Intellectual Thoughts by Sanjay Panda: July 2008

U.S. Housing Slump End `Not Visible,' Credit to Worsen - IMF

The International Monetary Fund said there's no end in sight to the U.S. housing recession and warned that deteriorating credit conditions for consumers and banks may prolong a period of slow economic growth.

At the moment, a bottom for the housing market is not visible, the IMF said in its Global Financial Stability Report. Stemming the decline in the U.S. housing market is necessary for market stabilization as this would help both households and financial institutions to recover.

The IMF, which a year ago failed to foresee the depth of the subprime mortgage collapse, stood by its April forecast for about $1 trillion in losses stemming from the U.S. mortgage crisis. Worldwide asset writedowns and losses have totaled $469 billion in the past year and $345 billion has been raised.

The Washington-based lender in the report said the Federal Reserve's decisions to expand lending to Wall Street firms have succeeded in containing systemic risks.'' Still, weakness in housing threatens to extend the slump.The growing concern is that, with delinquencies and foreclosures in the U.S. housing market rising sharply, and house prices continuing to fall, loan deterioration is becoming more widespread,'' the IMF said.

As economic growth slows, banks will face continued headwinds in maintaining earnings due to falling credit quality, declining fee income, high funding costs, and exposures to monoline and mortgage insurers.

On July 17 the IMF said inflation in developing and emerging countries would average 9.1 percent in 2008, up from a forecast of 7.4 percent in April. Their prediction for inflation in advanced economies for this year was raised to 3.4 percent, compared with a forecast of 2.6 percent in April.


Our real challenges lie at home - Internal security concerns

The internal security situation in India continues to remain a cause of concern for the Central/ state governments and all the citizens alike. Out of the many challenges we face at home, the internal security challenge is one of the key one. Violent incidents continue in some states of the North-East, particularly in Assam, Manipur and Nagaland. The ethnic overtones of violent acts in Assam are particularly disturbing. While the situation in Jammu & Kashmir has shown some overall improvement, apart from the bombings by the terrorists which are happening in several areas throughout India in regular intervals.

To control/reduce them we need better security forces, better in all senses, be it training, be it skills, be it equipment, be it resources, be it mobility or be it attitudes and the police forces should not be in control of the politicians. We need superior intelligence capabilities which can alert us to the impending threats. We need greater discipline, lesser politicisation and zero corruption.

We need to work with greater commitment for eliminating the threats posed by Naxalism. In the past that there are many dimensions to the problems of Naxalism. Concerted efforts can be made on the development front to remove any feeling of alienation, the security forces need to redouble their efforts to control the spread of this phenomenon.

Terrorism has become a global phenomenon of our times. In terrorist organisations, we face determined, committed and highly motivated adversaries working with evil design and evil intent. We need to go far beyond conventional responses in facing the severe terrorist threats. The government should work on many fronts — through dialogue processes, through development activities and through improved communication links — to tackle these problems.

Trust vote- who won - Govt or ..???????

The week 21st to 26th of July was indeed dramatic. Govt ( UPA) own the trust vote and before the euphoria dies down there comes the serial blasts in Bangalore & Ahmedabad and the list of city seems to be expanding if we believe of unexploded bombs found in Surat.

So who won the trust vote? Is it the government or is it the militants????. May be the militants won the trust that nothing will happen to them because of continuous appeasement from Congress and now the unexpected power of SP . only time will tell how long and to what extent these militants will continue these serial blasts.

The Crisis of confidence

The old-fashioned financial system was like Old Maid, a parlour game once beloved of small children. The banks were like players, dealt hands from a pack of cards, which they swapped among each other. At the end, one player was left holding a lonely queen—a bad debt, if you will—and lost. Over the past few decades the game has changed. Securitisation has snipped the old maid into pieces; new faces, such as hedge funds, have joined the party, enabling the banks to distribute those pieces among a larger number of players.
When the game is over, lots of players are left holding small losses instead of one player holding a big one. During two exceedingly prosperous decades, that theory seemed to work just fine. But the swings in almost all financial markets this month have made dispersed risk suddenly morph into dispersed mistrust. The uncertainty has been magnified .Meanwhile, collateralised-debt obligations (CDOs), made up of clumps of those securities and laced with leverage, have become almost impossible to trade. So none of the players really knows how much he has lost. While this uncertainty lasts, investors are taking it out on the banks that peddled the securities by dumping their shares; and the banks are taking it out on those they sold them to by demanding more collateral on their loans.
The banks have even grown cagey about lending to each other. The doubts burst into the open on August 9th when central banks were forced to inject liquidity into the overnight money markets because banks were charging punitive rates to lend to each other. At first, the problems appeared more serious among European banks. The pain in America was concentrated in the largest hedge funds, including those run by Wall Street’s biggest name, Goldman Sachs. Increasingly, however, analysts worry about the exposure of American, Canadian and Asian banks.
On Wednesday August 15th shares in Countrywide Financial, a large American mortgage lender, fell 13% after an analyst gave warning of possible funding difficulties. Despite liquidity injections by the Federal Reserve on August 15th, the S&P 500 index fell 1.4%. The heavy selling spread to Asian and European stocks on August 16th. Every crisis begets finger-pointing, and the blame now is falling on the rating agencies that helped structure these exotic instruments. Currently, they are guided by a voluntary code that aims to tackle potential conflicts of interest. The biggest is that the agencies are paid by the firms they rate. Rating CDOs was a profitable business. If these securities are now downgraded, banks could be forced to offload lots of illiquid instruments into a falling market—one of the fastest ways to lose money yet devised. But if there are no buyers, banks may have to sell something else to shore up their balance sheets. Something like this indiscriminate selling has been affecting hedge funds over the past couple of weeks. Faced with more demanding standards from their banks and investors, some have been forced to unwind positions in order to realise cash. That has led to unusual movements in debt and equity markets, which have only got some funds deeper into trouble. Quantitative funds have been hardest hit, as investment models that had made money for ages briefly proved worse than useless. Since banks lend to hedge funds, any problems there quickly become their concern. On top of this, both Bear Stearns and Goldman Sachs have found that when funds bearing their name get into trouble the desire to preserve their reputations soon leads to a rescue. Sometimes risk is not as far away from the banks as it seems. At the end of Old Maid as banks used to play it, the loser would take a big write-off and then everyone could start playing again. In the new version, the use of leverage means the game is being played with hundreds of packs of cards and by thousands of different players. Working out who has won and who has lost in this round will take a long time.


Dow acquires Rohm and Haas

Dow has signed a definitive agreement to acquire all outstanding shares of Rohm and Haas, one of the largest manufacturers of specialty chemicals, for $78 per share in cash. This acquisition would transform Dow into the world's leading specialty chemicals and advanced materials company. The companies are targeting completion of the transaction by early 2009.

The acquisition would be financed through an equity investment by Berkshire Hathaway and the Kuwait Investment Authority in the form of convertible preferred securities for $3 billion and $1 billion, respectively. Citi, Merrill Lynch and Morgan Stanley have committed debt financing.

Rohm and Haas is expected to help Dow make a mark in a number of industry segments like electronic materials and coatings that are poised for significant growth in the long term. Besides, Rohm and Haas has a strong presence in a number of other attractive areas such as water solutions, adhesives, personal care, biocides and building and packaging materials. The acquisition will unlock value from Dow's existing portfolio by delivering a range of innovative new products and technologies to these high growth downstream sectors, while at the same time expanding the product offering for sale through Dow's own existing market channels. Dow also anticipates that the transaction will produce significant revenue synergies, through the application of each company's innovative technologies and as a consequence of the combined businesses' broader product portfolio in key industry segments with strong global growth rates.

Dow will establish an advanced materials business unit at Rohm and Haas' current headquarters in Philadelphia and intends to contribute complementary Dow businesses to Rohm and Haas' existing portfolio, such as coatings, biocides and personal care. The total revenue of this new unit will approach $13 billion. Dow will retain Rohm and Haas' corporate name for this advanced materials business unit in order to capitalise on the company's brand value.

China to suspend exports of all HAZ chemicals for 2 months from mid July

The Chinese government is likely to suspend the export of all the hazardous substances including pharmaceutical chemicals for the two months starting from mid July to mid September, in connection with Olympics 2008. The decision is likely to create a major crisis situation for the Indian pharmaceutical industry.

According to industry sources, the Chinese government's decision is to suspend the movement of any hazardous substance, including pharmaceutical chemicals, in the region from one month prior to the beginning of Olympics. The restriction is expected to last till 15 days after the Olympics. For the next two months, therefore, the companies in India would find it difficult to import any chemical substances including bulk drugs and intermediates from China.

"This will have a double effect on the Indian pharmaceutical industry, as almost 20 per cent of the bulk drugs and around 70 to 80 per cent of the intermediates in the country are imported from China. Most of the companies are now collecting stocks as much as they can with their financial and storage capacity to meet the situation. The price increase of Chinese raw materials is already posing a problem for those who have to buy large quantities.

However, the sources informed that the restriction is only around Beijing, where the Olympics 2008 is to be held, and the supplies from other parts of China will be continued though the prices will be very high. The prices are expected to shoot up with increase in demand as the companies from Beijing and its outskirts cannot supply products to its customers.

The prices of active pharmaceutical ingredients (APIs) and intermediates imported from China have already gone up from 50 per cent to 200 per cent in the last couple of months. Further, the Chinese government has ordered closure of several major API manufacturers as the environment rules were made stringent prior to organising Olympics