The sad part is that the persons responsible in Eurpoe and in USA were not even brought to book – the Banking Regulators. In fact most of the so called heroes in the financial service industry have come out second best. Warren Buffet was literally dragged to give evidence. Then to protect his money (or whatever) he defended Goldman Sachs and Moodys.

Ben Bernanke…well less said the better. If you cannot trust the banker, the regulator, the rating agencies, …well how do you invest? This is a question we will all have to handle ourselves. One cannot run away from reality, but one needs to invest also…

http://www.project-syndicate.org/commentary/stiglitz126/English

So it could be a battle for AUM. Remember there is another player in the pace – PFRDA. Next will be their move saying ‘Life Insurance companies cannot sell pension plans unless they are registered with us. So here you go again.

If a life insurance company were to sell a pension plan (with a life cover) it will have to register this product with IRDA (risk cover), with SEBI (the wealth accumulation process), with PFRDA (all pension products will have to be registered with them) and with RBI – ultimately it is the bank which will sell the product. Amusing, because all the 4 registrations will not protect the investor.

This reminds me of a dialogue by Amjad Khan in the film Sholay. …

“Ramgad ke vaasiyon ko…Gabbar se koi bacha sakta hain …to woh hai  khud Gabbar”. (translated it means if somebody can save the people of Ramgad (one village that he has been tormenting) from Gabbar….then it is himself Gabbar.

One more quote from one of the Pogo programs…one of the characters comes running..and says “We have found out who is the enemy…it is us”.

So if the common man is waiting for IRDA, SEBI, NISM, RBI, …to protect him, he is mistaken. Only he himself can protect himself. Look at these institutions they still talk about ‘Investor Education’ – a typical high handed ‘babudom’ language. Is it not time we changed it to ‘Investor Learning and Development?’. Deven Shah are you listening?

What is a repo transaction? Every MBA student knows the word ‘Repo’ – however if you drill down and ask for its full form or what it means…you are in trouble!

So here is what an MBA student (Finance major) can say when confronted with the question – What is a repo transaction?

RE PO stands for repurchase option or a repurchase agreement. It is a transaction in which one party sells securities to another with a condition that it will be bought back on a specified date at a particular price. It is typically like a secured transaction – however it is recorded as a buy and a sell – not like a borrowing transaction. The rate of interest that is built into the transaction is called the ‘Repo rate’. Since it is a collateralised borrowing (or lending) REPO RATE is normally less than the reverse repo rate. Repo auctions of RBI is meant to reduce excess liquidity in the system.

Financial planner: Borrowing sensibly is a good way to build wealth. Do a disciplined borrowing and you will make money because the equity market moves faster than the interest rates that you pay on your borrowing. This logic can be made to look even more convincing with graphs and charts!

You should: Borrow cautiously, if at all. You have to worry about the total amount of debt too! The quarter-century leading up to 2007 wasn’t simply a golden age for stocks. It was also a bull market for leverage. (That’s Broker’s Bluff for debt.) Since 1999, mortgage rates have fallen, college loans have ensured that parents can hold on to assets while their kids borrowed. Cars, scooters, mutual funds were all available on loan! People responded to easy credit in a predictable way. Houses got bigger, shares were not for investment – they were for ‘call options’ and ‘futures’ – again naked debt! The personal savings rate fell, and household debt payments as a percentage of disposable income rose. Home up grades ensured that big houses were furnished big, EMI was bigger.

Looking back, retail investor (ok I should call them traders) borrowing binge was bizarre. But it didn’t feel that way at the time. There were retail traders who would have a leveraged position on the buy side on a single share and a leveraged position of a single share on the sell side. It was a brokers delight – surely the brokerage generated was far, far greater than the wealth created for all the investors put together. This was stunning, and RBI too should have been perplexed if the overall picture was available on one page! Forget the common man in India, Alan Greenspan thought everything was hunky dory.

If you watch Suzie Orman Show you cannot believe that nobody in USA was bothered about the leverage based on ‘ever-increasing’ housing price spiral. Indian bankers did not give Rs. 500,000 loan to a fruit seller with a Rs. 17000 annual income. In the US it was easy to get NINJA (No Income No Job Applicants) loans.

The obvious moral here is to be conservative. There are always good reasons to borrow, even today. You need to borrow to get a good education, you need a mortgage to buy a house, maybe a car loan – of an affordable size. However when buying a house you can always pay 50% down payment installment instead of 10% which the banker was asking for.

There’s a subtler lesson too. When leveraging keep an eye on the total borrowing. Lehman was so smart! They failed first. Bear Sterns did not get the bail out. The overall leverage hurts when EVERYBODY tries to give up the debt. Maybe your builder has gone under and he is pushing you for EARLY installments. Your employer may be laying people off to reduce leverage. Your equity portfolio may be doing badly – and your banker may be making margin calls on your mobile. Suddenly that PMS you could “easily” handle on your salary does not look like a great idea. You cannot depend on your equity or debt for help, because many of the companies you owned are revealing their true leverage and the market is furiously re-rating. And your extra bedroom which you bought cannot increase your cash on hand by selling ‘just that room’. Banks are no longer falling all over you to increase leverage – cards, cars or a foreign trip.

MUST DO: Be conservative about debt. Make that very conservative. Especially when your neighbors aren’t. Get a mortgage you can afford for the life of the loan, and put at least 35% down payment. Furnishing or home improvement loans make no sense – spend on consumables from your income. Just because a loan is available you do not have to take it. Taking a loan is easy – sometimes repaying becomes difficult.

A quick glance clearly shows that this company will NEVER make money in ANY of the abovementioned businesses during my life time. Surely over a period of time they will make rights issues, issue CCCPs, QIBs, write off losses from the reserves (so that they do not have a loss making year, dummy) …but sadly they will not earn any money. When I spoke to one of the senior functionaries he said (hey only RBI makes money all the others have to earn it…). However the grandness of the organisation, the top exec pay, esop, bonuses…nothing seems to be unhealthy!

On the abolishing of loads, at least one or two senior employees of mutual funds (each one has a KRA of visiting 20 IFAs a week) is worried about his EMI. His logic is if there are no IFAs….!! Surely the distribution chain will take a hit. What will happen to the MF industry is still being debated. One long time player in the fund business asked me a hitting question. Does it take 42 fund houses and 400 schemes to invest in 200 listed companies? Set me thinking…surely Srikant will answer this question…do not know if other IFAs are going to take up this question.

Many IFAs have organised themselves into organisations like faaida, ifa galaxy, orissa association of distributors, etc. but they are an almost insignificant part of a business which has to reinvent itself fast. Or perish. It reminds me of the textile industry in the 1970s in Mumbai! Dr. Datta Samant was just the facilitator for a funeral which had to happen.

Funnily if you analyse the Karvy / Cams data the big distributors get business from corporates – in some cases the payback (which other than the regulator everybody acknowledges) goes to some executive in the company. In family run companies the business is routed through somebody in the house who has passed AMFI. Many of the small distributors had learnt to live on trail commissions only – the upfront was anyway being rebated! The big national distributors were rebating the upfront commission to their own employees anyway – and the employees decided how much to rebate!

So who really loses? Really the small distributors for whom this was the main (only) source of income. All of them will sell ULIPs, those who sell index fund (were anyway living on trail) will continue to sell Index funds, and most mutual funds will pay 1 to 1.5% comission upfront to the distributors – so that they can continue to sell mutual funds at a lower margin!

It is a second SGL account at a PDO so that they can act as a custodian on behalf of their constituents for holding T-Bills, and G-secs in demat form. It is not opened with the RBI (like the SGL).

SGL account denotes Subsidiary General Ledger which is maintained with Reserve Bank of India for holding Government Securities and T-Bills in paperless form (or what in retail is called the demat account for G-secs!). This is obviously done to facilitate Delivery v/s Payment (DvP) trades. All big banks and Primary dealers have a SGL account with RBI at Mumbai.

I am not sure about the limits for the size of the transactions now. Once upon a time it used to be Rs. 100,000 and then in multiples of Rs. 10,000. Only banks and PDs are allowed to open an account with RBI. Others have to open CSGL – as mentioned above.

For most Americans, Christmas has been Hijacked. Or whatever was left of Christmas after the dreaded R word, the non-bail out of the auto giants, but the top most question is: In the fraud dictionary,

Has Madoff replaced Ponzi?

Every year, I watch, good, honest, hard-working people go and lose a lot of money to some Ponzi scheme or the other. This year it is Madoff. Of course all this has happened in the US, and many Indians do not identify themselves with the Madoff problem.

However, please remember all the characteristics that are present in the Madoff problem are there in India just as much. Some important questions to ask are – is my advisor competent and trustworthy?

It is not sufficient that he is your neighbor, boss, relative, etc. He should be both competent and trustworthy.

Does he walk the talk? Does he himself invest in similar asset classes that he advises you to invest or does he keep his money else where. Typically you are looking for a restaurant where the owner himself eats!

After executing the deal, do you really need him to access the investments? This is a little tricky question. In case you have anything less than Rs. 10 million to invest you should be using vehicles that have public access – like a mutual fund or a unit linked insurance plan apart from ppf, national savings certificate and bank deposits. Normally you should be able to access these investments without any intervention with the executor. The exceptions to this are of course some banks which do not allow you direct access of your mutual funds, your PMS, etc. In case you have invested in a PMS with a broking company and the DP is the same brokerage firm that should be a red flag.

If something was to go wrong, and you get falsified statements, you will not know till there is a huge scam.

So if your bank, broker or advisor gives you only his “view” of your investments and you cannot deal with your investments the way you want to deal with it when you want to deal with it without the intervention of your Relationship Manager that should be a big red flag. Madoff is proof that big social names are not a protection! So the agent belonging to your society, your club, your swimming pool, your walking club, etc. should not let you cloud your decision of choosing a professional. Treat your money with respect, please. It is hard earned!

Are my investments liquid without the need for the person through whom I executed the purchase? The answer to most PMS schemes, real estate partnership schemes, private equity deals, art, etc. the answer is no. So if you sour relationships with the guy(s) with whom you did the deal you can safely kiss your money good-bye. Take the case of art – the person who sold it to you does the valuation and keeps telling you that it is doing well. Frankly this is scary. Many buyers, many sellers, 3rd party valuations, are all not just nice things to have, but mandatory if you have put serious money into it.

And for heaven’s sake ask all these questions BEFORE you put your money, not after. Stunningly, in India well regulated industries open to public inspection can be sold only be ‘qualified’ people. However, F&O, PMS, equity broking, real estate PMS, real estate partnerships, etc. which are perhaps subject to less (or no?) regulation than mutual funds and life insurance can be sold by anybody.

If you remove the words Madoff and Ponzi, this article can still be suitable. So forget which part of the world you are. Forget that you are dealing with a ‘big’ bank which never lets you sleep, please learn to ask these questions. Surely SEBI, IRDA, RBI, Dr. Manmohan Singh, are all there.

However, when it is your backside that we are talking about, take care yourself!

and if you want to know about the oxymoron sophisticated investors who invested in Madoff, please read wsj. Specifically    http://online.wsj.com/article/SB122912266389002855.html

An option that can be exercised by the issuer of the bond whereby the bond can be extinguished prior to the date of expiry is called a CALL option.

An option that can be exercised by the investor of the bond whereby the bond can be extinguished -by repayment BEFORE the expiry date – is called a PUT option

It is the simple average of the quotes by the various participants in the market – banks, PDs, institutions polled on a daily basis.

It was issued for the first time (I think) in 1991 – maturity varies from 90 days to 364 days. Almost always issued at a discount. Recently it was made mandatory that the issue should only be in demat form. Can be held by individuals, banks, corporate bodies, etc. Can be issued on a non -repartiable basis to NRI – am not sure about whether there has been any change in repatriation guidelines – please check the RBI site.