Archive for January, 2010

A fantastic article about copyright and Digital Righs Management (DRM) – a manifesto by Cary Doctorow.

Some darn good points he makes:

• Here’s the social reason that DRM fails: keeping an
  honest user honest is like keeping a tall user tall.
• “Here’s how anti-circumvention works: if you put a lock—an access control—around a copyrighted work, it is illegal to break that lock. It’s illegal to make a tool that breaks that lock. It’s illegal to tell someone how to make that tool. It’s illegal to tell someone where she can find out how to make that tool.”
• No Sony customer woke up one morning and said, “Damn, I wish Sony would devote some expensive engineering effort in order that I may do less with my music.”
• “Go build the record player that can play everyone’s records”

I guess Microsoft didn’t listen. But Jon Johanssen did, it seems; check out DoubleTwist. It can play iTunes and Amazon MP3s on devices that the shops don’t otherwise let you play on.

But I digress. What does this have to do with the capital markets?

It got me thinking about plagiarism in this space. If you build a quality product – a way to structure a financial deal, an offering that a customer can get X upside but no downside, a fund that is “capital guaranteed” but still has Nifty linked upside upto a certain point – anything of that kind, these products come with innovative ideas. And no matter how good the deal is, you find that it’s easily copied – so if Nifty linked debentures were an innovation, they soon get copied and everyone’s offering it.

On the other side are those deeply devoted to secrecy – the hedge funds who won’t tell you how they do it, they ask you for money and offer you returns. Or the banks and brokers who offer only partial information but you realize what a bad deal it is when you see how easily they sucker you (see: Low annuity returns in India). And the fights to keep it secret – by using non-competes for employees, or by disallowing retail people into bond markets, or by curtailing shorting and things like that.

It’s strange that both co-exist. At one end you have the ultimate rip-off – you design a product with a lot of effort and the minute it’s out there people copy you and claim the idea as their own. At the other end, secrecy and access control are paramount to success. As times move, things move from the “secret” end to the “open” end – when “arbitrage” was a word only brokers could use, today everyone can do it from screen quotes. Where you couldn’t buy government bonds direct, now they encourage you to participate even in primary auctions (though no one else wants you to, so it’s not popular). Envy those Nifty debentures? You can build one on your own using Nifty long term options. It’s that cool, it’s that easy. The fight for “rights management” will continue, but it’s getting increasingly obvious that information won’t be curtailed, and providers will do well to adapt rather than fight.

Having said that, I’m not revealing the underlying details for my system just yet! For one if i did reveal it I’d have to go find another one. Second, I doubt it would make money once it’s out there in the open. And last, I’m just as much a hypocrite!

In it’s quarterly monetary policy, the Reserve Bank of India hiked the Cash Reserve Ratio (CRR) of banks to 5.75%. That much percentage of deposits will now need to be kept aside in cash (can’t be lent out, or used for other purposes). RBI says this will take out 36,000 crore of liquidity from the system.

The CRR comes in two phases – a 0.50% increase on Feb 13 and the remaining 25 basis points on Feb 27. The Repo rate (4.75%) and Reverse Repo (3.25%) are left unchanged.

Interestingly, here’s the project path of inflation in the next quarter.

With expected inflation at 8%, and interest rates at 5-6% we already have a big negative real rate; in fact, if you are now getting less than 8% interest on your deposits you’re losing money. Hopefully the next crop will be good and food inflation – a major part of both WPI and CPI – will stabilize to 6% or so. But with growth estimates like this:

Growth at 7.5% will demand inflation follow at nearly that level.

Stock markets recovered by the end of the day after opening about 2% down. They ended flat, though at the end of a week that has seen carnage after carnage, flat is the new “up”. The next week is likely to be just as exciting – a dangerous word when it comes to stock markets – as this one.

In other news: the 3G auctions have been moved to the next fiscal year. That is another 35,000 crore that the RBI will have to raise from the markets; but going by recent auctions it should be a breeze. The 10 year bond – the 2020 bond is now a lot more liquid than that 2019 bond – is trading flat at the 7.58% levels, and even here, flat is the new up.

But if they could collect from Hassan Ali Khan, a “real estate consultant” – that’s 50,000 crores in one take and should easily bridge some of that fiscal deficit. (Mint’s “Top Defaulter’s List” in “Taxpayers in Mumbai owe Rs. 1.35 trillion”)

The scale of the frauds on the left (on the right are honourable companies) is staggering.

Meanwhile, get ready: for no reason banks will raise rates even though their retail interest rates are 2x the repo rate – a rate they haven’t availed for the last full year because they’re flush with funds.

A company run by two close friends, iCreate Software has just secured Rs. 15 crores in funding from IDG Ventures. Based in Bangalore, iCreate makes business intelligence software for banks. I’ve had long and fruitful discussions with Anup and Vivek, the co-founders, about the future of BI and Banking – it’s such an enormously huge sector, and the technology adoption at the smaller banks is staggeringly low. A market waiting to be tapped, and the competition is looking at the more lucrative US/European banks which leaves the field more open in Asia/Africa/Latin America.

Domain-specific BI is the way to go, according to IDG MD Meenakshisundaram, and I agree.  I knew folks at Manthan Systems, a BI Provider for the retail space, and even there the scope is enormous. Subex has niche BI solutions – from Fraud detection to Route Optimization - for telecom providers, and a public company.

In Banking, BI has been of very huge interest to me; in India you see very little data on bank portfolios, loans, credit ratings etc.  (at least, the kind they reveal at quarterly meets in the US, like this Freddie Mac quarterly result supplement)

Plus, there’s a new field out there – market impact – that banks should be looking at. For instance, if the CDS spread on a certain company expands suddenly, and a bank has a big exposure to that company, it should be worried about the quality of that asset. Stock prices affect market value of collateral – in one case I know, a bank could only update it’s collateral values for loan-against-shares once a month because the manual process took so much time. While it’s all okay nowadays to remove mark-to-market and therefore hide the real asset quality from shareholders, banks must internally need a better and more real-world view.

Look also at the stupid kind of regulations we have in India – KYC rules for instance – which make us believe we can detect fraud or money laundering. True frauds will easily circumvent the system, while honest players get inconvenienced. Frauds operate in easily identifiable patterns, so does money laundering. You can detect such using better BI, by mapping or crunching data. For instance, someone who wants to launder cash may do a series of cash transactions, just below the 50,000 limit that institutes PAN card verification, or deal with a few parties over and over again. A stolen ATM card may show sudden splurges, that could trigger flags and phone confirmations. Personal loan or credit card defaulters could have triggers from stock markets, regional/sectoral events or even lack of bank account credits.

Having data mining/analysis can solve these problems, and you won’t get anywhere if you build a “generic” data mining solution. It’s like handing me an Intel CPU – I might know how to get a motherboard, memory, disk and cabinet and put it all together but it would save me a lot of time and money if someone were to sell me a full PC instead.

Getting BI currently is a hugely expensive and time consuming operation – typically banks go with a BI horizontal like Cognos, get a system integrator like EDS, IBM or Infy to copy data over from their core banking platforms to an OLAP back-end, and then spend time specifying the reporting so that per-head-billed consultants can build them in Cognos. First, this is out of reach of most smaller banks, and second, the management face time plus the cycle time is just too much.

iCreate’s been approaching this in a very interesting way; they have adapters that can get data from core-banking systems, and they have pre-packaged reports in their BI system. Both of these reduce the cost and cycle time enormously, and lesser time needed from management side to specify reports everyone will need. (Think of canned Basel X, or country specific regulator reports) Reduces time to sell, implement and get a customer happy – and defects from the model of “we need more people to make more money” approach so common in outsourcing.

Enough said. I know this is hugely different from what I’ve said on the blog but still:

• This is a shameless plug for two very good friends. Anup and Vivek, I’m proud of you guys. Now go there and make this company worth a 1000 crores!
• I’ve learnt a lot from iCreate’s growth – how niche can be successful, why it’s important to focus on growth rather than break-even, how you can go “all-in” and make it all come out right.

I’ve always wanted to have forums of some sort on this blog, but after a discussion today realized it’s better to scale discussions to a network of sorts. Ning to the rescue, and I’ve created http://capitalmind.ning.com

You can:

• join the group
• Check out the Forum
• Chat with co-users
• Read News links
• and much more as I add new feature

Do tell me what you think!

In the statistical recovery, we can expect to see good numbers on the GDP front, and Britain’s the latest.

The U.K. economy resumed growth by less than economists forecast in the fourth quarter as service industries and manufacturing expanded just enough to pull Britain out of its longest recession on record.

Gross domestic product rose 0.1 percent from the third quarter, the Office for National Statistics said today in London. The median forecast in a Bloomberg News survey of 33 economists was for a 0.4 percent increase and the lowest prediction was for a result of 0.2 percent.

Bank of England policy makers will study the data as they assess the strength of the recovery and decide next week whether to halt bond purchases and prepare to withdraw emergency stimulus measures.

A lot of countries are now out and with the lower base last year, should show growth. The US will, too. But will it last? A double dip is scary – just like dipping your biscuit twice into a hot cup of tea, you don’t know if you’ll make it out in one piece. (If you will excuse the sorry metaphor)

Meanwhile, Greece manages to sell $11.3 billion of bonds. The yield, at 6.2% was a ‘premium’ according to Bloomberg – but 6.2% in India is really low. It’s all a matter of perspective, I imagine – one man’s misery is another man’s joy. In any case, in the age of bailouts, it was unlikely the EU would let Greece fail. Everything, apparently, is too big to fail, except you and me.