Slumdog Millionaire

We all know about Danny Boyle’s Slumdog Millionaire, with ten Oscar nominations creating a new history for India. Let’s now look at the real Slumdog Millionaire,  for a difference here I am writing about anAfrican country.  Zimbabwe- When I think  of  Zimbabwe what I remember is 1994’s coca cola champions’ trophy match and Henry Olonga- Sachin revenge. Little is known to the outside world about the current crisis in Zimbabwe. It’s one of the hyperinflationary economies that exist today, if you Google inflation in Zimbabwe you could end up results indicating million percentage points. The official estimate of inflation as on July’08 is 231Million %. I was curious to know what lead to these conditions in Zimbabwe, once a country of prosperity.

The basis of the problem is declining GDP and quantitative easing by central bank (Increasing Supply of paper money). It all started with Robert Mugabe’s land reform polices (year 2000) which intended to redistribute the productive land from the whites to the blacks (Remember Zimbabwe was once a colony of British)! With the corruption in the administration all Mugabe’s allies end up owning huge land but without the skills of farming. The agriculture productivity once the back bone of Zimbabwe economy started to decline, resulted in food shortage. Once an exporter of agricultural products become an Importer.

An Unplanned “Operation Murambatsvina” Started by Mugabe in 2005 resulted in demolition of illegal housing as a clean up operation and drove 700 000 people into the slums . Mugabe’s anti west policies also resulted in steep decline in tourism and humanitarian financial aids.  GDP started to decline from 2000 due to the impact on the major sectors such as agriculture, tourism. Exports also faced hurdle with too little foreign currency reserves. The central bank stated to print money to fill the citizens pockets with some money. Then the worst begins, surge in inflation- Scarcity of goods chased by too much money!.

There were some comic measures taken by the central bank to curb inflation. In August 2006 the central bank devalued the currency (To remove three zeros from the notional value.A 1000 Zimbabwe Dollar suddenly became 1 Zimbabwe dollar), without significant change in supply-demand fundamentals all these measures end up worsening the problem. The hyperinflationary conditions were faslty eroding currency values. In order to save at least  some trees the central bank decided to release 100Million dollar note on December’08 then 100 trillion dollar note on January’09 and quoted easiness to carry as a reason. Today even billions of Zimbabwe dollars are not worth single US dollar. Every one has paper money, even the guys who live in slums have millions of Zimbabwe dollars but these million can not even buy a bottle of coke! A slum dog Millionaire who goes hungry everyday!!

Multiple Choice Dilemma

Every one likes multiple choice questions in an exam  (of course  without penalties for wrong answers!) . Most of the times when we don’t know the answer, a coin toss  (Head or Tail!),  blind  spotting  the  answer   comes  as  a strategy  to choose the answer with a strong belief on luck. Unfortunately coin has only two sides, so even  to  do  that  we  need to zero down to two probable answers. Recently when  I was  driving my  thoughts through  the financial  crisis  from 2008,  I come across  the similar  analogy  of multiple-choice  question,  But with huge penalties for wrong answers. Let’s look at How?

Ever since the financial crisis started it was evident that government intervention is required to stimulate the economy. The question in front of US administration was what’s the most effective way to spend the taxpayer’s dollar to stimulate the economy? And some of the possible answers from classical macroeconomics are

1.       Tax Rebates->More disposable income on consumer hands->More Spending->GDP growth

2.       Fed Funds rate cut->Easy Borrowing for banks->So More lending->More spending & Growth

3.       Buying Toxic Assets from banks->Banks relieved of toxic assets->More lending->More Spending & Growth

4.       Liquidity injection into banks(Recapitalization)-> Banks get more money to lend->More lending ->More spending & Growth

5.       Govt Infrastructure investments->More Jobs creations so more income-> More spending & Growth

 It seems almost all the options been explored, It started in February’08 with Tax rebate checks of $150Bn mailed to US citizens (Choice 1). Then there was and still is a TARP programme started in September’08 ($700bn) aimed at Buying Toxic assets (Choice 3) and again the same plan was withdrawn in November and it was decided to spend the money on liquidity injection (Choice 4). Throughout year 2008 FED also cut interest rates to zero (Choice 2), now nothing left to cut below! Only one choice of the above left that’s choice 5 which Obama pledged to use to spend massively on infrastructure programmes (approx US$ 1trillion) so basically US government has answered all the above!

When each choice was tried and fails to create a stimulus it’s not only the money which is lost! It also plunges the confidence in the system into new deeper levels. Recently I came across a data in Bloomberg which was quoting the total subprime lending is about US$2 trillion. If we sum all the money that has been spent (from above) it’s close to US$2 trillion if we include all other bank bailouts by the US governments it’s much more than the subprime marker size! Which was the epicenter of the problem.

The government could have bought all subprime loans for US$2trillion in the beginning of the crisis and avoided all these troubles. But the choice does not look easy, looking back is always easy, looking forward comes with lot of uncertainty. How come you could lose more money because of a problem which only worth US$2Trillion, Welcome to the world of Globalization& Finance! 

Numbers do(n’t) Lie

I  remembered  my  accounting  exam  when I read Satyam chairman’s letter of accepting the fraud.  It was in those exam hours when time was running out and the balance sheet entries did not get balance, I left with no time to check what mistakes I made, A vicious thinking in the mind  guided me to create some  fictitious  entry on one or the other side to balance (since the name is  balance  sheet it  has  to have same numbers on both the side!).  

I never thought these fictitious entries could find a place in real life accounting. Satyam seems to  have made similar entries in its books,  unfortunately this is not exam.  It’s real life and the entries of the books are being carry forward through out.   As stated in the news the basic reason for inflating the revenues was to  cover  up the bad performance of one quarter, in my opinion this seems to have happened years before,  as Satyam increased its revenue fictitiously in the books,  it has to undergo the exam syndrome of creating fictitious entries on both the sides of the balance sheet.  As we understand from the chairman’s letter inflation of cash balance, creation of fake debtors, understatement of liabilities to cover up the inflated reserves all these implies creation of entries on the both the sides of balance sheet.

I made a little calculation (assuming what ever has been said on the letter) satyam seems to have  inflated it’s assets by Rs.2858cr. The creation of non existent money in the books at one period of time, and the subsequent need of showing how the nonexistent money has grown overtime to keep the books perfect resulted into this mess. To put it simple if you lie to investors that you have earned Rs100 this year, in the next year you have to make bigger lie to explain what the Rs100 earned?, This is what seems to happened in satyam and the size of the bigger lie is Rs2858cr . 

Bankruptcy or Bailout- Auto on Reverse Gear

It seems to be no one is making money in auto industry in recent days.  Toyota –the industry front runner forecasted an operating loss first in its 68 year history, expected to make some net profit from non operating income.  I remember only Porsche (The German Auto maker) made some money, thanks to the Volkswagen Shorts Squeeze game.  So it’s clear that not many but some auto companies are making money but not through selling cars.

The downturn in the industry diminishing the chances of revival for the Detroit’s big three an all time tough job.  GM’s Rick Wagner relived a bit with his Xmas gift of  US$13.4Bn bridge loan from US government, still there seems to be no dawn nearing.  I have also read in the news about the talks in air of GM-Chrysler merger,  I still don’t understand how two failing companies will make one profitable company.  Synergy is all about 1+1>2 not -1+-1>2.  GM is already suffering with too many brands (they are already looking for selling Hummer, Saab Brands) merging with Chrysler will only complicate the problem.

Bankruptcy seems to be a better option than bailout; Bankruptcy enables these companies to go for a radical change than the small incremental changes happening now.  A preplanned bankruptcy proceeding may enable the companies to come out from chapter 11 filing in a faster manner.  But all this depends on will Americans keep buying these cars, if these companies file bankruptcy? An interesting question to answer? Who knows?. Bankruptcy is not a bad thing it’s about restructuring; it’s not liquidation (chapter 7).  Will an average car buyer understand this? When Governor Sarah Palin don’t know whether Africa is a country or continent we are expecting something bigger here! It will be interesting to see how the new administration approach will be in March-09 when these companies come back for second bridge loan.  Did any one know the length of the bridge here???!!