Anand Krishna’s musings

In a globally integrated financial system, it had to happen, I suppose. I am referring to Indian banks being affected by the US sub-prime crisis. In the last day or two, news is trickling in that a few Indian banks have had exposures to US housing loans that have now gone bad. It is not that these banks have lent to borrowers who have become delinquent. What has happened is that the original lenders have parcelled off bundles of asset-backed loans into what are called “Collateralized Debt (or Mortgage) Obligations”. The cash flows and hence returns from these CDOs/CMOs are derived from the cash flows and returns generated by the underlying assets- which are the lender’s receivables against the loans. That is why these are derivatives. And almost always, lenders package a mix of loans into each CDO “package”- some good, some more risky, some of relatively short term, others of longer term etc. The trouble is that investors do not fully understand the associated risk- manifested either as creditworthiness of the borrower and/or quality of the asset used as collateral. The problem becomes compounded when the original loan is made, say, in Texas, and the investor in the CDO is a bank in India- due diligence is that much harder.

Some estimates of the sub-prime crisis suggest that well over $1 Trillion is at risk. So far, only about $100B of write-downs have happened. Do the math yourself ($1 Trillion is roughly the total market cap of India’s equity markets). And start worrying about where your mutual/hedge fund has made investments, given that it promised to take advantage of investment avenues in global markets to deliver “superior returns”.

L N Mittal, Mukesh Ambani, Anil Ambani and K P Singh of DLF are on Forbes magazine’s list of global billionaires. Mexican telecom magnate Carlos Slim has overtaken Bill Gates, I believe. Another piece of evidence of the emerging new world economic order…. chak de India!