Saturday, December 24, 2011

real economy and real banking.

If you read through the messages inside the intranet of one of the frontrunner European Bank and read the executive comments rather closely, you would find an increasing reference to some "real economy". You would get a mixed feeling of satisfaction and a little surprise. Satisfaction because you would quickly understand that what you always thought was indeed correct. That the investment banking profession or practice seemed alien or detached from the ground realities. You just had this feeling or suspicion, call it intuition if you may but you never really believed that would be true. But the fact remains that our Banking system has been stretched a bit too far. Banking and finance have their prominent and justified places in Human society and always have had. Ancient texts could be found which delve into the science of Finance and I am not even alluding to Kautilya's relatively recent "Arthashastra". If endeavor hasto happen and someone has to venture into business, starting capital is needed. To give expression to one's creativity in Business and commerce, the leverage happens with capital. India's religious (not spiritual expression I say) tradition has a sacred seat for the universal consciousness' manifestation in the form of the goddess of wealth. In a nutshell, the world moves on finance and trade. Yet, it is a means and not the end.
The case in point is just that. What we saw in the ensuing phenomenon and the consequent crisis was that it became and end in itself. Few examples merit attention. Someone, like a pension fund needed to invest money in some kind of rated "AAA" lockers which promised the money invested was safe. So they created these lockers once. Probably they were AAA safe-lockers (these bonds and securities really) to begin with. However, folks got greedy then. There were fee cuts and bonuses to be had for creating such lockers and finding such investors and if you neighbour i-bank would do that blindly why would'nt you. Everybody looked happy and things were hunky the-dory. Only that the lockers were not really AAA safe. No-one really bothered though. There were some locker-testers (those Rating companies) there which stamped their AAA veracity and that was enough. However what started to possibly happen was that all the drive for the investor-locker syndrome came from the fee and bonus for creating the locker in the first place. I call it a Locker and not a Train because that what it really proved to be. I train or a car for that matter is a necessity. If someone finances someone to buy a train to do some sincere business, it is Banking. But what if someone finds two parties, one to invest and the other just on the street walking around and asks them if they were interested to have some quick money financed and the street-walker fancied yea, why not have a go. It becomes a locker no more a train. Whats more, the greed went a step further. They created "locker squares" (CDO squared really). They found more AAA investors and promised them the best money that would come from the lockers later. And they got some more fee cuts and bonuses. All in all, this process (only one of the multitude of such processes) quickly became the end. But such senseless and counter-natural finance could'nt sustain. Investment banking by itself couldnt sustain. There is definitely need for some mergers and those acquisitions and thus advisory duties. There is some need for hedging among communities and around commodities - currency hedges for instance. There is need for some simple derivatives. But looks like they stretch those a bit too far. Those exotic derivative products, those inflated CDS trades which none knows where the other end of the trade is. The so called "proprietory trading" where you take bets on the money given to you trustedly for safekeeping. It almost feels like taking your friend's money to a casino and hope you would always somehow win and take your share. Do we need Banking or gambling in casinos. To top it all, there is no regulatory oversight on these transactions, or rather there was no oversight. These Basel 3, Dodd and Frank and all these are just the regulation mechanisms suddenly everyone realised were missing in the playground of broker-dealer investment banks. It from the outside looks and feels like merry-making by these so called i-bankers (not many really know I guess what it really means to be an i-banker, some kind of an apple inc. creation, ridiculous thinking that). Maybe I am mistaken, accept my apologies then you i-banker. But I reckon they themselves started to believe at some point that they had unearthed some kind of a magic formula or machine to churn out transactions in multitudes without taking note of the financial sense beneath those. Hire that nerdy Physics Nobel laureate to come up with some kind of formulas to stratify different classes, get two parties interested, sit on the deal table (I wonder did they cut those deals on some expensive Cruise liners or somekind of a beach resort on the haven-of tax Cayman island). We are the superguys. We wear black suits, talk some nice-wrapped Finance jargon, flaunt our company logos, reside in expensive hotels, do zillion business trips, work (real mail) day and night and know so much about how the world business would function. Enough banker bashing? Alrite, done with it. There are nuances involved which we may not understand. Some of this trade may actually be required for our world's functioning. But please do not overdo it. Please understand you have borrowed money from countless shareholders, investors and stakeholdersand are the trustees of that money and not superstars who own the money to flaunt it. If you have an urge to have celebrity mannerisms, please try Hollywood. You may just have the charm. Good luck for that. But do not do the banking for the sake of it and as your favorite pastime like it were some kind of a Monopoly session.

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