Saturday, August 18, 2007

Defending Subprime lending - case for democratic economy

There is not a single day goes by without the media do not report the subprime meltdown unfolding in the US credit market. As much as I admit my ignorance on the intricate details of how my mortgage is split into million little pieces and sold to million little investors around the globe, I want to share my own experience of subprime lending if I could call it that.

Years back, actually 15 years back, I was in charge of a rural financial investment and lending scheme that was setup for the mutual benefit of the rural labor class people who did not have enough means to do transaction with a commercial bank. Here is how it worked.

The setup is a small wooden bench, an accounting book and myself sitting at a public open place between 6:00 PM and 8:00 PM every Saturday. I was in college then and they thought that they could trust me with their hard earned money. The members brought a small share of their weekly earning and I made a proper record of the deposit. The amount varied between Rupees 2 (5 cents in today's rate) and Rupees 100 ($2.5 per week). You must be beginning to wonder what we did with the money. Well, we lend money to people who wont qualify for a loan from the traditional banks especially the then notoriously credit tight nationalized Banks. Remember, this is before Muhammad Yunus's Nobel win and days when many did not know much about the concept of micro credits.

The amount of loan varied too. We loaned as small as 5 cents and as high as few dollars. They come to loan to buy school supplies for their kids, to buy weekly ration or some times to pay for the doctor's fee which ran anywhere from 25 cents to a dollar. Doctors were very mean most of the time. They would prescribe the newest medicine concoction cooked up by the pharma companies and ask them to 'come back in a week after trying this medicine'. The poor men and women would go back next week after 'trying' the medicine for a week only to be given prescription for a new medicine. Medical issues apart, they would come for money to make donations to conduct a marriage in their neighborhood, to buy some glass bangles for their loved ones in the annual village festivals. And some other times to buy the coconut leaves to cover their leaking roofs.

Of course, there was credit risk. Some of the loans were never repaid. But we compensated it by charging higher interest rates to every one who borrowed. We did not know that it is called 'Sub prime' in the economic lexicon. But it was the wisdom prevailed among the villagers for decades if not centuries. Even those who made regular repayments knew about the defaulters name. But they did not mind since they knew about the circumstances that caused the person to default and hoped to hedge that risk with higher rate they charge for their lending. It was a social understanding. Some times, well to do families also put their money into the scheme. They would get higher return on their money through this scheme since we lend money at higher than normal interest rates. We charged higher interest rates than Yunus's Grameen Bank. But like grameen bank, the profits were shared by the members proportionately. The high interest rates went to finance the subprime credits.

So what is the difference between the subprime lending in my tiny village and the subprime lending that created unprecedented real estate wealth in the US in the last half decade? It is the scale and complexity of the enterprise. Apart from that, both represent the same intention. Finance credits that are not credit worthy by mainstream banking standards and potentially benefit from it. The investors benefit from it as well as the person took the loan. Sub prime loan enabled them to put a new thatch roof to their humble abode. It enabled people with less than 600 FICO score own a piece of the south land California who otherwise were told by the glass box bankers in the past that they were not worthy of credit. Credit was the privilege of the few but sub prime made it the passion of the many. Sub prime did what Internet did to information. Information is not the privilege of network TVs and syndicated journalists any more. It is the passion of Matt Drudge and Ariana Huffington and alike. Subprime allowed the free flow of capital and credit across the US landscape that created dreams, hopes and immense wealth. Sure few hiccups and defaults. The melt down may take Countrywide along with it plus many frothy real estate markets. After the bubble burst, a new sub prime lending will emerge. Quite like the Web 2.0, Sub prime 2.0! Never underestimate the power of YOULOAN.
TIME article - Real Estate's Fault Line

Saturday, August 11, 2007

The courage to return and fear of failure - Gandhi My Father

M.K Gandhi went to South Africa as a young lawyer to handle a law suit involving an Indian firm. He was supposed to work in South Africa for a year. But he stayed on and worked his way up in the profession. He bought a bungalow in the luxurious Cape Town suburb Fresnaye. He sent his eldest son to the best western style school in South Africa and eventually got a law degree from Oxford. Gandhi established one of the top law firms in South Africa and Harilal joined his law firm. Years later Harilal continued to create and amass wealth and professional clout that is unmatched by any other law firm in the history of common wealth.

Harilal, eldest son of Gandhi

You know the history, it did not turn out to be this way. Gandhi went back to India and liberated millions into a new world of freedom and liberty. But he paid a huge price for his return. Gandhi rebelled everything western and did not allow his son Harilal to study law as Gandhi's rebellion against western education. Harilal rebelled Mahatma. 'Gandhi My Father' is born.

Century later, in the new millennium, immigrant parents are grappling with the same dilemma. To go back or Not? This is the same question every first generation immigrant parent tussled with. Even when Bhagat Singh Thind and likes were fighting their right to naturalize in the US supreme court, many parents were fighting the internal urge to go back to the home land. The fundamental struggle was to find an answer to the nagging question. Will their sons and daughters rebel against the parents for taking them away from the land of opportunity to land of poverty, despair and ruins of the bygone glories of the ancient heritage and history.

Will their sons and daughters be better off with a western education in the west or do well in India? Will they ever be capable of being a world citizen that can match the best personalities of the world, if brought up in India? Could they have become
Bono? Could they have become Oprah? Gates or Warren Buffet? Page or Brin? Could he/she have ever overcome the grueling competition to get away from mediocrity without loosing the greater purpose in life? Can my son ever intern for John Stewards without worrying about IIT-JEE exam or GMAT?

That is the old story.
The times have changed. The table is turned upside down, well, almost. If you probe little deep, the anxiety of the current generation of immigrants, like myself, about the children's education and their personal development gives way to something that is more deeper and pervasive. The fear of failure in the emerging India! Once they were the best and brightest in their home country. The ones who dared to take on challenges. The ones who rose from the millions and became a few. Not any more. Many of my friends candidly admit that they will never make it it in new India if they go back. I tell myself that it will be incredibly challenging to survive, let alone succeed, in the new corporate India where the smartest, sharpest and most informed work force compete for triple digit salary hikes. And without those triple digit salary increases, one cant hope to make the payment on their three bed room flats in Koramangala, let alone dream of a dust in Malabar Hills or Chanakya Puri.

But the economic reasons to go back are ever stronger. The dollar is falling slowly and steadily. The salary in the US grows at lower single digit while in India it can double every 3-4 years. The net savings gap is closing in fast and furious. Triple digit real estate gains in India shame the US housing boom. Noida buyer bought a piece of land for 30 lakhs and sold for 165 lakhs in 3 years, a whopping 500% gain!

Your kid could be crushed aside by the millions of young and assertive Indian kids raving to prove their place in the world. 95% marks for your kid wont get you a place in Delhi University. It will be far easier to get into MIT than IITs. It will be far easier to win American Idol than Voice of India. It will be far easier to win Miss US than Miss India. Miss USA Tara Conner will never pass the first round of Miss India not because Indian girls are better but because they are smarter not to do the things Tara enjoyed doing. Bollywood will eclipse Hollywood by its sheer volume and billions of viewers it attracts across the world in a rush to prove to the world, 'Billion desis can not be wrong'!

Billion people are watching you, through the prism of thousands of years of artistic and intellectual excellence trying to find a reflection of the eternal greatness once achieved in this land. You simply cant walk away from the rigor with tight jeans and iPods. Gray matter needs to outweigh Gadgets. Your voice and your steps will be judged against the scriptures of Natyashastra of Vedic Times. There is no place for mediocrity. Period.

So what will make you return to modern and raving India? It will sure not be for an easier life. It will be very tough for you and your kids. You will never be able to make peace with the sub par material world . You will return only for some thing larger than our life.
Some thing that is worth trading the easy life in the west. Like the hope of freedom of the millions of fellow Indians that made Gandhi return. There is a new freedom struggle waiting to brew in India as you read this. That is the struggle of the rural India to be financially free from the dal roti grind. The boys and girls who never heard of IITs and NIFT. The parents who never ate a pav wrapped in paper with meat patty in between. The only motorized vehicle they ever rode was Tractor but no Camry.

It will take immense courage and determination to be part of the economic freedom movement. To sacrifice everything west has to offer and work to make a difference in millions of fellow Indians who are left out of the new found wealth. The courage to realize that the only fear we have to fear is fear itself. The kind of courage that was eventually ridiculed by his own Son when he took a new name 'Abdulla Gandhi'.