Thinking out loud

Tuesday, March 24, 2009

Moving to Wordpress

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Wednesday, March 11, 2009

Risk and Return

In a recent paper by Nassim Taleb, and indeed many many more articles now, the claim is made that if the quants/risk-managers knew the pitfalls of their risk modeling methods, the catastrophic losses made today could have been avoided. Sure.

Here's the thing. Itis precisely because they disregarded the risks that they made all the money they made over the decade leading upto the catastrophe. So if they had actually factored in the risks, they'd have taken much more conservative bets and thus they'd have made much less money and therefore a smaller bad move could have wiped out what they have made. This argument could probably continue to be made until the average annual return generated by financial firms would be in direct proportion to their actual equity and real GDP growth in the economy. No?

Monday, March 09, 2009

Goodwill gestures and reciprocation

News items on two successive days:

March 7, 2009: Pak releases 12 Taliban prisoners in Swat valley as a goodwill gesture.
March 8, 2009: Taliban kill 14 kidnapped Pakistani soldiers

So much for goodwill gestures.

Thursday, January 29, 2009

"and what would you do," the master said unto the multitude, "if God
spoke directly to your face and said, 'I COMMAND THAT YOU BE HAPPY IN
THE WORLD, AS LONG AS YOU LIVE.' What would you do then?

Thursday, January 08, 2009

The Satyam Double-Cross?

A popular mid day newspaper today has floated an interesting theory on the Satyam scam - a double-cross if you will. It is simple, so elegant that a scientific mind would take immediately to it. Here's the essence: Satyam's missing money did not not come in; it was taken out after it did.

Now here's why I think that makes sense.

Consider this. Mr Raju started Satyam back in 1987. He started with 20 employees and grew it with his patience and relentless energy. At some point he went public to raise money. But like all enterpreuners, he still feels the company is his baby. He should be deriving all the benefits from it - his small 8% stake not withstanding. In such a scenario, is he more likely to pump in money of his own, without accounting for it just to keep a hold on it? At a peak price of Rs. 542, his share would be about 3k crores. Would he rather pump in money against his own name, or try to take out a share?

Again, he says that very few people were aware of the fraud. Now, if he was infact raising false invoices, etc it would be extremely hard to do. 600 crores of excess revenue would mean that he would have to create several fictitious projects/clients. New projects are probably always discussed with lots of meetings to decide on pricing, etc. If these projects were fictitious, a lot of people would have to be involved. Similarly, if their operating margins were only 3%, what were the marketing folks doing? Did they not know what the operating costs were? Were they negotiating conrtacts with such small mark-ups? If there was 5k crore of fictitious money coming into the country, wouldn't the RBI know? After all, all this money would be earned in USD/EUR etc.

On the other hand, consider the theory that he was siphoning of money. All you have to do is to issue cheques from the various bank accounts while taking your CFO into confidence so he would not make entries in the books. Nobody else would need to be taken into confidence, except perhaps one other person, to sign off on the cheques. The money could then be used to speculate in the stock market, real estate or to fund bribes for winning Government contracts. The hope would be that the returns on this speculation would be retained by Raju while the original money would be returned to the accounts and the books would never reflect this. Now, given that the market has tanked over the last 10-11 months, how hard is it that Mr Raju lost a lot of money on those bets. With no money to return, Mr Raju has no other option left. He writes out a letter trying to look like a victim of child-love rather than egregious greed.

What do you think?

P.S. - Why does Infosys have 5k crores in fixed deposits? That's half their net worth.

Update: Raju confesses that he diverted company funds to buy real estate.

Tuesday, January 06, 2009

Oh the irony...

September 22, 2008: Satyam wins the Golden Peacock Global Award for Excellence in Corporate Governance for 2008 from the World Council for Corporate Governance (Source)

January 7, 2009: Satyam chairman Ramalinga Raju resigns citing inflated profits, cash balances and understated liabilities. (Source)

I am amused no end! :)

Friday, December 19, 2008

The Apple Cart again...

Here's why I love the preface. I quote:

"An election at present, considered as a means of selecting the best qualified rulers, is so absurd that if the last dozen parliaments had consisted of the candidates who were at the foot of the poll instead of those who were at the head of it there is no reason to suppose that we should have been a step more or less advanced than we are today. In neither case would the electorate have had any real choice of
representatives. If it had, we might have had to struggle with parliaments of Titus Oateses and Lord George Gordons dominating a few generals and artists, with Cabinets made up of the sort of orator who is said to carry away his hearers by his eloquence because, having first ascertained by a few cautious feelers what they are ready to applaud, he gives it to them a dozen times over in an overwhelming crescendo, and is in effect carried away by them. As it is, the voters have no real choice of candidates: they have to take what they can get and make the best of it according to their lights, which is often the worst of it by the light of heaven. By chance rather than by judgment they find themselves represented in parliament by a fortunate proportion of reasonably honest and public spirited persons who happen to be also successful public speakers. The rest are in parliament because they can afford it and have a fancy for it or an interest in it.


You will notice that I am too polite to call Demos a windbag or a hot air merchant; but I am going to ask you to begin our study of Democracy by considering it first as a big balloon, filled with gas or hot air, and sent up so that you shall be kept looking up at the sky whilst other people are picking your pockets. When the balloon comes down to earth every five years or so you are invited to get into the basket if you can throw out one of the people who are sitting tightly in it; but as you can afford neither the time nor the money, and there are forty millions of you and hardly room for six hundred in the basket, the balloon goes up again with much the same lot in it and leaves you where you were before. I think you will admit that the balloon as an image of Democracy corresponds to the parliamentary facts."

There is more where this came from. I love the preface. Read it! Project Gutenberg of Australia has been gracious enough to make a copy available here.

The Apple Cart

For years have I searched for this book. I had a frayed old copy which I had read. Several pages were missing from the preface. Yet, I am a tremendous fan of Shaw's work. The Apple Cart is, a political comedy. More importantly, it is a satire on democracy vs. monarchy. Or rather, as Shaw says himself, of both vs. plutocracy.

The play is great. The preface is better. A must read for!