When we talk about the global financial crisis, one question that pops up in lots of people’s heads is about where the money went. Since every trade involves two parties, it is argued that every loser has a corresponding winner, and that most commentary about the global financial crisis (of 2008) doesn’t talk about these winners. Everyone knows about the havoc that the crisis caused when prices went down (rather suddenly). The havoc that the crisis caused when prices initially went up (rather slowly) is less well documented.
The reason winners don’t get too much footage is that firstly, they are widely distributed, and secondly they spent away all their money. Think about a stock or a CDO or a bond being a like a parcel that you play by passing the parcel. The only thing is that every time you receive the parcel, you make a payment, and then pass on the parcel after receiving a higher payment. Finally, when the whistle blows, one person has the parcel in his hand, and it explodes in his face, ruining him. We know enough about people like this. A large number of banks lost a lot of money holding parcels when the whistle blew. Some went bust, while others had to be bailed out by governments. We know enough of this story so I don’t need to repeat here.
What is interesting is about the winners. Every person who held the parcel for a small amount of time was a winner, albeit a small winner. There were several such winners, each of whom “won” a small amount of money, and spent it (remember that the asset bubble in the early noughties was responsible for increasing consumption among common people). This spending increased demand for various goods and services produced in several countries. This increasing demand led to greater investment in the production facilities of these goods and services. Apart from that, they also increased expectations of growth in demand of these goods.
The damage the crisis did on the way up was to skew expectations of growth in different sectors, thus skewing investment (both in terms of financial and human capital). The spending caused by “small wins” for consumers put in place unreasonable expectations, and by the time it was known that this increased demand came as a result of an asset bubble, a lot of capital had been committed. And this would create imbalances in the “real economy”.
Yes, the asset bubble of the last decade did produce winners. The winners begat more winners (people whose goods and services were bought). However the skewed expectations that the wins created were to cause damage in the longer term. Unfortunately, I don’t see this story being told adequately, when the financial crisis is being talked about. After all, the losers are more spectacular.
I apologise for this morning’s post on IPOs. It was one of those posts I’d thought up in my head a long time ago, and got down to writing only today, because of which I wasn’t able to get the flow in writing.
So after I’d written that, I started thinking – so if IPO managers turn out to be devious/incompetent, like LinkedIn’s bankers have, how can a company really trust them to raise the amount of money they want? What is the guarantee that the banker will price the company at the appropriate price?
One way of doing that is to get the views of a larger section of people before the IPO price is set. How would you achieve that? By having a little IPO. Let me explain.
You want to raise money for expansion, or whatever, but you don’t need all the money now. However, you are also concerned about dilution of your stake, so would like to price the IPO appropriately. So why don’t you take advantage of the fact that you don’t need all the money now, and do it in stages?
You do a small IPO up front, with the sole purpose of getting listed on the country’s big exchanges. After that the discovery of the value of your company will fall into the hands of a larger set of people – all the stock market participants. And now that the market’s willingness to pay is established, you can do a follow on offer in due course of time, and raise the money you want.
However, I don’t know any company that has followed this route, so I don’t know if there’s any flaw with this plan. I know that if you do a small IPO you can’t get the big bankers to carry you, but knowing that some big bankers don’t really take care of you (for whatever reason) it’s not unreasonable to ditch them and go with smaller guys.
What do you think of this plan?
Reading Deepak Shenoy’s excellent article on insurance this afternoon the first thing I wondered was about why I had never read anything like it before. It was so intuitive and insightful, and so obvious, yet I didn’t recall reading anything like it elsewhere in the “mainstream media” (quotes because that implicitly implies Yahoo! is not mainstream). And then I started thinking about Ajay Shah’s brilliant blog post about the undersupply of criticism.
Ajay mentions in his article that most articles on China (which need cooperation from sources in the Chinese government for information) tend to be favourable to the country, since no one wants to risk cutting off the supply of information (or worse) by antagonizing the Chinese government. A similar relationship, either implicitly or explicitly, is enjoyed between media and advertisers.
A quick glance through any business newspaper, or even a mainstream broadsheet, would tell you that financial institutions (this includes banks, asset management companies, insurers and brokerages) are heavy advertisers in these media. Given the amount of money papers make from these sources, it doesn’t make much business sense for them to publish opinion pieces that are critical of these heavy advertisers. There are papers (especially some broadsheets) that claim to enforce neutrality and fairness in their reporting, but even there it is hard to come across articles that are highly critical advertisers. The potential loss in revenue is too big a risk to take.
The biggest advantage of new media is that it provides alternate channels which depend on alternate sources of revenue. Think about the number of times you’ve seen banks or insurance companies advertising in the Yahoo! sidebar, and then compare that against the number of times you’ve seen such advertisements in newsprint. Similarly, there will be companies who are heavy advertisers online, but not so in broadsheets so you will find the latter to be more willing to be critical of them.
From the reader’s perspective it is important to get news and opinion not only from several sources, but also from several kinds of sources in order to get a balanced view.