Of course you can trust a big financial company as long as you can remember that:

MF Global misplaced US $ 633 Million (or was it Billion or Trillion – when it comes to US, these words lose their meaning)

Bernie Madoff ran a big company

Goldman Sachs is a big company which sold ‘garbage’ to clients and bet against the same bonds which made up YOUR portfolio

HSBC Bank is being prosecuted in UK

Arthur Anderson was one of the big 5…till it became big 4.

I am sure when the Gold bubble bursts one of the subsidiaries of a big company will confess that they did not check…and about 125kgs of bars are actually not gold…but an alloy with about 22% gold. L O L. They will say “our trustees depended on certificates issued by….”

Just Google about Citibank, HSBC, …and their run in with regulators around the world…read about Japan for starters

so these are the caveats…:-) L O L….

by the way do you want Indian examples? I am afraid some of them are still in business…:-)

and also read this please

http://timesofindia.indiatimes.com/city/bangalore/Bank-manager-held-for-stealing-Rs-1-3-crore/articleshow/11012141.cms

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NPS (New Pension Scheme) was bad – I have rubbished it enough, but as if all that was not enough, the Parlimentarians have tried to make it worse.

Why should a fund management company have only 26% FDI beats me. Stumped is the word. In the 1990s we allowed 100% FDI in Mutual funds, in 2011 we are worried about 26% in pension funds.

We are worried about 51% in life insurance companies, and airlines. I guess I am too dumb to understand. We will not allow 100% FDI in retail – and it involves a HUGE investment, but we will allow 75% equity of Hdfc Bank and Icici bank to be held by foreigners. We will allow Hsbc and Citibank to sell LIFE INSURANCE and MUTUAL FUNDS to retail Indian customers – and be 100% held by foreigners.

Ok, so 26% it is.

Then there is a Minimum Guarantee that is to be paid! Vow. How the hell will this be implemented? who will bear the risk? What will be the time frame? I mean if I am a 22 year old starting an account, when will the guarantee kick in? Every year or only at the time of the withdrawal? Thoughtless suggestions hurt the industry.

Having said that, I have seen the returns that clients have got in the DEBT schemes of the NPS – the standard deviation confirms my worst fears – easier to find a decent equity manager, but finding a decent debt fund manager seems to be impossible. That is scary. If one fund manager gives you 1%p.a. and another gives you 8%p.a.  – what are people supposed to do?

I can imagine a shrill discussion (shout session?) on Tv after which many people will move from the fund with 1% return to the fund with 8% return. Next year there will a ‘Return Reversal’ – and lo! the same people will again be in a discussion. God bless them all. I will be watching Comedy Circus.

Then there is another clause which they want to insert- The Withdrawal Clause- The very purpose of creating a pension plan is to lock it in for a person’s old age or to meet a critical illness post say, 55 years of age. There is no point in allowing a scooter loan, daughter’s marriage, wife’s remarriage, painting the house,…blah blah kinda loans. To beat this very thing a 2 tier NPS was created (or so I thought, my mistake!). Tier I (compulsory) NPS does not have a withdrawal facility but Tier II (optional) has a withdrawal option. Younger people should obviously open both and accumulate MORE in the tier II account. Frankly did not think this was rocket science. I think the parlimentarians were not briefed well by the experts and hence this suggestion – I hope this suggestion is not taken too seriously. The very purpose of creating a Tier I and Tier II would be lost.

One thing I have been screaming about is – Can the PFRDA say what will happen to the accumulated amounts? How can it be withdrawn? Will the protect it by a specific provision in the Sec 10 of the I T Act, 1961?

Will they say Rs. 25L will be automatically transferred to SENIOR CITIZEN ACCOUNT AND the account holder and his spouse WILL get an assured return of 12% p.a. FOR THE REST OF THEIR lives (9% interest and 3% return of capital) – without any money going to the heirs? Some people who live till 90years will be some kind of a drain, but those who die at 63 years of age will give a HUGE surplus! Of course these nos. are arbit – actuaries can work out better numbers. There should obviously no ‘asset management charges’ – and all this should happen from the Government’s consolidated fund. Here there may be a sense of subsidy, but at least there will be no guarantees during the accumulation stage!

What say Gautam Bharadwaj of IIEF and other pension experts?

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If you see the amount of money Coke, Pepsi, Citibank spend on lobbying in the US, you know how much of wrong doings they must be doing. The food industry, pharma, insurance, banking, auto and of course the lobbying industry are really the villians in US.

It is amazing that the financial services industry in the US spends more on lobbying in Washington than the combined lobbying budget of many industries put together! If the people in the US CANNOT see it, maybe they are blind. Let us not sleep – sleeping is the prerogative of the government and the regulators. As an individual I know I have to be alert to be alive.

The Financial Services industry’s contribution to the Presidential campaign is too huge for us to ignore ( upwards of  2 billion US dollars in the past decade ).

The banks are allowed to take deposits (guaranteed by the government) and they play the derivatives market – we need socialism back in some form to stop this stupid crony capitalism. This is like saying I will guarantee/ insure all your risks, but the premium will be collected by some body else. The losses belong to the people, and the profits belong to the EMPLOYEES (shareholders be damned!!). This is the impact of lobbying.

Theoretically it is possible that another Lehman/ AIG is building up somewhere (in terms of derivative positions) with the money that a bank has got (guaranteed by the government) – if there is a loss, the bank WILL HAVE TO BE BAILED OUT by the Congress. Rofl or LoL – you decide. If you are asking me ‘Will the Congress pass this?’.

Well, well fair enough a question – there are ONLY 70 members on the House Committee on Financial Services – what more do I need to say?

If you are wondering why the people in the US are angry at wall street you must see what Citibank has done. There is a link at the end of the page just read it..

http://www.time.com/time/business/article/0,8599,2097308,00.html

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Here are the details for the ones who are mathematically inclined. My insurance premium was Rs. 8000 per month (approximately Rs. 1L a year) and the sum assured was Rs. 20 lakhs (even if it was Rs. 5 lakhs it would have been tax free).

In the first month I paid Rs. 8000 and immediately topped it up with Rs. 3 lakhs. I did this for 2004, 05, 06, skipped 07, topped up again in 08, 09 and 2010. The administrative cost is Rs. 15 per month, the asset management charges are 0.8% (there is no cheaper amc product in the country today – other than ETF).

The risk charges have disappeared (the value of the fund is more than the sum assured). It is a decently well managed fund and thanks to the charges (including mortality charges) this fund of mine has done as well as some of the top mutual fund schemes.

I have no regrets, yes the life cover is over..but I have a 24 year contract which started in 2004 at amc charges of 0.8%. Yes it had a high entry load – I think about 40%, but I overcame that by topping up every year from the first year. For those of you who are good in excel try doing this:

Premium Rs. 100,000. Sum assured Rs. 20 lakhs. Top up (99% is invested – and has a cap of 20% of sum assured minus the regular premium) administration charges of Rs.15 per month, asset mgt. charges 0.8% – and a CAGR of 15% over 25 years. Assume top ups only till you reach the sum assured in the accumulated value.

The unit linked endowment plan of Hdfc Standard life bought in 2004, will beat the Hdfc Top 200 – not because it has superior fund managers, but the charging structure allows it to charge less, much less.

Learning:

The only protection against bad financial products is SELF learning. Nobody is here to teach you for free. You want a free lunch? Go to a langar or a temple. No banker, adviser, blogger, author is here to customize ‘gyan’. What you get free is some general pointers like:

‘Ulips are bad’ : some joker like subramoney then gives you articles that prove it wrong.

‘Equity is good in the long run’: Look at Japan, and it will be proved wrong.

‘A company that good service is good for the shareholder’: Look at Jet Airways.

‘A company which damages society is bad for the shareholder’: Look at Mcdonalds, Coke, Pepsi, ITC, Citibank..

‘Obama will save the economy’: see under jokes column. Annual PR budget of the financial service industry in the US is $ 5 billion – spent equally between the R and the Democrats. So laugh when Obama says ‘change’. In India only bhikari’s ask for so much change. Others know to really matter you need notes, not loose change.

Blogs like mine are run for fun, for poking you, for poking at the whole world, for selling my book (please buy it from flipcart – there is a link here), – if you learn something here, I am thrilled. This is meant to entertain, poke, …and accidentally educate.

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Almost all literature we have read on equity markets is American. The great American investors have written all this literature in the past 50-100 years. This was the time when American companies (fairly or unfairly) dominated world markets. Whether it was Boeing, Coke, McDonalds, General Motors, Citibank….so all of them sent back a lot of money home and helped the US. This meant you could have a portfolio of 80% American stocks and still look smart.

Things are changing. Obama’s 10 faces are looking like Ravana’s 10 faces!  Will Narendra Modi ban Mc Donalds for filling stomachs with lousy nutrition? Will more schools ban Coke and Pepsi? Will my daughter think Pepsi can be used as a pesticide? Whatever happens American domination will reduce. Banking, Insurance, Food, Oil…

This means all of us will have to create a portfolio with European, Japanese, Chinese, Indian companies if we are talking of  a world portfolio.

However all the American heavy weights still suffer from recency bias and ‘ownership’ bias. Most of them like Warren Buffet and the others are still suffering from an American hegemony bias, ignore them.

Be Indian, buy Indian will help here. Then Euro, Chinese, Brazil….you need more variety in at least 30-40% of your portfolio.

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If you are a shareholder who started an asset management company and /or a life insurance company hoping to make money, God bless you! For those of us who are shareholders with the Birla, Hdfc, Tata groups – remember we are all funding the insurance and mutual fund businesses indirectly.

Kotak bank, Hdfc ltd, SBI, are all very profitable businesses (banking is the most profitable business in the world -ask Goldman Sachs, J P Morgan, Citibank or all the psu banks). However the mutual fund and the life insurance businesses are not making sensible money in India – and do not show any chances of making money for the next FEW years. It is easy for people who have not much at stake to say that ‘these changes were necessary and it is for the good of the customer’ but the shareholder will bleed. The bank promoted life insurance companies have it very nice – here is a good retail product whose commissions can be used to subsidise new branch openings. That itself makes Hdfc bank and Kotak bank good shares to buy. One will have to see how Yes bank and Axis bank play out the life insurance business piece. Of course older banks like Hdfc have the ‘trail commission’ which can be used to grow the mutual fund business, but newer banks do not have that luxury.

SEBI has not been able to do anything to regulate the PMS business, the brokerage industry, or the media covering the financial services industry. It is difficult to believe that there are 20 personal finance magazines, websites, etc. depending on the advertising by the financial media. It is difficult to know how all the magazines will make money.

Experts in the life insurance business  forsee a 30% cut in the total salary bill, a dramatic cut in the number of branches (rent gone), travel will be cut down (Jet Airways will make more losses), lesser recruitment (MBA schools will wonder how to cover fixed costs), lesser hiring (students and banks will wonder how the money will come back), and some Mergers and Acquisitions.

And now I R D A wants to regulate agents…OMG…it is scary.

Currently the best place to be now in the financial services industry is in the media. Salaries are good (did I hear Madhu Soman say very good, not sure), there are some regulatory changes every 32 hours (either by SEBI, IRDA, Supreme Court, RBI …or the fin min!!). Talk to a few people in the industry and do a story. However it is not worth being a contributor of stories. The Job is better for the butterfly .

Amen.

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a. Banking: Over the years the biggest and the richest fortunes have been made by bankers. No doubt about it. Goldman Sachs, Morgan Stanley, the grandfather of them all J P Morgan, Citibank. Is there anybody who doubts about their profitability? I think not. They may once in a while go through a lot of criticism and problems but their profitability has never been in doubt.

In the Indian scenario if you had invested Rs. 10 in the Hdfc Bank IPO (you could have bought it for Rs. 40 on listing, if you did not invest in the IPO) the share is today worth Rs. 1920 (192 times in 13 years) as well as a regular dividend which was far greater than the fixed deposit interest in the same bank. That too tax free, vow banking is profitable. In fact banking is so profitable that even Psu banks make lots of profits.

b. Broking: Brokerage is a very very profitable industry after crossing a basic minimum. If your break-even volume is say Rs. 10 crores a day – every rupee of trade beyond this figure is very profitable. Also clients may sell on day 1 and buy on day 5 – the float helps. If you understand the profitability of this business you will not wonder why Hdfc, Icici, Kotak, Axis, Dhanalaxmi, Citibank, Hsbc, SBI, Bank of Baroda ….and the others are all either in the broking business or desperate to enter this business. Companies like Indiainfoline, Indiabulls, Networth Stockbroking, Platinum, Motilal Oswal, Sharekhan, Karvy, Geojit, Religare, Birla Money, Reliance Capital, Tata Securities, Cholamandalam, DBS, – so many LISTED brokers are ONLY INTO broking. So profitability must be very, very good to sustain so many players. Also with a growing market capitalisation all these companies must be very, very profitable. I am saying profitable because all these companies get good price earning ratios (means good profitability and nice future prospects).

c. Fund / Wealth Management: This is of course the most profitable business in the financial service industry. There are more wealth managers in the Forbes List than people who have come there because of good wealth management . Even in the Indian context there are 43 mutual fund companies (called asset management companies). All of them are likely to be very profitable in 3-5 years time – by when the market is expected to go to 10 times its existing size (DNA, Sikka of Reliance Capital). Even the small ones like Quantum or Benchmark will be profitable – so the profitability of Reliance, SBI, Icici Prudential is more or less guaranteed. A part of this business is the Portfolio Management Services – which is also likely to be very profitable  – look at the number of players in the PMS business (available on the SEBI website). Nobody has exited this business in the past 15 years except 2-3 companies who did not have deep pockets to stay on in the business for enough time.

d. Life Insurance: This again must be very profitable in the long run for the shareholder of the business (never mind that the profits have come from over-pricing the products for the consumer!). There are 21 players now in the field and another 20 foreign players are waiting to enter this arena. Hdfc, Icici, Kotak, SBI, Religare, Birla, – the same names that are there in the mutual fund industry are present here. Obviously this is a more profitable business and that is the reason that more talented people, better paid and trained are deployed in this industry compared to the mutual fund industry. The commissions for selling life insurance also is quite high and commissions in the region of 90% is NOT UNHEARD OF, however the mean could be lower.

e. Financial products distribution: the people who are not manufacturers of financial products but are just distributing it also find it worthwhile to do only this. Assuming about 10,000 agents for each company make a living out of selling these products, that is a big army out there is it not?

So…what is at stake in the SEBI vs. IRDA fight over ULIPs?

well the stake of the shareholders of the financial services Industry. If you are not a shareholder in the financial services industry – SBI, HDFC, HDFC BANK, Icici, Kotak, ……you are missing something and you have nothing at stake.

If you hold ULIPs, chill you have nothing to worry (as of now) in all this media hype about the regulator’s turf war…just switch channels and watch IPL. Till I do a story on fixing @ IPL….

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Let us look at the dollar – it looks like the dotcom boom – when we were all sure that the tech stocks can only go up. Or the real estate boom of 2007 when we were all sure that Indian real estate can only go up – and then we know what happened. Now let us see something about the dollar:

- it has been beaten, battered and bruised. It could be very close to the bottom if not the bottom.

- US has a massive deficit, very close to zero interest rates (Ok not zero your money will double in 7200 years if you invest in it!!)

- huge social security deficit – social security may default in 2020 if not in 2019?

-countries like India dumped dollars (to acquire gold) – poor signaling for the big holders

- Bernanke grilled at the recent hearings – he got butchered by the senators.

Wait…how can the dollar go up? All that I have said are against the dollar..have I not?

Well read ahead:

the dollar’s bad news is already priced in? Perhaps the market has overdone the pessimism in hammering down the price. The bad news is really over done?

- Asian companies will pick up distressed assets and create some demand for the dollar – apart from Asian tourists finding it cheaper to travel to and tour US.

- the demand for American dollars will slow down in Afghanistan and Iraq

- Japan, Eurozone, and UK are not doing too great either – and the world does not trust the balance sheets from those companies at all compared to the US.

All this could see the dollar strengthening – remember Citibank, Pepsi, Coke, McDonalds are big beneficiaries of the Asia growth stories – and they all remit huge profits back home…

so a strong dollar in 2010 …and the tech doing well…possible, correct? Well, it is at least a view!

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But see what the government is doing. That is worrisome. The great P C told us the impact of the 6th Pay Commission would be about Rs. 15,000 crores. The impact on Maharashtra alone is Rs. 18000 crores. Look at what Obama is doing – he is printing notes so fast that more money will chase less goods. China, India and Brazil are questioning the logic of having the US $ as the reserve currency. The dollar has to go down and go down fast. Again inflation.

This takes us to what Ronald Reagen said. Two of his quotes are very famous. The first one is “Trust, but Verify”. The second one is what he said about inflation. He warned us to be ever vigilant of a threat “as violent as a mugger, as frightening as an armed robber and as deadly as a hit man.”

Just what was he talking about?

It wasn’t Iranian terrorists… A Russian nuclear sub… Or some of Castro’s henchmen.

No. Reagan was talking about the thief that robs us all… Inflation!

In fact he was warning us against Governmental action. For example Obama should have let Citibank and General Motors die. Government of India should let Air India die. When the inefficient get oxygen, the efficient ones start stuttering and wondering how to breathe. Sheila Dixit of course takes the cake. She finds price of pulses high so she announces ‘subsidised’ pulses in Delhi. This will mean all the inexpensive (price) and cheap (quality) pulses will find their way to the Public Distribution Scheme. Fantastic for all till there is some food poisoning case in Delhi out of the poor quality!

Second she is sending a signal to the poor all over the country that the state can do something please either ask your state to do it, or migrate to Delhi! Poor signal to the rest of the country, what say?

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A good environment, stability, growing income etc. are sure signs of a successful organisation (company, country or a human being) – this allows him/ the organisation to borrow ASSUMING that the success of his past will continue. Similarly the USA now continues to borrow continuously. This could be harmful. Allowing the market to solve the problem is a far better solution than the US government print notes and bail out the ‘toxic’ banks.

The fact that the government is ‘trying’ to solve the problem is a big hassle – the market does not understand what to buy and what to sell! If Warren Buffet’s cost of funds is higher than Citibank (TARP) – this is a big noise in the market. It sends out a poor signal about Buffet and makes Citi look healthy. Some of this mess will be sorted out easily – but the more jumbled signals remain.

So be careful. In such times gold is a good asset. However, gold may be in the midst / end of a great 3+ years of a bull run.

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