By EcoFreak of  http://economicsoftheworld.blogspot.com/

Microfinance has been continuously cited as the most powerful tool to alleviate poverty, but has this tool been used to its full potential?. Microfinance has contributed significantly in reducing, if not eradicating poverty in many parts of the world. Its success stories are pretty impressive but, the question of whether microfinance be a vehicle through which even greater and more critical contributions to global poverty alleviation might be made needs further research. Many governments are still hesitant to adopt this model to help the poor and needy, and many tried but gave up too early. Microfinance should be adopted with the aim of social benefit rather than personal economical profits. People involved in economic decision making should realize that putting a microfinance framework in place effectively is arduous and time-consuming task. It involves teaching and making people aware of the rules and benefits of microfinance. It is particularly difficult as poor people have almost negligible literacy rate and they are afraid of paperwork because they have never done it before.

The growth of microfinance is fueled not by market forces, rather it has been due to sincere and conscious efforts of some governments, NGO’s and donors who view microfinance as an effective tool to eradicate poverty. There have been many revolutionaries who have shown how microfinance can be used most effectively. Mohd. Yunus, the founder of Grameen bank, is the most notable of them all. His model of Grameen bank has yielded unprecedented results. This bank has not only improved the standard of living of 5 million bangaldeshi families but has also succeded in making economic profits out of it. The success story of Grameen bank was a surprise to many economists. There are many lessons to be learnt from Grameen Bank model, especially for the governments of developing and underdeveloped Asian and African nations where poverty is widespread. Mohd. Yunus had to work really hard to find his way through red tapes and lack of awareness among his fellow citizens. But he was determined to bring a change in his society and so he did.

There are many things worth noticing in how he implemented his model of microfinance. Firstly, he was not in any kind of a hurry, he gave the poor time to absorb and get used to the idea. He focused on spreading awareness by appointing some student volunteers who would go door-to-door and talk to the villagers about the benefits of microfincance. Though people would reject the idea of taking a loan at first, but the volunteers were trained to accept it and not get disheartened. Instead they were taught to be humble and keep trying such that at some point people would agree to give it a try. Secondly, he never gave loans to individuals, rather he would ask the borrowers to form a group, and the loan was granted to the group. This helped him reduce the rate of defaults. As even if one person in the group repays the loan, it inspires the others to do the same. And people in the group had someone to watch their back if they deviated from the right and proposed use of money. This would be reported to the volunteer assigned and then he would try to reslove the matter. Thirdly, Grameen Bank focused on lending to women. Yunus found that women members of poor and needy families are more hard-working and inclined to take care of their children in the best possible manner than the male members. This zeal and determination of the women borrowers assisted them to earn enough to repay the loan as well as run their families. Fourthly, the Bank kept the paperwork to be minimal and borrowers did not come to bank for loan, rather bank went to the doors of the poor. One or two volunteers were assigned to each village who would note down the name of the borrower with the date and amount of the loan and would visit the village once in a week to collect the installments. Minimizing the paper work avoided red-tapes and delays in allocating the loan. Fifthly and most importantly, Yunus was not afraid of incurring a loss, infact he did suffer a loss at first, but he kept his belief alive. Grameen Bank would not send a recovery guy if somebody defaulted, instead, they were provided assistance. Assigned volunteer would speak to the defaultor about what led to the failure and if the borrower appeared reasonable, she was offered another loan to start all over again. Yunus’s autobiography “Banker to the Poor” explains in details the efforts and hard-work of Grameen Bank to bring a change in the lives of poor Bangladeshis.

Though Mohd. Yunus pioneered a way to use microfinance effectively but his model cannot be applied in the exact same manner everywhere due to varying traditions and mindsets of the people. However, with little improvisations to suit the region’s need, it can be used to fight poverty. It is up to the government and resourceful individuals of a nation to take a step forward and contribute to microfinance which helps the poor and at the same time conserves their dignity and respect. The only thing to be borne in mind is “every good thing takes time and nothing good comes easy”.
v

In the midst of a global recession that left many industrialized nations reeling and several near collapse, one nation seems to have sidestepped everything. China responded quickly with a large stimulus plan, and projections suggest that 2010 will yield a massive 8% growth in GDP. In 2008, China surpassed Japan as the largest holder of US treasury securities. China also has the largest foreign exchange reserves in the world at more than $2 trillion.

China’s Prime Minister detailed his expectations for China’s future. Speaking before the legislature in the Chinese equivalent of a State of the Union  address, Wen Jiabao was confident that the country could increase lending, social spending, and investment in strategic industries. He   also repeated the commitment to gradually wind down the economic stimulus of last year.

Most economists would agree with his confidence in China’s projected growth for this year. In 2009, the country achieved an 8.7% rise in GDP, and the last quarter of 2009 was the highest. Mr. Wen attributed this to the power of China’s socialist system that allows them to have a managed economy. The Prime Minister enjoined the legislature, “We must make best use of the socialist system’s advantages, which enable us to make decisions efficiently, organize effectively, and concentrate resources to accomplish large undertakings.”

Not everything is so optimistic, however. The speech also recognized the need to clamp down on speculative real-estate buying that could lead to a Chinese housing bubble. The Prime minister also recognized that risks in banking and public finance are increasing. Even as he recognized these risks, however, he also committed the nation to increase money supply by 17% this year. Some economists warn that this could lead to an avalanche of bad debt and climbing inflation. The prime minister also warned of a $154 billion budget deficit in the next year (3% of projected GDP).

China’s foreign-exchange regulator said that the country would limit its purchases of gold in the future, since its huge investment in the past thirty years has not yielded exceptional returns. Contrary to recent indications, he also said that China will continue to invest in US treasuries. However, China has a demonstrated history of doing the opposite of what it says. Some commentators regard the comment as an opportunity for China to lower the price before buying. There is really no way to know what this announcement indicates for sure. Most likely, the only thing that can be known with confidence is that China will continue to add to its extensive foreign exchange treasuries, while also expanding its own money supply.

Keep a careful eye on forex charts in the next few months, and expect to see a rise in the Yuan over the next year. At the same time, expect to see strong growth as the nation rapidly industrializes. In the long term China will have to address fundamental problems in its economy and social sector in order to maintain this kind of performance. Some pundits predict that China’s growth will slow by almost half in the next decade. China must also begin to address significant corruption, economic disparities, and environmental problems if the country is to go forward. Mr. Wen might be right in saying that there are advantages to a managed economy, but it also seems that the disadvantages will become more pressing as China’s economy grows. It will be fascinating to see what all of this looks like over time.

Two great authors/thinkers recently released a book titled The Elements of Investing. The authors who co-wrote the book are Burton G. Malkiel and Charles D. Ellis. Burton Malkiel is the author of the very famous and bestselling book A Random Walk Down Wall Street. Malkiel is also a professor of economics at Princeton University. Charles Ellis is a director at the Vanguard Group. He has taught investing at Harvard and Yale and is the author of the bestselling book Winning the Loser’s Game.
The two men have teamed up and written a book titled The Elements of Investing. The book is a very quick read. The authors accurately claim that the book will take about two hours to read ( it probably took me less time than that to read it). However, one must not mistake concise for lacking value. The book teaches invaluable lessons to the beginning investor.

The book is divided into five parts which I will describe in more detail alone. The five sections discuss saving, indexing, diversification, avoiding blunders, and keeping investing simple.

I Saving- the authors devote the first part of the book detailing the importance of saving money. The authors give a few tips on how to save. They warn readers to avoid credit card debt since you are getting charged interest of 18% sometimes. When you do not repay on time and you keep getting charged interest on interest the numbers become astronomical and nearly impossible for the average American to pay back. Other tips on investing include- buying term life insurance, buy pre-owned cars, buy high deductable insurance, and cut back your spending!

The authors also state that any money you save you can compound and make you very rich when you retire. The authors quote Warren Buffett as stating that he views every dollar spent as $7 or $8 spent since he could have invested it and compounded it.

The authors provide a good example of how important it is to start saving young. William at age 20 invested $4,000 a year in stocks in a tax free account for the twenty years at which point he stopped. James at age 40 started investing $4,000 in stocks in a tax free account for the next 25 years.
The results: William retired with $2.5 million and James retired with $400,000. The lesson is clear start saving as much as you can and start early.

II- Indexing- the authors being believers in efficient market theory are big fans of indexing. They show statistics regarding the outperformance of index funds to actively managed funds. This is not only true in regards to stock index funds, bond index funds outperform actively managed bond funds by even wider margins. The authors also discuss ETFs and why they believe that mutual funds are better for most investors. The reason being ,that if you are contributing to your savings on a regular basis you will have to pay ETF commission fees, whereas you can make additional contributions to your index fund for no cost.

III- Diversification- The authors stress the importance of diversification. They point out the folly in making your 401K contributions to your own company. The authors tell a sad story of a secretary at Enron who put all her 401K contributions in Enron stock. Right before the collapse she was worth $3 million, after Enron collapsed she was penniless. This chapter of the book also discusses the importance of dollar cost averaging. Malkiel and Ellis stress importance of diversifying not just in domestic stocks but across other asset classes such as bonds and by purchasing international index funds. The authors also mention the need to have a chosen allocation of stocks versus bonds depending on your age and financial situation. The authors also state the importance of rebalancing your portfolio from time to time to keep your chosen allocation at your desired level.

IV- How to avoid blunders- The authors discuss how one of the important ways of making money is avoiding mistakes of losing money. They mention Warren Buffett as avoiding the tech bubble in the late 1990s and complex CDOs during the housing bubble and how he was mocked at the time. However, in the end Buffett was proven correctly because he stuck to his instincts.

The authors discuss in this chapter how “experts” are usually wrong in their predications and that an investor should ignore their forecasts. The authors briefly discuss some bubbles and how easy it is to get swept up in the mania of one. Malkiel and Ellis provide an excellent chart which shows that unfortunately inflows in to stock mutual funds usually peak at market highs, and outflows peak at market bottoms. This sad fact leads to investors earning far lower returns than both index and actively managed mutual funds.

V- Keep it simple – Wall Street tries to make investing seem much more complex than it truly is. The authors review some concepts discussed in the book such as the importance of buying health insurance, saving, and setting aside a cash reserve for emergencies.

Malkiel and Ellis demonstrate in this chapter how simple it is to index.

To Read the rest of my book review on Guru Focus click here

To purchase the book on Amazon.com click on the following link The Elements of Investing

New FTC rules require me to disclose I have a material connection because I received a free copy of this book to review.

Murder of Lehman Brothers

I recently wrote a book review on The Murder of Lehman Brothers by Joseph Tibman. Mr Tibman was a senior investment banker at Lehman Brothers for 20 years and experienced the boom and collapse of the firm firsthand. Joseph Tibman is a pseudonym. Mr Tibman did not want to reveal his name and jeopardize his future career in finance. Joseph Tibman was kind enough to answer a few questions I had about Lehman Brothers and his thoughts on the current economic crisis. Below are few questions I asked him and his response.

Mr Tibman mentioned it would be hard to put together numbers that show Lehman’s collapse. What you would see on their last balance sheet was $2.7 billion in subprime loans and $10 billion in Alt-A mortgages. A large category of assets on their balance sheet were not clearly identified and therefore without looking at internal documents it was impossible to assess how precisely what these assets are. So it was hard to know exactly how exposed they were. As mentioned in the book when Alex Kirk and Mike Gelband were brought back to the firm, when they got hard look at financials they were shocked because it was considerably worse than expected. Madeline Antoncic, head of risk management, had earlier tried to hedge Lehman’s risk, but was removed from her role due to management’s determination to accumulate real estate risk.

How long did you work at Lehman Brothers?

I Worked at Lehman Brothers for approximately twenty years. I was there when American express owned them, before the IPO.

Can you tell me about your role/ position there?

I worked in various roles in investment banking, which is typical for Lehman Brothers. But I cannot tell you more precisely what my role was there without jeopardizing my identity.

Did you ever have any contact with top management such as Joe Gregory or Dick Fuld?

Yes, I mention in the book I was not in the inner circle, but on occasions I was in meetings with them. My thoughts about these executives were shaped in part by those meetings. In my book I mention an early meeting with Fuld regarding a very serious topic, and he just had his eyes on a green display. Still, he was not entirely ignoring what was going on.

Who do you think were the biggest beneficiaries from the collapse of Lehman Brothers. Barclays who bought them for almost nothing, competitors like Goldman Sachs etc?

Probably the biggest beneficiaries were Nomura and Barclays. Nomura currently produces far more of its earnings outside of Japan than in the past. This is in large part due to their acquisition of Lehman Brothers’ European and Asian operations and has made them into a global player. Bracap went from being a UK bank to a meaningful investment bank in the UK, a moderate player on the continent and a modest player in the U.S.to a far more global institution. Barcap has been moving former Lehman employees from US to Asia and Europe to strengthen its presence in those areas. Barcap also got a lot of high quality people from Lehman Brothers.

Out of the major investment banks which do you think took on the most risk?

I think without having access to real numbers it is hard to say which firm was the most exposed. For example the weekend Lehman filed for bankruptcy; there was consensus among the non Lehman people that the assets were not marked down correctly. I think it is fair to say there were clearly a lot of institutions that did not transparently account for their risk positions. Goldman which was had bet against subprime also held on to subprime positions protected by buying CDSs from AIG, and had AIG gone bankrupt Goldman would have taken huge loses.

In general with financial statements it is hard to make clear sense of hedges. Additionally, Bank of America currently has 7B in securities that are temporarily impaired. That basically means they have 7 billion in assets that are underwater and are hoping the market value will recover. To the extent that these assets may be illiquid it is very hard to determine their real value. Without access to all the internal numbers and without being able to evaluate all on a consistent basis it would be hard to say who had the greatest risk position. My guess is that Lehman and Bear were in worse shape than Merrill but I by no means know that for a fact.

.During Lehman’s last days, JP Morgan, Lehman’s clearer, demanded that Lehman provide more collateral that Lehman did not have.

What is your position on TARP?

The black and white answer is that TARP was a good thing. The failure of Lehman would be a footnote compared to AIG and many other institutions had the Government not passed TARP. The government has done a very bad job of managing it since then. The government was not efficient, but in terms of TARP or no TARP I am happier with TARP. TARP was absolutely necessary to prevent a complete meltdown. Had AIG not been saved Merrill would have come next, Morgan Stanley appeared to have been on the ropes which would have led to a serious domino effect, likely including the collapse of Goldman and others.

Ken Lewis never wanted to buy Lehman. He wanted to buy Merrill because he wanted their retail brokerage network; in addition Merrill was much more of heavyweight in investment banking than Bank of America. It’s staggering that Merrill shortly after the deal was struck with BofA was in such poor shape that they had to receive another 20 billion from the Government.

Lehman was a case of bad timing. There was no political will to back another bailout, after Bear sterns, Freddie and Fannie. By the time Lehman came around it was difficult for the Government to justify politically another bailout. The negative of Lehman going under has less to do with Lehman itself, than the magnitude of pain it caused worldwide. People in Lehman ended off better than some in other firms because many people at Lehman retained their jobs at Barcap. Many people who were laid off from Lehman got packages.

Do you think the banks are out of the woods yet?

I expect many bankruptcies over the next few years and this of course will affect the banks. During the 2000s many people were taking on huge risk to make money. The investment banks were doing deals because investors were willing to buy paper that was extremely risky. The institutional investors had to go into these funds, because investors would abandon funds with lower yields. So this caused institutional investors to buy up LBOs, and it will be hard for many LBOs to refinance as their debt begins to mature.

Ongoing problems with subprime and adjustable rate mortgages will also cause ongoing defaults in the coming years.

Since you have a great amount of expertise in investment banking, I want to know what would you propose the Government do to prevent a crisis like this occurring in the future?

There is no perfect answer. In terms of legislation I think we need a complete rebuild of the regulatory structure. I think the unwinding to get back to Glass Stegall would be impractical. I think there should be a super regulator to oversee every type of financial institution. Within the super regulator you would have people who specialize in different areas, so a team could assess the area of risk they are familiar with. The problem is getting there because the people in congress don’t have a clue about finance. I think it would help if congressional finance committees utilized people who were expert in finance and economics. Not people on Wall Street because there will be conflict of interest. Until you have effective legislation in place nothing will help. Private equity, hedge funds, etc need to be regulated to prevent profiteering at the expense of others. The bottom line is you need a super regulator of all market participants that exist now and that will materialize as markets evolve, in the future. Regulators must pay some number of people a large enough sum to attract quality. If you did this, returns to tax payers would be far greater than the cost. However, you will still have people who get paid less than they would working in the private sector.

Under the Bush administration there was a policy not to enforce securities regulation. Many good people were so frustrated by this that they left their posts in SEC. It will be difficult to replicate the experience of these people.

In terms of the Fed, Greenspan who said he thought the banks would police themselves shows you the mindset of the organization that was supposed to be the top regulator.

There will always be loopholes that people try to use. However, I look at the recent market environment as something close to anarchy. This provides incentive for unethical acts. We need sound rules and laws, as well as police to enforce them.

Do you ever plan on revealing your identity?

I don’t have any specific plans even though I never liked writing under a pseudonym. I never planned on writing a book but felt I had to. I hope one day I will be able to reveal it.

There were several reasons for writing the book. One reason I did is so that those without a background in finance could understand why we had a financial crisis, what is broken and what needs to be fixed. There are very small group of people who understand this, however most voters don’t. A top election issues is always the economy. Most people through no fault of their own don’t understand how our economy and financial system are operating. I hope such readers will be better equipped to judge the candidates the next time they step into an election booth.

Anyone who would like to purchase The Murder of Lehman Brothers on amazon.com can do so by following this link

The Murder of Lehman Brothers: An Insider’s Look at the Global Meltdown

I personally enjoyed the book very much which recommended in a book review I did several days ago.

Joseph Tibman’s blog is www.Lehmanbook.blogspot.com

Gillian Tett author of Fool's Gold

This book review is my fourth, in a series of reviews on the financial crisis. The three previous books I reviewed focused almost entirely on the events leading to the collapse of a specific investment bank. Two books focused on the collapse of Lehman Brothers, and the other book focused on the collapse of Bear Sterns.

Fool’s Gold by Gillian Tett is written from a different perspective. While the book is written with an emphasis on JP Morgan, the book is not focused entirely on the firm. The book is an in depth explanation of how a small group of bankers at JP Morgan invented the tools that are now blamed for exacerbating the financial crisis. They invented credit derivatives which were supposed to be beneficial for the economy and the banking system in particular. The author notes the irony, how instruments that were supposed to make banking more efficient, were manipulated by other firms to take undo risks and cause a near collapse of the financial system.

An interesting fact I learned from the book was how the first CDS was created. In 1993, after the Valdez oil spill, Exxon wished to borrow $4.8 billion from JP Morgan. JP Morgan knew Exxon was credit worthy, but did not want to extend them a loan because it would require a large capital reserve and produce little profit. JP Morgan persuaded the European Bank for Reconstruction and Development to insure the loan, while JP Morgan would keep the loan on its books. JP Morgan would pay a small fee to the bank, collect interest and be protected from a default by Exxon. JP Morgan was able to persuade regulators that since JP Morgan had no risk of default from this loan, they should be allowed to reduce capital reserves.

I have two main criticisms of the book. The author does an excellent job explaining the roots of the financial crisis, and the risks undertaken by the various financial institutions. However, the author is scant on detail when the crisis reached its height. I wish she had focused more on the collapse of Lehman Brothers, near collapse of AIG and other firms in late 2008. While the author devoted over 200 pages to explaining the various instruments the banks were using, she only devotes a few pages to the crucial year of the crisis: 2008.

My second criticism is that, although the author focuses almost entirely on the role of credit derivatives. I would have preferred that she also explain the other factors that caused the financial crisis i.e. Government actions, subprime lending etc. However, I do not think her goal in writing the book was to focus exclusively on these instruments and therefore I am not sure my criticism is valid.

Overall, the book is excellent and the author does a superb job in explaining the origination of structured investment vehicles, CDOs, and CDSs and their role in causing the financial crisis. I was surprised to learn the author had no formal education or job in finance, since she seemed to have such an excellent grasp on it, I would not recommend this book for someone who does not have a background in finance/economics. The book explains complex financial instruments which I think most people will have a hard time understanding. However, I think this is a great book for anyone who has an understanding of finance. This is the best publication I have read so far that explains the various instruments the banks created that ultimately lead the world to near financial Armageddon.

anyone who wishes to purchase the book on amazon.com can do so by clicking on this link

Fool’s Gold: How the Bold Dream of a Small Tribe at J.P. Morgan Was Corrupted by Wall Street Greed and Unleashed a Catastrophe

disclosure: long JPM