Will Securitization Industry reforms bring a good news this time...Halloween's round the corner..Lets hope for the best.

Okay now lets try and analyse and see what things we can draw from the recent measures being taken worldwide in the arena of the most hush-hushed topic today - Securitization. This would get seriously financial so non-financial guys can give it a skip.
Lets imagine this. Can the U.S.and its financial institutions create tens of trillions dollars from their virtual financial system in order to buy up bonds, derivatives and stocks around the world, all the inexhaustible assets like land for sale in the assumption of making capital gains and in the process making a margin out of the arbitrage spreads by debt leveraging at interest cost which might be say less than 1%. Seems possible or similar...
This is the game which was played in 2008, resulting in Recession.

When the US received critical blame for the debacle, it decided to stop this but it was too lucrative an opportunity for the US not to use it especially when it was under such a deficit crises so it planned an complete overhaul of the Securitization industry, this time it would mandate the lenders to be responsible for a part of the credit risk of loans which would ultimately be sold to the investors. It wants to put an end to the "gain-on-sale accounting" rules, that helped spur the market’s fake boom. This is being done to restore confidence in asset-backed markets and allow US banks to resume pumping more credit to the economy, albeit doing away with the creating of non-systemic risks.

Securitization of mortgages and credit card loans, which were termed as assets, accounted for about half of the credit markets before the financial crisis struck.
Now the originators will be required to retain at least 5% of the credit risk of loans,which would be packaged into the rated (A,A+,B,B+,B++) securities and sold to retail investors. The 5% rule (is to be tested in Europe) would ensure that lenders have their own stakes in the deal, the move makes the lenders attached with the default of the bargain.
This measure of doing away with the “gain on sale accounting” would prevent financial companies from booking paper profits on loans, when the retail investor buys into the packaged into securities.
The 2008 recession story was penned because Securitization had made adulterated credit more widely available. It had breaken the link between borrower and lender, now this measure will be different, whenever the first seller is barred from authentication of genuineness, the product leads to a general erosion of standards, in this case lending standards, resulting in a serious market failure that fuelled the housing boom and ravined the housing bust”.

We've spoken quite often of the unrelatedness between those who bear the risk and those who move the product in the financial world.So let me explain you how bankers, industrialists, political lobbyists helping with huge funds for political campaign played the game of bloodbath soaked in the green economy.

A local institution (remember these are generally private companies)(XYZ) gave a mortgage to the owner, a NINJA person with a strong defaulting history. Even before the house went up for foreclosure, the mortage has been used by small and big fishes alike to create a bubble... the local XYZ has sold the mortgaged papers to a regional bank, which has in turn packaged it in groups of A B C class bundled categories and sold to thousands of people, dishing out a perfect piece meal of the biggest fraud in the streets. To tell a complex story in short, XYZ made its money from the borrowers monthly payments, and the regional one, from the commission and fees of the volume of business it has generated.

The financial industry barfs up a financial crisis about every five to ten years. Remember the South American bonds, Long Term Capital Management, S&L crisis, Russian bonds, and the recent subprime, etc mess. It needs strong regulations since they can't compute risk, that's talking in a sterile world and instead we have to deal with the real world of political connections and protectionism by those who provide the biggest campaign donations. So the new set of solutions need to work within the framework that financial oligarchs will never feel the full pain so we need to protect ourselves from them. Lets hope against the hope that the vulturous bankers would handle our future well this time, with the industry tom-toming about the latest reforms .

Peepli Live - An untold story ... A reality check of societal development.

Peepli Live ... I could not just escape it. You must be thinking me as absurd on a movie review post. Yeah, the hype around me for the film was too much to have evaded, so i too sat with a popcorn.

Its how amazingly a story so simple and non condesending has been used to portray so much...
The real story is not of Mr. Natha but of Hori Mahtoo, the earth digger, who died in his own dugged grave ...
The real story is of the mis-understanding of media, the foolishness of the ilk of Miss Nandita Malik.
The real story is the shame which espionage brings to the profession of journalism.
The real story is of people involved in the political and social system and the kind of accountability they have.

Each of these have such a gaping social angle to it. But lets pick up something more pertinent.The real story is the stark divergence and the story of how farmers are becoming labourers.
A very sensitive issue governing Developmental Economics.

A new generation among the farming community in India is not interested in taking up agriculture as a profession as it is increasingly getting less profitable. Agriculture’s share in the country’s GDP shrunk to 17.5% last year from nearly 30% in the early 1990s.

This thoughts echoes in unison with a growing and worrisome trend in the nation's agriculture sector: Indian farms are failing to attract capital or talent or the 21,000 students who graduate from India's 50 agricultural and veterinary universities. Majority of the farm graduates vie for jobs in the government, or financial institutions, or in private sector industry. They are seldom taking to farming as a profession.And Why should they..? What is the kind of money that is there for them...?

A survey showed 40% of Indian farmers would quit farming, if they had a choice – an alarming revelation for a country where two-thirds of the billion-plus people live in villages. India's farm sector has changed remarkably little since the advent of the Green Revolution, while other industries have been transformed over the past two decades. We have to start realising that farming is becoming an increasingly less profitable profession. There was a time when farmers had very little choice. Things have changed. Farmers would like to make a shift. This has raised concerns that India's farm output could lag demand and the country – which ranks among the world's top three consumers of rice, wheat, sugar, tea, coarse grains and cotton – will become a large food importer unless yields jump. The increase in yields in the past decades have been insignificant.

But the next revolution faces a tougher challenge – in part because of the environmental damage done by the previous one. Back then, abundant groundwater was available and the soil was not degraded by pesticides and fertilisers, which initially helped boost productivity.
With 60% of Indian farms depending on erratic rains, it took just one failed monsoon to force India to import 5 million tonnes of sugar in 2008-09, after exporting a similar quantity a year earlier. The drought, after the worst monsoon rains in 37 years, is also expected to slash rice output by 17%, encouraging India to begin importing rice, after being a leading exporter of the commodity for decades.

Climate change(aka Urbanisation) is having devastating impact on growth and productivity of several crops, particularly the food grain crops, Agriculture in India had always been a toss of heads and tails with monsoon playing such an crucial part. Millions of poor farmers don't have the resources to cope with the uncertainty of monsoons.

If you want to make farming more profitable, the price for farm products needs to be more remunerative. Will the middle class accept this?

The government have to allow genetically modified crops in order to improve farm revenue, and more so to counter the limitations on the supply side. Productivity improvement is the crux of the issue. That is why we need to have an understanding of GM foods. However, without taking any stand n this issue, We should be alarmed by the mammoth number of seasonal farmers becoming full time urban labourers, propelling India's infrastructure growth story.

A lot of the farmers have become wage labourers in the urban cities where their day earnings are 90-250 depending on the city and the kind of money slosh around. Today you find labourers, plumbers and welders, are all moving from a city like Kolkata to Kerala... and from Kerala to Gulf ...

8 million farmers have quit job in the census of 1991-2001. That is 10 years way back, would be waiting for the recent census to startle India and its intellectuals. Its time India realised it has looked into the Jai Jawan, (you are payng them well with one Pay commssions after another) but the Jai Kisan, is about to loose its identity... What would be our identity 20 years from now ... An pathetic America in the making ??? A question which should be answered fast and addressed soon.

Kudos to Anusha Rizvi... Mam you have just earned a fan... Its time academic institutions started adressing these issues with more seriousness than making case studies on films ... and awarding doctorates to Mr. Amitabh Bachchans, Shilpa Shettys and Akshay Kumars..

Valuation of Intellectual Property

Intellectual Property as the name suggests refers to creations of the mind: inventions, literary and artistic works, and symbols, names, images, and designs used in commerce.

Now from a finance guy .. what kind of artistic and literary things can be expected... you are being too quick to judge ...

The scope of this asset( OMG, i beg your pardon... yes, an asset) usage and its manifold benefits are pushing the envelope further in the Asset Valuation Industry. Till lately, considered as an asset of undetermined value, it has suddenly gone to become one of important sources of Fund Raisimg and Valuation.
A key driver in consideration of :-
(1) Mergers & Acquisitions.
(2) Licensing & Assignment.
(3)Investment
(4)Enforcement
(5)Portfolio Investent & Management.

The scope encompassing this industry has been expanding bringing under its wake,right from bringing finance professionals from different walks to sourcing legal expertise in different capacities. The size of this industry going forward is estimated to be in hundreds of billion dollars.
The crux of the industry was formed, when people answered the question of
"Why to Value IP?."
To take a leaf from Prof. Drucker, "The value of the Invisible is more than the Visible."Enumerated below are the valuation methods we follow:

The cost method of valuating IP basically focusses on two of the criterias, Replacement Method and Reproduction Method.This valuation model either calculates value in terms of replacement or reproduction cost of the IP.The most important aspect in this method is that the valuation here is done at current and not at historic cost.For eg. A Pharma company which has been developing a molecule for the last 10 years would consider the cost incurred on the current date and not on the basis of last 10 years cost of inputs.
This method is used usually to value an asset at an early stage of development.

The next method is Market Value Approach method.This valuation is done by ascertaining the exchange value of an similar asset in the same industry.However, the difficulty of obtaining the transactional data poses a major challenge infron of the valuer.
Moreover, every asset of intangibe nature is unique and so does the valuation.This method is more prevalent in companies where there are a lot of substitutes available in the market, since the comparisons should be an "apples to apples comparison" and the industry per se has to be transperant in sharing its transactional data.

The next method in this industry is the Income Approach to Valuation. This considers the future income which can accrue from the asset in future.
It calculates (projections) the future earnings capacity of the IP(Intelletual Property), and its estimated years of life as per the patent filing.

The other method is one of the most prevalent and most talked about method in the valuation space, Discounted Cash Flow (DCF) method.

The other methods are :-
(1) Venture Capital Method, whose templates of valuation are very wide ranging and varied from the perspective of different Venture Capitalists.
(2) Relief from Royalty Method.
(3) Monte Carlo Simulation Method.
(4) Option Pricing Model Method.

The Intellectual Property derives its value in terms of :
(1)Accounting Value.
(2)Economic Value.
(3)Technical Value.

The IP Valuation Industry opens up a huge scope in another unexplore vertical, Securitization, which is presently ... crores. An Industry waiting to explode as far as emerging markets like India are concerned...