Financial Mess and the Reforms

I was worried.

I was worried very deeply when this financial crisis hit. Not just because lot of us lost truckloads of money in stocks or real estate investments; not just because lot of us may find ourselves deprived of comforts that we otherwise would have enjoyed; certainly not just because lot may go unemployed..

But I was worried because this financial mess might just be one another passing phase where the so called dark side and socialists shout for reforms and the rest of free market capitalists waiting for their time to go back to bad old ways. I was worried that we might never actually work and implement some of the financial reforms that will keep more checks and balances in the systems. I was worried that we might never get to action-ize what Paul Krugman, Joseph Stiglitz and Prof. Jeff Sachs have been talking about for a very long time.

But now I am not that worried. If the latest IMF report released today were to be believed, looks like the financial mess will stay for quite some time in spite of coordinated actions by bankers and governments. And that the world will witness just 0.5% growth - the lowest since Second World War. Don't mistake me as a sadist - I am very depressed about all this just the way you are. But I see this as an opportunity to learn tough lessons; to put into reality some of the measures that the Keynesians have been cribbing for quite some time; to put checks against financial institutions that go on a spree unchecked; to persuade development institutions who blackmail cutting of loans/funds unless there is free & open market without thinking through the consequences.; to work towards reducing growth gaps.

This is the best opportunity we have to work on financial reforms. If we dont use it, we have only all of us to blame in less than a decade again for similar situations.

ISB is World #15 - FT MBA 2009 rankings

ISB did it again!

After catapulting itself to FT #20 for MBA 2008 rankings, ISB has bettered its act. FT announced ISB as the World's 15th best MBA school in its 2009 rankings.

Last year, after the rankings were released, there was a major downplay of this record by non-sportive people. But ISB has proved itself and made sure that it is here to stay and is not just a one time (w)oneder. One of the comments in my previous blog when ISB was declared a FT #20 school said I was being profound. I stand by what I said that day and am proud of this school and this moment again.

Congrats to ex-dean MR, Dean Ajit, Chairman Rajat, the Governing board, all resident and visiting Professors, all the staff and all the alumni and students of this great school.

This is really an awesome time for Indian higher education. Go ISB!

Obama and he future of offshoring/Indian IT/ITeS

So Obama is in the coveted seat finally.

And after all the celebration of the black man moving into the White house, now the who's who of India Inc. is sitting up to see what this revolution means to them. In particular sweat are the IT/ITeS guys who worry that Obama's anti-offshore stand would affect their glorious run for a long time.

Their concerns are filled with reason. The new President has promised to punish those companies who send American jobs offshore. After all, the democrats are a labor party. And how can their President not listen to the socialistic calls? I have seen lot of Op-Ed columns in recent days blaming Obama for not taking a leadership stand when it comes to offshoring issues, but just succumbing to partisan politics and short term benefits.

A couple of days back at a social gathering, one of my acquaintances, who is a Senior VP with India's largest tech services company, said that the IT future of India looks bleak and maybe we will go back to pre-2000 days. Though the companies would remain profitable, he added that the margins will shrink, hiring will slow down and growth will not be at amazing numbers like before. A few people asked me what my take was.

Yes. We don't have a rosy picture for India now. Economic meltdown, Mumbai attacks, Satyam fiasco, Obama in the White house - infact it looks like when it rains, it pours!. So many anti-effects for India-IT.Com.. Yeah, the picture isn't good and analysts sentiments are real bad. Infact even after good results, a few IT companies stocks have been downgraded by analysts because the future is uncertain and current performances are largely because of currency fluctuations.

But lets put analysts away for a while. Business and world do not run by what media or analysts "think". Evaluating future of IT companies of India by analyst sentiments is lequivalent to saying that the Fed should form its operating principles based on what gamblers in Atlantic City or Las Vegas "think".

As much as we talk about problems of globalization, the inequalities created because of such moves (and I am a very strong subscriber to that faith), the (unfortunate) truth is that nobody is in control of globalization. It is not a phenomenon that you can stop by pushing a button. Obama may sit in the Oval office and proclaim himself as the World's most powerful man, but neither he nor anyone has the power to stop globalization. The world is shrinking at such a rapid pace that competitve advantages will overcome absolute advantages over a very short period of time.

If Obama thinks that he can "control" offshoring, by offering tax breaks to those who dont offshore and "punishing" those who do, he is simply trying to cover his eyes and claim that the Sun is gone. US has been doing this kind of manipulation in several sectors (like Textiles, or Fisheries for example); but in a matter of time, companies will stop buying this. You cannot control offshoring by these kind of laws. If he is serious about improving jobs in America, Obama would rather focus on building education platforms, control cost of living and make labor freely available with necessary talent.

By enacting laws to prevent offshoring, Obama will enable only weaking of companies who struggle to survive without quality labor or who struggle to live with high cost labor and finally end up offshoring anyway or worse, close shop or lose to competition from rest of the world.

So my take on this matter is that, Obama can do what he wants to do - the Indian IT will not face any crunch as long as we are backed my good educational institutions, great talent and of course, comparitively cheap labor. If we are worried with stock downgrades, I think we should conveniently stop worrying - as the analysts who do these funny acts really are playing without getting the big picture. After all, the analysts are gamblers - Do you still listen to them?

Satyam - a Poison Pill?

It has been bothering me for some time if Satyam had eventually decided to swallow the poison-pill? When the Maytas news broke out on Dec 16, there has been a bunch of conspiracy theories going around.

One big possibility which I tended to incline slightly at that time was:
- the promoters stake was getting diluted because sale of mortgaged Satyam stock by lenders (which were mortgaged in the first place to invest in Real estate)
- the only way the promoters could keep management control was to do a MBO(management buyout) of the company (with help of PEs)
- and the best way to do it was to reduce the buyout rate

While the above seems a nice little corporate theatrical act, there are lot of obvious gaps in the story.

With news being surfaced about the controversial Dec 16 board meet, there are questions if Satyam really decide to take the poison pill to avoid takeover by IBM or HP? That Satyam may get acquired is not a new story. As early as 2003, there have been strong rumors of a EDS takeover. From 2005, it was a IBM takeover story - the rumors got only stronger.
- What if they werent rumors? What if one of the IT biggies was ready to swallow the Indian IT major?
- By taking a poison pill to invest in real estate and infrastructure, it was a smart way to keep the interested parties away as they would have no interest in these kind of ventures
- Or was the poison pill an act too? - to cover up siphoning of funds and/or lack of real cash?

Some time back I watched Barbarians at the Gate - the fall of RJR Nabisco. Maybe we will have our own movie soon once we figure out the screenplay.

(For the record, I HATE conspiracy theories of any sort).

Trusting Economists - an oxymoron?

Uwe Reinhardt, an economics professor at Princeton says

Matters are worse when, wittingly or unwittingly, economists infuse their analysis with their own (or a political client’s) preferred ideology.

Consider, for example, President Bill Clinton’s 1993-94 health-reform plan. In this plan, President Clinton proposed a mandate on employers to provide their employees with health insurance.

Politically conservative economists predicted that the mandate on employers to provide employees with health insurance would lead to vast unemployment. Economists supporting the Clinton health plan predicted that the negative employment effect of the mandate would be small, and that the effect might even be to increase employment.

It can be shown with a simple mathematical model that an economist’s prediction in this regard is powerfully driven by two assumptions about the behavioral responses to mandated employer-paid health insurance.

The first is the responsiveness of the supply of labor — that is, how many workers are willing to work — to changes in take-home pay. Economists generally believe that employers reduce take-home pay to recoup their contributions to any sort of fringe benefit, including employer-paid health insurance. If workers are very sensitive to changes in take-home pay, one would predict a highly negative employment effect in response to government-mandated, employer-paid health insurance, other things being equal — i.e., the number of people with jobs should go down.

On the other hand, if the supply of labor is relatively unresponsive to declines in take-home pay, one would predict only a small decline in overall employment in response to the mandate. Unfortunately, the empirical literature on this responsiveness offers economists a wide range of estimates from which they can choose judiciously to make their (or their political client’s) preferred case.

The second effect bearing on this issue is the value workers place on having health insurance on the job. If that value is high, then the employment effect of the mandate might even be positive, other things being equal, as people choose to enter the work force just to get health insurance. Some economists in the Clinton era who supported the Clinton health plan appear to have used this hypothesized effect to predict a net increase in employment in response to the employer mandate.

This example starkly illustrates how easy it is for economists to infuse their own ideology – or that of their clients – into what may appear to outsiders as objective, scientific analysis.

………
So there you have the flexibility, shall we say, that economists enjoy when they apply their professional skills to affairs of state in what may seem, to outsiders, like purely scientific analyses.

In the first lecture of my freshman economics course at Princeton titled “The Art of Siffing Among Seasoned Adults,” I demonstrate how seasoned adults routinely structure information felicitously (i.e., “sif”) to further their own agenda, and I point out that economists can be among the most skillful practitioners of this art.

“If at the end of this course you still trust me,” I warn them, “I have failed in my mission. When economists advise on public policy, the operative mantra is Caveat Emptor!”

(source: The New York Times)

Blacklisting (and) World Bank

I am not sure what is this big obsession with World Bank blacklisting companies. After the Satyam fiasco, now IBN and ET are reporting in big titles that Indian IT companies Wipro, Megasoft have also been barred by this lending institution. The World Bank is also acting as a moral king by saying that they are publicly disclosing these names (and it is on the first home page of the worldbank.org website) for transparency reasons.

Now lets come to the point - so what?

The World Bank does not carry morals of any sort to command such a important headline in this area. If they have banned Satyam, Wipro or anyone, it is something internal to them. Why does the developing world need to care so much? The World Bank has not set any standards on ethics or corruption free practices. The World Bank has not set or upped any bar on moral codes of conduct. The World Bank has not even tried to keep its house in clean order before banning others for polluting it.

If only the World Bank was a publicly listed entity, no one would be purchasing its shares in any market- developing or otherwise. The organization would have folded for corporate governance (or the lack of it), (mis)management, double standards and corrupt practices. Ideally many organizations like Wipro would have banned doing any business with World Bank.

Maybe, the first thing the World Bank can do to ensure its integrity is to publish a list of (total, if not of individual staff) share holdings with institutions and and real estate holdings of areas/countries they do business with.

Back to my other rhetoric. The emerging popular media of India, IBN, CNBC, NDTV & TOI should stop sleeping with anyone who can be called as "flash news". The top respected journalists of India should be setting standards now, instead of running a TRP ratings war against each other. The media should ask relevant questions and also understand sensitivities. But when who cares?

Lot of good (wo)men..

It hurts.

After being celebrated as a czar of India software, today Ramalinga Raju is the most shamed corporate king in India Inc. Incident of this sort is unprecedented in India. It is not to say that there have been no frauds of this magnitude, but they have all been dealt with either secretly or somehow. And today, the media has a field day with reporters from CNBC, NDTV Profit shouting a the top of their voices 24x7 on the Satyam fiasco.

How is it possible that a company survived a lie of this sort so long? How is it possible that of all people, Ramalinga Raju - a supposedly perfect gentleman, a top philanthropist of India could have done this? How could any of them involved sleep peacefully for years trying to stuff this cash vacuum into their pillowcases? All invetigations, media rumors will fetch the truth slowly. The role of auditors, bankers, government will come out along with erstwhile management of the company.

But it is not about the company and its financials. An IT company is about people. It is about talent that is accumulated. And Satyam undoubtedly has some of the best talents of this country. What is to become to all of them? It is important for the Satyam staff to stay united. All the leadership principles that have been fed in the past years have to swing into action now. This is the time of real crisis - something which no one has imagined would happen, leave alone experiencing it in the past. All the emotional guns have to be fired now. For at the middle of it, there is a strong company, supported by strong people and servicing strong clients. 80% of the company's revenues come from 20% of the customers. It is important for the current leadership to connect with that 20% and retain business.

What Satyam needs to provide now is a swift, dramatic response. It is important for the company to prove that "Not everyone in Satyam is like Raju and Raju alone does not make Satyam".

The employees have to stop panicking. Trying to jump ship blindly is useless at this time. It is recession and no one is hiring. Jumping ship now is like jumping into the ocean leaving a current ship, which can still be made workable and move ahead. It is important for all employees to stay united, reassure clients, and try to salvage what is left. This is easier said than done - but definitely is the better course. Any mass resignations will only start a downward spiral.

Finally the media. All I have to write is a rhetoric. As it is, the big financial institutional investors are just gamblers who do nothing worthwhile on their own, but bet money on horses and try to make massive profits out of the winning horse. And financial analysts are even worse - all they do it just give some random running commentary of the horse race and make money of it. The media analysts are the most horrible - With no real talent to make a product or sale or run a business and generate money on their own, they just try to make profits by advising people on who runs better business. These are a bunch of jokers who have no idea of what is smoking under their pants until there is fire in entire building. I havent seen anything predictive out of the so called smart analysts. All they have done is more damage by pressurising people who do real work to manipulate financial records like backdating stock options or cooking books or bloating profits.

But who wants to hear? If the media can mess up something sensitive as Mumbai terror attack with utmost disregard for human lives and national security, will they ever find out that they are the ones who are putting unnecessary pressures on people who run real businesses? Will media ever understand that 50000 employees of Satyam are wondering about their livelihood and will need support at this point of time? Well, for those who copy titles like India's 9/11 and India's Enron and India's Obama, am sure they will not have any brains to think along these lines.

Until the next fraud happens, life will go on for media/analysts/investors. This episode will become a reference case for media and B-school case in Strategy (mis)mangement. But for current Satyamites, this is a struggle, a challenge and a war - one which they never wanted or imagined to be part of.

However the IT folks are much much better than analysts, investors and media. The IT engineers to do real operational work and make real money out of their work - than by betting and commenting and advising. That is why I still feel all the associates of Satyam will ensure that they can bounce back.

There are not just few good (wo)men in Satyam, there are lots of them.