like this, you tend to appreciate what he did more than we did at the time,” said Mr. (Rana) Kapoor. “He saved us,” added Mr. (Deepak) Parekh. (First names in parantheses inserted by me )

IIT Madras director appointment set aside

The Madras High Court has set aside appointment of Prof M S Ananth as IIT Madras director. Ananth got a second term after he had completed the first term of five years in December 2006. The appointment was challenged by an alumnus. A single judge bench had dismissed the petitition but the alumnus pursued the matter with a division bench of the HC which then asked a judge to hear the matter.

I have scanned several newspaper reports. I must confess I am still not entirely clear about the judgement. From what I could make out, the HC believes that due process was not followed. First, the appointment was made, not by the IIT Council, but by a search committee appointed by the MHRD. It appears the Council alone has the right to make such appointments. Secondly, the post was not advertised- the HC appears to have said that the requirement of equality of opportunity cannot be met unless this is done. The HC has also noted that the contract between IIT M and Prof Ananth for a second term was signed even before formal approval from the President had been obtained.

I understand the judgement will have implications for some other IITs where too a similar process for appointment of director was followed. One of the reports on the judgement quotes the judgement as saying that since the appointment was for a fixed tenure, the question of an extension of tenure or re-appointment did not arise. If that is so, it would have implications for institutions other than IITs as well.

One thing we must applaud is the insistence of the court on the post being advertised widely. (The court went on to point out that there are distinguished Indian academics scattered across the globe and every attempt must be made to tap this pool of talent). There was a huge uproar in the IIM community when the director's post was advertised in 2007. They saw it as a sinister machination to bring in an "outsider" (as though the appointment of an outsider is a crime). The uproar died down when it was pointed out that a newspaper advertisement was a technical requirement for appointments made by the Appointments Committee of the cabinet.

I am also of the view that fixed-term appointments for institutions such as the IITs and IIMs are a good thing. There is no dearth of talent, so I can't see why one person should continue for more than one term. Two, limiting the term makes for greater accountability- the incumbent knows that his decisions will be reviewed when he steps down after five years. This sort of built-in check on the office of director is required because market-based mechanisms that operate in the US are largely absent in India.

Tatas and Singur: who will pick up the tabs?

The Tatas have exited from Singur and made a soft landing in Gujarat. Between Sanand and Pantnagar in Uttaranchal, Tata Motors will be able to roll out the Nano car even if somewhat behind schedule. So the Tatas are taken care of. What happens to Singur and the state of West Bengal? D Bandyopadhyay dissects the issue in an article in EPW. He makes several important points:

• The government of West Bengal can acquire land for a private company only through a procedure laid down in the Land Acquisition Act. It perpetrated a fraud by acquiring 1000 acres of land through WBIDC ostensibly for public purpose and then leasing out 643 acres to Tata Motors.
• Now that the "public purpose" for which land was acquired will not materialise (since Tata Motors has exited), the expenditure on the project incurred by the government has gone waste.
• The author makes an estimate of the cost on various counts: land acquisition, cost of construction of 18.75 km boundary wall, provision of police protection for two years, cost of subsidised land transferred from government agencies. The cost adds up to Rs 532 crore. He says this cost should be recovered from Tatas after the CAG has carried out a more careful estimate.
• The leases given to TML and ancillary units should be cancelled. About 400-450 acres of land should kept for the development of an automobile factory for which a global tender for expression of interest should be floated. The rest of the land acquired must be returned to those from whom it was acquired or to the local Panchayat.
  

None of these nuances have been captured in the mainstream media. There is only scorn for the West Bengal government and Mamata Banerjee and a sense of triumph at Tatas managing to find an alternative site in Gujarat.

RBI Governor on issues raised by sub-prime crisis

RBI governor D Subba Rao flagged five important issues arising from the sub-prime crisis in a speech at a seminar in Hyderabad earlier this month:

1. How do we manage global imbalances?

2. Is self-insurance a viable policy option for emerging economies?

3. What are the flaws of the current regulatory regimes? How do we fix them? In what ways can international cooperation be fostered in this regard? How do we address the black swan systemic risk events?

4. How do we address the problem of regulatory arbitrage?

5. How do we keep the financial sector in line with the real sector?

Long term outlook for oil prices

Oil prices have dropped to under $34 a barrel despite OPEC's announcement of the large single output cut ever last week. There is talk of prices dropping further to $25. This may seem terrific news in a slowing global economy but it has unwelcome long-term implications. It could derail plans for oil exploration and it also constitutes a huge setback to the quest for alternative fuels. Too low prices for oil are as bad as too high prices.

But I have to wonder: where are the geniuses who forecast ever-climbing oil prices just a few months ago? Arjun Murty, the Goldman Sachs wonder-kid, was said to have forecast an oil price spike of $200. Other said that climbing oil prices merely reflected an emerging scarcity of a limited resource. I was among the few who said that the sharp rise in oil prices appeared speculative and that prices should drop below $100 before the end of the year.

Now, is the fall in oil prices temporary? Should we see soaring oil prices once global growth beccomes normal. The World Bank doesn't think so. Here is what the latest Global Economic Prospects report says:
<>

The strength, breadth (in terms of the number of commodities whose prices have increased), and duration of the current commodity boom have prompted speculation that the global economy is moving into a new era characterized by relative shortage and permanently higher (and even permanently rising) commodity prices. This outcome does not appear likely. Over the next two decades, slower population growth and weaker (though still strong) income growth are projected to cause trend global GDP growth to ease …. and, with it, the demand for commodities.

<>
Although the absolute quantity of fossil fuels and metals in the earth’s crust is declining and the quantity that is extracted each year is rising, there appears little likelihood that the world will run out anytime soon. Historically, proven reserves of both metals and oil have tended to rise even more rapidly than production, remaining surprisingly constant in the case of oil at about 40 years of production.

Satyam: comments on some responses

I notice that outrage over Satyam's abortive deal is not universal:

• Pradosh: wonders whether the media has sensationalised the whole issue
• Anonymous suggests that the seasoned promoters of Satyam would have thought through the merits of venturing into infrastructure.
• On a different note, Gaurav wonders whether fear of being dragged to court in the US was responsible for the deal being called off.

Well, it's always a pleasure to get contrarian views.

To respond to Gaurav first, yes, there does appear to be greater recourse to the law in the US in matters such as these than in India. Here, management can claim- as it has- that it violated no laws: board approval was obtained, norms of inter-corporate investment were adhered to, there was no requirement to obtain shareholder approval, etc. It's a different matter that the government is reported to investigating other aspects such as possible insider trading.

On Pradosh's point about media hype and media pressure, it's worth noting that, according to press reports, Satyam sent out an SMS at 3:45 am on Nov 18 - well before the headlines became available to Indian readers. The Satyam response was based on the hammering of the share in New York. It was not the media response but investor and analyst response that forced Satyam's hand.

Should we give Satyam management the benefit of the doubt, as Anonymous suggests? Well, there are a number of points against the deal:

• No obvious synergies between software and construction/infrastructure.
• Why invest in family enterprises in infrastructure?
• Timing of investment: everybody knows that infrastructure firms are today desperate for cash.
• Valuation: This is dicey at the best of times and these are the worst of times for infrastructure firms. I understand that the valuation rested primarily on the land bank of the two Maytas firms.
  

If Satyam was convinced of the merits of the deal, it should have come up with a proposal, presented it to analysts and shareholders, explained the merits, placed the valuation report in the public domain and sought feedback.

I saw the ISB Dean suggesting on TV that there was no problem with the deal once valuation was okay. What he overlooks is that, given the nature of the deal- transfer of cash from a firm in which the original promoters had a small stake to ones in which they had a large stake- transparency was of the essence.

It's gratifying that a number of high-profile businessmen have come out against the deal (Adi Godrej, Udak Kotak). Godrej went so far as to suggest that we needed more resignations from independent directors. One of the few I remember in a high-profile case is SS Tinaikar, former municipal commissioner of Mumbai, walking out of the Voltas board in the old days.

Still, at the end of it, one cannot resist the feeling that Satyam was a relatively soft target for the media and investors alike. Will they dare to take on bigger names in similar situations?

Welcome fall-out of Satyam move

It's an ill wind that blows nobody any good. The deal proposed by Satyam was a shocker, of course, but it's good that the management has called it off under investor pressure and after severe criticism by the media and the analyst community.

I see several positives in the episode:

• Investor activism: institutional shareholders, domestic and foreign, have been much too passive all these years. It's nice to see them flexing their muscles.
• Pressure for change of management: There is talk of a hostile takeover and also pressure on management to step down consequent to a bad decision. This again is much needed. Management is seldom made to pay a price for bad decisions.
• Focus on independent directors: The independent directors on the board of Satyam (see my post yesterday) have egg on their faces. They have been named (and hopefully shamed) in the media. Great!
  
• Client reaction: One of the best stories I read was in BS about some of the top clients evaluating their relationship with Satyam- they are not sure about sticking to Satyam as there are doubts about the intent of management.

All this is to the good. I would like to see more happening. I certainly want the appointment of independent directors to be looked at. Management inviting their friends to be on boards and paying them a fat fee for nodding their heads is a joke perpetrated on shareholders. We need institutional investors to appoint at least some of the independent directors.

Further, I would like Sebi (or some NGO) to have on their website a link on 'Questionable decisions by management'. Decisions such as the present one should be recorded and also the names of directors involved. Analysts should check to see which other boards these directors are sitting on and take a view on those companies. Other companies planning to appoint independent directors would also benefit from scanning this link while deciding their choice of independent directors.

There is a clear message that needs to be sent out: as independent director, your role is not to play deaf-mute on the board.

Satyam deal is off

I just heard on TV that Satyam has called off its move to invest $1.6bn in two property firms owned by the sons of Satyam chairman B Ramalinga Raju.

Raju and his family own less than 10%of stock in Satyam. The move promised to set off a big storm among the investing community- the share was beaten down by 59% in trading in New York yesterday. I heard a contrite-looking Raju say on TV that the company would not have proposed the deal had they anticipated the adverse investor reaction. That, I am afraid, shows poor judgement.

Poor judgement on Mr Raju's part and also on the part of the board of Satyam which approved the deal. How could the board have even imagined that the company would get away with a deal of this kind? The board's independent directors comprise: M Rammohan Rao (director, Indian School of Business), Vinod Dham(the Silicon valley entrepreneur), T R Prasad (former cabinet secretary) Dr(Mrs)Mangalam Srinivasan ( a retired academic and bureaucrat), and Prof V S Raju (former director, IIT Delhi). It also has HBS prof Krishna Palepu as non-executive director.

The independent directors were paid between Rs 12.1 to Rs 13.2 lakh last year as sitting fee and got between 5000-10,000 stock options. Did the chairman get the board's consent for calling off the deal? Or will the board simply ratify the chairman's decision?

There is no doubt that the Satyam move constitutes a serious corporate governance failure. This should prompt serious thinking on, among other things, the role and appointment of independent directors. I have long argued that such directors should not be appointed by management, they should be appointed by institutional investors and small shareholders.

The controversy will also cast a shadow on the IT sector as a whole. IT companies have been in the forefront when it comes to instituting healthy governance practices. But that was when the going was good. Governance, like character, is tested in times of adversity.It behoves the IT sector to adhere to the highest standards in the difficult times it is going through.

Another scam, another rip-off

Will the bad news for the world's banks never end? As though the losses in the sub-prime crisis was not enough, now comes the news of losses on exposures to an investment fund, rather aptly named Madoff, after its founder Bernard Madoff, former head of Nasdaq.

The investment fund has collapsed reportedly with accumulated losses of $50bn, incurred over several years. Madoff apparently ran a Ponzi scheme in this period, pay off old investors with funds from new investors. The prominent losers mentioned so far:

• HSBC- $ 1bn
• BNP Paribas-$468 mn
• Banco Santander- Euro 17 mn

BBC's double standards

Journalist MJ Akbar has lambasted the BBC for its coverage of the Mumbai riots. The BBC is said to have referred to the attackers as "gunmen" or "militants" and shied away from using the expression, "terrorists". BBC had no compunction in referring to the attackers in the 7/11 attack on London as "terrorists", rediff.com reports. Akbar wrote:

When Britain finds a group of men plotting in a home laboratory your government has no hesitation in creating an international storm, and the BBC has no hesitation in calling them terrorists. When nearly two hundred Indian lives are lost, you cannot find a word in your dictionary more persuasive than 'gunmen'.

....You are not only pathetic, but you have become utterly biased in your reporting. Since we in India believe in freedom of the press, we can do no more than protest, but let me tell you that your credibility, created over long years by fearless and independent journalists like Mark Tully (I am privileged to describe him as a friend), is in tatters and those tatters will not be patched as long as biased non-journalists like you and your superiors are in charge of decisions. Shame on you and your kind."

The BBC wrote back defending its position:

The guidelines we issue to staff are very clear-we do not ban the use of the word terrorist, but our preference is to use an alternative form of words. There is a judgement inherent in the use of the word, which is not there when we are more precise with our language. "Gunman", or "killer", or "bomber", is an accurate description which does not come with any form of judgement. However, the word is not banned, and is frequently used on our output-usually when attributed to people. I heard it being used on numerous occasions during our coverage from Mumbai

."

Lehman CEO to turn advisor?

Richard Fuld, the disgraced CEO of Lehman Brothers, is in no mood to call it quits, according to an FT report, quoted in rediff.com.

The 62-year-old Fuld, who run Lehman for nearly 15 years, is considering to launch a firm to advise small companies on financial and strategic issues.

British daily the Financial Times has reported that Fuld plans a comeback and has told friends that he might launch a small advisory firm to harness his contacts in US companies.

Fuld is in good company. Two other CEOs, who quit in the sub-prime crisis, Chuck Prince of Citigroup and Stanley Oneal of Merrill Lynch, have resurfaced.

Prince joined Stonebridge International, a strategic consulting firm, as vice-chairman in September, while ONeal is believed to be considering an offer from Vision Capital Advisors, a small hedge fund and private equity group," the report added.

Call it the value of networking- you build tremendous contacts in such positions and this will always be valued by the market. Leave it to " market forces", what? Anyway, I don't think we in India have any right to moralise. People convicted by the courts remain active in politics or in celebrity fields such as films.

Dos and Don'ts of Risk Management

There's one question that keeps getting asked again and again in the ongoing crisis: how did the best minds and the fanciest models fail so badly? How could some of the biggest players in the business have messed up risk management so thoroughly?

I'd venture to suggest that it was not so much a problem of flawed mathematical models or faulty assumptions being fed into models. Models do fail in situations of extreme stress but that is hardly the whole of the problem or even the biggest part of the problem.

The problem was that a few people at the top took the basic decisions on risk and that information on risk exposures was not shared widely enough. In other words, autocratic decision-making was a big factor in the downfall of mighty financial firms. Even the boards of these firms did not know- and did not care to ask. I dwell on this in my ET column, Managing risk in today's world and spell out some dos and donts.

My point is that risk management is a governance issue and is a matter of sound management and regulation- it's not just about models and rocket scientists. You need to get the whole culture of and incentives in a bank right for risk management to succeed. Wide dissemination of information on risk exposures and participation of a large number of people are crucial to risk management.

This last is where Indian public sector banks score. They have officer as well as staff representatives on the board. These people are watching managers all the time. They not only know about lending decisions but also about the lifestyles of managers. When the chairman throws a wedding party, employees are watching- how lavish it is, who attends, what is the body language, what sort of gifts are exchanged. They talk about these things. This sort of employee watchfulness is an excellent risk management tool. Because very often it is not lack of knowledge, but mala fide intent, that underlies bad business decisions.

Corruption in the US

Margaret Alva set off a storm a few weeks ago when she said the Congress was selling legislative assembly seats in Karnataka. But who says this sort of thing happens only in India? The governor of Illinois was arrested- he was carted away in handcuffs-for allegedly trying to auction the Senate seat vacated by Obama. FT reports:

Rod Blagojevich, governor of Barack Obama’s home state of Illinois, was arrested on Tuesday on a raft of federal corruption charges that included an alleged conspiracy to sell the president-elect’s vacant Senate seat for cash – or favours from Mr Obama himself.

The case was described by federal authorities as a “new low” for a state that has seen more than 1,000 people convicted on corruption charges since the 1970s – including the Democratic Mr Blagojevich’s predecessor as governor, Republican George Ryan, now serving six and half years in prison for racketeering.

<>.... ..The complaint appears to portray Mr Blagojevich as overseeing an auction for the Senate seat. “We were approached ‘pay to play’,” he told an associate of one potential replacement, according to the complaint. “That, you know, he’d raise 500 grand. An emissary came. Then the other guy would raise a million, if I made him a senator.”

Mr Blagojevich was also taped discussing whether he could use his power over the appointment to obtain other benefits. He speculated about securing a cabinet position or ambassadorship from the Obama administration or seeking Mr Obama’s help in obtaining a well-paying job at a trade union organisation or corporate board seats for his wife. Mr Blagojevich even mentioned asking Mr Obama to solicit $10m-$15m from Warren Buffett and Bill Gates for a non-profit organisation that the governor could run

Somehow, we think of Indian politics and politicians as uniquely corrupt. I have long pointed out that not just in the US but also in Europe- in France, Germany and Italy, for instance- politics can get really dirty. One thing we can say for Indian politics: it has not been entirely subverted by money power, although huge amounts are required for election finance. What I mean is: elections are not always won by those with the biggest financial muscle.

The prize for political lows goes to Israel: their former president had to quit following allegations of rape.

Fiscal stimulus- not enough

Hmm... so we have a fiscal package at last on top of the monetary stimulus.

• The government will spend Rs 20,000 crore on infrastructure, industry and exports
• Excise duty cuts will cost approx Rs 10,000 crore
• India Infrastructure Finance Company Ltd will raise Rs 10,000 crore in tax free bonds to support spending on highways.

All this is good but, in my view, not good enough. The present situation requires a much stronger response. The government appears inhibited not just by the FRBM provisions and its anxiety to revert to its limits at the earliest but also by impending elections. Let the next government (which, many think, will be a non-Congress government) tackle the mess, the government seems to think. There are also some who seem to believe the economy will somehow right itself in about six months' time, so no big initiatives are required.

I think this is a wrong-headed approach. We must prepare for the present crisis to unwind over two years and plan accordingly. Once you accept a two year horizon, the objections about infrastructure projects being of long gestation get blown away. Also, we need not think only of ports, airports and power. There are umpteen smaller things to be done in the rural areas, not glamorous but essential and labour-employing- warehouses, storage tanks, minor irrigation, etc

I wrote at length about this in my last column in ET, Crisis: bring in the politicians. My sense is that you need grassroots mobilisation in a crisis of this kind. It is at the state and panchayat level that the spending has to take place, it is there that a sense of urgency must develop, plans drawn up, tightly supervised and executed. The politician will take his cut but he will get things done because he is the guy who has to face the mob as the full weight of the crisis descends on the Bharat that is India.

Many in government seem to draw comfort from the fact that even a 7% growth rate sounds good in absolute terms. But, in terms of the impact on the economy and society, a deceleration from 9% to 7% can be as painful as a deceleration from 2% to 0% in the west. Just look at the migrant labour in Mumbai's construction industry heading back home in recent months. Industry is staying its hand on lay-offs but a few more months of a slowdown and you will see lay-offs happening in the organised sector. Job losses in the unorganized sectors, such as textiles, are said to run into thousands.

There is a crisis of confidence. Only a massive burst of government spending can restore confidence. The present stimulus is inadequate, I'm afraid.

India's war on terror

People have taken to the streets to express their indignation over the Mumbai attack and the nation's vulnerability to terror. 'Enough is enough'- says one TV channel. There is a demand for politicians to deliver. In response, there is tough talk emanating from government.

I'm afraid unrealistic expectations are being created all round. There is, first, the radicalisation of Indian Muslims in recent years consequent to the Babri Masjid episode, the Mumbai riots that followed, the Godhra riots, the use or misuse of Pota, the Kashmir issue as well as in response to the outrage of Muslims worldwide over American policies towards Afghanistan, Iran, Iraq, Syria and the Palestinian issue.

There is, secondly, Muslim anger and ill-will from outside the country directed towards India for a variety of historical reasons as well as the factors mentioned above, something that the Indo-US nuclear deal does little to mitigate. The threats emanate most directly from Pakistan and Bangladesh but also from other Islamic countries. It's hard to say what turn the US campaigns in Afghanistan, Iraq and Pakistan will take. What is certain is that this is going to be a long haul and, whatever the outcome, India cannot escape the fall-out.

In short, both domestic and international factors create conditions for an escalation in terrorist violence in India in the years ahead. Of course, we need to strengthen the intelligence and security apparatus to deal with these. But to assume that this will confer immunity from terror is sheer delusion. The more realistic course is to develop greater citizen alertness and public response to terror attacks, including a revamp of emergency hospital services.

Israel does not blame its political class for terrorist attacks- it tries to minimise the damage from these attacks and then seeks to pre-empt these as best as it could. Here in India, we need to find ways to disperse economic activity and, urgently, to reduce the importance of Mumbai and especially South Mumbai so that disruptions from terrorist attacks are minimised.

How to cope with terror and minimise the fall-out should be the priority- not unrealistic expectations about eliminating terrorist strikes. I repeat what I said in an earlier post: discrediting politicians and the political process is emphatically not the answer.

Politician bashing is in fashion

The Mumbai terrorist attack has triggered an outpouring of scorn on politicians. Politicians have provided grist to this by behaving in ways that may not be terribly responsible but the reaction also seems overdone. To wit:

• Maharashtra Dy CM R R Patil was on TV saying that incidents of this kind were bound to happen in a large city like Mumbai. Maybe. But that's not what you say in times such as these.
• Maharashtra CM Vilasrao Deshmukh took his two sons and film director Ram Gopal Verma to inspect the carnage at the Taj. Nothing wrong with that, he said. In normal times, yes. Trouble is that today the Taj is not exactly a picnic spot.
• BJP General Secretary Abbas Naqvi talked of women "in lipstick and powder" taking to the streets to display their anger against politicians. He has a point but, again, timing is the issue.
• Kerala CM Achuthanandan had some caustic remarks to make about Major Sandeep Unnikrishnan's father for the lack of courtesy he showed when the CM came calling. The CM has reason to feel upset but one has to make allowances for the father's terrible state.

These little incidents, duly played over and over again by equally insensitive TV channels, have added fuel to the fire, so to speak. People are lashing out against politicians for neglecting national security. In the process, film stars, investment bankers, ad-men and socialites have all become security experts.

They have questions. Why have the NSG only in Delhi, why not in other cities? Why did it take so long for the NSG to be transported from Delhi? Why can't we give better equipment to police? Why can't we have better coordination among intelligence agencies?

It was left to Mani Shankar Aiyar to point out drily in a TV programme that while many people might be asking these questions in the wake of the attack, these are questions that agencies in government are grappling with all the time. Given competing demands on scarce resources, a determination has to be made as to what is appropriate. The state of the security apparatus reflects the determination that has been made.

Tomorrow, somebody might ask: why NSG only in the four metros? Why not in 20 other cities? There could be perfectly valid operational reasons. Given the kind of training and equipment they need and the coordination, dispersing them may compromise their operational effectiveness. There are several elite forces in other countries (and elite forces in our own army) that are lodged at one place- presumably for the same reasons. 'Common sense' suggestions are often no more than nonsense- good sense, in professional matters, is unfortunately not all too common.

As for displaying contempt for politicians, this can easily spill over into contempt for the political process. Therein lies a big danger. Because from there to legitimising dictatorship, army rule, a police state is a short step. That would give the glitterati plenty of security and gleaming shopping malls but it would turn 95% of the population into terrorists and hence defeat the basic objective. It is well to remember that the same political system that could not prevent the breach of coastal security this time is the system that gave us the NSG that acquitted itself so creditably.

Let us find ways to strengthen the democratic and political process, not turn outrage over a tragedy to turn into outrage against the political system.

Novel set in Kashmir

Over a depressing weekend, I found solace in a terrific novel set in Kashmir, The Homecoming by Sashi Warrier. A couple of years ago, I had read Warrier's novel woven around terrorism, Night of the Krait, and had thoroughly enjoyed it.

Homecoming is set in Kashmir but it's not about terrorism or the Kashmir problem. These form the background but it's really a family story. It's about a Kashmiri Muslim, Javed, whose life begins to unravel just when he thinks of hanging up his boots and settling down with his family in Srinagar after having spent his working life as a trader in carpets in Bangalore.

Javed, a widower, returns to find his younger son carted off by the police on charges of terrorism. Bit by bit, he wakes up to his alienation from his elder son (who helped him with his business in Bangalore), his daughter, his mother, his brother and finally his girlfriend in Bangalore.

There's no viciousness or character defect in Javed to which one can ascribe his tragedy- it's just that he's been so wrapped up in himself that it's rather late for him to connect with his family. They simply have no use for him just when he seems to need them. A very ordinary story, you might think, but Warrier's skill as a writer lies in making an unputdownable novel out of it.

Life deals one merciless blow after another on the hapless Javed and one is filled with a profound sadness as one comes to the end of the story. In the ordinary exchanges amongst Javed and his family members, one discerns the underlying unpleasantness that is the stuff of most human relationships.

Terrorism in Kashmir looms in the background. The tension in Srinagar is palpable throughout the novel with the menacing presence of the army and the high-handeness of the local police. With a few deft strokes- little incidents involving his characters- Warrier captures how ordinary people are caught in the cross-fire between militants and security forces.

I find it difficult to read much of modern fiction. Somehow, the art of simple story-telling seems gone and you have in its place verbal gymnastics and streams of images. You pine for somebody who can tell a nice tale- say, an Ernest Hemmingway or a Somerset Maugham or, in our country, RK Narayan and Khushwant Singh. Warrier belongs to this vanishing species.

Mumbai attack and its aftermath

The recent terrorist attack on Mumbai is being called India's 9/11. In sheer audacity of design, that is true. The US, whose mainland has never been attacked, could not have imagined that a set of planes could be transformed into enormous bombs. Nobody in India thought of a sea-borne invasion of Mumbai- the attackers are said to have hijacked a fishing trawler, steered it towards the Mumbai coast and then landed on motorised dinghies. Not just out-of-the box thinking but meticulous execution has been in evidence in both the cases.

In 9/11, the attackers targeted the World Trade Center, beloved symbol of America's financial capital. In the Mumbai attack, the targets were two high-profile hotels and a Jewish centre in India's financial capital.The objective was the same: to cause dislocation and mayhem in leading financial centres in ways that would capture the world's attention. Smoke billowing out of the WTC is one image that is etched in our minds; so will that of the Taj Hotel in flames. The Mumbai attackers have certainly met their objective.

9/11 changed America. Unilateralism and the doctrine of pre-emption became central to American foreign policy. There was the bombing of Afghanistan and invasion of Iraq thereafter.Also less noticed transgressions of international law such as a missile attack on Sudan, the bombing of a suspected nuclear site in Syria and missile and bomb attacks on terrorist hideouts in Pakistan. T

The US has made clear that it will not be bound by the UN or international law when it comes to the protection of its intersts. The US has also gone after terrorists in several countries and spirited them to other locations for interrogation and incarceration. It did this in Italy a few years ago- an Imam was seized by CIA operatives. An Italian judge has issued arrest warrants for the CIA operatives, a warrant that has no chance of being enforced.

Within the US, the full financial might and technological capability of the country has been brought to bear on preventing infiltration of terrorists. The issue of visas has become more stringent, there is far greater scrutiny of visitors (including strip searches) at airports, stepped up surveillance at home and abroad and an abridgement of civil liberties under the Patriot Act. These have ensured that no terrorist attack has occurred in the US after 9/11.

There have been comparable measures in the UK after its own 7/11. Surveillance through closed circuit TV is so pervasive that the Orwellian prediction of 1984 seems to have come true in the UK. On top of this, tapping of phone calls and monitoring of email has been stepped up- the American journalist Seymour Hersh has said that he would never use pay phone in the UK because there was little chance of the call being confidential.

One other country that has had success in the war of terror- in the sense of limiting attacks on its soil- is Israel. But Israel is unique. Not only can it pour huge finanicial and technological resources towards securing itself, it is willing to use the most draconian methods. A whole wall has been created between Israel and the occupied territories and entry through it into Israel tightly regulated. Palestinians have been beaten into quiesence in the most brutal ways.Above all, there is the intense determination of the Israeli people, military conscrption for all young people and the fact that Israel is a small country.

Where does India stand after the Mumbai attack? One, there is no question that security measures in key places, including hotels, will be at a higher level hereafter, causing no small inconvenience but that is something that people will come to accept.

Two, it's hard to see how the pressure to enact tougher terror laws can be resisted- even PM Manmohan Singh had to mention this in his address to the nation after the attack. This does mean a certain curtailment of civil liberties.

Three, there will be profiling of communities and a crackdown on suspects within these. These will create more alienation and hence a greater susceptibility to domestic terrorism.

Will terrorism decline in India in response to strong-arm measures as happened in the US and Israel? One must be sceptical. We do not have comparable funds or technology but that is not the only problem. We must reckon with the country's size and diversity. Above all, there is the problem of corruption and poor governance.

Key institutions of the state, notably the police and the judiciary, suffer from both corruption and poor governance. Strong anti-terror laws, in such a situation, will simply become weapons for persecution and extortion.

Vulnerability to terrorism, it is worth pointing out, is an aspect of corruption and an indifference to the rule of law. The political class will not prosecute or pursue high-profile cases of terrorism; businessmen will maintain links with the underworld; the police is more concerned with collecting bribes than with maintaining law and order;the media has no qualms about lionising celebrities who have been convicted in important cases. When a political party moots the idea of giving a Lok Sabha seat to the key suspect in the Malegaon case, that is confirmation that India in many ways has the traits of a banana republic.

Without an overhaul of governance, without greater accountability, it is hard to see how terrorism can be fought effectively. It is the democratic process and the rule of law that need to be strengthened for these to happen.

Unfortunately, the knee-jerk reaction to heightened terrorism is in the opposite direction- the abridgement of liberties, greater powers to the police, a contempt for politicians and the political process. On TV, I saw a bunch of ad-men pouring scorn on politicians and asking them to keep their hands off the law-enforcement machinery. That is a prescription for fascism.

The gloomy conclusion that emerges is that India will try to emulate the tough methods adopted by countries such as the US and Israel without having the commensurate governance or enforcement capability. This can only lead on to a downward spiral where terrorism is concerned.

Citigroup- too big to succeed

Citigroup has received a government bail-out, so it lives to fight another day. This has been described as a $306 bn bail-out but that is not entirely accurate. The terms of the rescue are:

• The US government is essentially providing insurance on $306 bn of troubled assets with teh first $29 bn of losses being borne by Citigroup. This is conceptually not very different from any medical or car insurance contract where the first level of losses is borne by the customer.
• In return for this insurance, Citigroup will issue the government $7 bn in preferred shares carrying a dividend of 8%- this is the premium it pays on the insurance the government provides plus $2.7 bn of warrants
• The government will inject another $20 bn in preferred shares (not commn equity) into the financial group.
  

So, the government or the tax payer stand to lose only if Citigroup's bad assets decline more than 10% in value. If the markets recover- and this is a big if- the government is okay and the bail-out is fine. If not, there will be huge costs to the tax payer. Citigroup has $2 trillion in assets and it could under for reasons other than the identified $306 bn in troubled assets.

Citigroup may survive but can it really deliver in its present form? This is a bank with a long history of problems. Ddeveloping country loans, internet bubble, telecom bust- you name it, the bank has been in the thick of every problem in the past couple of decades.

The trouble with firms such as Citigroup, quite simply, is not just that they are too big to fail, they are too big to succeed. It's impossible to sustain good earnings growth on this kind of asset base. Managing $2 trillion in assets is crazy- no CEO or set of executives is equal to the challenge. The complexity is simply too overwhelming.

That's why we had Chuck Prince (the CEO, whom Vikram Pandit replaced) asking his CFO whether everything was ok, only to be told it was- and this when the bank had over $40 bn in toxic assets.The board's great idea was to replace Prince with Pandit, an ex-Morgan Stanley guy with no banking experience. We read that they were on the verge of replacing Pandit too until a Saudi prince affirmed his faith in him. How about replacing the board first?

Banks need to decide what is an optimal size for them. More than $100-200 bn seems to be extravagant. I have also never bought the stuff about universal banking- I once wrote an article deriding the idea as 'universal bunkum'. The idea that one entity can manage everything under the sun- banking, investment banking, insurance, etc - and that it can do a great job of this through cross-selling products is plain stupid. Citigroup never quite managed it. It goes against the idea of 'core competence'.

This is also why I have steadfastly been sceptical about the idea of bank consolidation in India. My contention is simple: if you can't deliver performance at your present size, forget about doing it when things get bigger and more complex.

PSU pay hike

The government has approved the Justice MJ Rao report on pay packages for PSUs. Good. But why does the media get hysterical about pay rises in the public sector? When the central government pay hike was announced, media reports talked of an increase of "over 40%". I showed through my calculations that the increase was 13%. I am inclined to believe that the media prejudice against all things governmental is so great that they are just not happy to see any pay rise in government.

Now, I have been seeing reports about 100-200% pay hikes for PSUs. Rubbish. The chairman of ONGC will get a basic salary of Rs 1,25,000 per month. Is this five times his earlier pay of Rs 25,000. Yes, but only if you compare basic with basic. What happens in government pay revisions is that the basic and DA get merged and there is an increase over that, with DA starting from zero all over again. This is the increase (new basic plus DA versus old basic plus DA) one must look at- and it comes to 20-25% in PSUs. And this increase is happening after 10 years whereas in the private sector, the annual increment would be 25%.

Of course, there are performance-linked incentives in the new scheme of things but these apply mainly at the top. There is an improvement in public sector pay but it will still lag behind that in the private sector in cash terms. The real benefits in the public sector are of the non-cash variety: job security, pension, medical benefits and housing and the sheer richness of the job.

Should pay in the public sector improve a great deal more? Not necessary. One consequence of the ongoing turbulence is that people here are going to re-evaluate the relative merits of public and private sector jobs- and my guess is that there will be a better appreciation now of the former.