A Closer Look at Sovereign Wealth Funds

A Closer Look at Sovereign Wealth Funds: Secretive, Powerful, Unregulated and Huge

When the Abu Dhabi government announced late in November that it was buying 4.9% of Citigroup for $7.5 billion, the general reaction was relief that the firm was finding a way out of the subprime mortgage mess.

The same response followed the early December news that UBS was selling a 10.8% share to the government of Singapore and an unnamed Middle Eastern investor for $11.5 billion, for much the same reason.

But is foreign ownership -- or, more precisely, foreign government ownership -- really a good thing? Many experts think this mushrooming trend bears watching, especially for any sign that these funds are evolving from pure investment vehicles into tools for exerting political pressure on the "target" countries. "I think pressure is a legitimate worry, but I'm not sure we have seen signs of that yet," says Wharton finance professor Franklin Allen.

There is nothing intrinsically wrong with foreign ownership, suggests Wharton finance professor Richard Marston, but ownership by foreign governments could be different from ownership by foreign businesses. "Clearly, there are industries where we would be concerned about certain countries having an ownership interest," he says, citing airlines and military contractors. "You do worry that these are governments, and you worry about their motivation."

Governments, through investment pools known as sovereign wealth funds, have put tens of billions of dollars into Western financial firms this year, from Bear Stearns and Barclays to HSBC Holdings and Blackstone Group, investing at bargain prices amid the subprime crisis. Two Middle Eastern government funds now even own a third of the London Stock Exchange.

None of this investment has drawn the kind of outrage that greeted a 2006 plan for a government-owned business in the United Arab Emirates to buy a firm that ran a number of U.S. ports. Much of that involved unease with a Middle Eastern country having a role controlling potential entry points for terrorists. "A lot of this becomes emotional when you're talking about the Chinese and Arabs as opposed to the French," Marston says.

Concerns over Secrecy

Still, some politicians and economists are concerned about the growing power of sovereign wealth funds, most of which are based in the Middle East and Asia. The International Monetary Fund estimates that sovereign funds control as much as $3 trillion in assets, up from $500 million in 1990, and it expects them to grow to $10 trillion by 2012.

While cross-border investments are nothing new, the sovereign funds raise special questions because the investment decisions are controlled by governments rather than individuals or corporations. And, unlike central banks, which tend to invest reserves in assets like U.S. Treasury bonds, the sovereign funds often invest in corporations. This year, the largest target country for such investment has been the United States.

The 20 largest sovereign wealth funds, each worth more than $10 billion, are estimated to control more than $2 trillion in assets, overshadowing the $1.5 trillion thought to be managed by hedge funds, which have been subject to calls for greater regulation because of their market clout. Like hedge funds, most sovereign funds are secretive. There is no comprehensive list of what they own, nor any mandatory reporting of their investment policies.

The Abu Dhabi Investment Authority, established in 1976, is the largest sovereign fund, with assets estimated at $500 billion to $875 billion, according to a widely cited analysis last August by Edwin M. Truman, senior fellow at the Peterson Institute for International Economics in Washington, D.C. Next is the $100 billion to $330 billion controlled by the Government of Singapore Investment Corp., founded in 1981. Singapore also runs $108 billion Temasek Holdings, started in 1974. Early in December, Temasek said it would provide $1 billion to a private-equity fund set up by Goldman Sachs Group of the U.S. to invest in China.

Norway has $308 billion in its Government Pension Fund. Kuwait's two funds total $213 billion. Russia has a $122 billion fund, and China a $66 billion fund. Other big funds are run by Qatar, Algeria, Australia, Brunei, Korea, Malaysia, Kazakhstan, Venezuela, Canada, Iran and New Zealand.

Though the funds are typically found in countries with big trade surpluses, there is one in the U.S: the state-run Alaska Permanent Fund, founded in 1976 to reinvest oil profits.

The oldest major fund, Kuwait's General Reserve Fund, has been around since 1960. But the funds are getting more attention now because of their mushrooming size, thanks to soaring oil prices. Truman says the funds could grow even bigger if the countries that run them were to divert more of their foreign exchange reserves into them. China, for example, has $66 billion in its sovereign fund, but more than $1.2 trillion in reserves, mostly invested in U.S. Treasury bonds. According to Allen, China might want to put more money into its sovereign fund for fear that more Treasury purchases would destabilize the Treasury market. "If they put it all into Treasury bonds, they are going to start having price effects," he says.

Reinvesting Oil Profits, for Now

Most of the sovereign funds that are soaring in size have rising oil prices to thank. In fact, it's no coincidence that the biggest funds belong to oil-producing states, which are using the funds to reinvest oil profits so there will be new sources of income when the oil is gone, Marston notes, adding that Norway's fund, considered the poster child of well-run funds, was established to reinvest North Sea oil profits. "They basically said, 'Well, we want to put some wealth aside rather than distribute it immediately, so we will have an annuity for the Norwegian people to make up for the fact that the oil is running out."

Countries that build up foreign-exchange reserves typically invest them in liquid assets like U.S. Treasuries. But once reserves are big enough to cover any short-term needs like currency intervention, countries feel they can afford to tie money up on long-term investments that offer better returns, says Wharton finance professor Richard J. Herring. "If you have your liquidity needs taken care of, then you start thinking about making longer-term investments. It's a very natural thing."

Since sovereign funds have traditionally taken a long-term approach to investing, they have had a stabilizing influence on world financial markets, Herring says. But because the top 20 sovereign funds are so large, they do put a lot of concentrated economic power under the control of a small number of people, often in autocratic countries. The smaller sum controlled by hedge funds is divided among thousands of players.

Writing in the Financial Times last July, former Treasury Secretary and Harvard president Lawrence Summers noted that government shareholders may not always have the same interests as ordinary shareholders. "The logic of the capitalist system depends on shareholders causing companies to act so as to maximize the value of their shares," he wrote. "It is far from obvious that this will over time be the only motivation of governments as shareholders. They may want to see their national companies compete effectively, or to extract technology or to achieve influence."

Governments of target, or "host," countries could find themselves in awkward situations, he said. "What about the day when a country joins some 'coalition of the willing' and asks the U.S. president to support a tax break for a company in which it has invested? Or when a decision has to be made to bail out a company, much of whose debt is held by an ally's central bank?"

So far, there have not been any serious cases of this power being used for political or other non-investment purposes. One of the few examples is relatively mild: In June 2006, the Norwegian fund sold its more than $400 million in Wal-Mart holdings, criticizing the way the company treated its workers.

Still, the temptation to use financial clout to further non-financial goals is ever-present, Herring says, recalling that many American universities and pension funds divested themselves in the 1980s of companies doing business in South Africa. "You had many large players reallocating their portfolios for other than economic reasons. That's simply the nature of things when government [of a fund] is in part political."

An Inside Look at Western Companies

According to Herring, the sovereign funds' investments in financial-services firms may be motivated not just by hopes of good investment returns, but by the desire to learn how those Western companies operate. In addition to the recent deals, China earlier this year paid $3 billion for a 9.3% share in Blackstone Group, the New York-based private-equity firm. "My guess is that these [investments] are substantially different than the kind of passive portfolio investment you see out of Norway."

Even so, he adds, that's no cause for alarm, as the U.S. government can step in if it sees a real problem. "The rules can change if we should become enormously concerned that, say, the agricultural-refining business is of strategic importance." U.S. law welcomes foreign investment so long as it poses no security risk.

For many observers, the biggest concern today is not the potential for political shenanigans but uncertainty about how sovereign funds might affect the financial markets. In an article this fall in Finance & Development, a quarterly publication of the International Monetary Fund, IMF research director Simon Johnson noted that: "Unfortunately, there's a lot we don't know about sovereign funds. Very few of them publish information about their assets, liabilities or investment strategies."

If the funds emphasize a buy-and-hold strategy, as is widely thought, they help stabilize markets, he said. At the same time, he cited some anecdotal evidence of sovereign funds investing in other funds, such as hedge funds, that multiply their impact through borrowing. Leveraging can destabilize markets when bets go wrong.

The global value of traded securities is about $165 trillion, so $3 trillion in sovereign funds is not yet a major concern, he wrote. But if the figure rises to $10 trillion, and if many funds do employ leverage, the funds will bear watching, he added.

The Peterson Institute's Truman advocates "a quantum increase in transparency and accountability" for sovereign funds. At a minimum, he says, the funds should publish annual reports detailing investment strategies and holdings. This fall, the U.S. Treasury Department called on the IMF and World Bank to develop a "best practices" guideline for sovereign funds.

Allen, Herring and Marston agree that greater transparency would be good. But Herring notes that such requirements would not be easy to impose: "It's hard to see how you get compliance with so-called 'voluntary' guidelines when the people who are making the investment decisions are really not involved in putting together the guidelines."

Published: December 12, 2007 in Knowledge@Wharton

Interview : A M Naik (Larsen & Toubro)

This is the irascible A M Naik's eighth year at the helm of India's most valuable engineering and construction company, Larsen and Toubro. In a freewheeling interview, Naik talks about the journey taken so far, and the one ahead, in a three-hour conversation with Satish John.

Excerpts:

L&T's core businesses have hit a sweet spot?
All my businesses are core. What was not core we sold. And the so called non-core businesses we have, will go eventually. But all the new verticals that we are forming are in the core businesses.

L&T will have 12 verticals, including engineering & construction, power and hydrocarbons, electricals, machinery business, industrial products, heavy engineering, technology and ship building. Thus nine of the verticals are mature businesses. Two are part of our mid-term and long-term strategy.

We have not given L&T Finance a status of a vertical yet. This business is a five year play which could turn out to be very important. Beyond 2011-12, these 12 verticals could go to 14 or 15, and then we will stop.

About 3-4 years ago there was a cover story in Businessworld that said L&T would be India's GE? Is it a fair surmise?
I don't think they said that. They only said that my style of working was like Jack Welch (legendary GE Chairman).

We have a GE type character -a conglomerate style of doing business. We are engineering driven after we sold our cement business. We (GE and L&T) don't have anything much in common except electrical switchgears.

GE also has finance…
Our finance business is puny. We pushed our finance related businesses only in the last three years. One company does financing and debt, and the other invests in infrastructure projects by picking up equity. It is currently doing more than 20 projects. We have investment in Bangalore airport. We have investment in Kakinada port, several roads and properties.

Like Welch, you personally pitch for business from big clients?
I have done roadshows with 20 customers because L&T wants to become a Rs 50,000 crore ($12 billion) company in 5 to 6 years. If you want to bag huge projects in the private sector they go by faith and not tenders. Like the Delhi airport did not go for competitive bidding. It was their belief that only L&T could deliver. (The day after the interview, L&T also bagged GVK's second Mumbai airport project.)

Otherwise you bring a multinational not used to working in India. In Hyderabad, Grandhi Mallikarjuna Rao (founder chairman of GMR Group) experienced it. We were only constructing there, the rest of the work was done by a multinational. They ran away or whatever. The promoters obviously didn't want to repeat it again and so we got the order in Delhi.

We are bidding for huge power projects. In the next 5 years we want to develop turnkey projects of 8 mw to10,000 mw. That's why we have the Mitsubishi joint venture for a super critical boiler plant. Our turbine joint venture is a toss up between Toshiba and Mitsubishi. (A week after the interview Mitsubishi was finalised.)

L&T fabrication experience may come in handy for ship building.

We are already doing naval ships and advanced ships. We have orders for 12 ships, without any foreign collaboration. As soon as I get my act together in three months in a new shipyard, I'll get orders for building 20 ships.

Aren't you looking for a ship building joint venture with a Japanese or Korean company?
Not at all. Why should I give my precious equity to someone unless I need the technology? Like in supercritical boilers or our proposed turbine venture. Otherwise I am not in favour of giving equity - the most prized possession — to anyone.

Would Mitsubishi have come without any equity stake?
They would have come with a smaller equity, but we said you come with 49%. The power
ministry and the NTPC felt that the supercritical boiler and turbine technology was so advanced, that they wanted me to have a "proper joint venture". But we still retain 51% and the casting vote.

In my tenure I have never done any 50:50 joint venture. When we formed L&T Dredging International, we secured 51% for L&T and gave 49% to our Belgian partner. The reason - it's a matter of time before foreign partners want control. They enter through the JV door, hire people through L&T or other Indian companies and create a good structure.

Then in three years, they say we can't bring new technology unless you give us a majority.

Then why a JV for dredging?
The Belgium company is a dredging operator. Us mein technology kya hain? It is for leveraging our ports business. Secondly, in my own port this dredger will be busy. Thus, one dredger will be kept busy. For doing outside work we need more dredgers. Our biggest problem is that we don't have enough dredgers for delivery.

Reliance and L&T are driving market sentiment today?
It's all hype. There are no fundamentals in that sense for investors to give 45-50 multiples. Almost all stocks are trading at those forward multiples. The market has discounted the current year's performance and perhaps even next year's performance for many midcap companies.

So is it time for L&T to list abroad?
I am against listing abroad. Today the whole world wants to come here, so why should I go there? The price-earnings multiple we get here is much more. Secondly, you don't get the price for the brand value of L&T. Very few know about us in the US. They'll compare us with GE and Bechtel, and say we are a small company. Companies like Infosys went there purely because of labour arbitrage.

They are respected in the US?
But does Infosys have the technology? Can they do what L&T can? Can they build India's defence, build ships, missile launchers, nuclear plants, satellites or radars? No.
L&T is one among eight companies in the world who can.

On defence equipment? You are still awaiting Raksha Udyog Ratna (RuR)?

That is the Leftist doing. We are the only company without the RuR. We are already working with the defence -aligned to India's national and defence research laboratories. We used to come up to prototype, and lost money throughout the late 80s and 90s. We were doing it as L&T is committed to building India and India's defence.

Even as the government talks about privatisation, the RuR is not forthcoming. The defence ministry is very clear that while RuR is getting delayed let the defence programmes go to whoever has done prototypes.

Can't L&T take advantage through the Offset Agreement?
All this is big talk. There has to be a lot of push from the government to get these foreign MNCs, who get the defence orders to comply with the Offset clause. In the end, for whatever reason, it invariably gets converted into counter trade. Offsets become counter trade and companies export oil, tea and commodities from here.

Some are trying to convert Offset to IT engineering outsourcing. Why include that?
Even if you have not sold, how can you convert jobs that you do at $100 an hour. The government has already diluted it by including outsourcing. This is how they have taken Infosys, Wipro and TCS in the RuR. I can understand if they were working for India's defence programme!

Except for TCS, which does defence-related work because it acquired CMC, who else does it? Forget defence, Infosys is so focused on making 26% profits, their India revenue is less that 1.5%. So India doesn't benefit with its own people. This makes me angry. Now they say they are looking at India and China, forced by their profitability issue. Not because they have any love for our country!

Who is fighting the MNCs —Schneider, Siemens, ABB, GE? We beat them hollow with our own products.
L&T is the pride of India. Others may make more money than us. At least (the) stock market is recognising us. Secondly, L&T is No. 1 in whatever it does — other than the power sector, where BHEL started 50 years ago at the cost of L&T.

Why at the cost of L&T?
In 1981 and 1984, we were not given a licence. I asked for the last time in 1989, and it was denied. Today the country is dependent on others, and everything is coming from China.

How do you manage to complete you projects on time even as MNCs and softwarecompanies poach your youngsters?
You are touching my boiling point. I took full control of L&T only seven years ago. I spent the first three years in reorganising and restructuring L&T — the getting ready kind of thing. In 2003, I demerged cement. The L&T stock was valued at Rs 4,000 crore including cement, which was later demerged. Today it is Rs 1,45,000 crore, without cement - a 32 times appreciation. The Sensex then was at 2,500. It has gone up eight times, L&T has gone up 31 times. So I have outperformed the Sensex 3.5 to 4 times.

If you compare other companies' performance versus the Sensex, you won't even find five like mine. Secondly, many of these companies are very focused. Bharti Airtel in telecom, Tata Steel in steel, Reliance in petrochemicals and refineries and Reliance ADA group in energy and telecom. Not a single company in our sector in the whole world will enjoy a market capitalisation appreciation —now $27 billion — like us.

You can now use your equity for acquisitions?
We don't want to make any major acquisition outside India. I don't want to make acquisitions for the heck of it. L&T is deeply focused in building India. I would rather acquire two more companies in India. Why should I put my talent in building America. I'll acquire a technology company if there are opportunities.

ABB Lummus was one foreign engineering company, according to investment bankingcircles…
Why should I put $3 billion in any company which has no role to play in India?
Talent drain is India's biggest problem. Previously the drain was because the talent was hired to go abroad. Now it is due to the outsourcing industry within India. Four out of ten Indians go abroad after using India's highly subsidised education system and 90% don't come back. Of these, four out of five go into outsourcing.

Consequently they are only working to give advantage to the US, Europe and Japan. They are designing the product here and taking it to China to manufacture. China's 52% GDP accrues from manufacturing. India shows only 17%. China's manufacturing has spread into the second and third tier districts. India is shining only in 12 cities. One Chinese engineer creates 20 jobs only because of the country's manufacturing prowess. An Indian engineer sells his man hours and fails to create any job for his fellow Indians.

It was alright when the Indian economy was closed and there weren't enough jobs for everyone. But today, there are no nurses in hospitals, or no proper hospitality staff in hotels.

We may have to put 15-20% activities in the Gulf and Malaysia. But we do not want to fritter away our energy by fighting German construction companies in Germany.

Why Gulf?
My people have to become smart. That's where they face the whole world. So when MNCs come and attack me in this country, my boys at least have a better benchmark, understanding and a better quality feeling. Therefore we can remain up-to-date to defend our turf.

In manufacturing, I have no geographical restriction. If it is made in India, I can export anywhere in the world. I am also not counting my IT business which is now exporting Rs 1,500 crore. It is one among ten companies. So when I grumble about the outsourcing industry sucking away India's talent it is because I want the powers-that- be to realise that outsourcing beyond a point is not in our interest. My complaint is that these companies sign up civil engineers, mechanical engineers, electrical engineers.

Why can they pay better salaries? Because L&T works at 7-8% PAT, they work at 26% PAT. I cannot overcharge the nation. They charge it because of the cost advantage gives them enough leverage and gives their employees double and they still end up making 26% PAT. I doubt if they will last for long.

Five years from now, China will emerge. As its manufacturing matures, China will use its non-engineering talent selectively, and use their 10,000 English teachers to create a rapid workforce to compete against us.

L&T also has some outfits in China?
I don't have IT-only four manufacturing plants. According to me, the Chinese are the most unreasonable competitors in the world. Everyone knows that China's currency is 35% undervalued. And we are champions of free economy. So we allow our rupee to float so the rupee has appreciated and tens and thousands of people are out of jobs. Small people are crying.

L&T's five units are put up for sale because of the appreciating rupee and Chinese
competition. Now, if China believes in competition and if they float their currency I am very confident that I can fight back. The moment their currency hava is over, there would be any number of people who'll say India is a far better destination.

They want to come here rather than China. Or, at least, have one leg here and one leg there. But India cannot fight Chinese competition. Who has created this? Our own government!

L&T is doing well in spite of these troubles?
The Securities and Exchange Board of India chairman says if you pinch L&T's Naik, you'll find an L&T overcoat. Kumar Mangalam Birla took me to his grandfather B K Birlaji and introduced me by saying: 'I've never seen a man who's so committed and loyal to his company." In my career of 40 years I've received many offers, but I always tell them that this life is reserved for L&T, may be if I am reborn and return as a human being, I could consider then.

So what are the challenges?
Talent is the only one for now. And China. The government said you should put one more boiler and turbine plant. The supercritical Mitsubishi boiler plant is the world's number one. On the other hand (Naik whistles) 4,000 mw is imported. So before I am born, I am being killed. This is our nation.

The least that the politicians can do is stop cutting ribbons in the outsourcing industry. There are more than 75,000 engineers working on design in India for foreign companies. They are the brains, and there are 150,000 other engineers working in the IT industry who are non-computer science engineers. Then the Bangalore Club complains that infrastructure there is cracking. Arrey tumko kisne bola tha 100,000 engineers leke aao Bangalore mein. Secondly, who asked you to recruit civil engineers? There are no civil engineers available to build infrastructure!

You also have an IT subsidiary…
Because, in 1999, when I took over we lost 8,500 engineers to the IT industry. And by the time I was thinking whether to enter IT or not I lost another 800. So I decided to defend L&T-so that when my other engineers want to join other IT industries, they can seek a transfer as long as they work in core L&T for three years.

Will you make L&T a holding company?

Right now we are deeply involved in creating verticals or virtual companies. We have formed a separate board for that. Currently there are six divisional boards eventually there will be 12 vertical boards.

Will they be filled up by young people in L&T?
Well young people do not exist in L&T, because they left when L&T became a seniority driven company. Not any more. So I am putting so much effort now that isme kaun hain star usko phataphat upar lao. Agle teen saal mein they have to become the backbone of L&T.

We've just launched the programme. Our internal processes training and development, encouragement and empowerment must be such that ordinary people can do extraordinary things.

So your succession planning has begun?
I want to call it steep deep diving into level four and five to see what's in store before we recruit laterally. Otherwise succession planning is an ongoing process. Now we want to be systematic-- take inventory of future talent.

How are you protecting L&T as a possible takeover target?
The most important thing is the spirit of L&T. It will live on as long as the old generation is there. The new generation does not have the same sense of belonging. We have a programme. Employee to L&Tite. My strong message when I speak every week or ten days is on only two things. We build India - please align with us to build our powerful nation.

Secondly, your main job is to convert employees to L&Tites, so that the future of the company is secure. One is by consistent performance. Second is to resist any moves. As long as L&T continues to perform, the financial institutions' understanding is that they will back the management. We are still paying back the loans.

What about the Ultratech stake? (L&T still owns 11% of the Birla cement company)
I haven't decided yet. Because I am waiting for peak value. But yes it's on the cards.

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Geopolitical Intelligence Report - Subprime Geopolitics

The subprime crisis is worth analysis in its own right, though it also gives us the opportunity to discuss our own approach to economic issues. Stratfor views the world through the prism of geopolitics. In geopolitics, there is no such thing as separating a country's economy from its national security or its political interests. A nation is a nation. Academic departments divide themselves nicely into areas of study. In the real world, things are much too intertwined and sloppy for that. Geopolitics views the international system and nations as consisting of a single fabric of relationships, with economics being one of the elements.

Not all events have geopolitical significance. To rise to a level of significance, an event -- economic, political or military -- must result in a decisive change in the international system, or at least a fundamental change in the behavior of a nation. The Japanese banking crisis of the early 1990s was a geopolitically significant event. Japan, the second-largest economy in the world, changed its behavior in important ways, leaving room for another power -- China -- to move into the niche Japan had previously owned as the world's export dynamo. The dot-com meltdown was not geopolitically significant. The U.S. economy had been expanding for about nine years -- a remarkably long time -- and was due for a recession. Inefficiencies had become rampant in the system, nowhere more so than in the dot-com bubble. The sector was demolished and life went on. Lives might have been shattered, but geopolitics is unsentimental about such matters.

The Russian default of 1998 was a geopolitically significant event. It marked the end of the post-Cold War period and the beginning of the new geopolitical regime that is increasingly showing itself in Russia. The global depression of the 1920s and 1930s was enormously significant, transforming the internal political and social processes of countries such as the United States and Germany, and setting the stage for political and military processes that transformed the world. The savings and loan (S&L) crisis of the 1980s had no real geopolitical effect, and the collapse of Enron meant nothing. However, the consolidation of Russian natural gas exports under Gazprom's control is certainly a major change.

The measure of geopolitical significance is whether an event changes the global balance of power or the behavior of a major international power. Looking at the subprime crisis from a geopolitical perspective, this is the fundamental question. That a great many people are losing a great deal of money is obvious. Whether this matters in the long run -- which is what geopolitics is all about -- is another matter entirely.

The origins of the crisis seem fairly clear. Traditionally, when banks look at mortgages on homes, they carefully study the likelihood that the loan will be repaid, as well as the underlying collateral. Their revenue and profits come from the repayment of the loan or the ability to realize the value of the loan through the forced sale of the house.

Two things changed this simple model. The first started a long time ago. Encouraged by the federal government, banks that issued mortgage loans began selling those loans to other entities. This, then, created a large secondary market in bundled mortgages -- huge numbers of mortgages grouped together and sold and traded as if they were simply financial instruments, which, of course, they are.

As a result, banks began to view mortgages less as long-term investments than as transactions. They made their money on closing costs, rapidly selling the mortgages to aggregators, which in turn passed them on to others. The banks then loaned the money again. The more mortgages banks racked up, the more money they made. The risk was transferred to others.

In the past few years, two new groups of players entered the scene, one on either end of the spectrum. The first group comprised mortgage companies and brokers, nonbanking institutions whose business model was built primarily around the transaction. The brokers in particular had no skin in the game. Every time they executed a mortgage, they made money. If they didn't execute one, they didn't make money. The role of evaluating the borrower increasingly fell to these entities, neither of which was going to hold on to the debt instrument for more than a moment.

The second group was the final buyers of bundled mortgages -- increasingly, hedge funds. Hedge funds are monies gathered from various "qualified" investors -- otherwise known as rich people and institutions. They are private partnerships, so what they do with their money is between the managers and partners. No federal agency is responsible for protecting the private placement of money by the wealthy.

In a world of relatively low interest rates, wealth-seeking investors flocked to these hedge funds. Some of the older ones were superbly managed. The newer ones frequently were not. With a great deal of money in the system, there was a restless search for things to invest in -- and the secondary market in subprime mortgages appeared to be extremely attractive. Carrying relatively high rates of return, and theoretically collateralized by fairly liquid private homes, the risks of these deals appeared low and the returns on the mortgages -- particularly when you looked at the contracted increases -- seemed extremely attractive.

The fact is that no one really worried about defaults. The mortgage originators that prepared the documentation for these riskier loans certainly didn't care. They just wanted the mortgages to go through. The primary lenders didn't worry because they were going to resell them in hours or days anyway. The mortgage aggregators didn't care because they were going to resell them, too. And the final holders didn't worry because they assumed the system would permit easy refinancing of loans at sustainable interest rates, and that -- in a worst-case scenario -- they at least owned a portfolio of houses that they could bundle and sell to real estate companies, perhaps even at a profit.

The final owner of the mortgage, of course, is the loser. The assumption that subprimes could be refinanced if need be failed to take into account that higher interest rates priced these people out of the market. But the worst part is this: Many hedge funds leveraged their purchase of mortgages by using them as collateral to borrow money from the banks.

That was the tipping point. When the subprime defaults started to hit, the banks that had loaned money against the mortgage portfolios re-evaluated the loans. They called some, they stopped rollovers of others and they raised interest rates. Basically, the banks started reducing the valuation of the underlying assets -- subprime mortgages -- and the internal financial positions of some hedge funds started to unravel. In some cases, the hedge funds could not repay the loans because they were unable to resell their subprime mortgages. This started causing a liquidity crisis in the global banking system, and the U.S. Federal Reserve and the European Central Bank began pumping money into the system.

Told this way, this is a story of how excess emerges in a business cycle. But it is not really a very interesting story because the business cycle always ends in excess. As economic conditions improve, more people with more money chase fewer investment opportunities. They crowd into investments that seem to guarantee vast or sure returns -- and they get hammered. The economy contracts into a recession, as it tends to do twice every decade, and then life goes on.

There currently are three possibilities. One is that the subprime crisis is an overblown event that will not even represent the culmination of a business cycle. The second is that we are about to enter a normal cyclical recession. The third, and the one that interests us, is that this crisis could result in a fundamental shift in how the U.S. or the international system works.

We need to benchmark the subprime crisis against other economic crises, and the one that most readily comes to mind is the savings and loan crisis of the 1980s. The two are not identical, but each involved careless lending practices that affected the economy while devastating individuals. But looking at it in a geopolitical sense, the S&L crisis was a nonevent. It affected nothing. Bearing in mind the difficulty of quantifying such things because of definitions, let's look for an order of magnitude comparison to see whether the subprime crisis is smaller or larger than the S&L crisis before it.

Not knowing the size of the ultimate loss after workout, we try to measure the magnitude of the problem from the size of the asset class at risk. But we work from the assumption that proved true in the S&L crisis: Financial instruments collateralized against real estate, in the long run, limit losses dramatically, although the impact on individual investors and homeowners can be devastating. We have no idea of the final workout numbers on subprime. That will depend on the final total of defaults, the ability to refinance, the ability to sell the houses and the price received. The final rectification of the subprime will be a small fraction of the total size of the pool.

Therefore, we look at the size of the at-risk pool, compared to the size of the economy as a whole, to get a sense of the order of magnitude we are dealing with. In looking at the assets involved and comparing them to the gross domestic product (GDP), the overall size of the economy, the Federal Deposit Insurance Corp. estimates that the total amount of assets involved in that crisis was $519 billion. Note that these are assets in the at-risk class, not failed loans. The size of the economy from 1986 to 1989 (the period of greatest turmoil) was between $4.5 trillion and $5.5 trillion. So the S&L crisis involved assets of between 8 percent and 10 percent of GDP. The final losses incurred amounted to about 3 percent of GDP, incurred over time.

The size of the total subprime market is estimated by Reuters to be about $500 billion. Again, this is the total asset pool, not nonperforming loans. The GDP of the United States today is about $14 trillion. That means this crisis represents about 3.5 percent of GDP, compared to between 9 percent and 10 percent of GDP in the S&L crisis. If history repeats itself -- which it won't precisely -- for the subprime crisis to equal the S&L crisis, the entire asset base would have to be written off, and that is unlikely. That would require a collapse in the private home market substantially greater than the collapse in the commercial real estate market in the 1980s -- and that was quite a terrific collapse.

Now, many arguments could be made that the estimates here are faulty or that different concepts should be used. We will concede that there are several ways of looking at this crisis. But in trying to get a handle on it strictly from a geopolitical perspective, this gives us a benchmark with which to analyze the mess.

Can it balloon into something greater? The big risk is that the weak hands in the game, the hedge funds, are suddenly coming into possession of a great number of houses that they will have to put on the market simultaneously in fire sales. That could force home prices down. At the same time, most homes are not at risk, and their owners are not hedge funds. Moreover, it is not clear whether most of the hedge funds that own subprime mortgages will be forced to try to monetize the underlying assets. It is far from clear whether the crisis will affect home prices decisively. If home prices were to collapse at the rate that commercial real estate collapsed in the 1980s, we would revisit the issue. But, unlike commercial real estate, in which price declines force more properties on the market, home real estate has the opposite tendency when prices decline -- inventory contracts. So, unless this crisis can pyramid to forced sales in excess of the subprime market, we do not see this rising to geopolitical significance.

From this, two conclusions emerge: First, this is far from being a geopolitically significant event. Second, it is not clear whether this is large enough to represent the culminating event in this business cycle. It could advance to that, but it is not there yet. We cannot preclude the possibility, though it seems more likely to be a stress point in an ongoing business cycle.

Apart from discussing the subprime issue, this crisis offers us an opportunity to explain how we view economic activity. First, we try to understand, at a fairly high level, what exactly happened, much as we would approach a war or a coup. Then we try to compare this event to other events whose outcomes we know. And, finally, we try to place it on a continuum ranging from fundamental geopolitical change to normal background noise. This is more than normal background noise, but it has not yet risen even to the level of a routine, cyclical shift in the business cycle.

China threatens 'nuclear option' of dollar sales

The Chinese government has begun a concerted campaign of economic threats against the United States, hinting that it may liquidate its vast holding of US treasuries if Washington imposes trade sanctions to force a yuan revaluation.

Two officials at leading Communist Party bodies have given interviews in recent days warning - for the first time - that Beijing may use its $1.33 trillion (£658bn) of foreign reserves as a political weapon to counter pressure from the US Congress.

Shifts in Chinese policy are often announced through key think tanks and academies.

Described as China's "nuclear option" in the state media, such action could trigger a dollar crash at a time when the US currency is already breaking down through historic support levels.

It would also cause a spike in US bond yields, hammering the US housing market and perhaps tipping the economy into recession. It is estimated that China holds over $900bn in a mix of US bonds.

China has accumulated a large sum of US dollars. Such a big sum, of which a considerable portion is in US treasury bonds, contributes a great deal to maintaining the position of the dollar as a reserve currency. Russia, Switzerland, and several other countries have reduced the their dollar holdings.

"China is unlikely to follow suit as long as the yuan's exchange rate is stable against the dollar. The Chinese central bank will be forced to sell dollars once the yuan appreciated dramatically, which might lead to a mass depreciation of the dollar," he told China Daily.

The threats play into the presidential electoral campaign of Hillary Clinton, who has called for restrictive legislation to prevent America being "held hostage to economic decicions being made in Beijing, Shanghai, or Tokyo".

A bill drafted by a group of US senators, and backed by the Senate Finance Committee, calls for trade tariffs against Chinese goods as retaliation for alleged currency manipulation.

The yuan has appreciated 9pc against the dollar over the last two years under a crawling peg but it has failed to halt the rise of China's trade surplus, which reached $26.9bn in June.

Henry Paulson, the US Tresury Secretary, said any such sanctions would undermine American authority and "could trigger a global cycle of protectionist legislation".

Mr Paulson is a China expert from his days as head of Goldman Sachs. He has opted for a softer form of diplomacy, but appeared to win few concession from Beijing on a unscheduled trip to China last week aimed at calming the waters.

Infosys ADR premium at the lowest levels

Infosys ADR Premium is at the lowest levels currently. Major reason for this fall in ADR price (based on study of the components used in calculations of premium since guidance for FY2007) shows that Prices has ADR has fallen more sharply than prices in local stock exchanges and this coupled with appreciation in INR by 5.6% has resulted in lowest level of premium in Infosys.

Increase/Decrease since guidance of Infosys

1. ADR prices of INFY has fallen by (6.8%)

2. INR/$ has appreciated by 5.6%

3. Prices on BSE has fallen by (3.9%)

Technically speaking it should have been otherwise - that is fall in local exchanges should have been more, since the interest rates in India are more and for similar amount of risk – risk premium paid in Indian bourses is less and vice-a-versa on foreign bourses. So as per me do keep away from large cap IT stocks as in market correction there would be stepper correction in Large cap IT stocks . As currently sentiments in Indian market look upbeat and major news flows are positive this is providing major support to this stocks.

Raw Sugar May Reach Lowest Since 2004, ED&F Man Says (Update1)

May 4 (Bloomberg) -- Raw sugar will drop to a two-and-a- half-year low of 8 cents a pound because of increasing production in Brazil, India, Russia and Pakistan, said ED&F Man Holdings Ltd., the world's biggest trader of the sweetener.

Global output will exceed demand by 9.8 million metric tons this year after growers expanded plantings to take advantage of a 25-year high in prices last year, London-based ED&F Man said in a report today. Brazil will produce 30.9 million tons, leaving a 20.4 million-ton domestic surplus. India will have a 5.5 million- ton surplus and may export as much as 1.2 million tons.

The outlook for raw and refined sugar prices ``remains rather bleak,'' analysts led by John Ireland, head of sugar research for ED&F in London, said in the report. ``A good start to the current Brazilian crop and even higher estimates for the forthcoming crops in the key regions makes the scenario bearish for the coming months.''

Raw sugar for July delivery on the New York Board of Trade gained 6 cents, or 0.7 percent, to 9.35 cents a pound as of 8:41 a.m. local time. Raw sugar has dropped 45 percent in a year. Eight cents would be the lowest since Sept. 10, 2004. The ED&F analysts didn't say when they expect that price.

White sugar for August delivery climbed $4.70, or 1.5 percent, to $317.50 a ton on Euronext.liffe in London, giving refined sugar a premium of $111 over raw. The premium stood at $83 on Jan. 3. The European Union has shipped less than 700,000 tons on export licenses since Oct. 1, down from 4.9 million tons by this time last year, ED&F said.

Refining Capacity

The 27-nation EU is cutting its production to comply with a ruling by the World Trade Organization limiting the amount of the sweetener the bloc can export. The cuts will lead to a temporary shortfall in white sugar until new refining capacity comes on stream, mostly in the Middle East and North Africa, ED&F said.

``In terms of the white premium, we expect it to remain well supported for the time being given the ongoing structural deficit in the refined sugar market,'' the report said.

Russia, the world's biggest importer of sugar, has more than doubled its sugar beet plantings to 504,300 hectares (1.25 million acres), compared with 284,000 by this time last year, ED&F said. The country is forecast to import 17 percent less sugar this year, at 2.5 million tons.

Pakistan, which imported 1.5 million tons of sugar last year, may have reached self-sufficiency this year, following a forecast 30 percent increase in its sugar production to 3.6 million tons and higher than expected inventories from last year, ED&F said.

A record crop is forecast for Brazil's centre-south region, which accounts for 85 percent of the country's cane output. The harvest, which started last month, may yield 416.5 million tons, in turn producing almost 27.4 million tons of sugar, the report said. The country is expected to produce 31.9 million tons in total in the 2007-2008 season.

3,500-year-old investment tips that still work!

 A book was cast in stone more than 3,500 years ago in Babylon and was found by a British professor late last century. What impressed him -- and helped him come out of a debt crisis -- were the inscriptions on how to manage one's finances.

The book is now available as The Richest Man of Babylon. It's a very small book, but with some very profound thoughts.

1. Pay yourself first: When we think of budgeting against our income, we typically look at our expenses: how much do I have to pay my landlord, my grocery bills, my medical expenses, my entertainment bills, et cetera. Once we have decided on our expenses, we find out what our savings will be.

Financial advisors and many credit card companies (or banks) today help clients in estimating their lifestyle expenses and help them understand where their money is being spent.

The old book turns this theory on its head: it says 'pay yourself first.' Before you pay others for the services that they give you, you should save money for yourself. You are working for yourself and not just for paying your bills and, hence, you should receive a fair share of your income for yourself.

The Richest Man of Babylon decrees that you should pay a minimum of 10% of whatever you earn to yourself. And the best thing is: once you have paid yourself, you will realise that your lifestyle does not change at all!

2. Make your money work harder: The Richest Man of Babylon says that the only way for your money to grow is if it procreates. Using a wonderful analogy, it states that the money saved -- and invested -- is the father and it should bear children. The joy -- and the secret to financial independence -- lies in seeing the children grow bigger than the father.

It is very instructive to learn the difference between savings and investments. Indians typically 'save' a lot -- as demonstrated by the savings to GDP ratio of around 30%. However, in many cases, savings do not translate into investments, which earn returns.

3. Take calculated risks -- but do take them: It is not always that the best intentions produce the best results. After having saved for one year as decreed by The Richest Man in the book, his disciple gave all his money to a merchant who was to go into far seas in search of the spices. Neither the boat, nor the man returned and all the savings of the disciple were lost.

While it is important -- rather it is a prerequisite -- that you need to take some risks to earn returns on your savings, you need to be careful in evaluating the risks that you can/should take. The first thing that you need to understand is the amount of risk that you are able and willing to take. It is easy to confuse between the ability and willingness -- and this is where you will need the assistance of your financial advisor.

Depending on your circumstances, you should define the amount and nature of risks that you can take. If you are nearing your retirement and have painstakingly built your nest-egg over your working life, it is important for you to ensure safety of your principal.

Conversely, if you are young and without responsibilities, you can risk your savings for higher returns.

4. Be persistent: After losing the money with the sea merchant, the disciple wanted to give up on saving and investment, saying that it is an illusory game leading to losses and pain. The Richest Man warned him not to lose heart and to continue the process year after year throughout his life. When the disciple invested -- more cautiously -- the second time, he not only received his principal back, but also received handsome interest.

It is easy to be lost in the maze of headlines and advisors who talk about the uncertainties in the markets and their abilities to time and make more money out of it. While one can try to get that extra return by tactically optimising on the portfolio allocations, what should not be lost sight of is that the mantra to investment success is to be disciplined.

There will be shocks on the way, but it is important that your savings are working for you.

It is surprising how the logic of wealth-creation written down millennia ago is still relevant today. The British archeologist who found these stone tablets was in a debt crisis, with credit card companies knocking at his door daily. By following the simple dictates above, he not only made his life debt-free, but set out on a path to financial independence!

Insightful article on Jamshedpur and the Tatas

I visited Jamshedpur over the weekend to see for myself an India that is fast disappearing despite all the wolf-cries of people like Narayanamurthy and his ilk. It is one thing to talk and quite another to do and I am delighted to tell you that Ratan Tata has akept alive the legacy of perhaps India's finest industrialist J.N. Tata.

Something that some people doubted when Ratan took over the House of the Tatas but in hindsight, the best thing to have happened to the Tatas is unquestionably Ratan. I was amazed to see the extent of corporate philanthropy and this is no exaggeration.

For the breed that talks about corporate social responsibility and talks about the role of corporate India, a visit to Jamshedpur is a must. Go there and see the amount of money they pump into keeping the town going; see the smiling faces of workers in a region known for industrial unrest; see the standard of living in a city that is almost isolated from the mess in the rest of the country.

This is not meant to be a puff piece. I have nothing to do with Tata Steel, but I strongly believe the message of hope and the message of goodness that they are spreading is worth sharing. The fact that you do have companies in India which look at workers as human beings and who do not blow their software trumpet of having changed lives. In fact, I asked Mr Muthurman, the managing director, as to why he was so quiet about all they had done and all he could offer in return was a smile wrapped in humility, which said it all.

They have done so much more since I last visited Jamshedpur, which was in 1992. The town has obviously got busier but the values thankfully haven't changed. The food is still as amazing as it always was and I gorged, as I would normally do. I visited the plant and the last time I did that was with Russi Mody.

But the plant this time was gleaming and far from what it used to be. Greener and cleaner and a tribute to environment management. You could have been in the mountains. Such was the quality of air I inhaled! There was no belching smoke; no tired faces and so many more women workers, even on the shop floor. This is true gender equality and not the kind that is often espoused at seminars organized by angry activists. I met so many old friends. Most of them have aged but not grown old. There was a spring in the air which came from a certain calmness which has always been the hallmark of Jamshedpur and something I savored for a full two days in between receiving messages of how boring and decrepit the Lackluster Fashion Week was.

It is at times such as this that our city lives seems so meaningless. Jamsetji Nusserwanji Tata had created an edifice that is today a robust company and it is not about profits and about valuation. It is not about who becomes a millionaire and who doesnt'. It is about getting the job done with dignity and respect keeping the age-old values intact and this is what I learnt. I jokingly asked someone as to whether they ever thought of joining an Infosys or a Wipro and pat came the reply: "We are not interested in becoming crorepatis but in making others crorepatis."

This is exactly what the Tatas have done for years in and around Jamshedpur. Very few people know that Jamshedpur has been selected as a UN Global Compact City, edging out the other nominee from India, Bangalore. Selected because of the quality of life, because of the conditions of sanitation and roads and welfare. If this is not a tribute to industrial India, then what is? Today, Indian needs several Jamshedpurs but it also needs this Jamshedpur to be given its fair due, its recognition. I am tired of campus visits being publicized to the Infosys and the Wipros of the world.

Modern India is being built in Jamshedpur as we speak. An India built on the strength of core convictions and nothing was more apparent about that than the experiment with truth and reality that Tata Steel is conducting at Pipla.

Forty-eight tribal girls (yes, tribal girls who these corrupt and evil politicians only talk about but do nothing for) are being educated through a residential program over nine months. I went to visit them and I spoke to them in a language that they have just learnt: Bengali. Eight weeks ago, they could only speak in Sainthali, their local dialect. But today, they are brimming with a confidence that will bring tears to your eyes. It did to mine.

One of them has just been selected to represent Jharkand in the state archery competition. They have their own womens football team and whats more they are now fond of education. It is a passion and not a burden. This was possible because I guess people like Ratan Tata and Muthurman havent sold their souls to some business management drivel, which tells us that we must only do business and nothing else.

The fact that not one Tata executive has been touched by the Naxalites in that area talks about the social respect that the Tatas have earned. The Tatas do not need this piece to be praised and lauded. My intent is to share the larger picture that we so often miss in the haze of the slime and sleaze that politics imparts. My submission to those who use phrases such as "feel-good" and "India Shining" is first visits Jamshedpur to understand what it all means. See Tata Steel in action to know what companies can do if they wish to. And what corporate India needs to do. Murli Manohar Joshi would be better off seeing what Tata Steel ha s done by creating the Xavier Institute of Tribal Education rather than by proffering excuses for the imbroglio in the IIMs. This is where the Advanis and Vajpayees need to pay homage. Not to all the Sai Babas and the Hugging saints that they are so busy with. India is changing inspite of them and they need to realise that. I couldn't have spent a more humane and wonderful weekend. Jamshedpur is an eye-opener and a role model, which should be made mandatory for replication. I saw Corporate India actually participate in basic nation-building, for when these tribal girls go back to their villages, they will return with knowledge that will truly be life-altering.

Corporate India can do it but most of the time is willing to shy away. For those corporate leaders who are happier winning awards and being interviewed on their choice of clothes, my advise is visit Tata Steel, spend some days at Jamshedpur and see a nation's transformation. That is true service and true nationalism.

Tata Steel will celebrate 100 years of existence in 2007. It won't be just a milestone in this company's history. It will be a milestone, to my mind of corporate transparency and generosity in this country.

It is indeed fitting that Ratan Tata today heads a group which has people who are committed to nation-building than just building inflluence and power. JRD must be smiling wherever he is. And so must Jamsetji Nusserwanji. These people today have literally climbed Every Last Blue Mountain. And continue to do so with vigour and passion.

Thank God for the Tatas!

Note:
Before this article I always thought that Tata's should have done always more socially responsible but have a look on corporate India and tell me another company or business house which has done more than them. Other software companies might have done more as better business house made there share holder's millionaires but have anyone made such a powerful yet humble attempt to empower rural India.

Few months before the budget I have one of top IT companies chairperson to lobby saying that Software Company should pay taxes and contribute to Indian growth since they pay taxes outside nothing to Indian government where there operations are.

But let me tell you one thing have this top honcho ever built till now any development centre in rural India. Microsoft has done total charity in India bigger than this India IT companies do together. The one of the top IT companies have 1000 sq ft. area for per employee (I doubt even we afford that area at home) on the name of recreation – they feel we don't have comfort on our homes so they provides better than home facility. There corporate styles tell us to afford the luxuries when half of the countries is barely could afford necessity.

Friends nothing against the capitalism – a king must live like a King. But a king has responsibility for public at large at least they must stop speaking like politicians when it comes to social responsibility and start doing something for people.

I have one honest suggestion for this big IT companies as they can afford some shaving of the revenues rather than looking to make tax free SEZ's which need large pool of employees which is available in TEIR I and II cities only. They shall come out with smaller development centers in smaller cities near engineering colleges and help engineering colleges to produce world class output. This will fuel the rural growths which have just started with disposable income. This will even be beneficial for them as fresher's will be available at lesser infrastructure and salary cost in smaller cities.

This is time for another IT revolution and challenging the mindset. If we could empower our rural India we could achieve a growth trajectory which is impossible to comprehend. This is the time technology can afford and rural India is roaring just feed it with proper resources.

The End of a 1,400-Year-Old Business

What entrepreneurs starting family businesses can learn from the demise of Japanese temple builder Kongo Gumiby James Olan Hutcheson The world's oldest continuously operating family business ended its impressive run last year.

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Japanese temple builder Kongo Gumi, in operation under the founders' descendants since 578, succumbed to excess debt and an unfavorable business climate in 2006. How do you make a family business last for 14 centuries? Kongo Gumi's case suggests that it's a good idea to operate in a stable industry. Few industries could be less flighty than Buddhist temple construction. The belief system has survived for thousands of years and has many millions of adherents. With this firm foundation, Kongo had survived some tumultuous times, notably the 19th century Meiji restoration when it lost government subsidies and began building commercial buildings for the first time. But temple construction had until recently been a reliable mainstay, contributing 80% of Kongo Gumi's $67.6 million in 2004 revenues.

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Keys to Success

Kongo Gumi also boasted some internal positives that enabled it to survive for centuries. Its last president, Masakazu Kongo, was the 40th member of the family to lead the company. He has cited the company's flexibility in selecting leaders as a key factor in its longevity. Specifically, rather than always handing reins to the oldest son, Kongo Gumi chose the son who best exhibited the health, responsibility, and talent for the job. Furthermore, it wasn't always a son. The 38th Kongo to lead the company was Masakazu's grandmother.

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Another factor that contributed to Kongo Gumi's extended existence was the practice of sons-in-law taking the family name when they joined the family firm. This common Japanese practice allowed the company to continue under the same name, even when there were no sons in a given generation.

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So if you want your family business to last a long time, the story of Kongo Gumi says you should mingle elements of conservatism and flexibility—stay in the same business for more than a millennium and vary from the principle of primogeniture as needed to preserve the company. The combination allowed Kongo Gumi to survive some notable hard times, such as when it switched temporarily to crafting coffins during World War II.

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Burst Bubble

The circumstances of Kongo Gumi's demise also offer some lessons. Despite its incredible history, it was a set of ordinary circumstances that brought Kongo Gumi down at last. Two factors were primarily responsible. First, during the 1980s bubble economy in Japan, the company borrowed heavily to invest in real estate. After the bubble burst in the 1992-93 recession, the assets secured by Kongo Gumi's debt shrank in value. Second, social changes in Japan brought about declining contributions to temples. As a result, demand for Kongo Gumi's temple-building services dropped sharply beginning in 1998.

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By 2004, revenues were down 35%. Masakazu Kongo laid off employees and tightened budgets. But in 2006, the end arrived. The company's borrowings had ballooned to $343 million and it was no longer possible to service the debt. In January, the company's assets were acquired by Takamatsu, a large Japanese construction company, and it was absorbed into a subsidiary. To sum up the lessons of Kongo Gumi's long tenure and ultimate failure: Pick a stable industry and create flexible succession policies. To avoid a similar demise, evolve as business conditions require, but don't get carried away with temporary enthusiasms and sacrifice financial stability for what looks like an opportunity. These lessons are somewhat contradictory and paradoxical, to be sure. But if sustained success came easy, then all family businesses would have a 1,428-year run.

4 Rules for Asset Allocation

One of the biggest (if not the biggest) determinants of how well your investment portfolio does is how you divide your assets into various investment vehicles. What percentage do you need in cash, stocks, bonds, real estate, and so on? It's a difficult question to answer for many. But in this piece, let's simplify the process into four rules for asset allocation. They are:

 

Rule No. 1: If you need the money in the next year, it should be in an interest-bearing savings or money market account.

 

Rule No. 2: If you need the money in the next one to five (or even seven) years, choose safe, income-producing investments such as Treasuries, certificates of deposit (CDs), bonds, bond funds, income funds or balanced funds.

 

Rule No. 3: Any money you don't need for more than seven years is

a candidate for the stock market.

 

Rule No. 4: Always own stocks. Even if you're at or near retirement age, stocks can help your portfolio beat the debilitating effects of inflation. In a growing economy, do a buy and hold approach for high quality growth scripts.

Interview of Warren Buffett - CNBC

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Part:3

Part: 4

Part:5

China’s soaring economic growth, POWER & MORE POWER

China’s soaring economic growth has been headlined in recent years by a single, attention-grabbing statistic: China each year adds new power generating capacity equal to the UK’s entire electricity grid. But China surpassed this benchmark last year, according to new figures released quietly at the end of January by the China Electric Power News, the mouthpiece of the state industry. The paper reported that new power capacity in 2006 had expanded by 102 gigawatts, or roughly equal to the entire capacity of the UK and Thailand combined, or about twice the generating assets of California, the state with the biggest economy in the US. China expects its installed power generating capacity to grow by around one third to 840 gigawatts by the end of the decade.

I wonder if any reader can doubt their GDP numbers.....

Rs 450,000 cr fund shortage in power sector

After the dismal performance in the 10th Plan, the power sector is facing a similar fate in the 11th Plan with the Centre, states and private companies estimated to fall short of a massive Rs 450,000 crore during 2007-12 -- nearly 45 per cent of the total funds requirement.

The country needs about Rs 10,31,600 crore to add more than 70,000 MW of generation capacity, besides creating and upgrading transmission and distribution systems. However, the sector would have a shortfall of Rs 4,51,607 crore, as per the report of Working Group on Power for 11th Five-Year Plan.

The major chunk of the shortage is for states which are slated to make total capacity additions of around 24,000 MW in the 11th Plan and need Rs 5,14,167 crore. On a debt-equity ratio of 70:30, states need an equity capital of Rs 154,250 crore, but surprisingly have no equity available to fund the expansion. Out of Rs 3,59,917 crore of total debt required, the states can arrange Rs 1,64,973 crore. This leaves a gap of close to Rs 2,70,000 crore in debt and equity for the states taken together, after considering an additional Rs 80,000 crore in funding by special schemes such as APDRP and Rajiv Gandhi Gramin Vidyutikaran Yojana.

The massive shortage is not surprising given the fact that the state utilities suffered a loss of Rs 26,150 crore and posted a negative rate of return of 27.43 per cent, according to the Economic Survey released in February 2007. According to the report, the 11th plan capacity addition target has been set at 68,869 MW. But since around 23,000 MW has been added in 10th plan, compared to the targeted 41,000 MW, the 11th plan would need a capacity of 76,000 MW.

During 2007-12, the Centre would add at least 37,000 MW, private firms over 9,000 MW and states 23,000 MW. (Economic Times)

Rs 50,000 cr required in '07-08 for Basel-II CAR

PSU banks alone will need a whopping Rs 50,000 crore in the current financial year to meet capital adequacy requirements under Basel-II norms, a finance ministry official said on Thursday.

"Public sector banks will need to mobilise Rs 50,000 crore by the end of the financial year, for the implementation of Basel-II norms," secretary (financial sector) Vinod Rai said. Banks are required to set aside Rs 9 as capital for every Rs 100 they lend.

"The current year may witness banks use a variety of options to shore up capital for Basel-II, including raising tier-I and II capital. More than a dozen public sector banks have enough headroom to dilute government equity up to 51% and raise capital," a government official said. However, sustaining GDP growth at current levels will require greater credit growth.

It has been argued that the credit-to-GDP ratio in the country at 30% is much lower than in developed countries where it is more than 150%. Bankers were divided on the moderation of credit growth. Canara Bank CMD MBN Rao said, "A calibrated increase in credit growth is desirable."

The capital requirement will increase if credit continues to grow at the same pace as the last three years: 28-30%. The Basel-II norms, that will be in force for 2007-08, require banks to assign risk weightage based on borrower's credit rating

China: Possibility of another rate hike

Chinese stats Bureau comments on over heating witnessed in china & excessive liquidity .PBOC could go in for another rate hike. All base metal could feel the pressure and Asian indices may take a clue from it.

China's Economy Surges at Faster Than Expected 11.1% on Exports

China's economy grew at a faster than expected 11.1 percent pace, powered by exports that have inflamed trade tensions and increased the risk of overheating.

Spending on factories and real estate accelerated in the first quarter, the statistics bureau said today in Beijing. The median estimate of 24 economists surveyed by Bloomberg News was for growth of 10.4 percent from a year earlier, the same as in the previous quarter.

China's government, concerned the boom may turn to bust, may raise interest rates or allow the yuan to appreciate faster to curb runaway investment in property, factories and the stock market. The China Banking Regulatory Commission today cautioned that a trade surplus that almost doubled to $46.4 billion in the first quarter may trigger a rebound in bad loans.

``China needs to raise the cost of capital -- it's still way too cheap, and that means investment is too strong,'' Stephen Green, senior economist at Standard Chartered Bank Plc in Shanghai, said before the release. ``Add asset-price inflation pressures, and you have a recipe that is worrying Beijing again.''

China's benchmark CSI 300 stock index fell 4.7 percent after the announcement, amid speculation that faster than expected growth may prompt a rate increase as soon as today. That's the most since the 9 percent one-day plunge at the end of February that triggered a global equities rout.

Consumer prices climbed 3.3 percent in March versus a central bank target of 3 percent for 2007. That's the highest inflation rate in more than two years.