Yeh sub-prime crisis kya hai, yeh sub-prime crisis?
The last week saw our bai ask us for a loan of a million Indian Rupees. When the better half asked her for a reason, the bai talked to us about the liquidity crisis and how she has lost a significant part of her income kyun ki “bajoo waale ghar ke Tandon saab ka sub-prime crisis ho gaya.” It was early in the morning and I hadn’t yet had my cuppa of filtered Arabica so I couldn’t jump out of my chair. Calisthenics isn’t a strong point of mine during that time of the day. But I was worried, very worried.
“Tandonji ka sub-prime crisis ho gaya” had a ring of impending doom. After all, Tandonji is kind of Aditya Shroff of ‘Rock On’ whose wife has designers coming to her home to showcase their collections. Of late, he had even restarted his college Rock Band at his home with decibel levels that created reasonable distress for everyone around. Agar unka ‘sub-prime crisis’ ho gaya, then this thing has reached much closer home than I ever thought. Nobody is safe, nobody is insulated, I thought. You don’t live in a bullet-proof world and even if you do, you will do well to remember this famous Mithun dialog:
Minister: “Yeh kaanch bulletproof hai. Tum mera baal bhi baanka nahin kar sakte.”
Mithun: “Yeh bulletproof hai magar patthar proof nahin”. Crash (as Mithun breaks the glass with a stone).
“But, why do you need a million bucks”? the better half arched her eyebrows.
“I-Phone kharidna hai. Aur Minnisha Lamba waale patiala ka sale bhi laga hua hai”, the bai responded. “Kareena waala ‘Jab We Met’ style purana ho chukka hai”, she added helpfully.
I looked at my Nokia 1110 (with the torch light at its end) and felt a mild throbbing in the head. This was clearly a bai steeped in the ethos of conspicuous consumption. She had insisted on getting married to a Peepal tree when Aishwarya had allegedly done the same. I had argued in her favor then reasoning trees are, after all, ‘Peepal’ too. We had hoped that she might turn a new leaf. But it clearly wasn’t the case. We had barked up the wrong tree.
I needed some early morning entertainment and it was time for India TV news. India TV news and comments on Rediff newsboard allow me to appreciate the state of our nation and its great citizenry. Also, no general entertainment channel packs in as much as they do. Only a few weeks back India TV provided heaps of intellectual fodder to me when they broke the story of how UFOs are abducting our cows (link courtesy Techieminds http://www.techieminds.org/?p=532) and asked this most amazing question, “kya aliens ke liye bhi gaay unki maata hai(do aliens also worship cows as their mother?)?” I could have told them it is entirely possible since I had interviewed Jan Bakuldas Kolesnikov Shukla on aliens last week (see here).
True to its reputation, it had a news item on “Finance ki duniya mein traahi traahi (translation: major chaos in finance world)”. So, this sub-prime thing had reached India TV. This must be serious stuff. Think of all the important news about UFOs, bhoot-pret etc they must be keeping aside for showing this ‘trahi trahi’ on Wall Street. ‘Trahi Trahi’ was something that I had last heard in Ramanand Sagar’s Ramayan when Kumbhakarn had descended on ‘vaanar-sena’. And, it was then I realized that I could no longer ignore the thousands of mails we receive at PFC asking us about sub-prime crisis and liquidity crunch. They could no longer be ignored. These requests need answers the same way Sambhavna Seth needs tissue papers on Bigg Boss.
As one possessing a curious (and a beautiful) mind, I always watched the many films from the ‘60s that Doordarshan played during its glory days with deep interest. Among many sociologically relevant scenes that have shaped me as an individual, one particularly amazing and often recurring scene is from a typical 60s film where Nazir Hussain (with a name like Diwan Deen Dayal), playing the father of Saira Banu or Sadhna, has a cardiac arrest kyun ki he is informed that unke bank ka diwalaa nikal gaya hai (translation: bank’s gone kaput). The cause and effect paradigms were so strongly intertwined in such cases that I could almost see Nazir Husssain’s right hand crawl across his chest even before the word “diwalaa” was uttered. How the global financial world must be missing Nazir Hussain and his ability to predict banks ka diwalaa? But I am getting ahead of my story.
Let’s go back to mid to late 90s. When we were watching Mithun churn out gems like Loha, Gunda, Yamraaj, Sher-e-Hindustan, Hitler and Military Raaj, Americans were going similarly berserk buying up homes. Statistics don’t lie. Mithun made about 30 films in those 3 years while the percentage of home-ownership which had remained constant for over two decades went up by a whopping 400 basis points in the USA.
The reasons for these two distant events were the same – easy availability of capital. Where did US mortgage lenders get this capital from? The answer, in great part, lies in Japan. Apart from loving Rajnikant in Muthu (aka ‘The Dancing Maharaja’), the Japanese have another quirk. They have among the lowest interest rates in the world. As low as a quarter of percentage!! This meant that there was nothing to gain from a savings account. So for a Japanese bank, any instrument that gave an annual return of more than 0.25%, was manna from heaven. US financial institutions accessed this easy money through a phenomenon called Yen carry trade where they borrowed in Yen from Japan and lend in Dollars relying on a stable currency exchange rate. All clear, till now? Basically, easy money flowed in and US mortgage lenders didn’t know what to do with it?
While the sources of funds for Kanti Shah, TLV Prasad and Rajiv Babbar will never be known, they did exactly what US mortgage lenders did when faced with it excess funds. First, they found a new market. In case of US mortgage lenders, till then, they followed a relatively strict method of assessing credit worthiness of an individual (income, inheritance, education, career prospects etc) and only loaned money to such ‘prime’ prospects at market interest rate. However, with this extra money at their disposal, the lenders started easing on credit check and focused on what they called ‘sub-prime’ prospects who were not very well off now but who might do well in future and pay out the mortgage loan. Similarly, a new audience was found for Mithun movies, what the industry terms the B and C centre and the Shahs and the Prasads spent money indiscriminately for Mukesh Rishis, Payal Malhotras and Monarch Hotels to draw in people from Chhabra to Chandrapur.
As has been seen before, such phenomenon can take a life of its own and spiral out of control. As more ‘sub-prime’ prospects get easy access to money and start buying homes, the prices of homes keep going up. As prices go up, more people are drawn into the net in the hope of making a good investment. Mortgage lenders become more and more relaxed in terms of giving loans as nobody wants to miss a ride on the gravy train. And that brings more people into the net of easy loans. A scenario that is as relevant for the slew of lewd comedies that keep showing up week on week at the box office in the hope that this is exactly what aam aadmi wants.
Things would have been bad enough with this. But there’s no end to human greed. The mortgage lenders started pooling these loan portfolios and started offering them as collaterals for others to invest in. That is they packaged them into a financial instrument and started transferring the risk to others. This process, called ‘securitization’, created Mortgage-backed Securities (MBS) or its cousin Collateralized Debt Obligations (CDOs) which were lapped up by investors looking for new avenues of investments especially in the growing real estate market. The credit rating agencies that should have been checking on the nature of such instruments thoroughly turned a blind eye and happily graded these instruments as ‘high-grade’ investment products. So now, not only were the lenders and the borrowers in the game, there were investors in MBS, CDOs, brokers, underwriters, other Investment Banks and everyone who thought of making easy money in this process. There were such excesses committed in the heady days of housing boom it appears that only ‘mass suspension of disbelief’ could explain how no one thought about the one delicate prop on which this entire edifice rests on – the ability of the borrower to repay his loan.
This was like Balaji Telefilms and Mukta Arts going public and raising money from the capital markets to fund such classics like C Kkompany and Good Boy, Bad Boy. More comedies followed and more excesses were committed – multi-crore multi-film deals, toilet humor, calendars booked for 18 months for leading actors et al culminating into a rumored a single film Rs. 71 crore deal for hottest star around. Another case of mass suspension of disbelief!
The cycle in the housing boom started reversing as the economy slowed down in the USA and home owners started defaulting on their obligations. As the mortgage lenders foreclosed the loans and started selling off the properties, the prices of houses started falling. This led to more people defaulting and selling off their homes. As easily as the cycle built up, it started unwinding faster. The first to be affected were the lenders themselves who started losing money in their sub-prime portfolio. The securitization phenomenon, however, had created a network that had left no one covered, I-banks, Insurance firms, Retail Banks, none at all. So, Countrywide and IndyMac going bankrupt led to a chain of events that led to Bear Stearns collapsing, Lehman Brothers going bankrupt, Merrill and HBOS sold off, Freddie, Fannie and AIG being nationalized and possibly many more bad news to follow. Of course, oil prices touching $100 a barrel, commodity prices touching record highs and an economic recession didn’t help either. Where do we go from here? Well, be prepared for worse.
Lesson learnt? Yes! Essentially, badly designed products drawing in masses on a flawed premise might give some instant gratification but will eventually result in excruciating pain. So, a mild warning to the producers of mindless comedies – there won’t be Nazir Hussain saab to predict oncoming bank ka diwalaa.
I would only echo Mithun’s warning about bulletproof glass. Sambhal jao, warna tumhara ‘sub-prime crisis’ ho jaayega.
Tags: AIG, all needed Nazir Hussain, bai, Bear Stearns ne Sambhavna Seth ko daraaya, bhago sher aaya, CDO, Fannie Mae, Freddie Mac, global gyaan, Kanti Shah is my God, Lehman, MBS, Mithun, Mithun and sub-prime crisis, Nazir Hussain, sambhal jao
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professor ji, shahstaang pranaam! you and your sugarcoated lectures… MAN!!
Excellent write up. Really laughed loud on “Trahi Trahi” and “Gaay Maata for aliens”. Very good description of sub prime crises too. I really hope that the so called hottest star gets paid Rs 71 crore for one movie. That’ll single handedly ensure that the movie goes bust and starts a receeding trend in the “sub prime” comedies.
Prof S..you rock, its a seminal piece on Global Financial markets disguised as a cinema piece and yet telling all guys in Indian Cinema to concentrate on quality..boss, Salaam!!
hahahah…..tum nahi sudhroge ????!!!! yeh aag kab bujhegi profsaab ? yeh aag kab bhujegi…kab bhujegi yeh aag profsaab ?
Thanks Subbu for this entertaining and informative piece…! I thought I knew most of it but didn’t know that the Japanese money was the initial source of capital…
Mazaa Aa gayaa!!!
..haha…nunni..
Thanks for the pather proof dialogue and a wonderful article..but alas..producers of mindless comedies are definitely not gonna pay heed to ur dire warnings..they are more likely to laugh it off and continue to torture us in the future..
But on the flipside..at least they will be giving more fodder for ur future articles !
Great article!!! Only now I have understood sub-prime crisis. Thanks yaar.
Dr.1952 ki jai ho
fantastic subrat saab………
kya combination banaya hai……..
a well summarized view on the subprime crisis equated aptly with the comedy or rather wannabe comedy mania in our films…
india tv , rediff and mithun wala angle toh sone pe suhaga that……excellent
@Subrat
Not being in India for sometime now, my indicator of sub-prime crisis reaching to our neighbourhood was an article on PFC.
I was half-expecting it to come anytime now and come it would from you!
So here you are!Good simplified explanation!
BTW i am not at top of the stats but 400 basis points (4%) doesn’t sound “whooping” to me…..u sure?
Thanks all.
D&C: Yeah, Yen carry trade is an important contributor. Also, next time someone calls you by name of Subrat don’t tell him that you are on vacation and slam the phone down.
Pradeep: 400 basis points (4%) is actually unprecedented. If you acount for population growth (since the home ownership is calculated on the total population) then it is quite a number. The number hovered around a constant for 2 decades.
subrat sab,
excellent article. sare basic funde clear ho gaye “sub prime crisis” ke. totally agree comments in Rediff discussion board and news on INDIA tv are more entertaining that anything else.
Subrat, i just recalled your session (location – undisclosed) that there are still two crisis waiting to happen after inflation hit. your words strike me when Lehmann crashed! What next sir??
lol
Subbu
Well summarized. Compliment from an I Banker. Liked the parallel with Hindi Cinema too. Not sure when the sub prime of Hindi movies will end though. Still money chasing a few stars there.