The stocks of Bank of America and Citigroup were hammered today after the 'Bank nationalization' rumor started to gain strength. Moreover, editorials and various publications started to raise their voice in favor of nationalizing the failing banks. Though most of the economists are not openly admitting this option, they accept that the tax payers money infused into the big banks is not working.
Considering the banks' high level of dependence on the government funds, now these banks are almost under the orders of Washington. This was clearly evident in the Congress hearing that was held last week. The CEOs of the Eight big banks were literally grilled and pounded by the Congressman. At one point of time, a congressman was asking a CEO to reduce his bank's interest rates and an other congressman asked the CEOs to sell their private jets. It almost looked like hundreds of Board of Directors were questioning the CEOs. Virtually, the bank executives resembled like the government employees of a nationalized bank.
Since these banks are in need of federal funds, it makes sense to nationalize the banks and remove the existing top management which brought the crisis at the first place. This option would be a better one, if the economic crisis is not bad as it is now.
Nationalizing these banks will serve as an additional burden to the govt which is already hands full in executing the stimulus plan. Acquiring these banks and running them successfully along with streamlining the funds of the stimulus plan is an onerous task and there is no room for failure. Considering the size of these banks, it is not an easy task to replace a new management and expect it to run the bank successfully in this tough economic situation. Any error in the nationalized banks would seriously hamper the confidence on US by the world countries. This will also add up to the already huge deficit and would heavily hamper the valuation of US currency. Then, US as a country would like a big corporation at the verge of bankrupt. On the other hand, successful execution of Bank and the stimulus plan would be a dream run. But this is not the time to test the tough waters.
Now the government would like to play safe and not worsen the current situation. But at the same time, it should avoid banks going bankrupt. Debacle of a single major consumer bank is enough to bring down the confidence and which this will eventually prolong the economic recovery process. The only way to help the failing banks is to acquire the toxic assets held by those banks. The government can aggregate these toxic assets into one entity and could alienate the banks from these assets. At the same time, it should ensure that the infused funds are used for its intended purpose. Strict transparency should be enforced in regulating the injected money. Essentially, a new regulatory environment should be setup which should have a greater control over these banks and at the same time a super regulator should be setup to oversee the interconnection between Wall street and Main street. The government can hold up these toxic assets and can sell them to the private investors in a staggered basis, thereby the spent money can be gained back.
The whole nationalization idea is widely seen as an option as the Swedish government followed this approach to recover its economy decades ago. Some say we can follow the same approach and others are against it. But, every situation is different and should be handled with its own pros and cons. US should devise its own customized model to suit the current situation. Revival of a country's economy is not so easy as copy-pasting a model from the history. It all depends on the risk capability of the government in devising an innovative approach.
Read rest of the entry...
Showing newest posts with label Finance. Show older posts
Showing newest posts with label Finance. Show older posts
2/21/09
2/9/09
Don't criticize the stimulus package
There are several criticisms going rounds on the effectiveness of US stimulus package.The most prominent grumble about the amount being spent on industries which really don't need stimulus. There are also critics who are against the passage of such stimulus packages, as the amount is too big ajnd it will add more to the current US debt. But is there a better alternative than passing this stimulus bill? I don't think so.
Firstly, the president can't just allow the economy to drown without acting on it immediately. The most important thing at this juncture is to raise the confidence among the consumers and trigger the cash flow. Just proposing long-term policies would not create any impact. You have to do something which would create an immediate effect. This can be done only injecting money into the economy. Now, the next question is whether the package would help the industries to be back on track immediately? possibly not. Most of the companies don't need dollar bills, instead, they want the consumers to spend, which is directly related to the confidence. Only if the job layoffs reduce, consumers can gain some confidence. There are two ways in which the proposed developmental projects could create or save jobs. Firstly, these government projects directly create jobs for the people who were fired by the private companies. Employing them will reduce the unemployment rate. Though all of them cannot be employed, the number will reduce a bit in the initial stage. Secondly, these proposed projects requires equipments which can be purchased only from the private companies. These new orders could benefit the businesses. Though, we cannot see a dramatic increase in the job creation, it could save the existing jobs. These new orders in the private companies would also benefit other small businesses who are linked as sub-contractors.
By including every industry in the stimulus plan, you are literally bringing in some level of confidence and new jobs across every set of consumers. Increasing a little amount of share on the 'most affected' industry is less preferable than allocating the same amount to the small industries, particularly when the government wants to instill confidence across the board..
All the above activities would buy some time for the government to act on the toxic assets held by the banks. These assets serve as a great headache both to the Govt and the bank. Once some solution is found for those bad assets, the banks can see some stabilization and can start the lending process. Unless the consumers hear some good news from their banks, they would not do the spending. In the mean time, new regulations can be implemented in the markets, which would shun away the existing fears. One thing is sure;the recovery will definitely consume more time, but any hasty decision along the way could prolong the tough times.
On a final note, the passage of the stimulus package is certain and should be immediate. Considering the current stage, any further delay would worsen the economy. Best anyone can do is to avoid disparaging the current stimulus plan. Criticizing the plan will dampen the very purpose of instilling confidence among the consumers.
Tags: stimulus package, Recession, Stimulus pacakge criticism
Read rest of the entry...
Firstly, the president can't just allow the economy to drown without acting on it immediately. The most important thing at this juncture is to raise the confidence among the consumers and trigger the cash flow. Just proposing long-term policies would not create any impact. You have to do something which would create an immediate effect. This can be done only injecting money into the economy. Now, the next question is whether the package would help the industries to be back on track immediately? possibly not. Most of the companies don't need dollar bills, instead, they want the consumers to spend, which is directly related to the confidence. Only if the job layoffs reduce, consumers can gain some confidence. There are two ways in which the proposed developmental projects could create or save jobs. Firstly, these government projects directly create jobs for the people who were fired by the private companies. Employing them will reduce the unemployment rate. Though all of them cannot be employed, the number will reduce a bit in the initial stage. Secondly, these proposed projects requires equipments which can be purchased only from the private companies. These new orders could benefit the businesses. Though, we cannot see a dramatic increase in the job creation, it could save the existing jobs. These new orders in the private companies would also benefit other small businesses who are linked as sub-contractors.
By including every industry in the stimulus plan, you are literally bringing in some level of confidence and new jobs across every set of consumers. Increasing a little amount of share on the 'most affected' industry is less preferable than allocating the same amount to the small industries, particularly when the government wants to instill confidence across the board..
All the above activities would buy some time for the government to act on the toxic assets held by the banks. These assets serve as a great headache both to the Govt and the bank. Once some solution is found for those bad assets, the banks can see some stabilization and can start the lending process. Unless the consumers hear some good news from their banks, they would not do the spending. In the mean time, new regulations can be implemented in the markets, which would shun away the existing fears. One thing is sure;the recovery will definitely consume more time, but any hasty decision along the way could prolong the tough times.
On a final note, the passage of the stimulus package is certain and should be immediate. Considering the current stage, any further delay would worsen the economy. Best anyone can do is to avoid disparaging the current stimulus plan. Criticizing the plan will dampen the very purpose of instilling confidence among the consumers.
Tags: stimulus package, Recession, Stimulus pacakge criticism
Read rest of the entry...
2/4/09
When the top economists brainstorm - WEF
The other day, WEF conducted a brainstorming session on the topic "What happened to the world economy?". This was attended by renowned economists from around the world and they brainstormed on various reasons and causes for this crisis. The economists were distributed into separate groups and finally, one from each table summarized their discussions.
As expected, the biggest wrong assumption the economists had was that, the markets would self-regulate. This was endorsed by many economists. Of course, there were few who declared that the basic structure of the economy is wrong. Their point is, if a failure of a single module in an industry brings down the whole economy, then the underlying model is wrong. The other valid point made in the discussion was, that the present risk model which is purely based on past data should not be believed completely, as it wont predict the future. Also, the available data is too small to rely upon.
Though most of the points discussed were quiet common, the one blame which always received the applause was 'the greediness of the bankers and the compensation' they received . The group criticized the compensation model for the bankers, which is purely based on the revenue they generate, it doesn't matter on how you do that. An other pundit suggested that, the executives whoever is responsible should be jailed and should be set as an example for all the wrong-doers. This was also well endorsed by a group of applause. Another table cited that the regulators always believed that China would do all the savings and the rest can just spend. Few think heads blamed that the banks depended too much on Mathematics model, instead of applying common sense. One economists just simply attributed to one word "Stupidity". Even though, regulators were blamed, one group of economists differed by targeting the 'interest groups" who had the control over the regulators.
Of course, lack of corporate governance and ethics were identified as a fundamental problem, which would have prevented this at the first place.
Finally, the economists were asked to vote on the assumptions and causes. In the below order, the first point got the highest vote and so on.
1. Assumption that markets would self-regulate
2. Cheap flow of money
3.Assumption that good times last forever. ie..house rates never fall
4.Putting regulation over ethics
5.High leverage
6. Assumption of economic literacy
7. China can do the saving.
The group also concluded that the regulation of the international framework as the top action item.
Watch the full video here: ( 90 mins) - Scroll to the last 20 mins for various voting results.
World Economic Forum, WEF 2009, economists, World Economy
Read rest of the entry...
As expected, the biggest wrong assumption the economists had was that, the markets would self-regulate. This was endorsed by many economists. Of course, there were few who declared that the basic structure of the economy is wrong. Their point is, if a failure of a single module in an industry brings down the whole economy, then the underlying model is wrong. The other valid point made in the discussion was, that the present risk model which is purely based on past data should not be believed completely, as it wont predict the future. Also, the available data is too small to rely upon.
Though most of the points discussed were quiet common, the one blame which always received the applause was 'the greediness of the bankers and the compensation' they received . The group criticized the compensation model for the bankers, which is purely based on the revenue they generate, it doesn't matter on how you do that. An other pundit suggested that, the executives whoever is responsible should be jailed and should be set as an example for all the wrong-doers. This was also well endorsed by a group of applause. Another table cited that the regulators always believed that China would do all the savings and the rest can just spend. Few think heads blamed that the banks depended too much on Mathematics model, instead of applying common sense. One economists just simply attributed to one word "Stupidity". Even though, regulators were blamed, one group of economists differed by targeting the 'interest groups" who had the control over the regulators.
Of course, lack of corporate governance and ethics were identified as a fundamental problem, which would have prevented this at the first place.
Finally, the economists were asked to vote on the assumptions and causes. In the below order, the first point got the highest vote and so on.
1. Assumption that markets would self-regulate
2. Cheap flow of money
3.Assumption that good times last forever. ie..house rates never fall
4.Putting regulation over ethics
5.High leverage
6. Assumption of economic literacy
7. China can do the saving.
The group also concluded that the regulation of the international framework as the top action item.
Watch the full video here: ( 90 mins) - Scroll to the last 20 mins for various voting results.
World Economic Forum, WEF 2009, economists, World Economy
Read rest of the entry...
2/1/09
What really is the Stimulus Plan?
In order to avoid the recession to linger for years, the US government has announced a stimulus plan (American Recovery and Reinvestment Plan) of $819 billion, that would be invested in diverse sectors. The idea is to create more jobs in these industries, thereby jump starting the confidence and trigger spending from the consumers. But, is economy so simple to just pump in money and avoid a recession. To understand this, lets look through a brief history of this stimulus plan.
Why Stimulus plan?
During the great depression in 1930s, then president Roosevelt introduced a series of spending initiatives named 'New Deal', aimed at creating more jobs and recover the economy. These initiatives helped to create more jobs at the time when the nation unemployment was at 25%. More than the actual benefits, it raised the confidence in the consumers mind. Some of the programs that were created through the 'New deal' is still existent. Social security system, Security Exchange commission and Fannie Mae were part of the initiative. Arguably, it is believed that these programs helped US to get out of the recession. So, following the same policy, the current government also introduced the same kind of stimulus plan to stage a recovery. This model is called 'Keynesian economics'- which is named after the economist John Maynard Keynes. Its an economic theory which advocates government intervention, or demand-side management of the economy, to achieve full employment and stable prices.
Unfortunately, the government is left with no other option than injecting money through these plans. The only other way which will encourage spending is to reduce the interest rates, but that is not possible now. In December 2008, the Fed reduced it rate to almost Zero and there was no positive effect.
What is the criticism about the plan?
When the stimulus plan was brought to congress for the approval, the Republicans voted against the bill. Some of the reasons were that, the plan has lot of investments which would not really create jobs. Eg: Investment in arts, Global climate studies etc. They propose to setup a new bill with better spending areas, even if takes more time to draft one. However, they support the tax cuts for the individuals proposed in the current bill. Nevertheless, the democrats has the house majority and the bill was passed.
Risks in the stimulus plans:
Though there is no better alternative to stimulus plan, there are risks involved in it. Since the US just needs more money for these plans, this huge amount adds to the already debt deficit US, which would come to 60% of its GDP by 2010. At the same time, it should pay off the interests to the foreigners who brought its treasury bonds. Remember, just printing more money would lead to inflation. Also, it will further reduce the value of the dollar in the global market. In order to avoid all these mishaps, the stimulus plan should work as expected and once the economy recovers, the government should align its economy more towards 'saving money' and produce more goods. Else, it wont be long enough before the dollar loses its sheen in the global market and the Euro could take over the position.
What if the Stimulus plan works too fast?
When the world economy started de-stabilizing in 2008, international investment poured into US treasuries and bonds. So if the stimulus works faster, then there will huge flow of money supply leading to inflation.
Indeed, its a tricky situation. All US needs is to boost the economy by bringing in confidence to the consumers. At the same time, the market should be regulated to avoid any unforeseen crisis that may occur due to any sporadic economic activity.
Tags: Stimulus Plan
Read rest of the entry...
Why Stimulus plan?
During the great depression in 1930s, then president Roosevelt introduced a series of spending initiatives named 'New Deal', aimed at creating more jobs and recover the economy. These initiatives helped to create more jobs at the time when the nation unemployment was at 25%. More than the actual benefits, it raised the confidence in the consumers mind. Some of the programs that were created through the 'New deal' is still existent. Social security system, Security Exchange commission and Fannie Mae were part of the initiative. Arguably, it is believed that these programs helped US to get out of the recession. So, following the same policy, the current government also introduced the same kind of stimulus plan to stage a recovery. This model is called 'Keynesian economics'- which is named after the economist John Maynard Keynes. Its an economic theory which advocates government intervention, or demand-side management of the economy, to achieve full employment and stable prices.
Unfortunately, the government is left with no other option than injecting money through these plans. The only other way which will encourage spending is to reduce the interest rates, but that is not possible now. In December 2008, the Fed reduced it rate to almost Zero and there was no positive effect.
What is the criticism about the plan?
When the stimulus plan was brought to congress for the approval, the Republicans voted against the bill. Some of the reasons were that, the plan has lot of investments which would not really create jobs. Eg: Investment in arts, Global climate studies etc. They propose to setup a new bill with better spending areas, even if takes more time to draft one. However, they support the tax cuts for the individuals proposed in the current bill. Nevertheless, the democrats has the house majority and the bill was passed.
Risks in the stimulus plans:
Though there is no better alternative to stimulus plan, there are risks involved in it. Since the US just needs more money for these plans, this huge amount adds to the already debt deficit US, which would come to 60% of its GDP by 2010. At the same time, it should pay off the interests to the foreigners who brought its treasury bonds. Remember, just printing more money would lead to inflation. Also, it will further reduce the value of the dollar in the global market. In order to avoid all these mishaps, the stimulus plan should work as expected and once the economy recovers, the government should align its economy more towards 'saving money' and produce more goods. Else, it wont be long enough before the dollar loses its sheen in the global market and the Euro could take over the position.
What if the Stimulus plan works too fast?
When the world economy started de-stabilizing in 2008, international investment poured into US treasuries and bonds. So if the stimulus works faster, then there will huge flow of money supply leading to inflation.
Indeed, its a tricky situation. All US needs is to boost the economy by bringing in confidence to the consumers. At the same time, the market should be regulated to avoid any unforeseen crisis that may occur due to any sporadic economic activity.
Tags: Stimulus Plan
Read rest of the entry...
1/27/09
How India avoided the economic crisis?
US and India were on the same boat during the real estate boom, but when the bubble burst, India was able to handle the downturn, while many of the US banks succumbed to it. What India did differently that saved its banks? NYtimes praises the former RBI governor for the effective measures that he took during his tenure, which eventually saved the Indian market. Before getting into the India story, lets briefly look at the incidents that brought down the US banks.
After the Internet bubble that burst during 2000-2001, the US stock market went down south and lost its lure as an investment platform. Many people were very reluctant to spend their money and the US was in the verge of a recession. So, to encourage spending among people and to infuse more liquidity, Fed reduced its interest rates. Eventually, the banks started giving more loans for the people to invest in houses. Those who were reluctant to invest money in the stock market, considered house as a safe-investment and invested in new houses; some bought their second house too. To attract the investors, the banks introduced the 'Adjustable Rate Mortgages' and people subscribed to it in huge numbers; loans were given to sub-prime borrowers . These were borrowers who were not eligible for the given loan amount and would default in their payment. So the loans accompanied high interest rates. Fueled by easy loans, the housing market grew rapidly over the period of time. This led to boom in the building industry which led to the over-supply. As over-supply always leads to lower prices, the housing prices started to reduce drastically followed by a few fore-closures.
So, to stabilize the market, the banks followed a different method to fund money. Here came Lehman and the other investment banks. All these mortgages were passed to these investment banks. Since these loans were generating some kind of money through high interest payments, those were considered as assets. The investment banks grouped these assets based on their Interest payment under the terms Mortgage Backed Securities (MBS) or Collateralized Debt Obligations (CDO). The CDOs were approved by credit rating agencies and were later insured by even AIG. So, these securities were sold to other investors around the world and the money generated out of those sales was shared by different parties involved in the transaction. So, these loans were generating good money. The greediness peaked here, and the investment banks needed more CDOs, which translated to more sub-prime loans to the customers. Remember, if the interest payment is high, the value of the CDO is also high. In this way, banks also benefited through these loans and it was money all over the wall street. Now, the market reached a point where the number of defaulters started to increase as the interest rates got higher and higher. This led to multiple foreclosures at a point as the loan value increased beyond the house value. This led to burst of the bubble and many banks failed as the borrowers were unable to pay the money. Now, the CDOs became worthless, so the Lehman and other investment banks too failed. Meanwhile, AIG which assured the CDOs were also in the verge of failure. It was later rescued by the government. The rest of the bad news were nothing but the domino effect.
Now coming to the India story, where did the Indian govt get it right?
Read rest of the entry...
After the Internet bubble that burst during 2000-2001, the US stock market went down south and lost its lure as an investment platform. Many people were very reluctant to spend their money and the US was in the verge of a recession. So, to encourage spending among people and to infuse more liquidity, Fed reduced its interest rates. Eventually, the banks started giving more loans for the people to invest in houses. Those who were reluctant to invest money in the stock market, considered house as a safe-investment and invested in new houses; some bought their second house too. To attract the investors, the banks introduced the 'Adjustable Rate Mortgages' and people subscribed to it in huge numbers; loans were given to sub-prime borrowers . These were borrowers who were not eligible for the given loan amount and would default in their payment. So the loans accompanied high interest rates. Fueled by easy loans, the housing market grew rapidly over the period of time. This led to boom in the building industry which led to the over-supply. As over-supply always leads to lower prices, the housing prices started to reduce drastically followed by a few fore-closures.
So, to stabilize the market, the banks followed a different method to fund money. Here came Lehman and the other investment banks. All these mortgages were passed to these investment banks. Since these loans were generating some kind of money through high interest payments, those were considered as assets. The investment banks grouped these assets based on their Interest payment under the terms Mortgage Backed Securities (MBS) or Collateralized Debt Obligations (CDO). The CDOs were approved by credit rating agencies and were later insured by even AIG. So, these securities were sold to other investors around the world and the money generated out of those sales was shared by different parties involved in the transaction. So, these loans were generating good money. The greediness peaked here, and the investment banks needed more CDOs, which translated to more sub-prime loans to the customers. Remember, if the interest payment is high, the value of the CDO is also high. In this way, banks also benefited through these loans and it was money all over the wall street. Now, the market reached a point where the number of defaulters started to increase as the interest rates got higher and higher. This led to multiple foreclosures at a point as the loan value increased beyond the house value. This led to burst of the bubble and many banks failed as the borrowers were unable to pay the money. Now, the CDOs became worthless, so the Lehman and other investment banks too failed. Meanwhile, AIG which assured the CDOs were also in the verge of failure. It was later rescued by the government. The rest of the bad news were nothing but the domino effect.
Now coming to the India story, where did the Indian govt get it right?
- India didn't encourage the concept of sub-prime loans. Mortgages were issued based on just the borrower's income.
- When the land values were rising in India, then RBI governor Y.V.Reddy ordered the banks to stop issuing loans to raw lands.Without this ban, India would have got trapped in the bubble with its rising middle class income.
- Loan amount were released to the customers only after the development work was started.
- Indian banks were tempted heavily by the securitization method adopted by the US banks for funding money. But, the RBI governor was strict in rejecting the model. The Indian bankers who were critical of Reddy's tougher rules, later realized the reason behind the decisions. Meanwhile, the US equity firms funded the land purchases and got trapped into the bubble.
- Later, when the inflation increased, the governor increased the interest rates thus halting the housing frenzy.
- Apart from this, Indian regulators played a crucial in the stock market by bringing in tougher regulations. When the market was booming with voluminous funds from foreign investors, SEBI imposed tougher rules to limit and to regulate the funds.
Read rest of the entry...
1/25/09
Why IT spending will not decrease in the finance sector
Finance industry being a huge contributor in the IT spending is in spotlight in this recession period. There are contradictory views in the sector on whether the IT spending will increase or not, which eventually contributes to outsourcing. Given the tight IT budget, let's see what is in the plate for the CIOs to deal with their IT division.
The biggest contributor in bank's IT spending propels from the new products, services and upgrading the IT systems to a newer technology. Considering the low consumer activity, the spending on services are now ruled out. Banks are reluctant in introducing new products, as they cannot a failure outcome. Ofcourse at this time, no bank would like to invest in the new technology or would prefer architectural change. Already, many projects which were initiated in the past year were put on hold or canceled.
All the traditional rooms of IT spending is almost closed now, but this tricky economic situation has opened up new avenues. After the housing market collapse, many banks were forced to merge with the larger banks and have contributed to consecutive mergers. Mergers would definitely require the integration of IT systems. Even if banks try to post-pone their integration plan to mitigate the cost, they cannot drag it beyond a point. Separate IT systems translate to more cost and also will reflect in their operational cost of bank centers. Apart from the expenditures on mergers, another new area is 'regulation'. Lack of regulation in the banks has been identified as the reason behind the current economic mess. The new government will definitely ensure that 'Regulation' plays a crucial role in the banks' operations. In order to comply with the new regulatory system, banks would need to alter their operating style and will definitely reflect in their IT systems. The new regulatory system may demand more transparency and interaction between the Banks and the federal regulatory agencies, which is possible only through new IT systems.
One other area which resulted in many bankruptcies is, the failure of the bank's management in foreseeing the current situation. Proper systems were not in place to analyze the available data and to forecast (or) to understand the trends in the money flow. This will require more detailed data from the banks divisions, which means more interactions between the various IT systems present in a bank. Having understood the crucial need of such systems, banks would definitely require investment in such systems or would require to change the model of the current functionality. These investments are inevitable and should be immediate to avoid another crisis. Another important area is, Risk management. It is clearly evident that the Risk management has failed and it badly requires a new direction. Considerable spending can be expected to revamp the system.
Not to forget the mid-sized banks, they will definitely try to grab its piece when the biggies failed. They will try to lure the customers with new services and innovative products which will trigger some IT spending. Though many of the above scenarios apply to banks in US and Europe, the relatively unaffected Asian banks are expected to increase their IT spending to tune their systems in this economic downturn.
Given the tight budget to implement the above changes, CIO has to make prudent decisions in their IT investment. There are banks which will spend more in IT to reduce the overall bank's operation cost. They will identify and remove the cost incurred by dead and redundant systems. Options will be explored to merge the system's functionality, thereby reducing the cost. But it requires more innovative approach in order to reduce the cost. But in innovations, there is always a risk of failure. The question is, whether the banks will take the new route despite the risk associated with it?
Given the amount of technology activity involved and layoffs that are underway, one could also expect more work to be outsourced. But banks which are yet to explore the outsourcing option may become reluctant to try this option at this juncture. But for sure, once can expect more IT activity in the finance sector.
Tags: Banking industry, Bank IT spending, Technology spending, Outsourcing
Read rest of the entry...
The biggest contributor in bank's IT spending propels from the new products, services and upgrading the IT systems to a newer technology. Considering the low consumer activity, the spending on services are now ruled out. Banks are reluctant in introducing new products, as they cannot a failure outcome. Ofcourse at this time, no bank would like to invest in the new technology or would prefer architectural change. Already, many projects which were initiated in the past year were put on hold or canceled.
All the traditional rooms of IT spending is almost closed now, but this tricky economic situation has opened up new avenues. After the housing market collapse, many banks were forced to merge with the larger banks and have contributed to consecutive mergers. Mergers would definitely require the integration of IT systems. Even if banks try to post-pone their integration plan to mitigate the cost, they cannot drag it beyond a point. Separate IT systems translate to more cost and also will reflect in their operational cost of bank centers. Apart from the expenditures on mergers, another new area is 'regulation'. Lack of regulation in the banks has been identified as the reason behind the current economic mess. The new government will definitely ensure that 'Regulation' plays a crucial role in the banks' operations. In order to comply with the new regulatory system, banks would need to alter their operating style and will definitely reflect in their IT systems. The new regulatory system may demand more transparency and interaction between the Banks and the federal regulatory agencies, which is possible only through new IT systems.
One other area which resulted in many bankruptcies is, the failure of the bank's management in foreseeing the current situation. Proper systems were not in place to analyze the available data and to forecast (or) to understand the trends in the money flow. This will require more detailed data from the banks divisions, which means more interactions between the various IT systems present in a bank. Having understood the crucial need of such systems, banks would definitely require investment in such systems or would require to change the model of the current functionality. These investments are inevitable and should be immediate to avoid another crisis. Another important area is, Risk management. It is clearly evident that the Risk management has failed and it badly requires a new direction. Considerable spending can be expected to revamp the system.
Not to forget the mid-sized banks, they will definitely try to grab its piece when the biggies failed. They will try to lure the customers with new services and innovative products which will trigger some IT spending. Though many of the above scenarios apply to banks in US and Europe, the relatively unaffected Asian banks are expected to increase their IT spending to tune their systems in this economic downturn.
Given the tight budget to implement the above changes, CIO has to make prudent decisions in their IT investment. There are banks which will spend more in IT to reduce the overall bank's operation cost. They will identify and remove the cost incurred by dead and redundant systems. Options will be explored to merge the system's functionality, thereby reducing the cost. But it requires more innovative approach in order to reduce the cost. But in innovations, there is always a risk of failure. The question is, whether the banks will take the new route despite the risk associated with it?
Given the amount of technology activity involved and layoffs that are underway, one could also expect more work to be outsourced. But banks which are yet to explore the outsourcing option may become reluctant to try this option at this juncture. But for sure, once can expect more IT activity in the finance sector.
Tags: Banking industry, Bank IT spending, Technology spending, Outsourcing
Read rest of the entry...
1/14/09
Infosys results analysis
Below are some notable and interesting highlights from the Infosys third quarter results 2008-2009, especially the quarter in which the economic crisis gained the strength.
Read rest of the entry...
- Though Infy succeeded in reducing the dependency on U.S in the past quarters, this quarter revenue from US rose to 64.5% ( It was 61.5% in the prev quarter and 62.5 a year back)
- Product sales saw a huge increase to 4.2% - it increased by 16% from the prev quarter
- As expected, Telecom business continued its decline. Its share came down to 16.7% - a 12% decrease. Manufacturing sector also saw a minor decrease(-2.5%) in its share.
- Onsite effort and revenue came down by around 1%
- Reflecting the job market, addition of trainees of decreased b 4000 ( note that freshers addition is more during the previous quarter, as it coincides with the end of the academic year)
- Utilization (excl. trainees) increased by 1%. Last quarter was down by 3%.
- Addition of lateral employees also got decreased. At the same, attrition also decreased by 1%
- Next to Bangalore, Pune has the most number of seats with 20K. Least number in India is from Jaipur with 990 seats
- The Revenue ending Dec 31 is Rs.5786 crores. It projected Rs.5519 - 5730 crores in the previous quarter.
- The company saw first ever sequential decline in dollar revenue from $1.17 from $1.22 billion in the prev quarter.
- Net profit rose by 33% Y-o-Y
Read rest of the entry...
1/5/09
Who is Mr.Madoff?
Recently, many would have heard about the Madoff scandal which amounted to $50 billion. This would not have timed better, especially during this turbulent times. But, this scandal cannot be exposed when the money is flowing regularly, so is the nature/model of the scandal.
Bernard Madoff is a former chairman of NASDAQ stock exchange and founder of a wall-street based investment firm Bernard L. Madoff Investment Securities LLC. Madoff roped in investors to his firm, citing the regular strategy of investing in stocks and indexes. Madoff firm’s was able to give consistent returns (rather than voluminous profits) that made investors to think it as a safe investment. Investors include major European banks, celebrities and independent firms. Everything was going fine until the suspicion rose to its peak, when he paid his investors with consistent profit, even during the year 2008, when the markets were bleeding. So investigators started drilling him and that’s when they uncovered a historic scandal in the financial Industry.
So what is the scandal?
His strategy/scandal is something similar to Ponzi Scheme. A Ponzi scheme is a fraudulent investment operation that pays returns to investors out of the money paid by subsequent investors rather than from profit. Madoff tweaked the Ponzi scheme to suit the securities sector. When an investor pays money to Madoff to invest in certain stocks, he will use the investor’s money to buy shares under his firm’s name. If the stock fails miserably, he will show them as a loss to investor. In case, the investor requires money and demands Madoff, he will use other investor’s money to pay him. Although, he will manipulate the customer’s report to disguise that the stock are invested under their name.
This scandal will not be exposed unless the investment is less than the payments demanded by the clients. Moreover, he maintained his investment strategy as a secret and would not divulge it. Investors did not care much, as they got the required money whenever demanded. But the light was heavy on him and he looked odd, when his investors got consistent profit at the time of market going south. This led to investigation, arrests etc..
Analysts are unable to predict on when exactly Madoff started to adopt this scandalous scheme. There are speculations that he was too good with the profits in the early days, that he don’t want to loose down and it’s when he started to manipulate the money flow.
This scandal was not exactly unnoticed. According to NY times, Mr. Markopolos wrote to US Security Exchange commission (SEC) that “Madoff Securities is the world’s largest Ponzi Scheme.” SEC’s cursory investigation pronounced him free of fraud. Thought, now SEC defends that, its primary role is to protect investors and not regulation.
By the way, Ponzi scheme is something you can vaguely relate to Multi-level marketing!
Read the Economist article
Read rest of the entry...
Bernard Madoff is a former chairman of NASDAQ stock exchange and founder of a wall-street based investment firm Bernard L. Madoff Investment Securities LLC. Madoff roped in investors to his firm, citing the regular strategy of investing in stocks and indexes. Madoff firm’s was able to give consistent returns (rather than voluminous profits) that made investors to think it as a safe investment. Investors include major European banks, celebrities and independent firms. Everything was going fine until the suspicion rose to its peak, when he paid his investors with consistent profit, even during the year 2008, when the markets were bleeding. So investigators started drilling him and that’s when they uncovered a historic scandal in the financial Industry.So what is the scandal?
His strategy/scandal is something similar to Ponzi Scheme. A Ponzi scheme is a fraudulent investment operation that pays returns to investors out of the money paid by subsequent investors rather than from profit. Madoff tweaked the Ponzi scheme to suit the securities sector. When an investor pays money to Madoff to invest in certain stocks, he will use the investor’s money to buy shares under his firm’s name. If the stock fails miserably, he will show them as a loss to investor. In case, the investor requires money and demands Madoff, he will use other investor’s money to pay him. Although, he will manipulate the customer’s report to disguise that the stock are invested under their name.
This scandal will not be exposed unless the investment is less than the payments demanded by the clients. Moreover, he maintained his investment strategy as a secret and would not divulge it. Investors did not care much, as they got the required money whenever demanded. But the light was heavy on him and he looked odd, when his investors got consistent profit at the time of market going south. This led to investigation, arrests etc..
Analysts are unable to predict on when exactly Madoff started to adopt this scandalous scheme. There are speculations that he was too good with the profits in the early days, that he don’t want to loose down and it’s when he started to manipulate the money flow.
This scandal was not exactly unnoticed. According to NY times, Mr. Markopolos wrote to US Security Exchange commission (SEC) that “Madoff Securities is the world’s largest Ponzi Scheme.” SEC’s cursory investigation pronounced him free of fraud. Thought, now SEC defends that, its primary role is to protect investors and not regulation.
By the way, Ponzi scheme is something you can vaguely relate to Multi-level marketing!
Read the Economist article
Read rest of the entry...
Subscribe to:
Posts (Atom)
