Friday, May 31, 2013

A welcome judicial intervention

After years of political turmoil and uncertainty, things are looking up in Nepal as a new experiment gets underway there, reports Mayank Singh
Nepal's Chief Justice Khil Raj Regmi's decision to become prime minister has been by and large welcomed but its actual impact will be felt once the modalities are clearly enunciated between the political parties and the apex court. It will also help in allaying both constitutional and political fears.

For India, that can only mean good news. Since the dissolution of the Baburam Bhattarai government in May, 2012 after four years of wrangling and repeated extensions for the Constitutional Assembly, there appeared no solution in sight. The decision of the chief justice to head the non-partisan government came as a relief since when Maoists emerged as the biggest party in the 2008 elections, they lead the country into a state of terminal decline.

The Constituent Assembly failed to finalise a Constitution by 2010 and voted to extend its own term four times.

The experiment has proved to be costly – political turmoil with four unstable governments in four years. Nepal was without a functional government since May 2012, thanks to the stand taken by the country's two main parties, Nepali Congress and the CPN-UML, who continued to defy the Bhattarai government's every decision.

In a country where opinions are sharpy divided and voters deeply polarised, all decisions are likely to find more opposition than supporters. Now even the chief justice's move is under the scanner. Which is surprising because it has the blessings of all four important parties – the Unified CPN-Maoist, Nepali Congress, Communist Party of Nepal (United Marxist-Leninist) and the United Democratic Madhesi Front.

Some opposition to the plans are based on the failures of the Constituent Assembly to get their act together. That could be used skilfully to make a point and may guide the dynamics of the elections in favour of the Federal Democratic Republic Alliance, an alliance of Maoist and the Madehsi parties. Their calculations are based on typical vote bank politics: the Maoists are strong in the hills and the Madhesi parties in the terai. It is a potent combination which can form a government since their interests in no way clash with each other.

In the process, could the judiciary, sucked into a political vortex, loose its impartiality and credibility. Officials say this problem has been taken care of: the chief justice will temporarily vacate his position as head of the judiciary to head the electoral process. Once elections conclude, he will automatically be relieved of that responsibility. Until such time though, as a temporary charge, the Deputy Chief Justice of Nepal will be elevated to that position.

To remove the inevitable clouds around his motive, the chief justice has categorically stated that he has no personal ambitions but has just stepped in to resolve the political and constitutional crisis. Observers believe that his fairness and impartiality remains intact.

The more serious problems are political. The scale and intensity of infighting in parties like the Nepali Congress and the CPN–UML is a matter of intense concern. At the moment, it looks very difficult for either to keep their flock together. That is bound to lead to further fragmentation.

According to Nihar Nayak, research fellow at the Institute for Defence Studies and Analysis (IDSA), opposition parties have more grass root support. "Mainline political parties are scared of the opposition because of their poor performance while in the government. This is also because of their lack of grass root support,'' he says.

But there are others like defence analyst Major General (Retd) GD Bakshi who believe that there is a lot happening under the surface which may not be evident at the moment. "There is a long term negative effect which is eroding institutions and will divert Nepal from the path of growth and progress. The army and the economy have been at the receiving end of this political turmoil. While the army has conducted itself well even in the worst crisis, its much-required modernisation and training have gone for a toss as they have no help from the government.''

The inflation in Nepal is hovering in the region of 9 to 10 per cent which has made life for its people very difficult. Political uncertainty is one of the major reasons for the economy going into a tailspin.

Furthermore, Nepal's interim constitution bars judges, including the chief justice from assuming any role which is not of a judicial nature without the prior consent and approval of the judicial council – something Chief Justice Regmi has not done. That too will require a constitutional amendment.

Most believe that while the new appointment is a step in the right direction, it is not likely to ease political complications. Even if allowed by political parties to preside over the elections, it would require a herculean effort on the part of the government machinery to conduct elections in remote areas which could take days to reach. Time is clearly running out for conducting the elections before May-end or the first week of June, before the monsoons, scheduled to reach sometime in the first or the second week of June.


Source : IIPM Editorial, 2013.
An Initiative of IIPM, Malay Chaudhuri
For More IIPM Info, Visit below mentioned IIPM articles

Wednesday, May 29, 2013

The Pakistan card

As US prepares to leave Afghanistan in 2014, India mulls its security options and the future of its decade-long economic relationship with the land locked country. Ranjit Bhushan reports

India's troubled neighbourhood is set for yet another change when US troops depart Afghanistan in 2014, three years after President Barack Obama grandiosely announced his 'surge and exit' policy from the war-wracked country.

With mounting domestic public opinion against a war which is not 'their own' in addition to a sharply rising public expenditure and inflation, the US has realised that while occupying Afghanistan may have been easy, to administer it in any strict sense is well nigh impossible: Soviet troops in the 1980s and the British Indian Army in the 19th century would unhappily vouch for it.

By virtually pushing out the mighty American army from Afghanistan – despite innumerable drone raids, huge military casualties and diplomatic heartbreaks – the Pakistani Army would see the US pull out as a political triumph. It is a scene tailor-made forthe General Head Quarters in Rawalpindi: they can now have a free run of the country which they consider a natural ally, cut a deal with the Taliban and promote the interests of war lords who have connections in Pakistan and are backed directly or indirectly by the army.

For the Pakistani army, the biggest road block in its total domination of Afghanistan to gain strategic depth remains the Indian presence – a presence loathed in ample measure by generals there. New Delhi has considerably expanded its influence in Afghanistan since the US ousted the Taliban regime by the end of 2001. There can be little doubt that this interest has flourished by the backing that India has got from the US and international military forces. "That period by all accounts is over. We are looking at a new phase in Afghanistan policy and there will be changes," says one senior Indian diplomat formerly posted in Kabul. Indian apprehensions have been compounded by President Obama's and British efforts to engage the Taliban in negotiations – for New Delhi, Taliban is but another face of the Pakistani army. For India's strategic community, US's reported move to carve out Talibani and Pakistani spheres of influence respectively in the battle-weary country even as they leave, is a potential nightmare with no quick fix solutions in sight.

Realists on Delhi’s strategic circuit believe that India's responses to the developing situation in Afghanistan have to be tempered by ground realities, not rhetoric. In a recent writeup in bi-monthly magazine The American Interest, strategic expert C Rajamohan wrote: "Despite much talk in Washington about India’s 'rivalry' with Pakistan in Afghanistan, Delhi is acutely aware that it is not a 'primary' player there in the manner that Islamabad is. The absence of a physical border is India’s greatest strength and main weakness in Afghanistan. Paradoxically, the 2,500 kilometer-long open border with Afghanistan – the Durand Line – is Pakistan’s greatest advantage and principal weakness. Because Afghanistan is once-removed from India, few Afghans distrust Delhi. The absence of a border means India cannot undertake and defend a unilateral security role in Afghanistan.'' In other words, any military engagement in that country can safely be ruled out for the time being.

Delhi, nevertheless, remains an important player in its immediate neighbourhood. Backed by Washington and NATO, the Indo-Afghan engagement has been broadening in the last decade or so. In 2011, the two countries signed a strategic partnership, which promised – on top of its agenda – a distinct Indian role in raising Afghan forces, mostly in India. Close to 200 Afghan soldiers are currently attending Indian military colleges.

In 2012, India played host to an international investment meeting on Afghanistan in New Delhi – a key visitor from Kabul told potential Indian investors that it was not easy to do business in his country. Despite it, India has pledged $2 billion in aid to build roads, power stations and even the Parliament of Afghanistan. As a return gift, India has got rights to mine prime iron ore reserves in the country. To be sure, the Indian private sector response has been tepid given the political climate in the country, but the government is known to be persuading public sector mining companies, including the NDMC and National Aluminum Company Co Ltd, to explore avenues of investment.

Officials in the two countries are reported to be discussing the 'new silk route' between the two nations. There is a vibrant Afghan community which lives in New Delhi, many of them beneficiaries of medical tourism, while Kabul itself is awash with Indian colours, food and music. Afghanistan President Hamid Karzai is fluent in Hindi, having spent his student years in the Himachal Pradesh University. A visiting British journalist traveling in Afghanistan remembers that "while you never hear a good word for Pakistan, you rarely hear a bad one for India".

Last year, India signed a deal to pipe gas 1,700 km from Turkmenistan across Afghanistan and Pakistan. India's leading gas company Gas Authority of India Ltd, is one of the leaders of a consortium trying to woo global investors to cough up $7.6 billion for the pipeline christened TAPI (Turkmenistan-Afghanistan-Pakistan-India). But there are many in Delhi who believe that this pipeline would make India dependent upon arch rival Pakistan and that is something which may not find backers in in the short term. Ministry of External Affairs spokesman Syed Akbaruddin told this magazine that India's presence is about strategic self-interest. "Afghanistan is in our neighbourhood and there is a history of Afghan soil being used for terror attacks on India. We cannot allow it to happen," he said.

For the Americans, their decisionto exit Afghanistan may create more problems than solve them. The US dilemma can be best understood in a recent Rand Corporation assessment of competing global and regional interests in the country.

Says the Rand Corporation report, "India and Pakistan have very different visions for Afghanistan, and they seek to advance highly disparate interests through their respective engagements in the country. Pakistan views Afghanistan primarily as an environment in which to pursue its rivalry with India. India pursues domestic priorities (such as reining in anti-Indian terrorism, accessing Central Asian energy resources and increasing trade) that require Afghanistan to experience stability and economic growth. Thus, whereas Pakistan seeks to fashion an Afghan state that would detract from regional security, India would enhance Afghanistan's stability, security, economic growth and regional integration. Afghanistan would welcome greater involvement from India, though it will need to accommodate the interests of other external powers as well. India has a range of options for engaging Afghanistan, from continuing current activities to increasing economic and commercial ties, deploying forces to protect Indian facilities, continuing or expanding training for Afghan forces, or deploying combat troops for counter-terrorism and counterinsurgency missions. To avoid antagonising Pakistan, India is likely to increase economic and commercial engagement while maintaining, or perhaps augmenting, military training, though it will continue to conduct such training inside India. Increased Indian engagement in Afghanistan, particularly enhanced Indian assistance to Afghan security forces, will advance long-term US objectives in central and south Asia.''

Could Indian policymakers then look for clues in modern history? British rulers, confronted with virtually uncontrollable tribal upsurge of the trans-Indus tribal territories in the 19th century, wavered between a policy that sought to physically control the boondocks through force and through a hands-off policy which recognised that given the region's natural turbulence where virtually everyone carried a gun and was quite willing to use it, it would be futile to try to subjugate: reconciliation was always a better bet.Indian mandarins say in the current situation, a hands-offpolicy would imply that there is no tearing hurry to get into Afghanistan after the Americans depart. India will instead, rely on internal affairs of the country to take a turn where New Delhi's role would come into play. For instance, it is nearly certain that once the Pakistani Army gets a run of the country once again and decides to put the squeeze, certain ethnic groups – the non-Pashtun minorities in Afghanistan for instance – who are opposed to Islamabad will turn to New Delhi for help.


Source : IIPM Editorial, 2013.
An Initiative of IIPM, Malay Chaudhuri
For More IIPM Info, Visit below mentioned IIPM articles
IIPM’s Management Consulting Arm-Planman Consulting
Professor Arindam Chaudhuri – A Man For The Society….
IIPM: Indian Institute of Planning and Management
IIPM makes business education truly global
Management Guru Arindam Chaudhuri
Rajita Chaudhuri-The New Age Woman

ExecutiveMBA

Saturday, May 25, 2013

Taking law in your hands

Chhattisgarh's tribal women are increasingly facing the wrath of errant policemen, reports Anil Dwivedi

While the Delhi gang rape case has led to more reporting of such instances nationwide and an increasing public awareness of the rights of women, in tribal-dominated Chhattisgarh, a spiral of physical assaults on women by uniformed police men and other government employees, have put paid to the state government’s clarion call to provide security to its denizens, particularly low caste backward women.
consider this:

1. In Sarguja district’s Chando police station, July 6, 2011, 15-year-old Meena Khelkon was allegedly raped by the police, branded as a Naxalite and then killed in an encounter. When the issue was raised in the state assembly, a CID inquiry was ordered but it reached no dramatic conclusions. There is still no charge sheet filed

2. In November 2012, in Narayanpur’s Koliyari village, four police personnel allegedly gang raped a 35-year-old tribal woman. Charges were filed under Section 376 of the Indian Penal Code (IPC) which deals specially with outraging the modesty of a woman by the police. The issue has been put into cold storage

3. Two special police officers (SPOs) attached to the Chhindgarh police station allegedly raped a minor; an FIR was filed but there have been no further investigations.

4. Soni Sori, a tribal woman was picked up ten months ago by the police on charges of being a Maoist sympathiser. She alleged that in the presence of the district SP, she was stripped and molested but managed to avoid rape. She continues to be behind bars. One of the officers reportedly involved in the incident was, ironically, later felicitated with a President’s Medal.

Welcome to Chhattisgarh, a haven for cop rapists who get away as clean as a whistle and a state which came into existence as a separate entity for tribals in 2000, threatens its denizens the most. While by means restricted to the state, the security provided for tribal women is increasingly coming under a cloud by, ironically, those meant to be upholders of law and order.

Now it seems, even the others are joining in. Last fortnight, in Kanker district’s Government Jhaliamari Ashram, 16 tribal girls were raped and molested by their teachers and similar reports from three government hostels suggest that no matter how high sounding the law is, there is little safety for tribals living in Chhattisgarh.

Says human rights activist BK Manish, who has also been campaigning for introducing the Fifth Schedule, a special constitutional provision which provides powers for governance in the country’s tribal hinterland, “Things have reached such a stage that tribals have stopped going to the police, knowing they are not going to get justice.”

In Chhattisgarh, tribals constitute the majority 31.81 per cent of the population followed by 11.60 per cent Scheduled Castes or Dalits. Cases of rapes, land grabbing and encounters as alleged by Maoists, are common place. According to the National Crime Bureau (NCB), despite the presence of a 1989 special ordinance which deals with the safe keep of tribals, there were 879 cases registered against those committing atrocities on them; of those charged, 172 were convicted while 625 got away due to lack of evidence.

Former Union Minister and tribal leader, BJP’s Rajya Sabha MP, Nand Kumar Sai, says he is a worried man. “The state Governor should use his powers to provide relief. The Constitution gives him the authority of take special steps for protecting tribals. Why isn't he using them?” he asks TSI.

According to a police officer who prefers to talk off the record, the biggest impediment in pursuing the cases is the lack of government go-ahead. According to the Scheduled Caste and Scheduled Tribe (Prevention of Atrocities) Act, 1989, no investigation can proceed without the government’s clearance. A case in point is the Janjgir-Chapa gang rape case of a 40-year-old tribal woman where senior police officers declined to give their approval for the probe. Not surprisingly, the officer who had build up a case against the accused was shown the door!


Source : IIPM Editorial, 2013.
An Initiative of IIPM, Malay Chaudhuri
For More IIPM Info, Visit below mentioned IIPM articles
2012 : DNA National B-School Survey 2012
Ranked 1st in International Exposure (ahead of all the IIMs)
Ranked 6th Overall

Zee Business Best B-School Survey 2012
Prof. Arindam Chaudhuri’s Session at IMA Indore
IIPM IN FINANCIAL TIMES, UK. FEATURE OF THE WEEK
IIPM strong hold on Placement : 10000 Students Placed in last 5 year
BBA Management Education

Friday, May 24, 2013

Has the 100-crore club reduced movies to IPOs?

Monojit Lahiri investigates B-town's latest, booming bimari!

Film critic, Anupama Chopra had lamented about this earlier when Sallu bhai was on the rampage with his monster hits, - Ready, Dabangg, Body Guard – but the obsession with this figure took on very sad, disappointing dimensions when recently the release of the late Yash Chopra’s swan song,  Jab Tak Hai Jaan, was completely hi-jacked by how soon this dazzling SRK-Katrina-Anushka rom-com would blast the Rs 100 crore mark; and not whether the film was the perfect ending to a filmmaker’s magnificent obsession of using love as a passionate leitmotif of all his films. Not whether SRK, despite his 45 years age, managed to wow and charm the mickey of his zillion fans with his matchless, stylised body language and histrionics; not whether the two heroines, in their own respective ways, fleshed out their roles with the sense of abandon and sensitivity demanded and not whether the Gulzar-Rehman magic, the spectacular locales and canvas out-excelled Yash ji’s earlier efforts. Whatever happened to old-fashioned movie-going experience - the thrill starting from the time the lights dimmed, submitting to magical willful suspension of disbelief right through and returning satiated and enthralled?

Even up till a few years ago, life was different. Mainstream publications and TV channels did reviews. Hits were defined by Silver, Gold and Diamond jubilees, with dazzling, glamorous parties marking the occasion, with reports splashed across film mags. Details of daily/weekend/weekly/monthly collections were restricted strictly to the ‘trade magazines’. In recent times however, this Rs 100 crore disease has spread like a fungus and today, in crass, blatant and brazen manner, First day/Weekend/Weekly collections – real or fictional – are blitzed across mainstream and film publications with depressing regularity! Has the fun and enjoyment of going to the movies reduced to an IPO-watch? Have the merchants taken over from the mavericks and magicians?

Many heavyweights of B-town share this concern. Rajkumar Hirani (Director of Munnabhai and 3 Idiots) is extremely uncomfortable with this fact and articulates it in no uncertain times. He suspects it is a chilling sign of a consumerist and market-obsessed time when people are encouraged to know the price of everything and the value of nothing! “For God’s sake, it’s not an IPO but a film! Sure I understand and am concerned about the ROI factor, but for me audience appreciation is the key. People loving your film and recommending it to others remains a matchless high. For me, the shoe-string-budgeted Jane Bhi Do Yaro, made three decades ago, is way beyond any Rs 100 crore movie because even today it is remembered, loved and given cult status.” Both Anurag (Barfi) Basu and Kabir (Ek Tha Tiger) Khan agree. Basu – returning after a big budget disaster, Kites, admitted he was apprehensive about the commercial viability of his movie. “Transforming young, hot, popular, glam stars like Ranbir and Piryanka into sexless deaf-dumb-artistic creatures could be risky. The content, too, was anti-glam. Would the audiences respond to the soul to the film? I guess I got lucky! If you go with your heart, chances are, it will find another.” Kabir agrees. “You can’t sit down with the self-created agenda of writing a Rs 100 crore film! Stupid! You have to go with your sense of self-belief. I did exactly that for Ek Tha Tiger and God was kind. It worked.” And how!


Source : IIPM Editorial, 2013.
An Initiative of IIPM, Malay Chaudhuri
For More IIPM Info, Visit below mentioned IIPM articles
2012 : DNA National B-School Survey 2012
Ranked 1st in International Exposure (ahead of all the IIMs)
Ranked 6th Overall

Zee Business Best B-School Survey 2012
Prof. Arindam Chaudhuri’s Session at IMA Indore
IIPM IN FINANCIAL TIMES, UK. FEATURE OF THE WEEK
IIPM strong hold on Placement : 10000 Students Placed in last 5 year
BBA Management Education

Monday, May 6, 2013

When Indian companies turn acquirers, is wealth created for shareholders of the acquiring firms?

A. Sandeep, Group Editorial Director, Business & Economy, presents a quantitative study on acquisitions by Indian companies involving both Indian and Foreign targets. Do such acquisitions destroy value (as has been commonly reported by scholars and researchers in the past)? And do market sentiments alone influence the change in market value of buyers, thereby negating the effect of the very acquisitions?

Globally, the outcomes of mergers and acquisitions (M&As) have been analysed at length. However in the Indian context, due to factors such as lack of data availability in the public domain, lack of transparency in deals et al, such studies have been rare. More so, studies discussing the outcomes of acquisitions by Indian companies alone have been the rarest. We developed a methodology to collect and analyse data on acquisitions by Indian companies. We had two scenarios: (a) Indian companies buying Indian targets (referred hereon to as India-India); and (b) Indian companies buying Foreign targets (referred hereon to as India-Foreign). The performance of each acquirer on a certain parameter (market capitalisation) was tracked down and mapped during the pre and post-deal periods. Our final conclusions were arrived at by studying 167 deals involving Indian firms as acquirers. We focused on the importance of using m-cap as a performance indicator. Critically, checks were introduced on whether statistical significance differences exists between the changes in m-cap of acquirers and changes in the standard index (BSE Sensex) under various control environments (like Sensex and non-Sensex acquirers, various time windows et al).

The results we observed turned out to be quite opposite of what studies on acquisition globally have stated – that acquisitions erode wealth for the acquirers’ shareholders. The mirage of synergy playing a role in destroying hopes of acquirers’ shareholders to gain wealth have been identified and proven by a number of academic scholars, consultants and research firms. Most of them use changes in financial metrics (like market capitalisation) to arrive at a conclusion. In the NBER Working Paper titled, ‘Do Shareholders of acquiring firms gain from acquisitions? (2003)’, scholars Sara B. Moeller (Cox School of Business, Southern Methodist University), Frederik P. Schlingemann (Katz Graduate School of Business, University of Pittsburgh) and RenĂ© M. Stulz (Fisher College of Business, Ohio State University), state, “We examine a sample of 12,023 acquisitions by public firms from 1980 to 2001. Shareholders of these firms lost a total of $218 billion when acquisitions were announced. Though shareholders lose throughout our sample period, losses associated with acquisition announcements after 1997 are dramatic.” In another study for The ESRC Centre for Business Research, University of Cambridge, titled, ‘Do takeovers create value? (2002)’, researchers Magnus Bild, Mikael Runsten (Stockholm School of Economics) and Paul Guest and Andy Gosh (Centre for Business Research, Cambridge University Judge Institute of Management), report that, “on average, acquisitions destroy roughly 30% of the acquirer’s pre-acquisition value.” According to James Heskett, Baker Foundation Professor, Emeritus, at Harvard Business School, “Acquirers often end up bargaining for a seat on the loser’s bench.” In his paper titled, ‘Should We Brace Ourselves for Another Era of M&A Value Destruction? (2004)’, he sums up thus, “Research tells us that the short-term value in an acquisition accrues primarily to shareholders of acquired companies. On the other hand, short-term value is more often destroyed than created for shareholders of acquiring organisations. As many as two-thirds of all acquirers fail to achieve the benefits planned at the outset of an acquisition. In the end, M&A is about buying more volume. It is a flawed process, invented by brokers, lawyers, and super-sized, ego-based CEOs. Acquisitions are a macho exercise, not an intellectual one. Think World Wrestling Federation, not a chess tournament.”


Source : IIPM Editorial, 2013.
An Initiative of IIPM, Malay Chaudhuri
 
For More IIPM Info, Visit below mentioned IIPM articles
 
IIPM’s Management Consulting Arm-Planman Consulting
Professor Arindam Chaudhuri – A Man For The Society….
IIPM: Indian Institute of Planning and Management
IIPM makes business education truly global
Management Guru Arindam Chaudhuri
Rajita Chaudhuri-The New Age Woman

ExecutiveMBA

Saturday, May 4, 2013

Panel members the people who made the verdict!

A snapshot of the 30 leading executives who ranked India’s top 30 B-schools in the B&E B-School Survey 2012-13

Keertan Adyanthaya,

MD, Fox International Channels
Keertan is in charge of the Factual & Lifestyle portfolio of FOX International Channels in India including its strong existing brands like National Geographic Channel and FOX Traveller. With a career spanning over 17-years in allied fields of the media, he has earlier worked at O&M and Mindshare in media planning where he honed his analytical and strategic skills; followed by senior level assignments at Channel V, Star News, VH-1 and Star Plus.

Pradeep Kashyap,
founder & CEO, mart
Pradeep Kashyap is Founder & CEO of MART, a leading emerging market research and consultancy agency having a footprint in South Asia. MART has partnered with many Fortune 500 companies for identifying business opportunities in India, Bangladesh and Nepal using community co-creation approaches. He is a global thought leader widely known as the ‘Father of Rural Marketing’ and has authored the most definitive book on the subject used as standard text in leading B-schools.


Source : IIPM Editorial, 2013.
An Initiative of IIPM, Malay Chaudhuri
 
For More IIPM Info, Visit below mentioned IIPM articles
 
IIPM’s Management Consulting Arm-Planman Consulting
Professor Arindam Chaudhuri – A Man For The Society….
IIPM: Indian Institute of Planning and Management
IIPM makes business education truly global
Management Guru Arindam Chaudhuri
Rajita Chaudhuri-The New Age Woman

ExecutiveMBA

Thursday, May 2, 2013

How Paulson’s plan gave life to US banks

How the US government’s response to the financial crisis in the fall of 2008 created enormous value for banks and saved a few that were on the brink of bankruptcy

On Monday, October 13, 2008, the CEOs of US’ largest banks were summoned to a meeting in Washington DC. The call came just days after the worst weekly decline in US stock market history. At the meeting, the-then US Treasury Secretary Henry Paulson announced a plan that reportedly took the CEOs by surprise. The plan was to inject a massive $125 billion in preferred equity investment in the country’s top banks and provide them with various guarantees – an unprecedented move that would hopefully restore stability to a tumultuous financial market.

Much controversy followed on whether this was the right thing to do and whether the government should have stepped in at all.

A recent paper titled “Paulson’s Gift” that I co-authored with Chicago Booth professor Pietro Veronesi states how the rescue plan announced by Paulson on October 13, 2008, indeed created value. The plan affected the country’s 10 largest commercial banks, including Wachovia, which was purchased by Wells Fargo, and three former investment banks: Goldman Sachs, Morgan Stanley and Merrill Lynch. In particular, Paulson’s plan increased the value of banks’ financial claims – debt, equity, and derivative liabilities – by $130 billion. Accounting for what the government spent for the rescue plan, which was between $21 billion and $44 billion, the plan produced a net gain of $86 billion to $109 billion.

The likely reason why Paulson’s plan appeared to have created value is that it prevented a disastrous run on the banking system that, according to the paper’s estimate, would have destroyed 22% of a bank’s enterprise value. Unlike a traditional run on deposits, a bank’s short-term creditors can run on a bank by refusing to roll over loans if they fear other creditors will do the same, which can quickly make a bank insolvent. The fear of a run can be self-fulfilling. Thus, successfully stopping a run on banks can create significant value.

In spite of its success, the plan ended up being very expensive for taxpayers. The terms of the deal were very friendly to banks. Moreover, a bankruptcy procedure that allows banks to restructure their debt would have been a better strategy to repair insolvent banks. In the long run, the success of Paulson’s plan underscores how tempting it is for the government to intervene, which encourages banks to take on more risk. The results exacerbate the perception that banks are too big to fail.

The financial rescue plan that Paulson presented, had three parts.The first was a $125 billion preferred equity investment in the 10 largest US commercial banks. In exchange for this capital infusion, the government would get preferred stock with a nominal value equal to the amount invested and which would pay a dividend of 5% for the first 5 years and 9% thereafter. In addition, the government would receive a warrant equal to 15% of the value of preferred stock with a strike price equal to the average stock price 20 working days before the money is invested. The second part of the plan was a 3-year Federal Deposit Insurance Corporation (FDIC) guarantee for all new issues of unsecured bank debt until June 30, 2009. The third part provided full FDIC insurance coverage on all non-interest-bearing deposits.

The study analyses the impact of Paulson’s plan by looking at the change in the market value of banks’ equity, debt, and derivative liabilities before and after the announcement.Looking at the changes in bank Credit Default Swap (CDS) rates between October 10 and 14, 2008, and at the same time controlling for movements in the CDS rate of the largest financial firm that was not involved in the intervention (GE Capital), the study finds that bond holders of the 10 participating banks gained $120.5 billion from the announcement of the Paulson plan. Citigroup and the three former investment banks gained the most.


Source : IIPM Editorial, 2013.
An Initiative of IIPM, Malay Chaudhuri
 
For More IIPM Info, Visit below mentioned IIPM articles