Monday, May 24, 2010

Winners' curse in India's 3G auctions

I had meant to flag this article earlier but it escaped me. There is great jubilation over the Rs 70,000 crore the government is set to rake in from 3G auctions. Some people even think this makes amends for the telecom minister not having earned enough from the award of telecom licenses earlier.

Sumit Majumdar, writing in TOI, highlights the downside. One, the firms may go broke after having paid through the nose, so we will not see enough investmen in 3G infrastructure. Two, the firms that have bid may forfeit their security deposits and walk away from 3G in which we will need a fresh round of bidding. Three, the companies may be forced to charge consumers steep prices. He sums up the implications:
The diffusion of a 21century radical infrastructure which could be both a positive and disruptive influence for propelling Indias badly-needed knowledge revolution for the masses will not happen.Since the impact of general-purpose technologies at the individual level is profound,because of changes in the organisation of activities,the diffusion of a general-purpose technology such as 3G could have raised the return to cognitive skills and education.
The ability of 3G as a generalpurpose technology to have a phenomenal capacity to transform Indian society can be on hold.India can lose a golden opportunity to transform its society via a knowledge revolution using 3G technology.Indias 3G spectrum auction is fantastic for the exchequer but a fiasco for the common man.

Monday, May 17, 2010

A first for an Indian lady academic

Gita Gopinath becomes the first Indian lady to become a full professor at Harvard's Economics department, ET reports:

Before joining Harvard in 2005, she was an Assistant Professor of Economics at the University of Chicago's Graduate School of Business.

Prior to that she completed her Ph.D. in Economics from Princeton University.

Born in Calcutta, Gopinath has studied at the University of Delhi.

Thursday, May 13, 2010

Greek rescue: It's the banks, stupid

The Greek rescue is more about rescuing foreign banks with exposure to Greece than about rescuing Greece itself. Foreign banks' exposure to Greece is estimated at 76 bn Euro. A Greek default would mean a loss of upto 70% or 53 bn Euro. If other countries such as Spain and Portugal were to default, banks' losses would increase.

The 750 bn Euro rescue package is intended to shock and awe. But this is hardly the 'cost' of the rescue. The cost of the rescue, assuming the guarantees in the package are all invoked, would be the difference in the market rate of interest and the rate of interest charged on the package- approximately 4%. This amounts to 30 bn Euro, which is less than what banks would lose on Greek debt alone. That's the maximum cost that taxpayers outside Greece will pick up.

As for Greece and other troubled economies, there will be huge adjustment costs. For Greece, fiscal consolidation of 11% over a three year period. Thus, the so-called rescue places the burden of adjustment overwhemlingly on Greece and other economies. Why? So that again there can be a massive bail-out of private banks using public money. The markets don't think will work because they don't think this sort of burden will be acceptable to the people of those countries.

The more sensible course would be to restructure debt and accept losses on bank exposure to government debt. Some of these losses could be made good by the governments concerned. This course would distribute losses more evenly and make for smoother adjustment.

More on this in my ET column, Why the Greek rescue won't work

Wednesday, May 12, 2010

Why single out Goldman?

My earlier post on the fraud case against Goldman has drawn some strong responses. I can understand the anger against firms such as Goldman. But it cannot be that Goldman becomes a target because it has been more successful than others. The case against the integrated investment banking model, with its potential conflicts of interest, has not yet been made.

An article in FT points out the pervasiveness of the practices that form the basis for the present against Goldman.

Of the banks that dominated the market a few years ago, why would the government target the only one to survive the crisis financially intact? It is not because Goldman was unique. In Abacus 2007-AC1, Paulson & Co, a hedge fund, suggested securities for the deal and also bet against it in a swap with Goldman. That feature is not uncommon. According to a recent report from ProPublica, there were 26 deals in which Magnetar, a hedge fund, both sponsored CDOs and bet against them. (Magnetar says these deals were perfectly legal.) They were arranged by Citigroup, Credit Agricole, Deutsche Bank, JPMorgan Chase, Lehman Brothers, Merrill Lynch, UBS and others (not Goldman). There are hundreds of non-Goldman CDOs that no one has yet investigated.

.....More fundamentally, if the other big investment banks had made similar “net short” trades in 2007, there would not have been a financial crisis. Bear Stearns, Lehman Brothers and Merrill Lynch collapsed because they took massive positions in the opposite direction. Given the cost of government bail-outs, why chastise the only prudent investment bank?
I am no unabashed admirer of Goldman. But it is hard to resist the impression that Goldman is being targeted because it survived and remains profitable. That is quite ridiculous.

Sunday, May 09, 2010

Goldman in the cross-hairs

I can't comment about the merits of the particular case in which SEC has brought allegations of fraud against Goldman. But the broad case about investment banks having to make disclosures of all kinds of positions- their own and their clients- is, I am afraid, rather weak.

I would go along with Blankfein that when Goldman sells a package of securities to qualified investors, it is for them to take a view on the attendant risk. What view Goldman or any other clients should not be of interest to them.

I dilate on the Goldman case in my last ET column, Gunning for Goldman.

I find my sentiments echoed in an FT piece. The author suggests Goldman is becoming a scapegoat for others' failures: unease has to do with the possibility that Goldman has become a scapegoat for millions of homeowners and investors psychologically unable to admit at least partial fault for succumbing to the madness of crowds and lure of easy money. The one investment bank that hedged appropriately and enjoyed a hugely profitable rebound is an obvious target. “The idea that Wall Street came out of this thing just fine, thank you, is something that just grates on people,” said Senator Ted Kaufman. Goldman may or may not have done anything illegal, but most Americans do not give them the benefit of the doubt.
Interestingly, the author asks whether the firm's Jewishness is stoking prejudice:
In Goldman’s case, some even wonder whether the group’s perceived Jewishness has infected legitimate criticism of it with centuries-old prejudices against a group with a long history of being scapegoated. Michael Kinsley, writing in AtlanticWire, cites echoes of the infamous blood libel. New York Times columnist Maureen Dowd earned rebukes from theologians after writing that “blood-sucking banks” like “Goldmine Sachs” were “the same self-interested sorts Jesus threw out of the temple”.

Thursday, May 06, 2010

Nitin Nohria, HBS Dean-designate

The process adopted for the selection of Nohria as Dean, HBS, is interesting. Harvard President Drew Faust consulted a 12-member advisory committee of faculty from HBS and three other academics from Harvard. Around 30 other members of HBS also shared their views with her. Faust also spoke to Harvard alumni and figures from the world of business. It is interesting that faculty at HBS itself had a dominant say in the selection of the Dean.

I have wondered why it is that academics, who are employees of an institution, are consulted when it comes to selecting a leader. In the corporate world, you don't select a CEO by soliciting the preferences of VPs and GMs. I guess the reason is that academics are best motivated only when they have a clear sense of ownership in the institution. They can't be given this sense through stock options. Instead, they are giving a say in decision-making in administrative as well as academic matters.

Stefan Stern, writing in the FT blog, thinks that Nohria's appointment may have to do with his focus on ethics and his questioning the traditional b-school focus on shareholder value:
Together with his colleague Rakesh Khurana, Prof Nohria has challenged the orthodoxy that claimed there was little wrong with the conventional MBA syllabus or with the approach taken by the élite business schools. Both of these things played a part in contributing to the over-confident mentality which dominated business and finance, and which led to the great financial crisis. By appointing Prof Nohria, Harvard University has signalled that it is not frightened of debate, or reform - indeed, it wants to play a leading role in both these activities.
Along with Khurana, Nohria has championed the equivalent of the Hippocratic oath for MBAs, whereby they pledge to commit themselves to a code of ethics. I don't see that the Hippocratic oath has done a great deal for standards of doctors, especially those who have invested heavily in capitation fees. So, I am not sure what such an oath will do for corporate managers.

I do believe that the MBA curriculum needs big changes. But not quite in the way it is suggested above. I cannot see much purpose in loading it with ethics courses- and, certainly, I would question the presumption that faculty teaching such courses are any more 'ethical' than others. My own preference is for introducing more liberal arts courses and downgrading the repetition of 'hard' courses in accounting, finance, operations, etc

It will be interesting to see what changes Nohria rings in. As the FT blog points out, his expertise in organisational behaviour should be useful- there's a lot of 'behaviour' from colleagues he will have to take in his stride.