More on independent directors

I have a piece in the Wire on independent directors in the context of the Tata ruckus.

Indian Hotels independent directors' move is a first of sorts

The unanimous support that independent directors of Indian Hotels Ltd have given to Cyrus Mistry is a first of sorts- so far a I can recall- and it adds to the damage done to the Tata group done in recent weeks. The six independent directors said:

After deliberations, the independent directors came to a view that being a listed company, it was imperative for the independent directors to state their views to the investors and public at large, such that those who trade in securities of the company make an informed decision,

Taking into account board assessments and performance evaluations carried out over the years, the independent directors unanimously expressed their full confidence in the chairman, Cyrus Mistry, and praised the steps taken by him in providing strategic direction and leadership to the company.

The independent directors have thus gone against the preferences of the dominant shareholder, an act of defiance that is entirely welcome, given that independent directors in India are widely perceived as chamchas of the promoters, often backing them to the detriment of the interests of minority shareholders.

It would be premature, however, to conclude that this marks the beginning of a trend. For one thing, we do not know how many of the independent directors were appointees of the Tata group and how many were appointees of Mr Mistry. Independent directors need to be independent of both promoters and management (although often the two are the same in Indian companies).

Secondly, I fear that promoters will now become even more circumspect in their choice of independent directors- they will only pick independent directors of whose loyalties they can be entirely certain. Perhaps, we will see more distant relatives and ex-employees as independent directors. The outcome of the Indian Hotels' independent directors could thus be turn out to be quite perverse in the long run. We need radical changes in the process of appointment of independent directors of the sort I have long advocated (see my earlier post on the Tata controversy).

Meanwhile, the blog post of Nirmalya Kumar, the former London Business School professor, who was advising Mr Mistry on strategy and was asked to go along with Mr Mistry, has elicited widespread sympathy.

It's not just the summary removal that is the issue. Prof Kumar joined the Tata group, he did not join Mr Mistry in a personal capacity. It is not that he was implicated in any improper decisions. Is it the contention of the Tata group that when a Chairman or CEO is removed, those around him must leave because they were "close" to him? I know this happens all the time in many places. Somehow, one expected things to be a little different at the Tatas.

Goodbye to central bank independence?

Central bank independence is an idea that came out of the stagflation in advanced economies of the 1970s. High inflation did not lead to reduced unemployment- the world discovered the truth that the Philipps curve trade-off exists only in the short-run. If you keep boosting money supply for too long, you get only inflation without the associated benefits of reduced unemployment.

So politicians decided they would leave it to central banks to decide monetary policy as a means of imposing overall macroeconomic discipline. Central banks would then no longer underwrite unlimited government borrowings and this was good for the economy.

Now central bank independence is under threat- and it's not on account of politicians, the Economist points out. The problem is the steady decline in interest rates in recent years, culminating in negative interest rates in many countries. Monetary policy no longer appears effective and this undermines the authority of central banks.

Moreover, the tool that some banks have resorted to, Quantitative Easing, which involves massive purchases of government bonds, amounts to the purchase of government debt using newly printed money- precisely what central bank independence was intended to avoid!

At the same time, there's a general sense that fiscal stimulus has a key role to play in the present situation:

Although economists remain broadly in favour of central-bank independence, the amount of new research affirming the importance of stimulatory fiscal policy is growing. The continued economic doldrums are also creating a political opening for more aggressive fiscal action. On August 2nd the Japanese government announced new stimulus measures worth ¥4.6 trillion ($45 billion) this year. Both American presidential contenders have plans that will raise government deficits, and the British government has abandoned its target of balancing the budget by 2020. Low interest rates have emboldened politicians who might otherwise have ignored the calls of frustrated voters for fear of the bond-market vigilantes.

As monetary policy wanes in influence relative to fiscal policy, so will the importance of central banks.

Here in India, we have seen a movement away from the commitment to a 4 per cent inflation target on the part of the RBI. This has at least partly to do with the perception of the political authority that rigidity in respect of the inflation target of 4 per cent was coming in the way of higher economic growth.

Central bank independence is not ordained by the gods. It was a mechanism devised by politicians in response to a particular economic situation. You can count of politicians to reduce its importance in a different economic situation.

Quote of the day

"Ratlike cunning, a plausible manner and a little literary ability".

Qualities of a successful journalist, according to Nicholas Tomalin, a member of the breed. (The Economist, September 20, 2016)

Cyrus Mistry spat with Tata- a peek into the board room

As many commentators have noted, the sacking of Cyrus Mistry and the angry letter it has elicited from him has done great damage to the Tata brand. If the dispute drags out, the damage will be that much greater. Tata shareholders have cause for concern.

So do banks that have exposures to the group. Much of this exposure rests on the Tata reputation and TCS profit. The problems at the group will cause banks to seriously rethink the sort of name-lending they have been doing. The RBI's Large Exposure Framework is timely in this context: the restrictions on group exposures were long overdue and it's a pity that the regulator is having to require something that bank boards should have done on their own by way of prudent risk management.

One particular item in Mistry's letter stands out and it had me rubbing my eyes in disbelief. Let me reproduce that portion:

The trust nominated directors, who I would assume would use their own independent judgment and discharge their fiduciary duties, were reduced to mere postmen. As an example, once, the trust directors (Nitin Nohria and Vijay Singh) had to leave a Tata Sons board meeting in progress for almost an hour, keeping the rest of the board waiting, in order to obtain instructions from Mr Tata. Such a work pattern has also created the added risk of contravening insider trading regulations and exposed the Trust, apart from exposing the trustees to potential tax liabilities.

This is incredibleif the staements are indeed correct. The Dean of Harvard Business School, we are told, excused himself from the board meeting and kept the board waiting for nearly an hour in order to take instructions from Mr Tata, who was not even a member of the Board! Is this what they teach by way of corporate governance at HBS? Is this how independent directors are expected to function- go out and take instructions from the leading shareholder even while a board meeting is in progress? The possible violation of insider trading regulations, to which Mr Mistry refers, makes the disclosure even more lethal. SEBI and the stock exchanges, one hopes, will look into this item closely. If proved right, Prof Nitin Nohria's behaviour might well attract strictures from the regulator and the exchanges. Since some of the listed Tata companies are shareholders in Tata Sons, institutional investors would be within their rights to raise this issue.

One wonders what HBS would make of this matter. This is not the first time that an HBS prof's behaviour has raised questions in the Indian context. In the Satyam Computers scandal, Prof Krishna Palepu, another HBS professor, drew attention as he was found to have earned a tidy amount by way of consulting fee from the company with which he was associated as independent director. As reported in the media, the court dealing with matter issued an order asking him to disgorge around Rs 2.7 crore in excess remuneration paid to him.

Mr Mistry makes a number of other statements that are damaging. He would have liked to discontinue Nano but could not do so because of Mr Tata's attachment to it. He was opposed to the group's entry into aviation. There were dubious transactions in Air Asia.The potential write down in the value of assets of group companies is Rs 118,000 crore. IHCL's investment in the Sea Rock property nearly wiped out its net worth. Tata Capital made a large loan under the advice of one trustee and it has since turned into an NPA. And so on.

The question arises: did Mr Mistry raise these concerns at Tata Sons board meetings and were these concerns duly minuted? Did he express his disapproval of the two independent directors holding up proceedings in order to seek Mr Tata's input? What did the other independent directors have to say on various matters? Were their comments, if any, recorded and minuted? It would be appropriate for SEBI to go through the minutes of the board meetings and take stock. Perhaps SEBI needs to issue guidelines on the minuting of board meetings, an area that needs considerable improvement.

Two thoughts arise. One, if this is the state of affairs at what has been India's most respected corporate brand, what can we expect at other boards?What sort of discussion happens at those places? How well are minority shareholder rights protected?

Two, what do we make of the role and functioning of independent directors. As readers of this blog would know, I have been extremely sceptical about the functioning of boards and independent directors. Most boards are rubber-stamp boards that duly accord their approval to whatever the CEO or Chairman wants done. There's very little dissent, very little questioning. This state of affairs cannot change as long as so-called 'independent' directors are selected by the CEO or the promoter. We need a wide variety of stakeholders to appoint independent directors- institutional investors, banks, minority shareholders, employees and others. In my book, RETHINC, which came out last year, I devote a whole chapter to corporate governance and the functioning of boards.

Alas, there's no sign of genuine reform in the board room.

'Bad bank' won't take us very far

The proposal for a 'bad bank' has been revived (although the chairman of the BBB, Vinod Rai, has been quick to dismiss it).

The idea is to rid the public sector banks (PSBs) of their NPAs so that they can generate interest among potential strategic investors or so that they can be merged with stronger banks without dragging down the latter.

I doubt that the idea will take us very far. A bad bank was conceived originally as a bank-specific entity- it was mean to transfer bad assets of a given bank. The bad bank we are talking about will transfer assets of all or many PSBs. That means having to deal with problems of a different scale altogether.

Next, there's the question of whether the bad bank will be have the government as a majority owner or not. If government is to be the majority owner, then all the problems we have with loan resolution at PSBs will continue. If the private sector is to be the majority owner, setting a price at which NPAs are to be sold will be a major headache.

It's not as if the majority of NPAs have to be liquidated. No, the principal challenge in India is to get stalled projects, which have turned into NPAs, to go through to completion. That requires fresh funding. If government cannot provide funds to the existing PSBs, how is it going to provide funds for a government-owned bad bank?

Moreover, the sale of NPAs will be a time-consuming process. The interest burden will mount. Projects which can be made viable today will cease to be viable tomorrow. There's the real danger that large amounts of infrastructure investment will go down the drain. A generalised bad bank for all NPAs seems just a bad idea.

Perhaps, we could attempt something on a small scale. We could transfer some project-specific or borrower-specific assets lying with various banks to a bad bank and see whether resolution can be expedited. In general, however, it's best for the banks to resolve the problem through appropriate restructuring and waivers, supported by government funding.

There's one thing about bad loan resolution we need to be clear about. The most enduring way to get out of an NPA mess is for economic growth to revive. From that perspective, the interest rate cut we saw in the last monetary policy and the expected cuts down the road are the best solutions. The interst rate cuts will revive the financial position of many borrowers and it will help recapitalise banks by boosting the capital gains on their securities portfolio.

Loan resolution will, of course,be necessary but it will be easier to handle once economic growth picks up.

More in my recent article in the Hindu, Why a bad bank is tricky

Urjit Patel's maiden monetary policy marks a significant shift

Make no mistake, RBI Governor Urjit Patel's maiden monetary policy statement (embodied in the MPC resolution) marks a significant shift in the approach to inflation.

The framework is the same as in Rajan's time, the mandate is the same (4% plus or minus 2% inflation) but the interpretation of the mandate is quite different. Rajan was committed to a 'glide path' whereby inflation would be brought down to 4% by 2018. Patel did not say so explicitly at any point but the message is pretty clear: 4% now is a target to be attained over five years with the flexibility to depart by 2% in the interim.

At the media interaction, Patel was asked whether the target of 4% by 2018 was still in place. He did not give a straight answer but read a statement on the mandate given to RBI. Most people would have read between the lines and understood.

How do we know? First, we have the 25 bp rate cut. True, food inflation has moderated. But we are looking at 5% inflation by 2017 with significant upside risks. The MPC would not be taking chances with a rate cut if it were fixated on bringing inflation down to 4% by 2018. It can afford to take chances only by interpreting the mandate more broadly.

Secondly, there was mention of the real interest rate target being lowered from 1.5-2% to 1.25%. At the present repo rate of 6.25%, this permits an inflation rate of 5%. The point was made that the real rate is not a fixed number, which means it can drift even lower. That gives even more flexibility in respect of lowering the interest rate.

Then, there's a softer approach towards NPAs- pragmatism will be the name of the game. The governor is keen to ensure that credit flows to industry are not stalled because of NPAs.

So, once again, the pundits have been proved wrong. They said that Patel's appointment marked continuity with Rajan's policies because Patel had authored the report on inflation targeting. They said he was a hawk who wouldn't budge on interest rates. They said two out of the three outside experts on the MPC were also hawks. What we have in the latest policy is six doves.

The pundits may also have been wrong in saying that the government did not persist with Rajan mainly because they didn't approve of some his speeches. I have argued in my blog that, within the Sangh parivar, there was considerable discomfort with the interest rate regime.

Finally, we were warned that any interest rate cut in the context of RRexit and Brexit would spark an exodus of foreign funds, the rupee and the stock market would collapse and economic doom was round the corner. Nothing of the sort has happened.

So much for punditry.

Rhetoric over Uri attack

The sound and fury over the attack on the army camp in Uri is understandable. The loss of soldiers' lives has been heavy and tragic. But the rhetoric and the jingoism evident in the media make little sense. It's important to underline two key points.

First, as an editorial in today's Business Standard points out, there have been lapses on the part of the security forces. The infiltrators were able to cross the LOC and they were able to get into the camp quite easily. Among other things, it points to unsatisfactory vigil at the border. This is not just a matter of equipment or terrain, although these factors do count. BS makes the point that the border is porous because there's laxity on both sides. And the laxity is on account of the thriving drugs trade. Smugglers are able to move in and out because sections of the establishment make this  possible. And once you relax the vigil for smugglers, the jihadis get their opportunity. So it's no use simply pointing the accusing finger at the Pak army.

Secondly, all talk of retaliation is futile because the international community at large and especially the US will not take kindly to a military strike, as ambassador M K Bhadrakumar points out. The writ of the US runs across the world and the Indian establishment has cosied up to the US in recent years. The question of any major military action on India's part without US approval does not arise. And hostilities with nuclear Pakistan is the last thing the US wants today:

...despite the government's sustained public diplomacy to create an impression in domestic opinion that its foreign policies have burnished India's international standing and image and so on, in reality, India's actions -- especially any military moves -- will come under close scrutiny and be weighed in terms of international law and the United Nations Charter.
The bottom line is that the present ruling elites dare not think of crossing any 'red line' that Washington demarcates.
The US State Department, in a series of statements, has distanced Washington from the Indian positions with regard to the situation in the Kashmir valley, India-Pakistan tensions and Balochistan.
Conceivably, the Americans have cautioned our leadership already against making any precipitate military moves. The kind of brazen military adventures that many self-styled Indian defence analysts are espousing will not get Washington's approval.
As the Barack Obama administration tiptoes toward the lame-duck period, the last thing Washington wants as legacy is an India-Pakistan conflict.......

.....If the Americans do not want a war between India and Pakistan or any precipitate Indian military moves that violated international law, Modi cannot act otherwise.The umbilical cord that ties the Sangh Parivar and our ruling elites to the US establishment may be invisible, but remains robust.

So that's it- the rhetoric and sabre-rattling on our part will remain just that. The media pundits can rant as they much as they want. Perhaps the saner course for us is to simply put our house in order first.

Tread warily on labour reforms

India's labour unions fired a warning shot across the bow of the government on September 2 by having a mammoth all India strike. They were relaying their concerns about the proposed reforms in labour laws and other issues such as privatisation and FDI.

The way people go on and on about our labour laws one would think that simply by allowing hire and fire we can generate massive employment. The academic literature on the subject is by no means as clear cut as that. India's labour laws are not more restrictive than that of France and you can't say that France has not developed manufacturing over a century.

When you begin to look closely, you find that not hiring labour often has to do with other factors such as tax incentives for capital, which makes it worthwhile for business to substitute labour with capital. In the present context, we have serious issues constraining private investment, such as weak global demand, high interest rates, high leverage in industry, etc. Tweaking labour laws isn't going to help. On the contrary, by provoking a labour backlash, it might make things worse. It would also cost the ruling coalition dearly at the hustings.

More in my article in the Hindu today, Labour's love's lost.

Do we need universities?

I know that's hardly the right question for somebody sitting in an elite educational institution to ask. And it may sound dumb coming from anybody- who could argue against higher education? But the case needs to be made rigorously. Tim Harford, the undercover economist, takes a look at the pros and cons.

Pro: a recent study suggests that universities boost the growth of economies in the region:

Valero and Van Reenen find that universities do indeed seem to boost the income of their region. Double a region’s count of universities — say from five to 10 — and GDP per person can be expected to rise by 4 per cent. Double the university count again, from 10 to 20, and that’s another 4 per cent on GDP per person. Neighbouring regions also benefit. This is not a trivial effect.

Con: a degree from a reputed university is no more a signal of talent. You got into a good school, so you must be worth something. It's not that you have learnt something at the university that is useful at the workplace:

....undergraduate degrees have no value to society: they enable employers to pay higher wages to smarter workers, but lower wages to everyone else — and in order to enjoy these higher wages, smart people must waste time and money going to the trouble of acquiring a degree. Everyone might be better off if the whole business was abandoned.

In other words, as we at B-schools understand very well, universities, more often than not, are about placement, they are not about learning. But one mustn't carry this too far. What people learn at engineering and medical schools is, indeed, of value. To put it differently, you may start off as a trainee at a company without any B-school degree and rise to become CEO. But it's doubtful that somebody can simply land up at a hospital and be trained to become a doctor.
 

Coal scam and HC Gupta

H C Gupta, the former coal secretary, has drawn enormous support from the IAS association, assorted bureaucrats and the media in connection with the many CBI cases he's facing. He's an upright man, everybody says, the last person to use his position to make money for himself. His is a case of how the Prevention of Corruption Act can be used to harass an honest, retired bureaucrat.

As this article in Scroll.in points out, the issue is not just whether Mr Gupta made money out of the allocations are not. The issue is whether he was party to a seriously flawed process, whether he abetted wrong decisions on the part of higher-ups:

From all accounts, Gupta is an honest and upright officer. But when the coal scam was underway, what was needed from him was more than personal incorruptibility. He needed to hold his responsibility to the country higher than what the functionaries in the Congress seemed to have been telling him to do....

....The Screening Committee that Gupta headed disregarded its own internal comparisons of all the applicants, as a Central Bureau of India official had pointed out. Subsequently, as we know, several of the files pertaining to the allocations went missing as well.
In other words, Gupta is not in the dock because he made recommendations that benefitted some companies. He is in the dock because he cannot explain why those companies were chosen. He cannot explain those decisions because he is not the one who made those decisions to begin with. Politicians, especially from the ruling Congress Party, influenced the allocations, this reporter was repeatedly told while covering the coal scam.

The charge against Mr Gupta, then, appears to be that he looked the other way. Bureaucrats are riled because that's precisely what many of them are required to do- in order to move up the ladder, if not to keep their jobs. It frightens them that something that's considered routine now in the bureaucracy- looking the other way- can bring retribution down the line.

And why single out bureaucrats? In PSUs, in private sector companies, indeed, in every organisation, safety, comfort and prosperity lie in looking the other way, not raising the voice of dissent. People know that wrongs are being perpetrated but they rationalise their silence by telling themselves that they are not profiting directly from questionable decisions. (They do profit indirectly because the reward for keeping silent is that you get your promotions and bonuses).

The amendment that bureaucrats want now in the law against corruption is that they can prosecuted only if they are shown to have derived a personal benefit. If they did not uphold or defend the public interest, that's fine. Politicians may well be inclined to oblige them because otherwise the basis of the neta-babu nexus gets broken. Without pliant bureaucrats who will not stand in their way, the netas cannot make hay.

It will be interesting to see how Mr Gupta's case plays out- and whether the amendment sought by the bureaucracy will be forthcoming.

 

P2P lending: early warning signs

A storm has erupted over P2P (peer-to-peer) lending in China, FT  reports.

P2P platforms offer higher returns for savers. They do so in two ways. First, they identify borrowers who are willing to pay high rates because they do not have access to formal lending channels. Secondly, they reduce the intermediation cost- there are no branches and large staff that these platforms have to pay for. These platforms claim to have evaluated borrowers by using big data.

Alas, matters are not that simple:

Within the past year, ordinary Chinese people have fallen victim to scandals in which online financial platforms have disappeared with billions of dollars, provoking angry protests on the streets.

In February, more than 20 people were arrested for their involvement in Ezubao, a “complete Ponzi scheme”, that allegedly took more than Rmb50bn ($7.6bn) from investors, China’s biggest case of financial fraud to date. A month later, a court in southern China jailed 24 people for defrauding about 230,000 investors of nearly Rmb10bn in a similar scam.

In response to such problems, the regulator last week issued rules forbidding online lenders from accepting deposits or guaranteeing principal or interest on loans they facilitate. It also capped borrowing at Rmb1m for individuals and Rmb5m for companies.

One of the China's best known businessman calls P2P lending a "scam".  Looks as though those who think banks will disappear because of the arrival of such platforms need to wait for a while.

Storm over the revolving door

Former EU president Jose Manuel Barroso is the latest high-profile figure to go through the revolving door to the private sector. He joined Goldman Sachs as non-executive chairman of the bank's London operations in early July. This has triggered a massive online protest, with 76,000 signatures being collected already.

Barroso- not to be confused with the Hindi word bharosa - collects a cool 100,000 Euro as pension every year. Clearly, this isn't enough for him- it would be small change compared to what Goldman would pay him. Barroso complied with the 18 month cooling off period mandated by the EU. But the storm over his joining Goldman shows that people don't believe this limitation is adequate. As EU president, you would be dealing with cases involving high-profile companies. How you act is bound to be influenced if you know that there are post-retirement plums to be picked up from the companies you are dealing with.

No wonder French president Hollande calls it "unacceptable". The current EU president Jean Claude Juncker has a more nuanced comment. “The fact that Barroso works for a bank doesn’t bother me. But the fact that it’s that one causes me a problem.”

Change of guard at RBI

On the Saturday that Raghuram Rajan sent his letter to employees saying he would not be staying on after completing his term, I got a call from the correspondent of a foreign paper seeking my reaction. The correspondent told me that the name of Rajan's successor would be announced on Monday itself as the government wanted to ensure there was no uncertainty. I told him that was most unlikely- a process would have to be followed, including approval by the Cabinet Committee on Appointments. He insisted his information was from reliable sources.

Well, it's taken a while since then for the appointment to be announced. In the intervening period, the media speculation on the subject has been unbelievable. They said the appointment would happen by mid-April, soon after the PM returned from his visit to Africa. It didn't. Modi had told WSJ that the RBI governor's appointment was an administrative decision. Since the governor's term expired in early September, a decision would be taken close to that date. He has been true to his word. One hopes the media begins to take the PM more seriously hereafter.

As for the candidates, the front-runner kept changing every few days. Initially, it was said that it would be some internationally known economist of stature comparable to Rajan's. Perhaps Arvind Subramanian?.. he was well known and was also less hawkish than Rajan, so he had a great chance.  A little later, it was ...no, no, it would be a bureaucrat who was on the same wavelength as the government. Shaktikanta Das, Expenditure Secretary, emerged as a favourite. Further on, BREAKING NEWS....Arvind Panagariya was set to be named (never mind that he had Cabinet Minister rank and this would be a step down for him). 

A few days later, it Arundhati Bhattacharya's turn. Sorting out the banking mess was now the priority, hence a banker! Two other names entered the fray at some point, K V Kamath and Kaushik Basu. Then, one day, there was a buzz around Subir Gokarn... he had met Rajan and Das, so there must be something to it? (As though the government would first share the news with the RBI governor).

One is glad this silly game has ended. To give the media its due, Urjit Patel was always in contention although I don't recall his being cited as the hot favourite.

One thing is clear. The government runs a tight ship, so the media is pretty clueless on these matters. It also appears that a rigorous process has been followed. Two rounds of the Committee on Financial Sector appointments followed by discussions between the PM and the FM. This is as it should be. Due process must be followed in the case of high appointments, so all credit to the government for adhering to one.

After the announcement, the excitement moved to a dissection of the governor-designate. Would he continue Rajan's hawkish stance? Or would he be something of a dove? Neither, they said, he would be an owl!

The usual platitude was rolled out- there would be continuity with change, although it wasn't clear what would continue and what would change. One paper quoted government officials saying that they expected Patel to take a more "balanced" approach to inflation. Fighting inflation was, of course, a priority but he should not ignore growth.

The fact of the matter is that no governor has much of a choice on interest rates, now that the Monetary Policy Framework has articulated the inflation rate band (4 plus or minus two per cent) and also said that the indicator used would be CPI. The governor is also somewhat constrained by the proposed constitution of a Monetary Policy Committee. We are bound to have continuity in respect of monetary policy.

The more interesting question is whether there will change in respect of the banking sector. Patel does have the option of relaxing the accelerator on NPA recognition and giving PSBs and the corporate sector a bit of a breather. Whether he opts for this course or not depends on the view that he and the government will take on PSBs. It does appear that there is an effort on to shrink the market share of the PSBs by curbing their access to capital and hence their ability to lend. Even if this is the game plan, it would be unwise to push it at this point because then lending to the corporate sector and infrastructure will be stuck. That would not be good for the economy. One has to see whether pragmatism trumps ideology in the incoming governor's approach to PSBs.

There's just one other observation I'd like to make. Perhaps Rajan's biggest contribution, which has gone unheralded, is that he changed the stuffy, hierarchical culture of the RBI. He made himself accessible to staff at all levels (I was told they only needed to check with his secretary whether he was free and could walk in). Rajan himself did not hesitate to drop in at colleagues' offices, sometimes just for a casual chat. In more ways than one, he took away the aura of aloofness and inaccessibility attached to the governor's office (and now the governor's floor)- this was no small achievement in an organisation in which the governor had always been some distant God perched on the top floor.

In meetings, he was refreshingly free from airs of any kind, unfailingly polite and courteous and a good listener, as I can myself vouch for. This was not an affectation, it was a genuine something, just an aspect of the personality of a very cultured person. Perhaps, it helped that Rajan came from an academic background, not a bureaucratic one.

This was a great contribution because organisations are ultimately about team work, motivating and leading by example. In an organisation such as RBI, you cannot motivate through bonuses and stock options. You can only motivate by creating a culture where people feel respected and cared for. Three years is too short a period in which to bring about a radical change in culture but we must salute Rajan for his efforts.

Deutsche Bank whistle blower refuses SEC award

A former investment banker who blew the whistle on Deutsche Bank in a case involving wrong valuation of its derivatives portfolio has declined the $8.5 mn award given to him by SEC ( his ex-wife and lawyers have a claim on some of it).

In an article in the FT, he explains he's doing so because he's unhappy that the SEC let off senior executives of the bank:

But Deutsche did not commit this wrongdoing. Deutsche was the victim. To be precise, the bank’s shareholders and its rank-and-file employees who are now losing their jobs in droves are the primary victims.
Meanwhile, top executives retired with multimillion-dollar bonuses based on the misrepresentation of the bank’s balance sheet. It is therefore especially disappointing that in 2015, after a lengthy investigation helped by multiple whistleblowers, the SEC imposed a fine on Deutsche’s shareholders instead of the managers responsible.

Compare this outcome with a contemporaneous SEC enforcement action against the less connected executives of a smaller firm, Trinity Capital, and its subsidiary Los Alamos National Bank. The violations at Trinity seem similar to Deutsche, but orders of magnitude smaller. Five executives at Trinity were charged, the chief executive settled and paid a fine, and litigation continued against two senior officers. 

He explains that this happened because of the "revolving door" sydrome about which I have written often:

So why did the SEC not go after Deutsche’s executives? The most obvious concern is that Deutsche’s top lawyers “revolved” in and out of the SEC before, during and after the illegal activity at the bank. Robert Rice, the chief lawyer in charge of the internal investigation at Deutsche in 2011, became the SEC’s chief counsel in 2013. Robert Khuzami, Deutsche’s top lawyer in North America, became head of the SEC’s enforcement division after the financial crisis. Their boss, Richard Walker, the bank’s longtime general counsel (he left the bank this year) was once head of enforcement at the SEC.
This goes beyond the typical revolving door story. In this case, top SEC lawyers had held senior posts at the bank, moving in and out of top positions at the regulator even as the investigations into malfeasance at Deutsche were ongoing.

This is a classic case of regulatory capture. And because regulations will always be weak and will be undermined by crony capitalism, the idea that free markets can function efficiently, subject to their being regulated properly, will remain a myth.

Lehman Brothers should have been saved

One of the biggest controversies around the financial crisis of 2008 is about the decision to let the investment bank Lehman Brothers fail.

The moment that happened, it was as though somebody had dropped a bunker-busting bomb on a shaky and dilapidated building. The money market mutual funds, on whom the banks depended for short-term funds, withdrew their funding raising the prospect of the collapse of the financial system. It required a series of bailouts, including that of insurance giant AIG, and the guaranteeing of money market mutual funds' investment in banks, to rescue the system.

One argument trotted out at the time was that the US Treasury Secretary Hank Paulson wanted to send out a clear message on moral hazard to big players: no more rescues. However, since further rescues followed the failure of Lehman, that argument has worn thin. The official position since has been that the Fed simply could not provide liquidity to Lehman because it was not solvent and could not provide the necessary collateral. The Fed would violated the laws applicable to it had it tried to save Lehman.

Larry Ball of Johns Hopkins has done a brilliant analysis of the Lehman failure and he finds that the arguments don't stand up to scrutiny. He believes that Lehman was allowed to fail because the US Treasury and the Fed didn't quite anticipate the disastrous consequences that would follow. He also contends that the Fed has failed to provide the necessary documentation to substantiate its contention that Lehman wasn't solvent at the time.

More in my article in the Hindu, The cost of political interference

More on helicopter money

I wrote about the possible use of helicopter money in the UK in my last post. The question is asked: how different is helicopter money from Quantitative Easing. Helicopter money is the government financing its spending by borrowing from the central bank. This leads to an increase in the creation of money. In QE too, the central bank pumps money into the system by buying bonds from banks.

So, where is the difference? As an article in the Economist explains, QE is, in theory, subject to reversal. The central bank can sell back the bonds in the market. This, of course, has not happened with the QE we have since post the crisis of 2007. Helicopter money, on the other hand, is a permanent expansion in money supply. It can, therefore, be expected to have a more stimulatory effect.

The flip side is that the markets would view helicopter money unfavourably for precisely that reason. It is easy money for governments- it's just a matter of dipping one's hands into the central bank's till. This could easily lead to a sharp depreciation in the currency.

Helicopter money for the UK

'Helicopter money' is a policy option that is being urged seriously by serious economists. In its most literal form, it means dropping money from a helicopter. People who get the notes will go out and spend.This will boost aggregate demand, which is the policy objective today.

On the other hand, people may not spend the money, they may hoard it. For the UK, Robert Skidelsky favours other approaches that have been in the public domain:

The government should pay for, say, an investment programme not by issuing debt to the public but by borrowing from the central bank. This will increase the government’s deficit, but not the national debt, since a loan by the central bank to the government is not intended to be repaid. Thus the government acquires an asset but no corresponding liability.
However, this is only one possible form of helicopter money. Another way of achieving the desired increase in spending was suggested by the Swiss businessman, Silvio Gesell, in 1906. His idea was to give cash directly to households. But to give people an incentive to spend the money and not hoard it, there had to be a cost to holding on to it. In his scheme, unspent currency notes would have to be stamped each month by the post office, with a charge to the holder for stamping them. 

The combination of the two methods, Skidelsky believes, could be used to inject £100 bn into the British economy. This would, of course, be a repudiation of the austerity measures pursued by ex- Chancellor George Osborne.

Greek tragedy wrought by the IMF

So, Greece, which had paid higher yields than others in the Eurozone before it was created, could now borrow cheaply. The obverse of such borrowings was a widening current account deficit. Following the financial crisis of 2007, the markets became sensitive to sovereign risk. They sensed the possibility of sudden stops to capital flows that had financed large current account deficits. Yields on Greek sovereign bonds began to rise. Large amounts of Greek public debt were falling due. It became clear that some private creditors would not be willing to roll over debt and, even if they did, the government could not afford to borrow at the higher yields.

The IMF and the EU stepped in to organise a €110 bn bailout. The objective in any bailout must be to restore an economy to health. The Greece bailout has clearly failed to accomplish that. That's because IMF did not ensure that the terms of the bailout ensured sustainability of debt. This is astonishing because the IMF's rules required exceptional access to finance to be provided only after this condition was satisfied. How this norm and other norms were circumvented is a story that is well told by the IMF's Independent Evaluation Office, the IEO.

More on this in my article in the Wire, How the IMF bungled the Greek crisis

Did you know? Milosovic has been exonerated!

Would you believe it, the former Serbian President Slobodan Milosovic, widely reviled as a genocidal tyrant, has been exonerated by the International Criminal Tribunal for former Yugoslavia! I'm sure I'm among the vast numbers of people who had assumed that he had committed ghastly crimes that ended only with the liberation of Serbia through Nato bombing.

I guess we should have known better. This piece of disinformation was put out by the west and its obedient media and lives on long after Milosovic's death while still under trial. The exoneration is contained in the judgement that convicts the Bosnian Serb Radovan Karadzic, according to a terrific report in RT.com (on which I had my last post) by well-known journalist and Guardian contributor Neil Clark:

For the past twenty odd years, neocon commentators and 'liberal interventionist' pundits have been telling us at every possible opportunity, that Milosevic (a democratically elected leader in a country where over 20 political parties freely operated)  was an evil genocidal dictator who was to blame for ALL the deaths in the Balkans in the 1990s......
But the official narrative, just like the one that told us that in 2003, Iraq had WMDs which could be launched within 45 minutes, was a deceitful one, designed to justify a regime change-op which the Western elites had long desired.

The ICTY’s conclusion, that one of the most demonized figures of the modern era was innocent of the most heinous crimes he was accused of, really should have made headlines across the world. But it hasn‘t. Even the ICTY buried it, deep in its 2,590 page verdict in the trial of Bosnian Serb leader Radovan Karadzic who was convicted in March of genocide (at Srebrenica), war crimes and crimes against humanity. There was no official announcement or press conference regarding Milosevic‘s exoneration.

Clark  says that Nato put it out that Milosovic had perpetrated horrible crimes in Kosovo. This was proved false by a UN court in 2001. Then, Nato latched on to alleged crimes of his in Bosnia. This claim too has now been thrown out.

The Western propaganda machine has since found other targets: Afghanistan, Iraq, Libya, Assad, Putin:

Since then we’ve also had the NATO destruction of Libya, the country which had the highest living standards in the whole of Africa and the backing of violent 'rebels' to try and achieve ‘regime change’ in Syria.
You don’t have to be Sherlock Holmes to see a pattern here.Sinc
Before a US-led war or ‘humanitarian intervention’ against a targeted state, a number of lurid claims are made about the country‘s leader and its government. These claims receive maximum media coverage and are repeated ad nauseam on the basis that people will bound to think they’re true.
Later it transpires that the claims were either entirely false (like the Iraq WMD ones), unproven, or greatly exaggerated. But the news cycle has moved on focusing not on the exposure of the fraudulent claims made earlier but on the next aggressive/genocidal ‘New Hitler’ who needs to be dealt with.  In 1999 it was Milosevic; now it’s Assad and Putin.

You won't find such stories in the western mainstream media. That's why you should go to channels such as RT.