Can I lend you some bucks for that swamp? Practising what you preach

September 23, 2008

Greetings from my insanely overvalued Mumbai apartment!

Mumbai’s skyline is seen April 9, 2008After experiencing Japan’s bubble economy through the 80s as a near starving student, I watched how loans based on overinflated property values, led to the slow motion destruction of banks considered to be the bedrock of the Japanese economic miracle.

Sumitomo, Mitsubishi, Mitsui, Fuji, Daichi Kangyo – and Long Term Credit Bank of Japan (bought by a US hedge fund post collapse and now reincarnated as Shinsei Bank) – these were the banks who helped build Japan from the ruins of WW2… So, when things went too far and collapsed early the 90s, American economists told the Japanese to get rid of “non performing loans” and restructure.

Well, it took ten years , but they kinda did. Fast forward to 2008, and what do you know – it’s American banks who have made loans to people who can’t really pay, on the basis of you guessed it… inflated property values! Even better they managed to hawk off packaged versions to companies not even in the banking industry… think AIG.

Now the tables have turned: this week Japanese investment bank Nomura picked up Lehman Brothers Asia business and Mitsubishi UFJ is set to grab stake in Morgan Stanley. And, it’s not over yet.

Maybe my memory is too long, but it does make you wonder: Will these guys ever learn? or more cynically, is this just a way to earn a few bucks? After all, no one who earned a bit of cash selling mortgage backed securities has to pay anything back – that’s left to the American taxpayer – 700 billion USD or just 2000 bucks a head!

So let’s turn to India – the outsourcing boom, liberalisation and subsequent domestic growth have led to the creation of many jobs, but demand based on rising incomes could never justify real estate prices appreciating as they did in the past two years, yet it’s pretty clear all kinds of deals were done on the basis of these inflated assets . There’s no way of knowing exactly how far this led to some unwise banking decisions (loans!) , but in the short term things look like they didn’t quite get out of hand.

Meanwhile Indian land prices appear to have softened significantly – so could the US collapse now be a small blessing in disguise? Perhaps India has been spared a much larger crisis or, is this a boon and bust cycle India is destined to follow? What do you think?


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That’s a very interesting tale about the circle running on bad loans between the JP & US banks … but obviously US dont practice what they preach as they can even undo their own saying … talk of “Stegall act” and now that the major i-banks looking out for retail deposits so that the US Gov can bail them out …

However in India too, there will be defaulters with kind of credit crisis we are seeing in the markets .. the whole ecosystem gets affected … I think its more wide-spread than what meet to the eyes …

i-banks –> investors
i-banks –> employess
i-banks –> IT Servicess –> employess

and it goes on …

Posted by VN | Report as abusive

Do people ever learn from past mistakes? Yes and no. If it is very big and become sort of case study material, then yes. But one always thinks I am going to beat the system and get away with it, especially so if I am the biggest bully in the class. In the past, single rogue traders have been enough to bring down centuries old institutions and here we had the Big 5 dealing in institutional junk. As for India, we have had experience of bank nationalisations in the past. The US collapse will definitely be a blessing, a wake up call…a forced learning process.

Posted by Real Times | Report as abusive

REgarding housing bubble in India, I agree with the author. I have been watching property values go high and high without any justification. I have even seen greedy advertisement for a place far away from the city being sold at 1 ground for 1.5 crores. The boom is created by mostly NRIs and people in IT in india who have the new currency smell in their hands. I know lot of people who have lot of net income on the paper but come home with 5000 INR. I think they got carried away by the hype. In india hype plays a big role. but any collapse will be catastrophic in india. I can’t even imagine it. it will probably take more time for india to recover than US or japan.

Posted by vivek | Report as abusive

Dear all,
I think it is a cycle. When you study you may not score good marks always, similarly this happens…
It is not good for India to be affiliated to U.S. though in short term it looks good.

Posted by arun | Report as abusive

its a boon and bust cycle not only india but each and every economy is destined to follow,BUT,in the case of india theres a long way to go still,its just a 4 years of bull run in india started in 2003, it will take another 10-15 years for india to reach that phase when everyone will start thinking that india cant go to bust !!! yes that will be the point in time cycle from when it will end a major bull run.

Posted by bjnaik | Report as abusive

Give the idiotic leves the prices have risen to, going up 3-4 fold in as many years a crash in prices will be most welcome by the users. At least people who want to buy a place to live can breath a sigh of relief, but the way things are going; contruction firms are ready to go down under but cut prices, it’s reduced to a blinking match now…..

Remember in India, no housing agreement states the full amount paid for the house, courtsey the “black componet”; owners wont have ioption of mailing in apartment keys to bank.

Posted by vinny | Report as abusive

It happens in Mumbai only

Posted by hanmi | Report as abusive

One needs to remember that in India, unless the income levels dramatically fall, the bust may nto be of the same kind that affected Japan and the US. Home resales are not as popular in India as it is in the US. Homes are mostly either inherited or sold as new. Properties, though- mostly for the land- are sold to make way for apartments or offices. Besides the reported prices are at best 50 percent of the actual prices as the rest is changed hands unaccounted for (no taxes paid and exchanged in cold hard cash). There is a thin layer of professionals who are dealing in a similar market as in Japan and the US, but I have so far not heard of the credit derivatives or ARMs being in widespread use in India.

When the property level are corrected in India, people looking to sell their property to get liquidity for other uses such as education (mostly abroad) or retirement may be affected. This will likely mean having to adjust to a different standard of living, but this will not mean giving up their homes or having them foreclosed. so the intrinsic net worth of these individuals may come down, but I doubt whether it will affect their day to day livelihood.

Posted by Vijai | Report as abusive

Overall, its easy to imagine that the india as a whole is getting an influx of money due to its participation in global economy and that any change in the world will affect it to a large extent. However, india’s share of global trade is hardly 2%, and secondly the “exposure” of the typical indian to external economy is not *that* bad.

Assuming the world crashes around us – I guess the indian economy itself could survive, even if you consider that I’d be out of a job and oil dependency would make things horrible.

The property market on the other hand, would possibly see a big slump in new developments, but its unlikely for the un-realistic prices to drop very much. case in point – even with the slump in the stock markets (and by extension – the expected earnings from there) … you dont see the property prices drop. or did I miss something here ?

Posted by Someone | Report as abusive

I recently watched the movie “WEDNESDAY” ; It was fantastic and dont miss it.The message is very clear that a common stupid man can act more effective than a terrorist when his frustration crosses a limit. RUDE/TOUGH rules has to be adopted by the government against the terrorists who are convicted.There should not any delay in executing them ; Take for instance in saudi arabia, When somebody is proven guilty, the person will be executed immediately after the next prayer session.When this is the case, why our government is taking 10 yrs to punish a person.Later at some point of time, the culprit’s friend’s may kidnap a VIP and ask for exchange like what happened to indian airlines domestic flight few years ago or the person may escape and cause more havoc.I dont know when our govt gona change…

Posted by Bobby | Report as abusive

Smart Film- innovative product

mart-Film under opaque status (power-off mode) is able to deliver high projection quality and larger project area (e.g. 100”, 160”, 320”, and etc. by a simple sheet by sheet and edge-to-edge expansion) upon the quality of LCD projector (LCD type projector, preferred, not DLP type) by a way of rear-end projection to glass walls.

So, it would be a fantastic and innovative tool for projection advertising inside shopping malls, theaters, churches, shops, train/metro/subway station lobbies, airport terminal lobbies, etc. around a whole day as well as on building façade glass walls during the night.

Posted by daniel | Report as abusive

this is what i am talking about, a few good men can make a change,everyone has a credit card and all funds can be tracked for you, for me, and the government, all the people, everyone gets equal interest rates, loans they can pay back, homes they can afford,a paying enough to have a piece of the dream, dr. martin luther king said,”for in a sense america is essentially a dream”

Posted by sarayoung | Report as abusive

…Hundreds of billion dollars are being spent like a penny…symbols of American financial supremacy are getting sold for nothing…financial czars are hiding their faces cos of shame (they are also hiding treasures they have amassed)…markets are suddenly tumbling as if they were the deep water divers and all they had was overvaluation…those fancy careers on the Wall Street and other such streets would be mentioned in heroic movies…

What is it all about???
GREED & EGO of nations, companies & individuals.

These are cycles which are born out of these two virtues.
And we humans have complicated them through excels, super computers, super brainers, etc etc.

Otherwise, how can these BIG people could not fathom a crisis like Sub prime which they themselves created?

What Say???

Posted by Pramil | Report as abusive

Some thoughts….

Economic Growth
India is just at the beginning of the economic boon/bust cycles….since its exposure to global economy is very recent its impact could also be small.

Use of Credit facility
The current out-of-college generation is beginning to see the use of Credit as way to pay for neccessity or luxury. Prior generations used less of credit

Saving v/s Spending
Indian psyche is based on saving 90% and spending 10%… atleast for the 40+ folks.

House as investment
Disposal incomes in the some sectors has always provided avenues for people to invest in homes but that number was small. It has started to grow.

Billion Population as a Market
If the consumer adopts western spending habits the local economy will keep growing within the local market. Global changes may impact but the large market may have a cushioning impact.

We are part of global market now. Using the momentum to propel local market development and growth could determine how much interconnected or isolated we are/will be.

Posted by Raam Jaane | Report as abusive

Common man and layman have to depend upon the financial capabilities of so called elite individuals and upon those who pretend to be elite and knowledegable.Institutions collapse due to greed and mismanagement which severelly affects common man.Control and checks are very important which should be followed and practiced in substance.

Posted by J P SINGH | Report as abusive

You must remember the word – CREDIT.
That was the basis on which the house of cards where based on in Japan and in the US.

In India, thankfully, that has NOT yet taken on a big role.
I recently bought a flat in Bombay on a loan. BUT
– I had to put in more than 20% in down payment, unlike US.
– The EMI rate is floating, but the amount is fixed per month, which means I know exactly how much to pay for the next 20 years, unlike the US where the teaser rates reset.
– THe documentation requirements was strenuous with pay stubs, letter from employer etc.

Yes, there will be some effect on Indian markets, but I dont think it will be as bad as the US, because we (India) havent yet embraced their credit based capitalist model.

Posted by Andy Rebeiro | Report as abusive

At the current level of land rates in indian metros,it’s almost impossible for 99% of the population to buy anything there.It’s almost impossible for most businesses to break even.Government doesn’t have the money to expropriate anybody to build roads etc…Nobody knows how to accommodate the 200 million Indians who will move from the countryside to big cities (government land banks are sold to cronies by politicians for their own profit).The market has to collapse for India’s sake.

Posted by Ganesh | Report as abusive

Here in the USA, the home prices have come down to a more realistic level. I am sure it will come down another 15%. When I visited India during Jan 08, the cost of an apartment was 3 crore INR. The same apartment was 30 lacks 4 years ago. I wonder if the people who bought at such a high price are kicking thmselves in the rear. An avarage person in India can never afford even a simple home in a far off village at this rate. I am glad the market is going through this “correction” so all can wake up from our drunkan stupor and see “the light”. It is quite apparent that none of the “Bush Doctrine’ worked during the past 8 years. Obviously he is known as THE worst and stupidest president ever.

Posted by Dr.Jay | Report as abusive

India’s cushion will not be the government or the Reserve Bank of India. It will be India’s archaic banking norms, which find it very hard to lend money without thousands of checks and balances. The other cushion is India’s size. Not everybody is out there buying a house or trying to outdo themselves in the real estate market. India’s economy is still very much old school in habit and this is going to prove very good in the long term. There’s a reason it is called “old school” thinking!

Posted by B S Kumar | Report as abusive

India may not face the crisis in the next 20-25 years, which Japan faced earlier or US is facing now due to a number of reasons-

1. The actual Loan to Value in Indian Banks which are advertised as 85% to 90%, is as low as 65-70%, as there is an average black component of 10% involved and other factors mentioned below.
2. Indian financial institutions do not fund a number of components of the property deal such as VAT. service tax, club house charges, annual maintainance charges, water supply and electricty charges, etc. These charges which form about 10% of the property cost, is anyway sold by the builder and the buyer has to may these charges from his pocket. When the property is sold, the seller makes a profit on these charges also and hence, the actual loan to value of the property reduces.
3. The attachment to a home is very high in India when compared to United States and hence, the situation where a number of people will start to default on payments and give the keys of the residential property to the financial institution is less.
4. The population of India and the underlying demand due to this population is high and hence, a crisis of this sort may not happen unless our banks and financial institutions start funding 100% or more than 100% of the property value through different means from now on.
5. In US, a mortgage loan is over leveraged and the interiors of the property is also funded(forms about 15% of the value of the property) which cannot be recovered in the same proportion if the property is sold. In india, over leveraging the property for liquidity is rare as people are debt-averse.

Posted by Praveen Subramanya | Report as abusive