CLSA Greed & Fear Christopher Wood

CLSA

Greed & Fear

Christopher Wood

-India's Central Bank-the RBI not only foresaw the coming global credit crisis but acted decisively to forestall it as early as 2006.

-Poorly capitalised urban cooperative banks will be allowed to convert part of the fix deposits of holders having capital in excess of Rs 1 lakh into equity. This is a far superior effort than the US, where public money is being used to bail-out failed institutions and guarantee deposits of the rich.

-Greed and Fear advises investors not to hold concenterated deposits in banks, but to spread them around.

-The fact that sensible guys live in India who understand the enormity of the ongoing banking crisis is in fact, the most bullish thing about India's stocks and its stock markets.

-Watch "Slumdog Millionaire"-while it may or may not win an Oscar this weekend, it truly reflects Modern India and this is bullish about Indian Stock markets.

As Western governments, led by the US, continue to look in vain for silver bullets to save their economies from a traumatic credit contraction,

GREED & fear was interested to hear from a contact that the Indian authorities are following the ultimate logical approach to bank recapitalisation.

GREED & fear refers to the fact that the Reserve Bank of India is encouraging

the recapitalisation of certain weak urban cooperative banks by allowing a portion of individual deposits of over Rs100,000 (US$2,000) and institutional deposits to be converted into equity or hybrid equity.

That this is happening in India is a function presumably of the relative scarcity of capital. But it also highlights another way to recapitalise banks without immediately resorting to the long suffering taxpayers. This approach will also be politically appealing if the deposit-for-equity swap is linked to deposits above a certain amount.

GREED & fear

is not predicting that this will ever be the approach followed in the West. But the point GREED & fear would make is that it is a far more equitable approach than the present one of ripping off the taxpayers by mindless guaranteeing of all deposits.

Still it is also the case that the bigger the present crisis becomes, and the loss estimates are now running plausibly into the trillions of dollars, the greater the potential risk of such an outcome. This is because wealthy depositors are not going to command much sympathy on Main Street.

GREED & fear’s advice to the wealthy is, therefore, not to hoard cash savings into concentrated deposits, be they in individual or corporate names.

Meanwhile, this episode reminds GREED & fear again that the RBI is by far most credible central bank globally. Remember that the RBI was the only central bank globally, so far as GREED & fear is aware, that understood the inherent dangers in securitisation and pre-emptively moved in early 2006 to control them in an extremely effective measure. That was simply by making Indian banks who sold securities amortise their profits from the sale of the security over the life of the loan securitised.

GREED & fear

makes this point to counter the current self-serving propaganda of the Davos crowd that no one saw the current credit crisis coming. The RBI is a case in point, which is why it also formally targeted asset growth and credit growth in recent years contrary to the dogmas of Pipsqueak Pinball and Billyboy.

Meanwhile, on the subject of India,

GREED & fear will depart from normal practice by recommending investors watch the box-office hit “Slumdog Millionaire”. While GREED & fear’s uninformed guess is that the film is not popular in India, it is in GREED & fear’s view a rather realistic depiction of modern India. Some may find the film depressing.

But in GREED & fear’s view its message is bullish for the Indian stock market.