Subramoney

When I was talking to a regulator,  he asked me “How come ULIPs (Unit linked insurance plans) charge such a high “entry” load? I told him as a distributor I can actually make more money from a customer selling mutual funds than selling ULIPs because of churn and a trail commission that is based on aum. He was quite stunned.

Frankly, I think some desirable fall out of this meltdown will be as follows:

Financial services will see a drop in salaries: Compared to useful industries like engineering, pharma, health, etc. the salaries in the financial services sector is too high. A big auto manufacturer will have say 20 people earning upwards of Rs. 50 lakhs (Rs. 5 million or about $ 110,000) per annum. However, even a loss making life insurance company which is at the bottom of the chain will have 20 people. This so called “shortage” of skill sets will disappear and salaries will come down to earth from the stratosphere.

Shareholders are still in the red: The life insurance industry may be charging the sun, moon and the earth for its products but companies are still in the red. The financial services industry broke one cardinal rule - the risk was taken (is being taken) by the shareholder, but the rewards are being reaped by the employee. Leveraging your balance sheet by a ratio of 40 will be done only by bankers with no morals or scruples. However in India we have seen “conservative” NBFC with a leverage of 10.

How the distributor is rewarded will change: Currently about 3% of the distributors may understand goal setting, budgeting, risk profiling, asset allocation, client servicing, etc. They have no guts to ask the client for fees - but they survive because the mutual fund and the life insurance companies are willing to pay him. This is not because they love him, but because they love the cheques that he brings! Hopefully paying commissions will be made unlawful - and the client will have to pay a fee for the services. This will ensure that many mutual funds, life insurance companies, and share brokerage firms will wonder how to live.

Penalty may be high: A big retailer from the South has defaulted on the Inter corporate loans and bank loans - to the extent of Rs. 25 crores. A big housing company which had a lot of short term borrowings -invested in long term loans - is finding it difficult to raise money. IN India such companies would have got away earlier - now they will find closure a serious possibility a la Citibank.

If the market goes up 3 days in a row, i get emails / queries asking “Is this the end of a bear market”. UNfortunately I do not have any simple answers.

First of all the market does not announce the starting of bull / bear markets. Pundits have chosen the names and almost always tell you “This was a bear market” after the event is OVER. Similarly in case of a bull market. Also people who have got the predictions correct may have got it by luck. They have no clue how long it will be there - and what rate will it come up. If it does come up, will it come up at the same speed at which it went down. Or let us say in case of Indian conditions will the journey from 14k to 22k take much longer than it took last time? Nobody has the correct answers to these questions.

However let us look at the industries which were directly put to inconvenience - BFSI. In the mutual fund space a beginning has been made. Lotus India Amc has been taken over by another new comer Religare. Similarly there are some talks about 2-3 other mutual funds being on the block. It may or may not happen. However, salaries will take a whiplash.

One large broker has recently cut salaries - in the trading team. Another large player has downsized aggressively. One shipping company (non bfsi) has not paid salary for September….the list is long.

At the end of a bear market, at least half the brokerage terminals have to be shut, mutual funds have to downsize their working force, while increasing their aum. This will lead to lesser amc charges - and hopefully to better returns to customers.

So is the bear market over? I Have no clue!

Is the United States of America a capiatlist state, a communist state or a socialist country? The answer is obvious is it not? It is a capitalist country…well er so you thought.

When Lehman, AIG, Merrill, etc. were distributing high salaries all of them looked like they believed in capitalism. Surely they would have said “there should be no government oversight” - thank God for the English language! Surely for FED it was oversight. All that happened was over its sight!!

Now that Lehman has gone under, and AIG was almost there, there is a clamour for government help - Fred and Mac got help, but Lehman did not. Now AIG has got protection. Will somebody get up and say how does the FED behave? Please? What logic?

Anyway if I sound like a commie, please excuse me. Does it not sound like the profits are in the private sector, the risk on the government, and failure on the tax payer? To me this sounds bizarre.