Smart ideas to make you Wealthy

Are the physical Gold SIPs offered by Jewellers worth the money?

noreply@blogger.com (Ideas2Wealth) — Thu, 01 Mar 2012 09:39:00 +0000

I have been seeing a frantic rush to buy gold, both in physical and in electronic forms over the last couple of years. It is natural for investors to use gold as an investment avenue when we go through inflationary conditions, as we currently do. Thanks to huge bailouts packages starting from the 2008 bailout of financial institutions to the latest bailout of Greece, there is a huge influx of paper money into the world economy. This in turn drives the erosion in value of various financial assets like stocks, bonds etc., but an asset like Gold is believed to retain value. This is true according to the classical economic theories and validated by our forefathers who bought nothing but gold whenever they had money. From all aspects the clamour for gold has been increasing among the investing community. The price of the gold has also moved up in tandem over the last couple of years.

Sensing a big business opportunity is the Indian Jewellery community which is now vigorously marketing the systematic investment plan in physical gold. Almost all the jewellers in Chennai have launched schemes where people can invest a specified amount of money and the equivalent amount of gold would be credited to their account at the prevailing rate. The jewellers sweeten this deal by foregoing the traditional making charges and wastage. The jewellers market this scheme by informing the gullible investors that the price at which gold they bought is protected for future price escalations. Their basic assumption is that the "price of gold would continue to raise forever". One of the basic tenets of economics is that nothing can keep raising forever and what goes up has to come down sometime.

There are number of questions which crosses my mind:
1. Lack of regulations: Who regulates these jewellers with regard to these systematic investment plans? The answer is nobody regulates them and nobody independently certifies that the price at which the gold is alloted to investors are in alignment with the market price.
2. Credit worthiness of the jewellers: These systematic investment plans are long term products running for 12-18 months and exposes the investors to default risk. They have nothing else to fall back upon other than the empty guarantees of these jewellers.
3. Price risk: One of the biggest risks is what happens tomorrow if the price of the gold crashes to pre-2008 levels? In my opinion this is one of the biggest risks associated with these schemes. You may ask how it is different if I buy gold today at high prices and subsequently the price goes down? Good question, but the answer is the gold you buy today is a bird in hand compared to these schemes where you just pay the money to the jeweller and expect him to honour the committment after 24 months or so.
4. Lack of transperancy: Normally, for these type of transactions, the seller has to properly hedge their positions in the gold market. But we don't know if these are being properly done by the jewellers on a daily basis. Also, I am afraid they dont mark to market their losses if any and account it in their books of accounts. I think I am sounding too naive to expect our Indian Jewellers to do this prudent accounting. First of all, let them account all their sales!
5. Risk of over-trading in commodities/derivatives exchange: If we assume that the jewellers try to hedge their positions in the derivatives market, then there is a risk of over-trading in the derivatives market by the jewellers. We have seen many instances in the past when the traders have literally lost their shirt by excessively trading on the commodity derivatives market. Very recently, there were press reports of the promoters of KS Oils losing huge money by trading in the palm oil futures.

So, overall there are huge risks assumed by the people who go for this systematic investment plans with jewellers and it is better to avoid them altogether. If you want to buy gold, just buy it over the counter rather than joining a scheme like this.

New Product - Mutual Fund based ATM card

noreply@blogger.com (Ideas2Wealth) — Wed, 30 Nov 2011 15:15:00 +0000

Reliance Mutual Fund has introduced the first of its kind "ATM" card linked to Mutual Fund Folios in association with Visa. This is a new concept with regard to Mutual Fund investments and this may ultimately take us closer towards Investment accounts with Cheque book facility.

In this new product, Reliance Mutual Fund would issue ATM card, which you can use like any other bank debit card and it is accepted across 30 million outlets. The ATM card holder should be holding units in Reliance Money Manager Fund or Reliance Liquid Fund - Treasury Plan schemes.

At this stage, we have limited information on this product but we see the following benefits:

1. Flexibility in monetising the mutual fund investments and the ability to carry the value of your liquid investments in an ATM card would be very useful.

2. Possibility to earn higher interest on the liquidity funds as compared to savings bank account. With the recent de-regulation of savings bank interest rates, the difference on yields between savings bank accounts and MF liquid fund investments are reduced.

Clarifications required in the following areas:

1. The modus operandi on the reduction of the units for the usage on the ATM card. What is the expected lead time before the number of units would be reduced?

2. Do they block the equivalent number of units as and when a transaction takes place?

3. Does this service involves any additional charge to MF investors?

These are early days but I think we require new and innovative products like this to liven up the financial services space. We can expect a slew of launches on the same lines from other Mutual Fund players in the coming months, if not in the coming weeks.

Will post more as we are able to lay our hands on additional information.

De-regulation of Savings Bank interest rates

noreply@blogger.com (Ideas2Wealth) — Mon, 31 Oct 2011 11:32:00 +0000

The major development during the last week was the de-regulation of the savings banks interest rates of banks in India by the Reserve Bank of India. This is one of the last of administered interest rates in the banking industry and which has an impact on both the parties involved, the customers and the banks. We wholeheartedly welcome this move of Reserve Bank of India as it would lead to finer pricing of savings bank deposits to the customers.

Savings Bank deposits are the most common of the banking relationship the customers have with their bankers. Around 20 to 25% of the banking deposits are in Savings Bank accounts. So what does the de-regulation mean in layman terms? RBI has now allowed banks in India to offer an interest rate which is not mandated to them. They are free to price their savings bank interest rates to attract new customers. RBI has mandated two slabs, for SB account with balances less than Rs100,00 and SB accounts with balances more than Rs100,000. The banks can offer differing rates for these two categories, which I think is very logical. Couple of banks have already raised their SB interest rates. Yes Bank was the first of the block, raised its SB interest to 6%. More banks are expected to follow suit in the days to come.

How does it benefit the customers? The balance lying in the SB account would get higher interest with effect from the Q3 of 2011-12 Financial year. But the customers should also note that with the freeing of interest rates, the interest rates can also go down as and when we see a cheap money policy. That is, when the overall interest rates come down, the SB interest rates would also be coming down and there is no floor stipulated by RBI. Just like the FD interest rates are ruling high currently, the SB interest rates would also be high and may even go up to 7% or so in the coming months, but with inflation coming down (RBI expecting this to happen in Q4) the interest (repo) rates would also come down. Along with that, SB interest rates would also come down. So it is no longer going to be one way street!!

So the point to be noted here is that there is no minimum guaranteed interest rates on SB deposits going forward. This makes it very important for people with high SB account balances to actively manage these funds for better returns. It is not sufficient to just leave it in SB accounts to earn these high interest rates forever.

There would be initial euphoria for this announcement and I expect a flurry of announcements by banks trying to entice customers. There would be increased pressure on the margins of the banks which has a very high quantum of SB account balances, like HDFC, SBI etc., As a result the cost of funds for the banks would increase proportionately to the ratio of Savings Bank accounts in their deposits.

Banks are smart and they would definitely try to pass on this increased cost of funds to the customers in a different manner. They would restrict the number of transactions allowed in a savings bank account per quarter, number of branch visits and anything above the allowed limit would be chargeable for the customers. There is no free lunch in the system!

But over a period of time, the impact on banks because of this new regulation would even out. Actually, in my opinion, banks would stand to gain in the long run. The interest rates would come down but the transaction charges and the limits imposed would remain for the customers. Gain in the short term but its going to be pain in the long term for SB account holders. I wish I am wrong here!!!!

Pre-Payment Penalty on Housing Loans and Discriminatory Pricing between Old and New Customers

noreply@blogger.com (Ideas2Wealth) — Sun, 23 Oct 2011 11:27:00 +0000

During the last week, two significant circulars were issued by the National Housing Bank, the apex regulator of Housing Finance Companies in India. The gist of the circulars are as follows:

1. Housing Finance Companies are not allowed to charge pre-payment penalty on closure of floating rate loans irrespective of the source of funds to close the housing loans.

2. Housing Finance Companies are not allowed to charge pre-payment penalty on closure of fixed rate loans, provided the loan is closed with own funds. That is, the customer is not borrowing from other Housing Finance Companies or banks or NBFCs to close his fixed rate housing loan.

3. Thirdly, the housing finance companies are not allowed to charge differential interest rates for old and new customers on their floating rate loans where the credit/risk profile.

Frequently Asked Questions:

When does these provisions take effect?

It is effective immediately. That is, from 19th October 2011.

What are these Housing Finance Companies?

Few examples of HFCs are HDFC Ltd., LIC Housing Finance Ltd., Dewan Housing Finance Ltd., Gruh Ltd., REPCO Housing Finance Ltd.,

Does this new rule apply to banks like SBI, AXIS, ICICI?

No, it applies only to HFCs. Banks are regulated by Reserve Bank of India.

Can we expect the same set of rules to be enforced for Banks in the near future?

Yes, RBI is working on a similar kind of rules for housing loans issued by Banks. Our guess is it should happen as soon as possible.

Does this new rule apply to part-payment of housing loans?

Though it is not specifically mentioned in the NHB circulars, it is very logical to assume the same set of rules for part-payment of housing loans. So, there won't be any penalty for part-payment of either fixed or floating rate loans out of own funds.

Who should make use of this new set of pre-closure rules?

Having high balance in Savings bank account but paying high interest on their housing loans fearing exorbitant pre-closure charges, should be first set of people who must take advantage of this new provision.

Whom should I contact if my HFC doesn't allow pre-closure of loans without penalty or if there is discriminatory pricing?

You should contact National Housing Bank.

Special Demat account for non-equity holdings

noreply@blogger.com (Ideas2Wealth) — Sun, 09 Oct 2011 12:01:00 +0000

We have always felt the need for a demat account which can help people to hold on to various financial instruments, like Mutual Funds, Debentures, Non-convertible bonds, Deep Discount bonds etc., who don't normally invest in direct equities. There is a huge section of people who desist from investing in equities but would like to hold other debt and MF instruments in demat form. Off late, we are also seeing an increasing tendency among the issuing companies to go for electronic form of holding these debt instruments as it makes their lives easier.

Sensing this requirement correctly, Integrated Enterprises have come out with a special purpose demat account to hold these non-equity financial instruments at a very nominal cost of a refundable deposit of Rs1000/-. Integrated Enterprises claims that they would not charge any other charges during the lifetime of the account, which makes it all the more interesting.

Key features of this demat account are:

You can maintain all existing Mutual Fund units in the Demat account.
Demat account is compulsory for investing in Corporate Bonds/NCDs. There is NO TDS, ONLY if you maintain them in the Demat mode.
Demat account is compulsory for investing in Gold ETFs.
You can invest & maintain Long Term Infrastruture Bonds (with income tax benefit 80-CCF) in the Demat account

We think this is a significant development for small and retail investors and it also helps to further deepen the reach of these financial products.

For more information, you may please visit their website.

Happy Investing!!

Disclosure: The above information is collected from the publicly available information disseminated by Integrated Enterprise and shared on this blog without any obligation. We don't have financial or business dealing with Integrated Enterprise. Please check their terms and conditions carefully before concluding any transaction.

Welcome back!!

noreply@blogger.com (Ideas2Wealth) — Sun, 09 Oct 2011 11:59:00 +0000

We are back online after a 2 year hiatus. We know, this is quite a long period to be away, and we would try to be more regular going forward.

Wish you all a very happy reading!!

Co-operative societies and stamp duty evasion issue

noreply@blogger.com (Ideas2Wealth) — Thu, 22 Oct 2009 15:39:00 +0000

In the last 3 - 4 years, lot of co-operative societies in Tamil Nadu has promoted and marketed many housing plot lay-outs. The chief attraction of these lay-outs are the waiver of stamp duty of 9% at the registration of these housing plots. Using this effectively, many co-operative housing societies have sold plots to investors and end-users over the last so many years.

Whats the catch here?

As per the Government regulations, the waiver of stamp-duty is available only in respect of housing plots laid out on the land owned by the Co-operative society. The Co-operative Society is supposed to follow the following process:

Pool resources from the members
Purchase a piece of land and register it in their own name
Sub-divide it into housing plots and get the necessary approvals
Allot the sub-divided plots to its members
Register the plots in the name of its members with the stamp duty waiver

What went wrong in this case?

Instead of Co-operative societies buying land and sub-dividing them into housing plots, they started marketing the land owned by other individuals/promoters for a commission. They offered the prospective buyer stamp-duty exemption in respect of the plots which are only marketed by them for a commission but not owned by them. The buyer of the plot enjoys stamp-duty waiver, owner of the land is able to sell fast and the co-operative societies were making their money through commissions from the land owners.

Who is the loser here?

The state Government. The Governmnet of Tamilnadu has now woken up and stopped all registrations of plots which are just marketed by Co-operative Societies by its order dated 05 Oct. The Government estimates that the revenue loss of close 400 crores over the last 5 years or so.

What would happen now?

The Government has found out that there are atleast 20 lay-outs near Chennai, another 5 layouts in Coimbatore are currently being sold under this route. The Government may order for an audit of the past registrations and issue a stamp-duty demand notice on the current and erstwhile property owners.

What we should be careful about?

If you are currently in the look out for a plot of land promoted by a co-operative society, be careful when somebody tells you there is a stamp-duty waiver in respect of the property. Ask and clarify from the co-operative society if the stamp-duty waiver is applicable to that particular lay-out which is being promoted by them and if possible, seek documentary evidence of the same. You can also check and ensure that the land is owned by the co-operative society and the registration is done with the co-operative society as the seller.

Caveat Emptor!!

PAN requirement for Mutual Fund investments through SIP may go off

noreply@blogger.com (Ideas2Wealth) — Thu, 18 Jun 2009 09:43:00 +0000

The Finance Ministry is set to issue a new set of guidelines for SIP investments upto Rs50,000 in Mutual Funds relaxing the need to produce Permanent Account details. PAN was required under the Prevention of Anti-money Laundering Act (PMLA) to establish the identity of the person making the investment. As Systemtic Investment Plan transactions are routed thorugh the Banking channels, the identity of the investor can be easily established.

Dhirendra Kumar of Valueresearchonline.com feels that this is a positive development for the mutual fund industry particularly at a time when everybody is talking about extending financial services to the "bottom of pyramid" population and would also open up the Mutual fund avenue for more than 100 crore Indians who don't have a Permanent Account Number.

As more and more people are interested in investing in the stock markets using the Mutual Fund route and with the advent of products like Micro SIP's, where the monthly contribution can be as low as Rs50, this is definitely would give a fillip to the Mutual Fund industry in augumenting the funds under management.

As per Economic Times, KYC process would still be enforced for Mutual Fund Investments.

Please note that this relaxation is still not official as AMFI India, the umbrella organisation of Mutual Funds in India is yet to receive the Government order.

Nomination facility to your Demat account with NSDL

noreply@blogger.com (Ideas2Wealth) — Tue, 17 Mar 2009 11:00:00 +0000

Recently National Securities Depository Limited through its Circular NSDL/POLICY/2009/0002 dt 3 January 2009, has asked all the depository participants to collect nominee details for all the current demat accounts held by them.

For example, you may hold an Demat account with ICICI Bank or Kotak Securities. They would contact you to update the nominee details in case you have not updated it earlier. This is a step in the right direction as it provides hassle-free transfer of securities in the event of death of the demat account holder.

You would have started receiving emails from the Depository Particpant. Please take some time off and arrange to fill up the form and send it back to your DP where you hold your demat account.

The last date for the submission of the form is April 30, 2009 as per ICICI Direct emailer. Please check with your respective DP's to find out the last date for the submission of the form.

EPF rate kept unchanged at 8.5 per cent for 2008-09

noreply@blogger.com (Ideas2Wealth) — Mon, 23 Feb 2009 12:22:00 +0000

The Central Board of Trustees of the Employees Provident Fund met here on Sunday pegged the interest rate payable to subscribers for 2008-09 at the existing 8.5 per cent for the third successive week against the trade unions' demand for 9.5 per cent return per annum.
The decision was taken by the newly constituted board which met under the chairmanship of Oscar Fernandes, minister of state for labour and employment and chairman, central Board of Trustees of EPF in New Delhi.

The decision to keep the interest rate at 8.5 per cent for the current financial year has been opposed by almost all major trade union leaders, including the Centre of Indian Trade Union (CITU), All India Trade Union Congress (AITUC), Bhartiya Mazdoor Sangh (BMS), Hind Mazdoor Sabha (HMS) and All India United Trade Union Centre (AIUTUC). The Employees Provident Fund has more than 44 million subscribers.

The EPF trustees said the fund has been dipping often into the contingency fund to give subscribers a ''reasonable return'' for the past few years. The fund is reported to exhaust with the current pay-out.
EPF has already paid an 8.5 per cent on withdrawals and retiree payments in 2008-09, and that too for a higher amount than in earlier years.

The decision to retain the interest rate 8.5 per cent in the backdrop of the coming general elections is expected to be a severe drain on the economy at a time when the Reserve Bank of India is forcing a downward revision of interest rates – both lending and borrowing – in order to boost consumption.

Source: World Wide Web

Review of Bajaj Allianz Capital Shield Plan

noreply@blogger.com (Ideas2Wealth) — Fri, 06 Feb 2009 14:17:00 +0000

Recently Bajaj Allianz Life Insurnace company has introduced a Insurance Linked Index Investment Plan called "Capital Shield". This product is being aggressively pushed by one of their Bancassurance partners, Standard Chartered Bank.

The salient features of the plan are as follows:

1. 5 times the initial amount as life cover, i.e., Rs5 lakhs for the next five years.
2. Investment allocation of 98% of the investment after deduction of the mortality charges.

The product works like this. You make the initial investment and after 5 years of the policy term, Bajaj Allianz guarantees that they would be able to return the money what you invest today. The minimum investment amount is Rs50,000/-. That is, they guarantee to return back the capital after the policy term. In this period of fast depreciating investmnets, the idea is to entice the investors with a capital protection guarantee. So what is the big thing about this product? The important thing is that portion of your investment is channeled towards buying NIFTY Call Options and the returns you would get is linked to the NIFTY returns over the next 5 years. The plan also guarantees a 15% return on investment at the end of 5 years subject to certain conditions.

Does it sound interesting to you? I have a capital protection and also at the same time I have an exposure to equity markets through NIFTY Index options. On this premise only this product is being aggressively sold. I think there are lot of questions which needs to be answered before you can invest in these structured products.

First one is the Participation ratio: This is the percentage of your investment which goes into NIFTY Index Linked Call Options in this product. Technically, this is the percentage which has been left after allocating investment towards the fixed income portion of your investment which guarantees your capital at the end of 5 years term. It is not clear from the product brochure the percentage of your investment which will go into Index options.

Unable to time the entry based on NIFTY Index Levels: In this Capital Shield Product, the entry point for you would be the average of the first 3 months from the time you invested. Actually, this is a double edged sword. You may decide to invest today just because that the NIFTY has been hammered a lot and hovering around 2700 levels. But Bajaj Allianz would not take the investment at today's NIFTY Index Level but wait for the next 2 months level to decide on the average. In case, the NIFTY goes up in the next 2 months, your entry price is averaged out upwards. Though this averaging out helps to smoothen the volatility, it defeats the very concept of trying to time the market.

Poor guaranteed returns: The plan brochure talks about guaranteed 15% return on investment over the next 5 years if the NIFTY Index moves up by 100% over the next 5 years. On plain reading this return percentage looks attractive but the fact is the return of 15% is simple return after 5 years. That is, you invest Rs1 lakh today and the NIFTY level is at 2750 and at any point of time during the next 5 years it moves to 5550, then you are guaranteed 15% on Rs1 lakh after 5 years. It works out to a measly 3% simple interest.

What happens if the NIFTY fails to double within 5 years?: There is a possibility that NIFTY never manages to double from todays level over the next 5 years. Then Bajaj Allianz is not even compelled to pay this 3% simple interest per annum. In that worst case scenario, they would pay Rs1 lakh back to you with a big thank you. They would have used your investment for 5 years and return the capital only. The product doesnt have a feature of roll over the maturity period to take care of the prevailing market conditions.

Overall, investment in Bajaj Allianz's Capital Shield product should be avoided as there are better investment opportunities in the fixed income domain itself. Our suggestion would be go for plain vanilla products compared to these structured products where fixed income and equity index futures are combined. It neither has the stability of the fixed income instruments nor gives the multi-fold returns of Equity products.

Encashing the ESOP - another stark reminder from the recent Satyam episode.

noreply@blogger.com (Ideas2Wealth) — Tue, 13 Jan 2009 14:23:00 +0000

We all know about the Satyam scandal and the various efforts made by the Government in salvaging whatever possible for the various stakeholders from this unprecedented fiasco. At this juncture, we have to remember the employee millionaires of Satyam who had made tremendous wealth (of course on paper) through ESOP's. The employees who were holding ESOP's were one of the worst affected of the lot due to steep correction in share values of Satyam. We cautioned in one of our earlier articles when Bear Stearns went down in March 2008 about the need to systematically encash ESOP's to avoid situations like this. You can read that article here.

The Satyam episode once again reinforces the need for encashing the ESOP's on a periodic basis. One of the most commonly faced phenomenon with regard to employee shareholders of the company is that they continue to hold on to their ESOP's thinking that their company is strong and nothing would happen to their company. We have past examples of Bear Stearns, Lehman Brothers, I2 Technologies from USA where employee shareholders held sizeable portion of the equity and finally they were the one who were left in the lurch. Bear Stearns shares were exchanged by JP Morgan at USD2 per share. Lehman Brothers is currently engaged in Bankruptcy proceedings and we dont know the fate of the share price. I2 Technologies had fabulous prices during the early years of 2000 and now quoting nowhere near its all time high prices.

None of the employee of Satyam would have imagined prior to 07 Jan 2009 that their top management is doing all sorts of corporate frauds. Leave alone the employees, the stock analysts who were following the Satyam stock for number of years had any clue on what is happening in the company. So how we can blame the novice employee shareholders. They in most cases neither have the time nor the skills to evaluate their own company financials and exit at the right price. But that should not mean that they should continue to hold all their ESOP's without doing anything.

What the employees can do to mitigate the "Black Swan" events?

They would have never thought that their share prices would plumment more than 80% of the value in the next 3 days or so.

The employees should practice systematic encashment of ESOP and convert them into different classes of assets. Instead of holding shares of their own company, they can spread the risk by investing in Fixed deposits, real estate or even shares of their competitors or in equity of other companies. This would help them to tide over this unexpected black swan events better rather than just lament about their loss of wealth.

We once again advise all employee shareholders who hold massive amounts of ESOP shares to convert at least partially into other asset classes or move into equities of other companies other than their own company. Lets be better prepared to meet these corporate events rather than react to them.

Highest Bank Fixed Deposit rates for different time periods

noreply@blogger.com (Ideas2Wealth) — Mon, 29 Dec 2008 04:05:00 +0000

The interest rates are peaking across different maturities and here is quick review of the highest interest rates across different time frames offered by various banks.

Time Period Bank(s) Interest rate

15 - 29 days Barclays Bank 6.75%

30 - 45 days Barclays Bank,

DBS Bank 7.25%

46-60 days Oriental Bank of

Commerce 8.25%

61 - 90 days Oriental Bank of

Commerce 8.25%

91 - 179 days ING Vysya Bank 10.00%

180 - 364 days State Bank of

Hyderabad 10.25%

1 yr - 2 yrs DBS Bank 11.25%

2 yrs - 3 yrs CUB, KVB, LVB 11.00%

3 yrs - 5 yrs Karnataka Bank 11.00%

In addition to the above, there are "Special Deposit Rates" offered by banks which are as follows:

Bank Rate Term (Days)

ICICI Bank 10.50% 890

City Union Bank 11.30% 1000

Federal Bank 10.00% 365

Standard Chartered 10.00% 401

ING Vysya Bank 10.50% 365

Tamilnad Mercantile

Bank 11.00% 1095

Please note that these special deposit rates are applicable only if you choose the specified term mentioned above.

Make best use of this opportunity to lock in your fixed deposits componenet of your asset allocation.

Real Estate gets little relief in Andhra Pradesh

noreply@blogger.com (Ideas2Wealth) — Sun, 28 Dec 2008 03:57:00 +0000

The Andhra Pradesh Government has recently announced the following concessions to prop up the ailing real estate industry in the state:

The concessions offered are:

* Stamp duty on new houses of area up to 1200 sq.ft would be exempt from January 1, 2009 to December 31, 2010.

* Building approval and permit fee has also been exempted.

* City level infrastructure is also allowed to be paid in four-six monthly instanlements during th period of construction.

We believe this would start the process of exempting stamp duty and offering other benefits to real estate developers in various other states as well. The concessions should be time bound and withdrawn once the overall market recovers in the next 2-3 years. Else, this would become a matter of right for the consumers and it would lead to large scale protests when these concessions are withdrawn. The Government would be forced to keep extending the benefit just like what is happening with STPI benefits for IT/ITES companies.

Coupled with the recent reduction in loan interest rates on housing and the proposed exemption of stamp duty, the buyers gets real bargains while buying the house.

Time to lock into Fixed Deposits - Part III

noreply@blogger.com (Ideas2Wealth) — Fri, 05 Dec 2008 06:57:00 +0000

After completing the first two parts on the attractive fixed deposit interest rates currently prevalent in the banking sector, we have been contacted by various people if they could committ into fixed deposits for 3 years for the entire corpus/savings they have.

We have also come across advertisements from banks over the last week or so where the interest have still gone up from the 10.50 - 11.00% bracket to above 11%. This is particularly very evident in the case of private sector banks and makes it all the more enticing.

The rates looks very tempting for lay investors. But at the same time, it is very important to note that the time-frame of the deposit should be decided by the funds requirements of the individuals. Just because a bank offers higher interest rates, the deposits should not be contracted for a longer time-frame. It should be aligned with the individual's funds requirement before the tenure of the fixed deposit is committed. In case you have surplus money which you may not require for a longer tenure, then it makes sense to lock into deposits at higher rates, but at the same time maintain your assset allocation matrix.

One should also remember that Fixed Deposits are only a portion of your investment portfolio and higher interest rates alone should not influence you to have a very high proportion of your investments in fixed deposits. When we take into account the inflation rate of around 8%, and the deposit rate of 11%, technically it means that you are able to get a real effective interest rate of only 3% or so pre-tax. Post-tax, the return would be much lower. Therefore, in order to grow your investments and build the corpus for meeting your future financial goals or retirement, you need to ensure that investments are also channeled to other investment avenues like equity, gold etc.,

The other point to remember is to spread your deposits across different banks with a maximum limit of Rs100,000/- to take advantage of the Deposit Insurance scheme. Though it involves more running between the banks, it may be prudent to do so.

Just for information purposes, few attractive interest rate options which has come up from private sector banks are:

City Union Bank is offering 11.30% on 1000 day deposit. Karur Vysya Bank is offering 11% on a 3 year deposit.
Standard Chartered Bank is offering 11.00% on 90 days short term deposit.
In Chennai, REPCO Bank Ltd., is offering 11.50% on 40 months deposit. But please note that REPCO Bank deposits doesnt come under Deposit Insurance Guarantee scheme.

Time to lock into fixed deposits? - Part II

noreply@blogger.com (Ideas2Wealth) — Thu, 20 Nov 2008 13:06:00 +0000

India also started feeling the heat of global slow-down. Inflation ruling well above 12% has now slipped into single digits and it has been reported below 9% for the last week. The rupee continues to trade volatile against the USD and again slipping below the Rs49 mark yesterday. The Prime Minister is making statements to the effect that more pain is in the offing for India. Exports have gone down to a great extent both in manufacturing and service sector (IT) resulting in lesser inflow of foreign currency. FII sales in the stock markets are continuing and the demand for the greenback remains constant.

Coming back to the main question of interest rates in the econcomy, the auto manufacturers and real-estate developers are crying hoarse about the high interest rates which is affecting the demand for their products. Of course, the interest rates alone cant prop up an industry, but it is a definitely a critical factor. With the increasing cost of money, Indian industries have started delaying or jettisoning capacity expansion plans. Many projects could not achieve financial closure due to lack of funds in the market. Now the Government started stepping in through RBI by giving out signals of low interest rate regime. Now there is no threat of demand led inflation, Government is keen on reducing the interest rates in the economy. RBI, under a new head, D Subbarao, started using the monetary tools to bring down the rates to banks and financial institutions. It has aggressively cut the CRR rates by 3.5% over the last 2 months. It has reduced the reverse repo rates and opened up the window for lending to banks and mutual funds.

With the signals becoming clear that Government favouring a lower interest rate regime, the banks has started reducing the lending rates. Of course, the PSU Banks have taken the lead in this instance as they are more amenable to the Government's intervention in the interest rates. The measures taken by the RBI is expected to pump in more than 200,000 crores of Rupees into the system and it should relieve the current pressure on the credit. The interest rates may also start coming down over the next couple of months. Though term deposits are not as tax efficient as FMP's, it is still better to have a good percentage of your fixed income investments in the form of term deposits, as it gives the needed liquidity and the redemption terms are much more easier compared to FMP's. Therefore, I think it is one of the best times to committ funds to Fixed Deposits with banks to take advantage of the high interest rates offered by them.

State Bank of India offers 10.50% for 1000 days deposit and other private banks like Karur Vysya Bank, City Union Bank, Lakshmi Vilas Bank are offering 11.00% on term deposits for 400 days or more. State Bank's deposit scheme was very popular that it garnered more than Rs1000 crores on a daily basis during the first few days of this campaign. Remember, the deposits in the name of Senior Citizens fetches 0.50% more than the normal rates.

Enjoy this small window of high interest rates and commit your term deposits at attractive rates. Make hay while the sun shines!!!

Time to lock into fixed deposits? - Part I

noreply@blogger.com (Ideas2Wealth) — Wed, 19 Nov 2008 13:04:00 +0000

Fixed deposits or time deposits were a long last financial instrument hardly used over the last 3-4 years thanks to continuous bull run in the stock markets. Persons who wants to keep money in Fixed deposits were looked down upon as risk-averse, conservative and naive investors. Low interest regime and inefficient tax structure also added to the woes of the investors in fixed deposits. Fixed deposits, as the preferred asset class, vanished from the investors radar.

Coupled with the recent turmoil in the global financial markets and erosion in value of stocks across the board and the high fixed deposit interest rates, fixed or term deposits have slowly gaining prominence again. Currently banks are offering attractive interest rates of 10.50% to 11.50% (for senior citizens) on retail fixed deposits.

If you analyse the reasons behind the high interest rates, you will understand that it is due to the tightening of the domestic money supply by RBI through various monetary policy measures like hiking the CRR rates and repo rates making it costly for banks to borrow and lend. RBI followed the dear money policy till couple of months ago due to the run-away demand led inflation. Suddenly in September, the global financial markets went through a very bad patch where many of the global investment banks disappeared from the scene and it led to sudden realisation of counter-party default risk among the financial community. Banks started hoarding cash instead of lending to customers and financial institutions thereby creating scarcity of deposits.

In that scenario, Indian banks and financial institutions which have lent money to various sectors like real-estate and others started facing defaults or delayed payments. The stock markets worldwide tumbled as the FII's started selling across the board and more particularly in emerging markets. FII's selling the stocks and taking the money out of the country resulted in heavy demand for the US Dollar. The Indian rupee depreciated sharply against the dollar breaching the Rs50 mark against the dollar before recovering to Rs48 against the dollar. The industrial production, exports and consumer demand started to slow-down across the world. Today many countries have seen negative growth in their economy. US, Japan and Europe have slipped into recession. What a change compared what was 6-9 months back. The reaction were swift and painful for most of the market particpants.

Part II of the article would be published tomorrow.

It's an interesting article by Yogesh Chhabria.

noreply@blogger.com (Ideas2Wealth) — Tue, 28 Oct 2008 07:23:00 +0000

LATELY, I have been thinking a lot about the Lehman crisis. Spending money that they didn't have and going beyond their means is one of the main reasons for their situation today. In fact that is the cause for the current economic crisis in the US.

When I see all this happening, I can only remember the good old days. Then, karz was bad. People looked down upon those who took loans. Parents would not give their daughter's hand in marriage to a man with loans.

But of course, the times have changed now. Everyone I know has a loan. The buzz word is EMI (equated monthly installment). Today, you can buy everything on EMI - a house, a television, even an i-Pod. In fact I know of someone who just bought a fancy BMW 3 series on EMI, instead of buying a cheaper car outright with cash. I mostly prefer to take public transport, but then I am an old man with old thoughts!

Anyway, coming back to what caused the crisis.

Imagine having Rs 2 lakh in your bank account, no regular income, yet buying a house worth Rs 65 lakh, in the hope of selling it for a higher price. Even if the price of the house fell by just 5 per cent (that is Rs 3 lakh), you will go bankrupt. This is what Lehman Brothers did; with around USD 20 billion they went and bought assets worth over USD 600 billion. Isn't it suicidal and simply foolish?

I am sure things would have been different, had I been the head of Lehman brothers. But who wants an old conservative man like me to head a complex financial institution.

But there are a few lessons that we can learn:

1.Live a balanced life and avoid overspending.
2. Don't buy things we don't need.
3. Don't buy Branded goods.
4. Don't buy excess Food, Cloths, Cosmetics, Footwear, electronics and Fashion accuracies. Just think before you buy.
Tip: World still has a lot of growth ahead and the future holds immense opportunities for us. Let us make the most of it and save and invest it wisely instead of wasting our precious little on things we don't need.
5. Try to balance life with work (No one is happy to work in their professions).
6. Don't stress out your self, after work try to do some extra activities like swimming, yoga, walking, running where you can divert your mind from stress.
A thumb rule: Health is more important than money.
7. Try to understand each other (Wife and Husband) in financial matters and help each other.
Tip: As soon as you get your monthly salary, set aside a fixed amount, usually 35 per cent, for insurance, savings and investments. You can then spend the rest.
8. Not all loans are bad. Loans that are 'need based' (home loans, education loans) can always find a place in your finances against those that are largely 'want based' (Credit cards, personal loans, car loans).
9. Borrow only if repayment is financially comfortable.
A thumb rule: Keep EMIs within 35 to 45 per cent of your monthly income.

In that respect, there is one American who I really respect - Warren Buffet. He has lived in the same ordinary house for over three decades, drives his own medium sized car and leads an extremely regular 'middle class' life. If that's all it takes for the richest person on earth to be happy, why do all of us need to take extra stress just so that we can get things which aren't even essential?

Source: World Wide Web

How deposit insurance works in India?

noreply@blogger.com (Ideas2Wealth) — Tue, 14 Oct 2008 06:44:00 +0000

When rumours about the financial health of a private bank began to circulate last week, people queued up at the bank's ATMs in the wee hours to withdraw money. One of my friends who had large sums parked in fixed deposits with the bank called to enquire about the rumour.

When I asked him whether he had similar deposits across a range of banks, he replied that his entire surplus cash of Rs 8 lakh was parked with the same bank, as he did not have an account with any other bank! Shocked, I took the opportunity to explain to him how deposit insurance works in India. Here is what my friend, and others like him, need to know.

How much is covered?
All deposits of up to to Rs 1 lakh in a commercial or cooperative bank in India are insured by the Deposit Insurance and Credit Guarantee Corporation of India (DICGC) (a wholly owned subsidiary of RBI).The insurance coverage to the banks is extended by collecting premium from the banks, at half-yearly intervals at the rate of 10 paise per annum per hundred rupees. The insurance protection is made available to the depositors free of cost. The cover of Rs 1 lakh is applicable for your principal and interest dues taken together. Deposits in different banks are separately insured, with each deposit eligible for Rs 1 lakh cover.

What kinds of deposits are covered?
Insurance cover is available across savings accounts, current accounts, recurring and fixed deposits.

Which banks are covered?
All commercial banks including branches of foreign banks functioning in India, local area banks and regional rural banks are covered. At present, all co-operative banks other than those from the States of Meghalaya and the Union Territories of Chandigarh, Lakshadweep and Nagar Haveli are covered under the deposit insurance system. Primary cooperative societies are not currently covered by the scheme.

What are the ways to increase the cover for my bank deposits?
Spreading your surplus across many banks is the most direct way to increase the deposit cover.
You can even make sure that your deposits in a single bank are insured, by having multiple joint accounts with different "first holders". Insurance tends to be offered in the first holder's name.

What happens to deposits in a joint account?
If more than one deposit account (whether savings, current, recurring or fixed deposit) is jointly held by individuals in one or more branches of a bank, then all the accounts in which their names appear in the same order will be aggregated for the Rs 1 lakh cover. However, if deposits are held under different first holders, then every such account will be eligible for insurance cover of Rs 1 lakh.

Is it possible to increase the insurance cover for my deposit by paying a higher premium?
No. It is not possible to pay premium and increase the cover. However, such provisions may come into being in future. Recently, with the financial turmoil in the US, as part of the bailout package, the US Government has increased the cover from $1,00,000 to $2,50,000. So it's possible in India that the cover may be enhanced in future.

How are the settlement claims awarded?
In the event of the winding up or liquidation of bank, every depositor of the bank is entitled to payment of an amount equal to the deposits held by him at all the branches of that bank put together, standing as on the date of cancellation of registration of the bank. So, all my friend has to do to avoid sleepless nights at the ATM is to spread his deposits over several banks, to increase his overall insurance cover!

Source HBL

Global Financial Crisis keeps rolling - latest to be rescued is Fortis! Who is next?

noreply@blogger.com (Ideas2Wealth) — Mon, 29 Sep 2008 05:51:00 +0000

Fortis, the largest Belgian financial-services firm, received an 11.2 billion-euro ($16.3 billion) rescue from Belgium, the Netherlands and Luxembourg after investor confidence in the bank evaporated last week.

Belgium will buy 49 percent of Fortis's Belgian banking unit for 4.7 billion euros, while the Netherlands will pay 4 billion euros for a similar stake in the Dutch banking business, the governments said in a statement late yesterday. Luxembourg will provide a 2.5 billion-euro loan convertible into 49 percent of Fortis's banking division in that country.

Fortis is the largest European firm so far caught up in the global financial crisis that drove Lehman Brothers Holdings Inc. into bankruptcy two weeks ago and prompted U.S. President George W. Bush to seek a $700 billion bank rescue package. Fortis dropped 35 percent last week in Brussels trading on concern the company would struggle to replenish capital depleted by the 24.2 billion-euro takeover of ABN Amro Holding NV units and credit writedowns.

``Confidence in Fortis needs to be restored,'' said Corne van Zeijl, a senior portfolio manager at SNS Asset Management in Den Bosch, the Netherlands, who oversees about $1.1 billion and owns Fortis shares.

Fortis plans to sell its stake in ABN Amro's consumer banking unit, though a buyer wasn't identified. Fortis joined with Royal Bank of Scotland Group Plc and Spain's Banco Santander SA last year to buy Amsterdam-based ABN Amro for 72 billion euros, just as the U.S. subprime mortgage market collapsed.

Lippens Resigns
Fortis Chairman Maurice Lippens stepped down and will be replaced by someone from outside the company, Fortis said. The firm picked company insider Filip Dierckx to succeed Herman Verwilst as chief executive officer on Sept. 26, just three months after former CEO Jean-Paul Votron was pushed out.

Fortis, formed in the 1990 merger of the Dutch insurance company NV Amev, Belgian insurer AG Group and the Dutch bank VSB, angered investors on June 26 by scrapping the interim dividend and announcing plans to sell shares to help strengthen its finances.

``We're buying power in the bank, getting more influence on the decisions that will be made, that's what savers need in these times,'' Dutch Finance Minister Wouter Bos told Dutch public television NOS. Bos said he couldn't comment on who'll buy the ABN Amro business.

The collapse of New York-based Lehman and the U.S. rescue of American International Group Inc. heightened concern about the global financial system and made it costlier for banks to raise funds. Seattle-based Washington Mutual Inc. was seized by regulators last week in the biggest U.S. bank failure in history.

Fortis tried three days ago to assuage investor concerns by stating that its financial position was ``solid,'' and that it had identified banking and insurance businesses to sell worth as much as 10 billion euros. Fortis said it wouldn't sell assets at fire-sale prices, and didn't have an urgent need for funds.

`Over-Leveraged'
The remarks, presented in an impromptu press conference by Verwilst and Dierckx, failed to stem the selling. The stock ended the day down 20 percent.

``Markets thought that they were over-leveraged,'' European Central Bank Governing Council member Nout Wellink said. ``What's happening in the U.S. is having an impact on the rest of the world. At the end of the day Fortis is a good bank,'' said Wellink, who also heads the Dutch central bank.

Fortis has fallen 71 percent this year in Brussels, the second-worst performance among the 69 companies on the Bloomberg Europe Banks and Financial Services Index, cutting the lender's market capitalization to 12.2 billion euros.

The company has about 3 billion euros of bonds maturing this year and needs to refinance an additional 7 billion euros next year, said Ivan Lathouders, an analyst at Banque Degroof SA in Brussels, in a report last week.

Short-Selling Restricted
Fortis reported a 49 percent decline in second-quarter profit on credit-related writedowns on Aug. 4. The banking business's core Tier I capital ratio, an indicator of a bank's ability to absorb losses, was 7.4 percent at the end of June, compared with Fortis's own target of 6 percent.
The company's structured credit portfolio, which includes collateralized debt obligations and U.S. mortgage-backed securities, amounted to 41.7 billion euros at the end of June. Fortis said Aug. 4 the pretax impact of the credit market turmoil on its earnings was 918 million euros in the first half.

Belgian and Dutch regulators restricted short-selling in the shares and derivatives of financial companies for three months last week to curtail a market rout. The rules require investors betting on a decline in stock prices to arrange to borrow the shares before selling them. The Belgian and Dutch regulators also requested investors to refrain from lending the securities.

Source: Bloomberg.com

U.S. government seizes Washington Mutual

noreply@blogger.com (Ideas2Wealth) — Fri, 26 Sep 2008 09:42:00 +0000

The U.S. government on Thursday made the largest bank seizure in American history, taking over Washington Mutual, the severely troubled savings and loan, and selling pieces of it to JPMorgan Chase in an emergency deal intended to avoid sticking the taxpayer with a bill for another bank, according to people briefed on the plan.

For weeks, the Federal Reserve and the Treasury Department had been nervous about the fate of WaMu, among the worst-hit by the housing crisis, and had pressed hard for the bank to sell itself. As panic gripped financial markets last week after the collapse of the investment bank Lehman Brothers, U.S. regulators stepped up their efforts, working behind the scenes, and at times going behind WaMu's back to work privately with potential bidders.

Indeed, the seizure and the deal with JPMorgan came as a shock to Washington Mutual's board, which was kept completely in the dark: the company's new chief executive, Alan Fishman, was flying from New York to Seattle at the time the deal was brokered, according to these people.
The shot-gun acquisition marks the second time since the housing crisis began that the government has pushed a troubled bank into the arms of JPMorgan Chase. In March, JPMorgan rescued Bear Stearns as it teetered into bankruptcy protection.

The deal will give JPMorgan branches in California and other markets where it does not have a footprint. But JPMorgan will also inherit a big loan portfolio of troubled mortgages and commercial real estate.

U.S. regulators had been trying to broker a deal for Washington Mutual because a takeover by the Federal Deposit Insurance Corp. would have dealt a crushing blow to the deposit insurance fund. The fund, which stood at $45.2 billion at the end of June, had been severely depleted after suffering a debilitating loss from the sudden collapse of IndyMac Bank. Analysts say that a failure of Washington Mutual would have cost the fund upwards of $20 billion to $30 billion.
The takeover of Washington Mutual is yet another black-eye for its primary federal regulator, the Office of Thrift Supervision. It also oversaw IndyMac Bank, another big lender that suddenly collapsed in mid-July, and several other deeply troubled savings banks. Washington Mutual was the largest institution under its watch.

Washington Mutual long insisted that it could remain independent, but the giant thrift had quietly hired Goldman Sachs early last week to identify potential bidders. Among the banks that expressed interest were Citigroup, JPMorgan Chase, HSBC, Banco Santander, TD Bancorp and Wells Fargo. Each had different reasons for making an offer, but nobody could make the numbers work. Several deadlines past without anyone submitting bid.

Washington Mutual had struggled to find a partner earlier this year willing to inject fresh funds in its ailing business. This spring, it balked at an offer from JPMorgan to buy the entire company. Instead, TPG, the big private equity firm, led a group of investors that made a $5 billion capital injection in April.

Optimising your tax benefits on your life insurance premium

noreply@blogger.com (Ideas2Wealth) — Thu, 25 Sep 2008 06:07:00 +0000

Life Insurance is a must for any income generating individual. The nature and the quantum of risk cover required varies from person to person. The Government also provides you with excellent tax benefits for the amount of life insurance premium you pay under sec 80 C of the Income Tax Act.

The insurance premium paid on our life insurance policies is deducted from your total income under Sec 80 C. The practical story is that most of you would have already exhausted the available limit of Rs100,000 under Sec 80 C by way of housing loan principal repayment.

But there is a possibility of utilising a portion of the life insurance premium paid by availing the benefit under Sec 80 D of the Income Tax Act. Sec 80 D of the Income Tax Act provides for deduction of premium paid towards Health Insurance from your total income. If the insurance policy covers "critical illness", then the premium portion attributable to the critical illness cover can be deducted u/s 80 D of the IT Act instead of claiming it under Sec 80 C. Normally we deduct the total premium on life insurance policies under sec 80 C but it is possible that we get few extra thousands deduction from taxable income if you have a policy with critical illness rider.

You have to contact your Life Insurance company and ask for the premium break-up details between the mortality charges for the life cover and the critical illness cover. Few of the insurance policies you have taken already has a "critical illness" rider attached to it. Going forward, when you opt for a life insurance cover you have to do a cost benefit analysis of having a critical illness rider considering the additional deduction possible under Sec 80 D of the IT Act.

Get a premium certificate from the life insurance company stating clearly the amount of premium charged for critical illness cover and claim it under sec 80 D and avail extra tax deductions.

Warren Buffett to invest $10bn in Goldman Sachs!!

noreply@blogger.com (Ideas2Wealth) — Wed, 24 Sep 2008 09:16:00 +0000

Warren Buffett, one of the richest men in the world, is to invest up to $10bn (£5.4bn) in Goldman Sachs as the investment bank attempts to bolster its financial position amid continued fallout on Wall Street as a result of the sustained credit crisis.

Mr Buffett, known as the "Sage of Omaha" for his legendary investment skills, will buy an initial $5bn holding through his Berkshire Hathaway investment vehicle, and will receive warrants to buy up to another $5bn at a later date.

Goldman is also raising a further $2.5bn through a public offering of its shares, which soared by 8.4pc to $135.56 in extended after-hours trading.

The investment is a major vote of confidence in the bank, which has largely avoided the worst of the sub-prime crisis, but also highlights just how precarious the market has become that an institution such as Goldman feels the need to raise money in the first place.

The news should act as a fillip for the wider stock market, given that Mr Buffett is perceived by many as a shrewd investor to whom timing is crucial. It is the first time Mr Buffett has bought a stake in an investment bank since purchasing a holding in Salomon Brothers in 1987.

His investment comes just a day after Goldman changed its legal status to allow it to become a federal holding bank. "Buffett did this after Goldman converted to a bank holding company," said Pat Dorsey, director of equity research at Morningstar,"Buffett is saying that, with less leverage and more stable sources of funding, this is an institution worth investing in. From Buffett's perspective you have a world-class firm in a less-competitive landscape, with a hopefully less-risky business model."

As a result of its initial investment, Berkshire will own the equivalent of a 10pc stake in Goldman, based on last night's closing market capitalisation, in return for buying $5bn of perpetual preferred shares which will pay a 10pc dividend and which the bank can buy back at any time for a 10pc premium. Berkshire will also receive warrants to purchase $5bn of ordinary shares at a strike price of $115 a share at any point over the next five years.

Mr Buffett said last night "Goldman Sachs is an exceptional institution" with "the intellectual and financial capital to continue its track record of out-performance".

Japanese bank Sumitomo Mitsui Financial Group is also reported to be considering investing $2.5bn in Goldman Sachs.

Goldman Sachs and Morgan Stanley to become banks

noreply@blogger.com (Ideas2Wealth) — Mon, 22 Sep 2008 13:11:00 +0000

The Wall Street that shaped the financial world for two decades ended last night, when Goldman Sachs Group Inc. and Morgan Stanley concluded there is no future in remaining investment banks now that investors have determined the model is broken.

The Federal Reserve's approval of their bid to become banks ends the ascendancy of the securities firms, 75 years after Congress separated them from deposit-taking lenders, and caps weeks of chaos that sent Lehman Brothers Holdings Inc. into bankruptcy and led to the rushed sale of Merrill Lynch & Co. to Bank of America Corp.

``The decision marks the end of Wall Street as we have known it,'' said William Isaac, a former chairman of the Federal Deposit Insurance Corp. ``It's too bad.''

Goldman, whose alumni include Henry Paulson, the Treasury Secretary presiding over a $700 billion bank bailout, and Morgan Stanley, a product of the 1933 Glass-Steagall Act that cleaved investment and commercial banks, insisted they didn't need to change course, even as their shares plunged and their borrowing costs soared last week.

By then, it was too late. As financial markets gyrated --the Dow Jones Industrial Average whipsawed 1,000 points in the week's last two days -- and clients defected, executives at the two firms concluded they had no choice. The Federal Reserve Board met at 9 p.m. yesterday and considered applications delivered that day, said Michelle Smith, a spokeswoman for the central bank. The decision was unanimous, she said.

`Blood in Water'
``There's blood in the water in the industry and the sharks are circling,'' Peter Kovalski, who helps oversee about $10 billion at Alpine Woods Capital Investors LLC, said at the end of last week. ``It all comes down to perception and the current trust within the community.''
Morgan Stanley rose 4.1 percent to $28.33 by 11:16 a.m. in German trading, after jumping 21 percent in New York on Sept. 19. Goldman declined 1.2 percent to $128.28 in Germany, after surging 20 percent three days ago in New York.

Wall Street hasn't had such a shakeup since the 1980s, when firms including Morgan Stanley and Bear Stearns Cos. went public and London's financial markets were altered forever with the so- called Big Bang reforms implemented in 1986. Bear Stearns disappeared in March, when it was bought by JPMorgan Chase & Co.

The announcement paves the way for the two New York-based firms, both of which will now be regulated by the Fed, to build their deposit base, potentially through acquisitions. That will allow them to rely more heavily on deposits from retail customers instead of using borrowed money -- the leverage that led to the undoing of Bear Stearns and Lehman.

Depositors Rule
Morgan Stanley has taken $15.7 billion of writedowns and losses on mortgage-related securities and other types of loans since the credit crunch started last year. Goldman's tally stands at about $4.9 billion. While both companies have remained profitable and avoided money-losing quarters suffered by Lehman and Merrill Lynch, their revenue from sales and trading and investment banking has been declining this year.

``Deposit-banking is king right now,'' said David Hendler, an analyst at CreditSights Inc. in New York. ``It's the only meaningful critical-mass way to make money.''
Morgan Stanley may feel it has more time to contemplate alternatives to the deal that it began to shape last week with Wachovia Corp., said Tony Plath, a finance professor at the University of North Carolina at Charlotte.

`Certainty'
``This means Morgan Stanley is reassessing its plan for a merger with Wachovia,'' Plath said. ``Morgan Stanley is going to try to go it alone, and I expect it will try to buy a bank with a market-to-book ratio that is next to nothing. It means they are walking away from Wachovia.''
Morgan Stanley, the second-biggest securities firm until this week, had $36 billion of deposits and three million retail accounts at the end of August. The company plans to convert its Utah-based industrial bank into a national bank.

``This new bank holding structure will ensure that Morgan Stanley is in the strongest possible position,'' Chairman and Chief Executive Officer John Mack, 63, said in a statement last night. ``It also offers the marketplace certainty about the strength of our financial position and our access to funding.''

Goldman, the largest and most profitable of the U.S. securities firms, will become the fourth-largest bank holding company. The firm already has more than $20 billion in customer deposits in two subsidiaries and is creating a new one, GS Bank USA, that will have more than $150 billion of assets, making it one of the 10 largest banks in the U.S., the firm said in a statement last night. The firm will increase its deposit base ``through acquisitions and organically,'' Goldman said.

``Goldman Sachs, under Federal Reserve supervision, will be regarded as an even more secure institution with an exceptionally clean balance sheet and a greater diversity of funding sources,'' Lloyd Blankfein, 54, Goldman's chairman and CEO, said in the statement.

The Washington-based Fed is the primary regulator of bank- holding companies, which are firms that own or control banks. Citigroup Inc., Bank of America Corp. and JPMorgan are bank- holding companies regulated by the Fed.

Securities firms, by contrast, had been regulated by the Securities and Exchange Commission. The SEC's future becomes dimmer with the change in Goldman and Morgan Stanley's structures.

Less Risky
``You can't kiss goodbye to the last two important investment banks without noting that the house is empty,'' said David Becker, a former SEC general counsel who is now a partner at Cleary Gottlieb Steen & Hamilton in Washington. ``It's a downward spiral where the less significant the population you regulate, the less your available resources.''

The change is also likely to lead to less risk-taking by the companies and possibly lower pay for their employees. Both Goldman and Morgan Stanley held more than $20 of assets for every $1 of shareholder equity, making them dependent on market funding to operate.

Goldman, in particular, has been remarkable for the high bonuses it pays to its employees. Goldman's CEO and two co- presidents were each paid more than $67 million last year. `They're going to have to protect their deposit bases by law, and the days of high leverage are gone,'' said Charles Geisst, a finance professor at Manhattan College in Riverdale, New York, who wrote ``Wall Street: A History.'' ``The days of the big bonuses are gone.''

Source: Bloomberg.com

Fallout from the bankruptcy of Lehman Brothers

noreply@blogger.com (Ideas2Wealth) — Fri, 19 Sep 2008 09:39:00 +0000

WHEN Warren Buffett said that derivatives were "financial weapons of mass destruction", this was just the kind of crisis the investment seer had in mind. Part of the reason investors are so nervous about the health of financial companies is that they do not know how exposed they are to the derivatives market. It is doubly troubling that the collapse of Lehman Brothers and the near-collapse of American International Group (AIG) came before such useful reforms as a central clearing house for derivatives were in place.

A bankruptcy the size of Lehman's has three potential impacts on the $62 trillion credit-default swaps (CDS) market, where investors buy insurance against corporate default. All of them would have been multiplied many times had AIG failed too. The insurer has $441 billion in exposure to credit derivatives. A lot of this was provided to banks, which would have taken a hit to their capital had AIG failed. Small wonder the Federal Reserve had to intervene.

The first impact concerns contracts on the debt of Lehman itself. As a "credit event", the bankruptcy will trigger settlement of contracts, under rules drawn up by the International Swaps and Derivatives Association (ISDA). Those who sold insurance against Lehman going bust will lose a lot. But Lehman had looked risky for some time, so investors should have had the chance to limit their exposure.

The second effect relates to deals where Lehman was a counterparty, ie, a buyer or seller of a swaps contract. For example, an investor or bank may have bought a swap as insurance against an AIG default, with Lehman on the other side of the deal. That protection could conceivably be worthless if Lehman fails to pay up. Until the Friday before its bankruptcy, Lehman would have posted collateral, which the counterparty can claim. After that day, the buyer will have been exposed to price movements before it could unwind the contract.

The third effect will be on the collateralised-debt obligation (CDO) market, which caused so many problems last year. So-called synthetic CDOs comprise a bunch of credit-default swaps; a Lehman default may cause big losses for holders of the riskier tranches.

Insiders say the biggest exposure may be in the interest-rate swaps market, which is many times larger than those for credit derivatives. In a typical interest-rate swap, one party agrees to exchange a fixed-rate obligation with another that has a floating, or variable, rate exposure. Depending on whether floating rates rise or fall, one will end up owing money to the other. Again, those banks that dealt with Lehman should have been fine until Friday, when the bank was still posting collateral. But not afterwards.

Although there are ISDA rules to cover such events, the sheer size of Lehman in the market (its gross derivatives positions will be hundreds of billions of dollars) makes this default a severe test. There will inevitably be legal disputes as well. The good news is that the swaps markets did not utterly seize up after it went bust on September 15th. But the reaction may be a delayed one. Mr Buffett's WMD could leave behind a cloud of toxicity.

Source:Economist.com