Here is HDFC Bank:

Notice the discontinuity? About how for a couple of randomly chosen dates the interest rates suddenly shoot up?

Similarly with ICICI Bank:

Again same story. On certain “magical” days, interest rates shoot up. The degree of increase in rates here is much less dramatic, though. Nevertheless this is extremely interesting, and I wonder why. I remember last year going to Karnataka Bank and asking for a 1 year deposit, and they asked me to make one for 400 days saying that I’ll get 0.5% per annum better for that.

This morning I went to State Bank of India and found that they don’t offer these special rates. I had a friend check at another nationalized bank and found that they too don’t offer special rates. Wonder why the private banks are offering it, though. Why it makes that big a difference to them that the deposit is for 990 days as against 991 or 889. Or is it some way to prevent early closure?

In other news, SBI is offering teaser rates for home and auto loans. Their ads have been there all over the airwaves for the last few weeks. They offer 8% for first year, 8.5% for second and third years and then what they call as “normal rates” after that. If SBI is getting into teaser rates, god only save Indian finance.

I borrowed The Black Swan from Aadisht sometime in late 2007. I tried starting to read it several times but never got past Taleb’s childhood stories of his hometown Amioun. I took a couple of months to get past the first 50 pages, I think. And then it was easy reading. I loved the sub-plots. I broadly bought into the main plot. By the time I had finished reading the book, I wanted to ask Taleb to accept me as his sisya. I  bought and read Fooled By Randomness, and liked that too. And then decided to read The Black Swan yet again. It was only a couple of months back that I finally returned the latter book to Aadisht (in the meantime he had bought two other copies of it, and read it).

Till very recently, I would read up any article of Taleb’s that I could find. I wrote to him a couple of times with my CP, and he even responded. I infact wrote to him about “Positive Black Swans and the World of Romance” and he responded with a “Thanks Karthik, Ciao, Nassim”. I had become a worshipper.

However, now I think he’s kinda lost it. I don’t think he intends to write another book and so he has nicely settled down to peddling his last theory (black swan). In response to a recent post on studs and fighters, Kunal had said, “He that is good with a hammer tends to think everything is a nail.”. The same disease affects Taleb I think, as he goes around the world trying to force-fit his black swan model to every conceivable problem.

And then I have a problem with people like Taleb and Satyajit Das, and actually with all those ibankers who are asking for bailouts. These guys made full use of capitalism, and made heaps of money, when things were good. And now that their money has been made, they call for government intervention, and socialism. Taleb and Das are different from the other wall streeters because they are calling for full-scale government intervention, unless the other bankers who are only calling for a bailout!

Now that the elaborate intro is done, let us get to the point. Taleb’s essay consists of ten points. The headings are italicized and there’s a detailed explanation. For purpose of brevity I’m putting only the headings here, and writing my comments after each of them. Go to the FT site to read the full points that Taleb has written.

1. What is fragile should break early while it is still small.

I agree with this. And my take is that competitors need to keep each other in check. For example, if this round of bailouts were not to happen and the biggies were let to fall, no one would grow so big in the future, and even if they did, they would make sure that they were insulated enough from one another. This round of bailouts will make the next crisis (whenever it will happen) worse.

2. No socialisation of losses and privatisation of gains.

Agree with this.

3. People who were driving a school bus blindfolded (and crashed it) should never be given a new bus.

Taleb has clearly not learnt his own lessons (fooled by randomness). I might have crashed the school bus once, but it may not be my mistake. the one data point of one bus crash should not be used to decide my career as a driver. One should look at how the driver drove before the crash to determine whether he gets a second chance. Blanket banning of people involved will not help.

4. Do not let someone making an “incentive” bonus manage a nuclear plant – or your financial risks.

It’s all about structuring. Taleb was a trader and he forgets about structuring. As long as incentives of the employee and the employer are reasonably well aligned, there is no problem with an incentive bonus. The problem in ibanking was that too much emphasis was placed on short-term performance of employees. It’s tragic that the fall of the financial system has brought to an end what was an excellent compensation system (in principle, mind you; not the way it was practised) – where each person was paid fairly based on his/her contribution.

5. Counter-balance complexity with simplicity.

I think the simplest way would be to leave things to the market. Government intervention would lead to a new form of complexity, and in the overall scheme of things increase complexity rather than decrease it. None of the stuff that Taleb has mentioned is easily implementable.

6. Do not give children sticks of dynamite, even if they come with a warning .

Again Taleb prescribes mai-baap sarkaar. Does he realize that if governments had always had tight control over the markets, the markets wouldn’t have crashed on October 19 1987, and he wouldn’t have made any money? (Taleb has reportedly made 97% of his life’s earnings out of this one event). What is “complex derivatives”? And how can you ban it? If you ban it, it’ll go to the black market. You are better off collecting hefty security transaction tax.

7. Only Ponzi schemes should depend on confidence. Governments should never need to “restore confidence”.

I agree

8. Do not give an addict more drugs if he has withdrawal pains.

Agree once again. We need to structurally change things to get to saner leverage than what was practised 1-2 years back. Regulations should be simple and principles-based, minimizing chance for regulatory arbitrage. Remember that the purpose of creation of most “complex derivatives” in the last 25 years is regulatory arbitrage.

9. Citizens should not depend on financial assets or fallible “expert” advice for their retirement.

Bullshit. The point on markets not containing information, that is.

10. Make an omelette with the broken eggs.

None of this makes any kind of practical sense. It’s just an old man ranting. Thanks, guru (pun intended).

In fact, a common refrain about banking crises is that they happen mainly due to the tenure mismatch – banks borrow by means of short-term deposits, and then invest these in long-term loans. Most theories regarding liquidity crises cite this as a common problem.

Now, my contention is that this banking/finance rule is just a special case of a much larger rule in life. Remember that funding, or raising money, can be looked at as a “problem”. By classifying it as a problem, I’m not necessarily saying it’s a very tough problem. All I’m saying is that it’s a problem. And when you do raise money, it is a solution to the problem. Thus, the generalized form of the rule

The tenure of the solution needs to match the tenure of the problem.

So before you look for a solution for any problem in life, you need to first figure out about the tenure of the problem. And then generate a list of possible solutions which have similar tenures, and then pick the best among them. And based on my limited anecdotal experience, most people don’t really appreciate this concept when they suggest, and sometimes even implement, certain solutions.

So on Monday I called up a friend and told her that I was going through a strong bout of NED and we should meet up. She started philosophising and said that this is a fundamental problem and that I should think of a fundamental solution. That I should get a new hobby, or learn a new instrument, or some such long-term thing. Of course, I know myself better than she does, and so I knew that my problem was short-term, and so all I needed was a nice evening out. A short term solution to a short term problem.

On the other hand, during my previous job, I used to go through prolonged periods of NED. A little analysis revealed that the fundamental reason for this NED was my job, and that until I got a new one, I wouldn’t be happy. It was a long-term problem that deserved a long-term solution – of finding another job. However, most of the advice I got for my NED was of the nature of “go get drunk, you will be fine”.

My mother also doesn’t seem to appreciate this tenure concept. Nowadays I’m afraid to crib to her about anything, because if I crib, she assumes it’s a long-term problem and suggests that I should get married and that she’ll intensify her efforts in the arranged-marriage market.

Yes – people not appreciating this tenure concept is a long-term problem. The solution to this should also, thus, be long-term. They need to be taught such a lesson regarding this, that they won’t forget this concept for the rest of their lives.

We also bought a number of other things – jackfruit papad, fried peanuts, banana chips,? etc. The killer was what the shop had nicknamed as Brahmagranthi Nibedhini or something to that effect. it’s some ayurvedic solution which can cure the common cold. I actually tried it sometime last week when a cold seemed imminent and it worked! All you need to do is to just take a drop between your thumb and forefinger, rub them together and then sniff. In a few minutes, the cold will be clear.

Now that I’ve told you what I bought, let me come to the point of this post. It’s about the shop’s business model. The shop has figured out that if they rely only on tourists coming to Sringeri, they won’t be able to sell too much. So they have this unique formula for door delivery. All you need to do is to call them up and give your order and your address. They will then courier the products to you. And after you receive them, you mail back a demand draft.

I found this interesting. Basically in order to expand their business, they are taking a huge risk (of not being paid at all). Actually, this reminds me of the ICICI Bank/SBI business model. In order to “grow”, you give out more loans, with less guarantee that they’ll be paid back. If they are paid back, you make a small profit. Else, you make a huge loss. Actually this pickle business – if you look at the flow of cash/kind – is exactly like the lending business. And here too, if you default once, they won’t give you any products the next time you call them – like you getting a bad credit score in banking.

Given that they are based out of Sringeri, and procure most of their products from around the area, it’s going to be tough (and really expensive) for them to relocate to Bangalore. However, I think they might do well if they go online. When they can get customers to pay them by means of a credit card and then send the goods. Which is the same mechanism that is used for all things bought online. I wonder why they haven’t done it so far. Or maybe they want to build their reputation further before they ask people to trust them.

Having consumed the products mentioned in the beginning of this post for about three weeks now, I must say that all of them are excellent. And the rates are reasonable too – fifty rupees for a bottle of appe midi mango pickle (i’m not sure how much they’ll add for shipping. I just guess they’ll charge the actual courier charges they incur). I’m sure I’ll be ordering some stuff from them over the phone in a few days time (once I’ve finished off all that I bought).

Now that that digression is done; in this book Taleb talks about the transformation of Wall Street in the 1980s. With the development of exotic derivatives, and as products became more sophisticated, MBAs and accountants found it difficult to cope. It was simply too much math for them. And they got replaced by Mathematical Physicists of Russian, French, Chinese and Indian origin. People who weren’t necessarily the most practical, but people who were completely at ease with the model. Soon they started recruiting more of their types, and i you look now, Wall Street is filled with people from a math background, and few MBAs work there (I’m talking about the derivatives division; MBAs do exist in large numbers inside the wall; the models there don’t get too complex, right?).

Similarly, in India, currently, the investment banking industry is dominated by Chartered Accountants, with even a large number of the MBAs there coming from a commerce kind of background. As regulations ease and products become more developed, it is likely that these guys are going to find the models too hot to handle, and make way for engineers, or MBAs from an engineering background. And hopefully, the day isn’t too far when we can see the Indian financial industry being dominated by engineers.

The recent forex derivatives “cheating” cases might be the first indicator of accountants finding things too hot to handle. Most CFOs, who sign off on these derivative products are from an accounting background, and understand little about the products they are getting into. It is only when the cash flows show up in the books that they realize they’ve gotten into a bad deal and then cry murder.

I wonder why companies still trust their CFOs (from an accounting background) when they get into complex financial products. They should instead hire bright engineers with a good knowledge of derivatives (i.e. people like me) in order to help them get into proper contracts. Accountants should just remain accountants.

Sometimes one wonders if the tight RBI regulations that prevent the development of new complex products are a conspiracy by the CAs to retain control of their turf.

Postscript
On the way home from work this evening, I learnt about the dangers of leverage, and why it is especially dangerous when the situation is volatile. I was reading Fooled by Randomness. More importantly from the leverage perspective, I was sitting in the last seat of the bus.