Carving Global banking

• Some wounds go on hurting for years after they were inflicted. For bank regulators, the trauma of the collapse little more than five years ago of Lehman Brothers is as raw as if it had just happened.
• Lehman had spanned the world, and was run as a single entity largely overseen in America. Its disintegration caused rancour almost everywhere. Britain complained that it had been allowed to snatch $5 billion in cash from its London operation just days before the bankruptcy. Germany fumed that the Bundesbank had been saddled with defaults on about €8 billion-worth ($11 billion) of loans the central bank had made to Lehman’s German subsidiary.
• Since then regulators around the world have done much to avoid a repeat. Many of their actions, such as making banks hold more capital, have been sensible. But the rule makers have also been quietly carving up the global financial system.
• Britain is forcing the local operations of foreign banks to hold more capital. In Germany regulators have told the subsidiaries of Dutch and Italian banks not to send cash out of the country. But the biggest move could come in America, where the Federal Reserve will soon publish rules governing the operations of big foreign banks that will, in effect, throw up a wall around America’s financial markets.
• This rush to reduce the risks posed by the collapse of big foreign banks is understandable. Regulators are accountable to taxpayers at home. And, given Europe’s tardiness in cleaning up its own banking system, who can blame the Americans for wanting to insulate themselves from its troubles? European banks are still undercapitalised compared with their American peers. In an ideal scenario, forcing Barclays or Deutsche Bank (let alone shakier local German lenders) to put up more capital would make the whole system safer everywhere.
• But reality is not that simple. To begin with the Europeans may well retaliate. France’s big banks are already lobbying the European Commission to impose retaliatory restrictions that will keep JPMorgan and Goldman Sachs out of French bond markets (even though the American banks are better capitalised). That will fragment global finance.
• Walling off banking systems will increase the costs of borrowing, especially in small or fast-growing economies that need to import capital. It will cut returns to savers in countries with excess saving. McKinsey, a consultancy, reckons that fragmented banking systems could trim global growth by almost 0.5 percentage points a year. And a more fragmented system, even with better-capitalised local banks, is not necessarily safer. Risk will be more concentrated if banks cannot spread it around the world, and failures more common if they cannot move capital to bail out ailing units.
• The Fed’s impatience with Europe is understandable. America has cleaned up its banks and Europe has not. European regulators need to use the European Central Bank’s forthcoming asset-quality review to show they are serious about doing so.
• But even the Americans admit that the best system, for big banks, is a global one—and there are ways of making a global system safer. Banks could be forced into structures that would push losses from their subsidiaries up to the parent and send capital down to struggling subsidiaries. Big cushions of equity and “bail-in” debt held centrally could reassure regulators.
• For that to happen, there need to be formal deals between the main financial centres. The Financial Stability Board (FSB), a club of supervisors and central banks, is championing these ideas, but neither the Americans nor the Europeans have done enough to push them. If the Europeans get serious about cleaning up their banks, the Americans should make one final, genuine attempt to get the FSB’s global rules to work.

Mahindra,the obvious face of India capitalism

•  Anand Mahindra, an Indian tycoon, there is a rebel bursting to get out. He works amid aircraft models and walls of framed posters and has a mildly indiscreet Twitter account with a million followers. A former film student at Harvard, he describes his country’s malaise using the metaphor of “Star Wars”. Graft and cronyism in India are like an evil Empire that has struck back. His hope is that middle-class and young Indians become Jedi knights to battle the Dark Side.
• Most of the time, though, Mr Mahindra, aged 58, is a senior statesman—the acceptable face of Indian capitalism, especially since the retirement in 2012 of the admired Ratan Tata from Tata Sons. Mahindra & Mahindra dominates India’s market for sport-utility vehicles (SUVs) and is the world’s largest tractor firm by volume, selling them in India and abroad—it is sufficiently entrenched in America to sponsor Texan bull-riding tournaments. It is not huge, being the fifth-biggest Indian family group by sales ($16 billion) and the 17th largest Indian firm by market capitalisation ($15 billion). But it is notable in several ways.
• First, it is a rare Indian manufacturing success—and has created its technology at home. Indian conglomerates are often financial quagmires but Mahindra has high returns and little debt, and uses capital efficiently. In a country where power is dynastic it is the business house closest to being controlled by outside investors: the family and its allies own only 25%. Mr Mahindra is the third generation, and probably the last, to be boss—there is no obvious family successor. Lastly, the group is known for avoiding cronyism. Mr Mahindra has kept away from industries that require “a competence for lobbying”, and says he avoids Delhi, India’s capital, like the plague.
• The magic formula has ordinary ingredients: luck and judgment. When India liberalised in 1991 Mahindra was sprawling and flabby like many of its peers—making everything from jeeps to lifts. It slimmed fast, perhaps because the family’s low stake made it vulnerable to a takeover. In 1993 it hired Pawan Goenka, a veteran of Detroit, who now runs the automotive unit. Then came a fall in property prices, in 1997-98, which stretched the firm’s finances and forced it into some hard choices, says Bharat Doshi, a director. Rather than put more cash into a joint venture with Ford, Mahindra backed its own SUV project. By 2002 a model called the Scorpio was born and by 2005 it was a huge hit.
• More good decisions have come since then. New SUV models were launched. In 2007 Mahindra had a sniff at Jaguar Land Rover (JLR), a British carmaker, but backed off. Although JLR has since prospered under Tata’s control, the $1 billion of cash it ate up in the first year of its new ownership would have overwhelmed Mahindra, which then had a market capitalisation of only $4 billion. In 2009 Mahindra bought Satyam, an IT-services firm that had been floored by a huge fraud. It fully merged Satyam with its own IT arm in June, lowering its stake to 26% in the process but helping to boost the value of the combined entity, which has reached $6 billion.
• The big worry is that Mahindra will have a “Nokia moment”, when an apparently unassailable position crumbles. The Indian SUV unit contributes about 55% of operating profits and cashflow. It has a market share of 41% according to Hitesh Goel of Kotak, a broker. Its returns on capital are tremendous, partly reflecting a relatively low level of technology investment. Tractors, also with a 41% market share, contribute one-third of profits—and demand is booming thanks to this year’s heavy monsoon rains.
• Max Warburton of Sanford C. Bernstein, a research firm, notes that the global SUV craze has created other successful specialists—China has Great Wall, a firm now worth $20 billion. But Mahindra’s strong position in its home market is vulnerable to attack from the global carmaking giants, as they seek to diversify away from the unprofitable mass market for conventional cars towards such profitable niches. Renault and Ford have launched new SUVs and now “everyone and his uncle, cat and dog is leaping in,” says Hormazd Sorabjee, editor of Autocar India. In tractors, too, foreign firms are developing the smaller machines that tend to do best in India, says Abhijeet Naik of CLSA, another broker.
• Mahindra is not asleep at the wheel. It has new SUV models in the pipeline and a rural distribution network that will be hard for rivals to replicate. Still, it makes sense for it to invest in new areas. In 2011 it bought SsangYong, an ailing South Korean firm, and is nursing it back to health. Mahindra hopes to use its brand to build a presence in pickup trucks and two-wheelers—efforts which analysts tend to hate, arguing that both product lines are losing money and face formidable competitors.
• Yet taken together these three experimental areas are hardly big bets, consuming only about one-fifth of the group’s underlying cashflow. Mahindra spends only $170m a year on research and development—1.9% of its market value. It has a conservative balance-sheet, with no almost no net debt once you exclude the liabilities in its listed finance arm.
• Sometimes being an admired firm is a trap. Investors get addicted to steady cashflows and become jittery about risky new projects. Mahindra could legitimately invest heavily in developing big tractors for the American market, trying to export more SUVs under its own brand or SsangYong’s, and broadening its rural presence into new areas such as logistics. It could also buy a Western car firm, to acquire better technology—already it is considering a new research centre in Britain. Mr Mahindra says “it is not in our culture” to bet the ranch. But it must not be too conservative either. Capitalism only works when the best firms rebel a bit and take some risks.

Clarity about public spending can make poor countries richer

• Whether you are a farmer in Mexico, a student in Nigeria or an IMF official, openness about government expenditure matters. In the run-up to this week’s summit in London of the Open Government Partnership, a slow-moving international effort to promote transparency, clarity about budgets is a bit of a bright spot.
• Until 2008 the Liberian government provided scant information on its spending. It now puts budget documents online, and in January erected an electronic billboard outside the Ministry of Finance in Monrovia, the capital, to provide fiscal news to passers-by. Meanwhile, Morocco and Kyrgyzstan publish their budgets on downloadable spreadsheets.
• Openness need not be costly. Of the African states surveyed by the International Budget Partnership (IBP), a pressure group, 24 turned out already to produce 58 of the budgetary documents needed. But these were private—either for donors or for internal purposes. Warren Krafchik of the IBP says political will, not technical capacity, is the main brake on openness.
• Once details are published, citizens can lobby for different spending priorities. BudgiT, a Nigerian group, turns the numbers into easily understood infographics. It shows that $144 billion from oil revenues could pay the university costs of 1.5m students, or provide fertiliser for 14m farmers. Fundar, a Mexican think-tank, created a website showing that richer states got the lion’s share of money from the Procampo farm-subsidy programme. (Getting the data took 30 requests and 16 appeals.) After a media uproar the authorities brought in a new maximum payout for subsidies and promised to revise the list of recipients.
• Openness and scrutiny encourage lenders. In a study in 2012 the IMF linked economic crises to undisclosed debts and deficits. Openness in public finances was found to be an important predictor of a country’s credibility in the eyes of the market. Richard Hughes from the IMF’s Fiscal Affairs Department says that clarity also makes shocks to fiscal policy less likely.
• The IMF does not exactly practise what it preaches, however. In an index on aid transparency published last week, it came 28th out of 67 donor organisations for the openness of its aid programmes, with a “poor” score of 32%. (America’s Millennium Challenge Corporation came top, with 89%.) Secrecy is a hard habit to ditch. But at least it is becoming more conspicuous.

BSE Sensex hits life high

• The Sensex surged to a record on Friday as blue chips rallied on the back of strong foreign buying, in a remarkable turnaround from two months earlier, when the rupee hit record lows and threatened a crisis of confidence.
• The Sensex has been propelled by foreign inflows of around $3.5 billion since the Federal Reserve unexpectedly delayed tapering of its monetary stimulus.
• The foreign buying comes despite mixed signals in an economy growing at its slowest in a decade, with analysts seeing new challenges ahead as the central bank raises interest rates to curb stubbornly high inflation.
• That has made some investors cautious about whether a rally that has sent the index up 21.5 percent since a yearly low on August 28. can be sustained.
• “I am not too pleased with the way fundamentals are shaping up. This new high is driven by only a handful of stocks which are hopelessly expensive, despite fundamentals,” said fund manager Phani Sekhar at Angel Broking.
• “The liquidity rush is making people accumulate stocks. If fundamentals don’t improve or liquidity tapers, then this rally won’t have many legs.”
• The Sensex rose as high as 21,293.88 points, a gain of 0.6 percent for the day, surpassing the previous record of 21,206.77 points on January 10, 2008. It ended Friday up 0.2 percent.
• Despite the record high, the Sensex remains Asia’s fourth-worst performer this year in dollar terms among the exchanges tracked by Thomson Reuters, with a fall of 2.6 percent.
• The returns have been hurt by a weak rupee, which hit a record low of 68.85 in late August, that had sparked concerns about a currency crisis in the country.
• Those concerns have subsided, thanks to the delay in the Fed tapering and steps to steady the rupee taken by India’s new central bank governor Raghuram Rajan.
• Still, challenges to the broader economy remain. Manufacturing activity contracted for a third straight month in October, data on Friday showed, for example.
• Signs of weakness are keeping the economic outlook uncertain even as other data show signs of improvement, including a report showing India’s infrastructure sector output rising at its fastest in a year.
• The World Bank last month slashed its growth forecast for Asia’s third-largest economy to 4.7 percent in the year ending March, below the decade low of 5 percent in the previous fiscal.
• The Reserve Bank of India also raised interest rates by a quarter percentage point for a second consecutive month in October, to fight accelerating inflation.
• Indian shares are expensive compared to regional peers, trading at about 14.4 times trailing 12-month earnings compared to 10.6 times for Asian emerging markets, Credit Suisse said.
• Yet blue chips have been gaining. The Nifty rose 0.1 percent, also within sight of a record high set on January 8, 2008.
• State-owned banks gained for a second consecutive session on Friday on hopes of stabilising asset quality, sending State Bank of India Ltd up 5 percent.
• Among other lenders, Bank of India  rose 5.5 percent, while Bank of Baroda  surged 4.5 percent.
• Infrastructure Development Finance Co Ltd  shares jumped 6.8 percent after its September-quarter consolidated net profit beat some analyst expectations.
• Hero MotoCorp Ltd  gained 1.1 percent after the company said October sales rose 18.2 percent.
• Dr.Reddy’s Laboratories Ltd  gained 0.6 percent after its September-quarter consolidated net rose 69 percent to 6.90 billion rupees.
• Shares of Titan Co Ltd  fell 2.1 percent after its September-quarter net profit missed some analyst estimates.