Greed is Good?

Prof. Roy C. Smith, former managing partner at Goldman Sachs and my professor at NYU talks about bonuses at Wall Street firms. We discussed this topic in class and his rationale and points were worthy. Or was it that they seemed right because I was on a different side of the line? The professor said that the headline was not his idea and he didn't like it as well. He also said that he got close to a hundred hate mails for the article which appeared in the weekend edition.

Produced in verbatim, the article written by Prof. Smith in the Wall Street Journal
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1973 was a terrible year on Wall Street. An unexpected crisis in the Middle East led to a quadrupling of oil prices and a serious global economic recession. The president was in serious trouble with Watergate. The S&P 500 index dropped 50% (after 23 years of rising markets), and much of Wall Street fell deeply into the red. There were no profits, and therefore no bonuses.

I was a 35-year-old, nonpartner investment banker then and was horrified to learn that my annual take-home pay would be limited to my small salary, which accounted for about a quarter of my previous year's income. Fortunately the partners decided to pay a small bonus out of their capital that year to help employees like me get by. The next year was no better. Several colleagues with good prospects left the firm and the industry for good. We learned that strong pay-for-performance compensation incentives could cut both ways.

Many wondered if that was still the case last week, when New York State Comptroller Thomas DiNapoli released an estimate that the "securities industry" paid its New York City employees bonuses of $18 billion in 2008, leading to a public outcry. Lost in the denunciations were the powerful benefits of the bonus system, which helped make the U.S. the global leader in financial services for decades. Bonuses are an important and necessary part of the fast-moving, high-pressure industry, and its employees flourish with strong performance incentives.

There is also a fundamental misunderstanding of how bonuses are paid that is further inflaming public opinion. The system has become more complex than most people know, and involves forms of bonuses that are not entirely discretionary.

The anger at Wall Street only grew at the news that Merrill Lynch, after reporting $15 billion of losses, had rushed to pay $4 billion in bonuses on the eve of its merger with Bank of America. Because Merrill Lynch and Bank of America were receiving substantial government funds to keep them afloat, the subject became part of the public business. The idea that the banks had paid out taxpayers' funds in undeserved bonuses to employees, together with a leaked report of John Thain's spending $1 million to redecorate his office, understandably provoked a blast of public outrage against Wall Street. The issue was so hot that President Barack Obama interrupted his duties to call the bonuses "shameful" and the "height of irresponsibility." Then, on Wednesday, he announced a new set of rules for those seeking "exceptional" assistance from the Troubled Asset Relief Program in the future that would limit cash compensation to $500,000 and restrict severance pay and frills, perks and boondoggles.

In the excitement some of the facts got mixed up. Mr. DiNapoli's estimate included many firms that were not involved with the bailout, and only a few that were. Merrill's actions were approved by its board early in December and consented to by Bank of America. But the basic point is that, despite the dreadful year that Wall Street experienced in 2008, some questionable bonuses were paid to already well-off employees, and that set off the outrage.

Many Americans believe that any bonuses for top executives paid by rescued banks would constitute "excess compensation," a phrase used by Mr. Obama. But no Wall Street CEO taking federal money received a bonus in 2008, and the same was true for most of their senior colleagues. Not only did those responsible receive no bonuses, the value of the stock in their companies paid to them as part of prior-year bonuses dropped by 70% or more, leaving them, collectively, with billions of dollars of unrealized losses.

That's pay for performance, isn't it?

Source:Wall Street Journal
Wall Street" has always been the quintessential, if ill-defined, symbol of American capitalism. In reality, Wall Street today includes many large banks, investment groups and other institutions, some not even located in the U.S. It has become a euphemism for the global capital markets industry -- one in which the combined market value of all stocks and bonds outstanding in the world topped $140 trillion at the end of 2007. Well less than half of the value of this combined market value is represented by American securities, but American banks lead the world in its origination and distribution. Wall Street is one of America's great export industries.

The market thrives on locating new opportunities, providing innovation and a willingness to take risks. It is also, regrettably, subject to what the economist John Maynard Keynes called "animal spirits," the psychological factors that make markets irrational when going up or down. For example, America has enjoyed a bonus it didn't deserve in its free-wheeling participation in the housing market, before it became a bubble. Despite great efforts by regulators to manage systemic risk, there have been market failures. The causes of the current market failure, which is the real object of the public anger, go well beyond the Wall Street compensation system -- but compensation has been one of them.

The capital-markets industry operates in a very sophisticated and competitive environment, one that responds best to strong performance incentives. People who flourish in this environment are those who want to be paid and advanced based on their individual and their team's performance, and are willing to take the risk that they might be displaced by someone better or that mistakes or downturns may cause them to be laid off or their firms to fail. Indeed, since 1970, 28 major banks or investment banks have failed or been taken up into mergers, and thousands have come and gone into the industry without making much money. Those that have survived the changing fortunes of the industry have done very well -- so well, in fact, that they appear to have become symbolic of greedy and reckless behavior.

The Wall Street compensation system has evolved from the 1970s, when most of the firms were private partnerships, owned by partners who paid out a designated share of the firm's profits to nonpartner employees while dividing up the rest for themselves. The nonpartners had to earn their keep every year, but the partners' percentage ownerships in the firms were also reset every year or two. On the whole, everyone's performance was continuously evaluated and rewarded or penalized. The system provided great incentives to create profits, but also, because the partners' own money was involved, to avoid great risk.

The industry became much more competitive when commercial banks were allowed into it. The competition tended to commoditize the basic fee businesses, and drove firms more deeply into trading. As improving technologies created great arrays of new instruments to be traded, the partnerships went public to gain access to larger funding sources, and to spread out the risks of the business. As they did so, each firm tried to maintain its partnership "culture" and compensation system as best it could, but it was difficult to do so.

In time there was significant erosion of the simple principles of the partnership days. Compensation for top managers followed the trend into excess set by other public companies. Competition for talent made recruitment and retention more difficult and thus tilted negotiating power further in favor of stars. Henry Paulson, when he was CEO of Goldman Sachs, once remarked that Wall Street was like other businesses, where 80% of the profits were provided by 20% of the people, but the 20% changed a lot from year to year and market to market. You had to pay everyone well because you never knew what next year would bring, and because there was always someone trying to poach your best trained people, whom you didn't want to lose even if they were not superstars. Consequently, bonuses in general became more automatic and less tied to superior performance. Compensation became the industry's largest expense, accounting for about 50% of net revenues. Warren Buffett, when he was an investor in Salomon Brothers in the late 1980s, once noted that he wasn't sure why anyone wanted to be an investor in a business where management took out half the revenues before shareholders got anything. But he recently invested $5 billion in Goldman Sachs, so he must have gotten over the problem.

As firms became part of large, conglomerate financial institutions, the sense of being a part of a special cohort of similarly acculturated colleagues was lost, and the performance of shares and options in giant multi-line holding companies rarely correlated with an individual's idea of his own performance over time. Nevertheless, the system as a whole worked reasonably well for years in providing rewards for success and penalties for failures, and still works even in difficult markets such as this one.

As firms became part of large, conglomerate financial institutions, the sense of being a part of a special cohort of similarly acculturated colleagues was lost, and the performance of shares and options in giant multi-line holding companies rarely correlated with an individual's idea of his own performance over time. Nevertheless, the system as a whole worked reasonably well for years in providing rewards for success and penalties for failures, and still works even in difficult markets such as this one.

At junior levels, bonuses tend to be based on how well the individual is seen to be developing. As employees progress, their compensation is based less on individual performance and more on their role as a manager or team leader. For all professional employees the annual bonus represents a very large amount of the person's take-home pay. At the middle levels, bonuses are set after firm-wide, interdepartmental negotiation sessions that attempt to allocate the firm's compensation pool based on a combination of performance and potential.

Roy C. Smith, a professor of finance at New York University's Stern School of Business, is a former partner of Goldman Sachs.

To be or not to be

An oft asked question. A rarely given answer

For starters, the real [and only true] question that you need to ask yourself as you get out of Atria mall and take a cab down to Worli Seaface and walk by as the water hits the walls is... Why do you want to pursue an MBA?

* Is it only because the world does it?
* Is it only because you want to see what else is there to offer?
* Is it only because you want to move away from where you are?
* Is it only because you want to be independent and away from home?
* Is it only because you could live in NY?
* Is it only because you want to make shitloads of money?
* Is it only because you want to be successful in life?

If you answer in the affirmative to any of the questions other than the last, you probably want to re-assess why you want to pursue an mba and the self doubt is well-placed. If you affirm to the final question though, you are probably on the right track.

The MBA today has become [unfortunately] a fashionable thing to do. It is like colouring ones hair [ I swear i couldnt get a better analogy and this isnt aimed at anyone in particular ] or getting the latest phone. People pursue it because everyone else does it. People go to some random school to pursue it, if they have to. It is a rat race and they think they are missing something if they don't run that race as well. They don't know why they are running. They have no freaking clue. All they know is that they need to run.

Another reason is because people are generally escapist [I do not judge, it is perfectly fine to want something that is out there that one wants and cannot get to] and want to run away from what they are currently doing. One major reason for the plethora of engineers/IT guys after that MBA dream is that they don't like what they do and see this as an avenue to escape. This is a fair reason, a good reason. But I am sure there are other ways to do what they want to do. Also, the world after an MBA is not some super rosy place where there are no assholes, back-stabbers and super-achievers. On the contrary, it may be far worse sometimes.

Inertia is a bad thing. It makes things difficult to start moving. Things are easy the way they are and most people like to keep them that way. Then, there are others for whom change needs to be constant. For some, that change never came. They have lived where they have [albeit a few geographic changes] all their lives. Life has been sheltered and they haven't seen the world outside. They yearn to break the proverbial shackles, to travel to lands unseen and to live life as they want to. Life at their pace, where they are in charge of their destiny. They love their parents to death. Yet, they desire to experience life as a lone stranger who walks down Marine Drive, assimilating the wonders and experiences of life. They want to shave their head bald, to colour their hair blonde, to wear those plunging necklines and to live-in with their girl. And yet, not have to deal with the frown of daddy and mummy dearest.

Someone liked the city so much, they decided to name it twice. Hence, it is New York, New York. The Greenwich Village, Central Park, Wall Street, Broadway, Chelsea, TriBeCa and the Washington Square Park are places they want to be and visit. Friends was their favorite show and they like all things American. They speak with the American slur, believe that colour should be color and not the other way around. The Lion King, Phantom Of the Opera and other shows on Broadway are on the top ten things on the list of things to do. Wouldn't they kill to get that elusive American visa, land on the chimerical soil and live that elusive dream? Touted to be the best city in the world, a reputation one believes that it lives up to. A good reason to try to land at JFK or EWR and believe that they have Truly Arrived!

Green is good, green is fashionable. A few extra thousand to spare, those elusive Jimmy Choo stilettos, that Brooks Brothers tailored single button suit, the Roger Vivier tag in the closet, the Bulgari dress watch, the Hermes and Ferragamo ties, the Lexus Sedan and that annual trip to the Alps. The life in the dreams, one that you always wanted, but was very much out of reach. So out of reach that you didn't even know anyone who had even one item in the list. You could have been the person that told Dawar Seth in Deewar, 'Main aaj bhi phenke huey paise nahin uthata'. You wanted to be there since a kid and would put in whatever effort it would take.

You have a dream. You want to make it big. You have an interest. You want to pursue that interest. You don't work for charity, and yet money is not the only thing that drives your career ambitions. You have things to prove to yourself. You want to chart new territories. Have a great life along the way. Meet great people, have awesome experiences while you do so. Rise up fast and yet know what you are doing. Be the star that people talk about, yet have your feet on the ground. In short, be something. There are many ways to get there. An MBA is merely one of them.

Some of us are brilliant. We become the Bill Gates of the world. Some of us are gifted, we become the Richard Bransons of the world. Some of us pursue a dream, we become the Jyotiraditya Scindyas of the world. Some of us have the vision, we become the Laxmi Mittals of the world. The others try to get to where these people are. They try to pursue utopia. Some succeed, some don't. They do because they are what they are. Not only because they did what they did.

There are many ways to the top of the pyramid. Some paths are easy, others are hard. Some paths need luck, others need a fairy godmother standing by. The MBA is not a sure shot to success. It merely offers a ladder. The biggest lesson in business school is not taught in class. It is in the experience. One learns from the situations, one learns from their peers and most importantly one learns from themselves. As one chugs through the two years, one learns things that cannot be learnt from reading text or watching videos. One learns from experiences. If these experiences come in a multi-ethnic setting in the midst of minds that think much differently from your own, they are worth all the more. Living in India, studying in India prepares us to a particular mindset. An education in a different setting teaches us things we would never have imagined or been exposed to.

You research on schools, you write LONG applications. You edit and re-edit. You take exams after a long hiatus. You beg and plead people for recommendations. You beg and plead people to review your essays. You study day and night for the GMAT. You miss the neon lights, the whiff of white wine and the adrenaline rush of dancing to Punjabi MC. You apply. You pray. You interview. You beg and plead. And finally you get in where you want to. It seems like a lot of work. It seems like it's hardly any fun. It hardly is. But at the end of the day, the sweet pleasure of two years that were the best you ever had... more than makes up for it.

I think that coming to the US to study is the best investment you can make in yourself. It is fun that I cannot explain. You have to study, it can be strenous. But you won't hear people complain about it, other than a random bitching. Secure job in one of the MNCs is great. But I am sure you want and can do better. Manager position is good. The question is: what next? An MBA gives you the tools and the pedigree to succeed. Not only at the job you have, but also the one when you need to switch. i believe that the math changes a lot.

That said, the MBA pours you the drink. It doesn't sip it for you.

It is most definitely and certainly worth leaving and coming. the funds are probably the single most difficult reason. The thing is that it can be totally funded on loans. If you have someone in the US you know well who can cosign your loan, you can get the entire education funded on loan. Else, you can fund it with a mix of educational loan in India and the US [no co-signer required]. It is not the most lavish of life, especially after not thinking twice before spending the money. But it can be managed. Dad may have to be your guarantor, which I am sure he will, if you call him daddy dearest from now on until the fateful day.The exposure is enormous. The ROI depends solely on what you want to do with your life. I think its an investment. A very good investment in yourself. Sometimes, its obvious right from the word go. Other times, its more intangible.

The proverbial ball is in your court. The question is, what do you want to do with it?

Option Valuation

Overheard between two MBA students [A and B] as they discuss another MBA student [C].

A: We had basically been discussing the new year eve parties
and i was telling C he should value it like an option
B: You said youu wanted help with option valuation!
A: The potential for an encounter is subject to much volatility
B: Okay, I can understand the analogy.
A: We wanted your expertise in option valuation to value the price of the party
A: Obviously the strike price is the ticket
B: Okay
A: The time frame is known. The woman's response is the volatility factor which we are having difficulty assigning value to. Bernanke has also helped by lowering interest rates to zero.
B:: Women are empirically known to be more volitile than the market. You have to take the volatility to be atleat 50%. If C can choose between the party and the chick, it has to be valued as a chooser! The best of both outcomes. Else if is buying the ticket, and can seek a refund then it is a put option.
A: One will lead to the other. Where is the chooser in it? If he doesn't got to the party, where will he meet the woman
B: I thought that he can go to a party with us or take a chick for a date
A: No, he is talking about going to a party and finding a girl there.
B: Then, it has to be valued as a compound call option. Event 2 is dependent on event 1. If he comes to the party, then there is a probability that he finds a chick. The key is in choosing the right party.
A: I guess that for him time also will be inversely proportional if he finds the girl at 6 AM, she may decide to go to breakfast rather than for some other 'activity'.
B: Yes, it seems to be a very complex option depending on whom he finds there. You can raise this question to (Aswath) Damodaran for real options. Anyway, from what i can see, we are busy valuing the option and C is busy with the chicks.
A: Yes, that is true. He seems to have disappeared.
B: I will catch up with you later.
A: Cool. Later.

Global Banking & Capital Markets

One of the most interesting classes that I take this semester is the Global Banking and Capital Markets class with Roy C Smith, an ex-chairperson of Goldman Sachs and someone who has seen a financial crisis too many [and for no fault of his own] in his long and illustrous career.

In this class, we have talked about the various crises that have been seen in the current times. We discussed a wide variety of current issues in the financial markets, while discussing the fundamentals of capital markets and financial systems
- the downward spiralling mortgage markets
- the bailout of Fannie Mae and Freddic Mac
- the unfortunate demise of Lehman Brothers
- the capital infusion in AIG
- the acquisition of Lehman Brothers' assets by Barclays PLC & Nomura
- the sale of Merrill Lynch to Bank of America
- capital raising by Morgan Stanley and Goldman Sachs
- the sale of WaMu to JPMorganChase
- the sale of Wachovia to Citi
- the subsequent renege and sale of Wachovia to Wells Fargo
- the downward spiral of Citi
- the fate of General Motors
- Troubled Asset Relief Program
- Federal Reserve and Ben Bernanke
- Treasury Secretary Hank Paulson and his efforts
- Banking Failures in the UK
- Banking Failures in the rest of Europe
- Banking in China
- the benefits of Obama vs. McCain
- What it means to have Obama

This was one of the most informative and illustrative class that I have taken at Stern. It touched upon various developments in the current financial turmoil [or what Prof. Smith refers to as the financial tsunami]. A great course. Most definitely recommended.

Here is an article that Prof. Smith wrote in Forbes where he talks about the questions that he, as a professor, and his students [that is us] would have for the new treasury of the Federal Reserve, Mr. Geithner.

I hope that Mr. Geithner reads this article and implements some of the suggestions and answers the questions that the professor and his class have for him and the new administration.

Citigroup, the Bismarck?

Roy Smith, my professor and ex-chairperson and partner of Goldman Sachs talks about the run down in the share price of Citigroup.
"We used to say that Citigroup was like the Bismarck. It could take bullets forever without sinking. But ultimately, the Bismarck sank."

At $26-billion, it is now worth about the same as Toronto-Dominion Bank and $11-billion less than Royal Bank of Canada.

One thing is for sure, Citigroup CANNOT fail. I just shudder to even think of the thought of where the markets are headed if it thinks that Citi could potentially fail.

Read an interesting article here which quotes the above italicized information. Could the markets go more downward? I shake my head in disbelief.

CDS and their perils

Interesting article by Prof. Figlewski and Prof. Roy Smith on Credit Default Swaps or CDS and how they wrecked the system. Prof. Smith often talks in class about how these instruments were supposed to diversify risk and be good for the system, only to be abused and misused beyond repair.

Reproduced in verbatim from the Forbes.com

Commentary
Credit Default Swaps Are Good For You
Stephen Figlewski and Roy C. Smith, 10.20.08, 12:55 AM EDT
What is dangerous is their misuse.

Warren Buffett has said that "derivatives are financial weapons of mass destruction," and in a credit crisis like the one we're in, many people think he wasn't kidding.

Recently, an auction was held to determine the size of the settlement on "credit default swaps" (CDS) that were written on the outstanding debt of Lehman Brothers. Each of these swaps was a contract between one party wanting to insure against the risk of a Lehman default and another willing to sell that insurance. (Lehman had nothing to do with the contracts, but the over-$600 billion of debt for which it was responsible had attracted about $400 billion in outstanding swap contracts).
About 350 different counterparties to the Lehman CDS contracts attended the auction, where it was determined that Lehman's debt would be worth only 8.62 cents on the dollar in bankruptcy. Those who sold insurance against Lehman's default (the "protection sellers") therefore must pay out 91.38 cents for each dollar of debt they insured. This is the largest payout ever in the $55 trillion credit default swap market. After netting out offsetting positions, cash payments will be approximately $270 billion, a huge amount even for this crisis, which has seemed to know no limits on the size of write-offs. And all this for just one default!
What Buffett didn't say was that while derivatives come in many sizes and shapes, every one of them is a zero-sum game for the users--for every loser, there is always a counterparty who wins an equal amount. Such contracts don't eliminate risk, and they don't increase it. They just transfer risk from one counterparty to the other. But this enables those who bear a risk to protect themselves against it, and considering the huge volume of risk-taking that occurs daily in financial markets, the ability to redistribute risk has to be seen as very useful.

Receiving the payments on the Lehman CDS contracts (which offset losses they had insured against) were a number of banks, brokers and other financial intermediaries. They had extended credit to Lehman but wanted to hedge the risk that it might default, an unlikely event at the time perhaps, but one with serious consequences if it occurred.

On the other side of the contracts, making the payments, were end-user investors such as insurance giant AIG [NYSE: AIG], PIMCO, the world's largest bond fund, and Citadel, a large hedge fund group. They took on the Lehman credit risk in exchange for a regular quarterly payment that seemed at the time to be a fair premium for insuring a default that probably would never happen.

For diversification, protection sellers maintain large portfolios of credit default swaps, just as an automobile insurance company insures a lot of cars. They lose on those that crash, but make it up on those that don't. Apparently none of these insurers have been buried by their Lehman exposure. But if there had been no credit derivatives and the banks and other intermediaries had been unable to hedge the risk, they would either refused to lend to Lehman at all or, more likely, they would now be adding these losses to the others they have already endured in this unusually difficult credit cycle.

Banks and investment banks function as both market makers, which requires them to carry inventories of risky securities for brief periods, and also as proprietary investors. They manage credit exposure in a number of ways, including hedging with credit default swaps. This transfers the risk to other investors, often outside the banking system (whose safety and soundness may benefit). A competitive market in credit default swaps contributes to the transparency of price-setting and thus to the efficiency of the whole process. This lowers the cost of financial risk management in general.

The vast majority of transactions in the credit default swap market are straightforward, insurance-type transactions. But losses on ordinary insurance contracts are sometimes much higher than expected, for example, when an unusually severe storm causes a lot more damage than was provided for when the homeowners insurance premiums were set. Such a storm may wipe out the insurer's reserves and even its capital, as appears to be AIG's unfortunate experience with its financial products insurance business. But that's the risk of providing insurance on events with low probability of occurring, but which result in large losses when they do.
A big problem in the over-the-counter credit derivatives market is the risk of counterparty default. The protection seller may be unable to fully cover the loss it is insuring against. To mitigate this risk, the protection seller may have to post collateral, but amounts and terms are negotiated between the counterparties and not standardized. When AIG's credit rating was cut from AAA to A in mid-September, it was suddenly obliged to post more than $14 billion in collateral against its CDS positions. This is what drove them over the edge. When Bear Stearns was teetering on the brink, the Fed examined the extent to which the firm was connected to other firms through their extensive web of OTC derivatives contracts and decided that it would be too disruptive for the market to let Bear fail.

These problems are significantly reduced for exchange-traded derivatives like futures and options. The exchange and its Clearing House establish high standards for the contracts, provide a centralized marketplace for them, establish and enforce rules on posting collateral and making payments and act as a guarantor that trades will be money-good and that users will not have to rely on individual counterparties to pay what they owe.

The over-the-counter credit default swap market needs such an exchange. Over-the-counter markets are too fragile, too loosely regulated and too opaque for such an important financial derivative as credit default swaps. What makes these swaps dangerous is misuse; an orderly exchange would help make them safer.
There have been informal efforts by the industry to organize such an exchange, which would have to operate globally in view of the size and breadth of the market, but so far, the effort has not been successful. It would benefit greatly by having the governments of the leading banking countries--which will soon be taking up a broader regulatory framework for banks after the current crisis--to require one to be established and regulated banks and broker dealers to participate in the credit default swap exchange.

Stephen Figlewski and Roy C. Smith are professors of finance at the Stern School of Business at New York University

No to Detroit?

Interesting article by Prof. Yermack on the auto industry and his perspective on the same. Academically sound and theoretically the right thing to do. Practically, impossible that Democrats will allow anyone to go down this road, especially after all the promises that have been made to this effect.

As usual, a question that I ask: Why did they not think when Lehman Brothers was going under. It could have saved them so much grief.

Produced below in verbatim from the Wall Street Journal.

NOVEMBER 15, 2008 Essay
Just Say No to Detroit
Given the abysmal performance by Detroit's Big Three, it would be better to send each employee a check than to waste it on a bailout, says David Yermack.

Before Michael Moore became famous for documentaries like "Fahrenheit 9/11" and "Sicko," his first big success came in 1989 with "Roger and Me." In that film, Mr. Moore followed General Motors chairman and chief executive Roger Smith with a camera crew, asking him why the company was closing plants and producing low-quality vehicles. Mr. Smith looked flustered and inartfully avoided Mr. Moore's camera crew while it lingered outside his country club or GM's executive offices.

Debating the Bailout "Roger and Me" was entertaining, but it missed the real story about Roger Smith, who turned out to be a forward-thinking genius. Mr. Smith made big investments in information technology and satellite communications, acquiring Electronic Data Systems in 1984 for $2.5 billion and Hughes Aircraft in 1985 for $5.2 billion. Mr. Smith's successors divested those businesses at huge profits -- EDS was taken public in 1996 for more than $27 billion, and Hughes, renamed DirecTV, went public in 2003 for more than $23 billion. (The man who sold EDS to Roger Smith at a bargain price was H. Ross Perot, who then convinced many people that the experience qualified him to be president.)

Mr. Smith understood all too well that GM shouldn't continue investing in its failing automobile business. That was 25 years ago. Today, our government is being asked to put tens of billions of dollars in GM, Ford and Chrysler, but we would be much better off if Washington allowed these companies to go bankrupt and disappear.

In 1993, the legendary economist Michael Jensen gave his presidential address to the American Finance Association. Mr. Jensen's presentation included a ranking of which U.S. companies had made the most money-losing investments during the decade of the 1980s. The top two companies on his list were General Motors and Ford, which between them had destroyed $110 billion in capital between 1980 and 1990, according to Mr. Jensen's calculations.

I was a student in Mr. Jensen's business-school class around that time, and one day he put those rankings on the board and shouted "J'accuse!" He wanted his students to understand that when a company makes money-losing investments, the cost falls upon all of society. Investment capital represents our limited stock of national savings, and when companies spend it badly, our future well-being is compromised. Mr. Jensen made his presentation more than 15 years ago, and even then it seemed obvious that the right strategy for GM would be to exit the car business, because many other companies made better vehicles at lower cost.

Roger Smith, who retired as chairman in 1990, seemed to understand that all too well, and so did Chrysler's management, which happily sold their company to Daimler Benz for $30.5 billion in 1998. That deal, one of the savviest corporate divestitures ever, ended very badly for Daimler, which essentially paid Cerberus a few billion dollars (by agreeing to retain pension liabilities) to take Chrysler off its hands in 2007.

Over the past decade, the capital destruction by GM has been breathtaking, on a greater scale than documented by Mr. Jensen for the 1980s. GM has invested $310 billion in its business between 1998 and 2007. The total depreciation of GM's physical plant during this period was $128 billion, meaning that a net $182 billion of society's capital has been pumped into GM over the past decade -- a waste of about $1.5 billion per month of national savings. The story at Ford has not been as adverse but is still disheartening, as Ford has invested $155 billion and consumed $8 billion net of depreciation since 1998.

As a society, we have very little to show for this $465 billion. At the end of 1998, GM's market capitalization was $46 billion and Ford's was $71 billion. Today both firms have negligible value, with share prices in the low single digits. Both are facing imminent bankruptcy and delisting from the major stock exchanges. Along with management, the companies' unions and even their regulators in Washington may have their own culpability, a topic that merits its own separate discussion. Yet one can only imagine how the $465 billion could have been used better -- for instance, GM and Ford could have closed their own facilities and acquired all of the shares of Honda, Toyota, Nissan and Volkswagen.

The implications of this story for Washington policy makers are obvious. Investing in the major auto companies today would be throwing good money after bad. Many are suggesting that $25 billion of public money be immediately injected into the auto business in order to buy time for an even larger bailout to be organized. We would do better to set this money on fire rather than using it to keep these dying firms on life support, setting them up for even more money-losing investments in the future.

Two main arguments are being raised to justify a government rescue of the auto industry. First, large numbers of jobs may be at stake, perhaps as many as three million if one counts all the other firms that supply the Big Three. This greatly overstates the situation. Americans are not going to stop driving cars, and if GM, Ford and Chrysler disappear, other companies will expand to soak up their market share, adding jobs in the process. Many suppliers will also stay in business to satisfy the residual demand for spare parts even if the Detroit manufacturers go under. If the government wants to spend $25 billion to protect auto workers, it would do better to transfer the money to them directly (perhaps by cutting each worker a check for $10,000) rather than by keeping their unproductive employer in business.

Second, it is suggested that the failures of the U.S. financial industry, which have cost us something like $700 billion, justify bailouts of other sectors of the economy. This makes no sense. If the government diverts our national savings into businesses that have long track records of destroying investment capital, eventually we'll end up with an economy like France's -- or Zimbabwe's.

Other arguments are on the table as well. Some see the troubles at GM and Ford as opportunities to retool the auto industry to produce environmentally friendly cars. Given their long track records of lobbying against fuel economy standards and producing oversized gas guzzlers, this suggestion seems ridiculous, sort of like asking cigarette companies to help with cancer research.

Not many of my students today remember "Roger and Me" (many confuse the film with another picture from the same era about the cartoon character Roger Rabbit). However, Roger Smith's example casts a long shadow over the auto industry today. It's time to cut our losses and let society's scarce investment capital flow to an industry with more long-term potential to create jobs and economic value.

David Yermack is a professor of finance at New York University's Stern School of Business.

Scrap the car

Interesting article by Ed Altman on what he thinks to be the future of General Motors and how it should be handled.

I had an interesting discussion with Prof. Roy Smith after my Global Banking class on what he thought to be the way forward for General Motors. I am happy to have access to professors such as him who have a thorough and indepth understanding of the matters at hand. I am sure that he will soon publish his views in the press and hence will not divulge the details of our conversation.

Retail Sector in India

Here is a short presentation on our take on the future of the retail sector in India!
This was for the final project in the Global Economy class that I took this semester.

C'est la vie!

My fortune reads:
You are soon going to change your present line of work



I find that interesting given that I am going to interview tomorrow for a function that I am not particularly keen on doing. Yet, it is something that I have gotten myself into.

I didnt apply. They called me and asked me if I would be interested. I told them where my interests lay. They were persuasive. They said they didnt mind being my second option. I said... 'What the hell!'

I have been running around to ask people to consider me. And here I was in a situation where people were calling me and asking me if I could come along. That even after I told them what was on my mind.

I didn't apply and yet they invited me for an interview. I was surprised. So were a lot of other people. I didn't have much of an interest and that was obvious given my lack of interest in the whole profile and the firm. A firm that is a great firm in its field of expertise. A field that a lot of people are dying to get into. Good for them. That is what they want. That is not what I want. It is not a bad field. It is infact a great career to have. It is just that it is not a career that I wish for myself.

I have long believed in doing what my heart tells me. I go by what my instincts say. And my instincts tell me that I should pursue what I am currently pursuing. The road looks tough and there are a lot of obstacles in the path. But that is okay. It is what interests me and it is what I want to do. It is what I want to see myself doing. Why do you ask? Interesting question. A fair one too.

I have never worked in the field before. As much as I have tried to understand and learn about the field, the fact remains that I have not worked in it. Hence, it is not likely that I truly and fully know what it is all about. Yet, it is in a field that is an area of interest. It involves a challenge that is hard to pass. It is a challenge that few other profiles can offer. I dont know any other profile that comes nearly as close. It will give me great exposure and access. Tangile results that make the news... for the right reasons.

But first and foremost, it offers a challenge. A challenge to work in an environment where you start with knowing nothing and learning everything there is to know. And I am not talking about a lifetime. I am talking about one task. It is the challenge of learning, understanding and performing in such an environment. The power and ability to make a difference in such a manner that few people can imagine, being twenty something guys.

The money is there too. It is obvious and I won't deny it. But, I will add that I don't do things that are necessarily for the money. Ofcourse, nobody works for charity and I am not nobody. But, I also do not work for the money. It is a criterion, but it is not the criterion for me. Satisfaction is more important for me. At the end of the day, I need to know and understand that what I am doing is something that is important, critical and I am making one hell of a difference to what I am doing.

And yet, destiny chooses to play hide-n-seek. It offers things that I don't want and denies things that I don't have and want badly. C'est la vie!

I just hope that the fortune that I mentioned does not come true. I hope that I get where I want to be... I dont mind the pitfalls and the hardships (before or after).

A whole circle

Life has come a whole circle around. My last post was about an interview. This one is about one too. The previous one was a good one.

Somewhere in between
 I was admitted to NYU Stern!
 I quit my job!
 I flew to the US!
 I stood around in circles!
 I went through the recruiting!
 I did not slept!
 I drank a lot!
 I connected well with people!
 I got my a** kicked at a few banks!
 I prayed to make it to yet another event!
 I heaved a sigh of relief when i was invited!
 I screamed with joy when I got my first invite!
 I was content with the invites that I had!
 I spent sleepless nights for the exams!
 I partied 14 hours on the trot after the exams!
 I took a couple of days off!
 I started studying for interviews!
 I did my first MBA1 mock!

That is briefly what I did... will try and fill you up with a background as I try to start getting this blog alive again!

Today was the first MBA1 mock that I did. I may be later than a few. I am earlier than most. It was a guy in my group. Wanting to set the tone for the interview, I acted as the interviewer.

- Tell me your story!
- Questions on the story and grilling on possible loopholes!
- Grilling on why MBA and Stern!
- Grilling on why not the other school in the city!
- Why not asset management?
- Why not consulting?
- Do you have an experience working in global environments?
- Do you think you will fit in within ACME Inc.?
- What are you strenghts?
- What are you weaknesses?
- Why should I hire someone like you, when I could hire a 20 guys who are just as good if not better?
- Why ACME Inc.?
- Where else are you recruiting with?
- What if another firm offers you more money?
- Rapid fire round of 6 questions (Yes/No) on ethics, integrity etc

I had decided to act as an a**-hole. The intent was that if I did so, I would be preparing him and myself for interviews such as these. There is a misconception that Investment Bankers are a*-*holes. If you have met all the people that I have, you would think otherwise too. A dear friend often tells me that I am too good a person to be a banker. I tell her that she is sadly mistaken!

It was good to see that he took it really well. He answered decently, but faultered a lot as well. Initial blues.

He liked the approach. He found it interesting as it was exactly like an actual interview. So smiles and no brownies. I asked he do the same for me.

We started off well. The story went off as usual. He asked questions on the same lines. He didnt seem to like a few of the things that I said. Need to work on them. He also said that I was too long winded and need to be succinct. He cut me short at many questions to unsettle me. I did well at that.

It was nice to do the mock. Shows us where we stand and shows us where we need to work. Also, I may have a few things in my head. But to word them correctly and succinctly is the key.

I take this as the reference for all interviews.

On the right track...
Yet way to go Jack!

Stern Interview

At the scheduled time, Ms. ABC ushered me inside the meeting room. She was a beautiful tall American woman with a wonderful smile. The smile was instrumental in calming the initial nerves.

She invited me to sit so that we could both begin. She began by speaking a bit about herself. She then talked about how on having read the application, the Stern admissions committee was keen on talking to me in order to learn more about me. This was the reason that the two of us were having the discussion here in Mumbai. So far so good…

I was aware that unlike most of the other business schools, NYU Stern interviewers have complete access to the entire application file. A lot of this has to do with the fact that a senior member of the admissions committee is the person conducting the interviews. In this case, I believe it was one of the Executive Director of the Admissions committee. Nevertheless, I was amazed with the level of understanding and thoroughness of the interviewer in knowing and analyzing my application.

With the initial small discussion, we began the interview.

* You have mentioned in your application that you graduated from Goa University. Is
this the same Goa… (well read application #1)
-- You needed to seen the grin on my face as it lit up hearing this. It was a great way to break the ice. I told her that it was indeed the fabled Goa, the land of sun, sand, and sea that I hailed from. I mentioned how I had studied there all my life, before moving in search of my dreams. She asked whether I missed being out there. I shrugged and told her that one had to do what he/she had to do. I told her how had it not been for the lack of opportunity, I would not have left. However, there were no opportunities in the space that my eyes set were on. I asked her if she herself had been to Goa. She replied in the negative. She said that she had been to Delhi before and visited the Taj Mahal. Due to her grueling schedule, she would not be able to visit Goa, although it was something she wished to do… I exhorted her to visit Goa at the first possible opportunity.

Max: + 2 points

* I see that you have worked with ABC and are now working with PQR. There seems to be a logical flow between what you want to do and what you currently are.
(well read application #2)
So can you tell me a bit more about the reasons that you chose to leave your job with ABC.
-- I explained the reasons behind the same and she seemed satisfied. She mentioned that sounded good. There was a smile of approval.

Max: +1 point

* You believe that it was the right step that you took?
-- Yes! I told her how it had worked in the right direction. There was another approval.

* So you mentioned that you chose to join a startup
(well read application #3)
You were one of the early birds. Why did you make the choice?
-- I explained the reasons behind my decision. I told her the absolute truth. There were no negatives, in fact a heap of positives for the old as well as for the new firm. She seemed to appreciate that. However, she was non-committal at this point.

By this time, the initial jitters, if any, had long disappeared. I was listening very intently to what she was saying. I was looking into her eyes. This is extremely important because:
- You need to let her know that you are confident.
- You need to let her know that you are listening and are attentive.
- You need to make her feel comfortable.
- She needs to know that she has your complete undivided attention
- She needs to see your communication skills

I kept a calm and composed (and yet enthusiastic) voice. I found myself using many hand gestures as I put my point across to her. This was in fact a sign for me that I felt calm and confident. This tends to have a cascading effect and in turn, helps me perform better. The going was good at this point. I was feeling confident and that is the single most important factor in an interview.
Firm believer of the power of confidence here…

* You said that there were many challenges that you faced because of having joined the startup arm of an MNC.
-- I talked about having synergies, each person getting something new to the table and how it was difficult to bring all of this together in a small cohesive unit. We have since grown into a big organization. However, it was important to have patience in those early days. Although we are a huge MNC, there are always the pains of the initial hiccups. Despite all of this, we brought it all together and made it happen. We had an opportunity to formulate the work culture, the ethos, and the team spirit. We attempted to do the best we could to ensure that we married the US culture of the firm with the Indian ethos to arrive at something that was within the boundaries of the firm and yet catered to the Indian sensibilities.

* Is there any specific challenge that you would like to discuss?
-- I was totally zapped with this question. It was not that I was exaggerating or speaking something that was untrue. It was merely that at that moment, I was unable to recollect a sensible and meaningful answer to this one. I bought some time for myself by asking her to repeat the question. In the meanwhile, I scanned before my eyes the entire experience. It was probably the only time that I realized that I was not paying complete attention to what she was saying. The horrendous taste of the brewed coffee from the vending machines, our irritation with the lackadaisical attitude of a few support staff (who polluted the atmosphere around with their arrogance and negativity) or our complaints against the transport policy were neither serious nor appropriate to the occasion.
Eureka! Just when it was looking like I would not have anything to say, I recollected it. I almost wanted to stop her from speak it and blurt it out, lest I forget it. But I managed to hold the trigger until she stopped. I talked of our tirade against a few of the finance policies and the problems on a general level. Due to company policies governing issues such as these, I chose to keep them out of the purview of the interview. And out of the purview of this blog…
Max: +1 point – Getting out of a tricky situation
Max: +2 points – Respecting confidentiality agreements
Max: -0.5 points - Initial Confusion, jittery and confusion


* How has your experience been working with teams? What is the single most strength that you bring to a team? How will you use that in your stint with the NYU?
-- I talked about growing from a small team of 2 to a much bigger team now. I talked about how it was important to work in a team and the ethos of our own team. I mentioned that I was grateful to my team that has helped me grow as a person.
The single most important strength that I bring to a team is my communication skills (she better have seen them there) and my ability to work with diverse individuals with relative ease.
This then worked towards how I would bring this to a synergy at NYU as well.

There were a couple more questions. But I believe by this time, I was fairly confident that this was going to be a hit. I smiled, laughed, cracked jokes and kept the conversation lively and jovial.

At the end, I asked her about specific clubs such as the Emerging Markets Association, the Stern Private Equity Club and the Graduate Finance Association. We also spoke about student life in general.

There were a couple of specific questions about the admissions process, the financial aid process and the VISA process.

At the end, I got up, thanked her for taking the time to come all the way to India, wished her a pleasant stay ahead and exited from the interview. Contrary to popular view, I did not lean on my knees and kiss her on her hand (A couple of over-zealous friends seemed to believe so!)

I left believing that I was going to achieve my dream of spending my New Year at the Times Square! :)

Interview Scheduled

Dear Mr. Max,

The Admissions Committee has reviewed your application and is pleased to invite you to interview.The interview gives us the chance to get to know you better and is an important part of our decision making process. It also gives you the opportunity to ask any questions you have about our program and to experience our community firsthand.

Thank you for your continued interest in NYU Stern, and we look forward to meeting you in person.

Sincerely,
XYZ
Director,
MBA Admissions and Financial Aid

Woohoo... Its time to interview! Time for me to know them better and for them to see what a great person I am ;) hehehe

Scheduled for
Monday, March 12, 2007
The Taj Mahal Palace & Tower- Business Center
Apollo Bunder, Colaba, Mumbai

Time for me to get that charm working. Never dinged at an interview... Don't intend to ding at this one! This is HUGE! :)

Sterned

Dear Mr. Max,

Congratulations! We are very pleased to offer you admission to the NYU Stern MBA Class of 2009. The Stern admissions process is highly competitive, and we congratulate you on this achievement.

Very pleased damn right!!! You cannot imagine how pleased I am! I’ve had a head-rush and I am flying high in the sky… grinning ear to ear… incoherent thoughts… extreme emotions… ecstatic and euphoric!
This is how it feels! Psychedelic lights, karmic sounds and the feeling of being lighter than sky itself. All thanks to one word. This is how it feels to be Sterned!

Third Time Lucky?

The wait started long back. It suffered a few setbacks (two to be precise). Hope was not lost. Backup plans put in place. Frantic attempts made to firm them up. This may have included calls with people at weird (read 0300 IST) hours of the night, discussions with people on a jet lag and visiting people at their homes to firm up the options and discuss the future as a whole. Overdrive was what was needed and that is what happened. Deep within, the prayers continued for the third one to be a homerun. For I wanted to know what fourth base (no pun intended) felt like.

Having waited for what felt like an eternity, it can be extremely frustrating at times to be so near and yet so far. Although I am of the belief that I had winner applications (as did most if not all of the people who reviewed them for me), the news from PA and IL made me think otherwise. Guess that it was the case of good but not good enough.

Finally, it was time. It was time for the do-or-die situation. After two strikes, it was important to see the light of day. It was important not to merely see the stars, far away in the sky, out of reach and blinking at me mischievously. They mocked me that they were merely in sight and not in reach. Things were getting a bit tense. Obviously, it was not a situation that I appreciated. Alas, I found myself in one. I had to make the choice: I could wilt under the pressure and fail. I could stand strong and fight it back. I wanted to fight back. That seemed like the logical (and obvious) thing to do. However, after having fought for the last few years, I found myself wilting. The knees were wobbly and I was petrified that I would cave. I was not sure that I could hold on for much longer. I consoled myself for being in the state that I found myself. In my defense, I could not blame myself for it. I was human too. I too was prone to assuming and accepting defeat long before it had raised its ugly hood and painted the town black.

The pitcher took his place. It would not have been difficult to mistake him for a three-headed fire-spewing evil dragon. Looking around at the other bases, he had one final look at the striker, and took what felt like ages before he pitched the ball. The scene had all the makings of a Hindi potboiler. The journey of the ball from the hands of the pitcher until it reached the striker was as vividly captured as the journey of a bullet after it has been fired and before it is to come within striking distance of the victim.

Each of the previous deliveries had been different. UPenn - Wharton was a long letter from the dean of the school expressing his sincere regret. Chicago was short and curt with a single word: deny. This particular response had come within an e-mail. My fingers were shivering… again. The co-efficient of the shivering is directly proportional to the rejects that one has received and is inversely proportional to the interviews/admits that one has on his/her plate. It is also proportional to the amount of effort that has gone into it, the time in years for which the plan has brewed, and the desperation with which it is wanted. Expectedly, my hands were indeed shivering very badly. I carefully picked the laptop from my lap and placed it circumspectly on the desk. Such was the level of the shivering that I was scared that I might drop it to the ground. I am not kidding here. It was late into the night and I was understandably petrified. For a second, I almost did not have the guts to see it. I wanted to leave it for another day. Yet, I knew that I had to face the demons and stare them in the eye. Believe me, it is a whole of words. It was easier said than done.

From the subject line and from the name of the sender, I realized that it was a response from NYU Stern. This one school was different; it was different in a pleasantly beautiful way. They spoke of the NYU community and the benefits of NYC. I saw all of them (the benefits) and more. That was the reasons that this was one of the schools that I was looking to make home.

Like I have mentioned before, I had applied to a grand total of five princely schools. Each of the schools were such that I would not think twice before accepting an offer from the school. The only problem in the decision-making process would arise if and when there would be more than a single admit and it would be up to me to decide on the then future course of action. Going by the current statistics, I would be more than overjoyed with having an opportunity to go at all! Let alone the option of having to choose from more than one.

Now, what the email had was a link to a URL on the NYU Stern website. I started my prayers. I have never been a devout person, but at this time, I could have done with whatever help I would get, divine or otherwise. In a frame of mind that was hopeful for the best, yet resigned to fate and ready for the worst, I went about finding out the details of the result. I logged into the site and went about figuring out how I could get the result.

I reached the final step. Involuntarily and subconsciously, I closed my eyes and said a silent prayer. If there was ever a good task I had done, I was calling the IOUs. With a heavy sigh, I clicked the link. I waited anxiously for the page to load. Slowly and steady, I began reading each and every word of what the email had to say.

Dear Max:

There has been an update to the status of your application to the NYU Stern MBA program. To view the current status of your application, please visit the Application Status Check Website at http://applicant.stern.nyu.edu/statuscheck/
As a reminder, your password is ******.

Thank you for your continued interest in Stern,

NYU Stern MBA Admissions

My heart skipped a beat and more as I read the line that I had been short-listed for the And then, I was dancing like there was no tomorrow!!! I had made it to the next phase! I had been short-listed! I was going to the interview! I suddenly felt a vacuum in my heart as I realized what happened. I had been invited to an interview! There was a chance. I was another step closer towards the ultimate dream! For a whole minute or so, I did not know what had hit me. I didn’t realize that I had indeed made it to the next level.

I guess that it took a while for the entire feeling to sink in. It took a while to realize that this is what I wanted. I was not there. But I was getting there. And that was good enough. It was a matter of time is what I was telling myself. It was merely a matter of time.

Until date, I have never screwed up at an interview. I have had the distinction of having returned victorious from every interview that I have attended. I have not attended a whole lot many of them. Nevertheless, I have attended pretty many for the MBA admission process, the IIM and the AIM interviews. I have also attended a couple of job interviews and I have not had to attend more than that as that is also the number of jobs that I have had.

The point of the matter is that I have successfully cleared the first hurdle. The next hurdle is in sight and it is obviously a challenge. But I am up to it. The third response was a positive one. It gives me hope and a future. It has started well. It is just a matter of time before I realize whether the third time was indeed lucky!

The end of R2

Today officially marks the completion of R2!!!
I submitted Stern today!
Although there wasn't much left to be done, It was a sigh of relief when it was submitted!

I feel relieved in more ways than one!
I guess that I can finally breathe easy!



Njoi the moment and savour the feeling!
Phase II is officially complete!
Time to rejoice!

But that marks the beginning of Phase III.
This will involve the gift of the gab and the extruciating wait for the result!
The use of the F5 key and the long wait for success! (XX - crossed fingers!)

For now! yahoo!!!!

Almost there

All done and ready to go!
The button needs to be pushed!
I have forwarded the essays to a few friends for reviews. Some have reverted back. Some are yet to get back to me. I don't foresee anything major happening between now and the submit button.
The recommendations are also in place.
Its the end of a long journey. And the journey seems to be coming to an end.

Its just a matter of hours now...its just a matter of hours!

Clamor to finish

Its suddenly a clamour to finish it all.
All in place and yet things to do!
As usual, things have to be perfect and as a result of this, i will review and get them reviewed!
and submit i will tomorrow!
And that will be the end of the third phase of the application!
The first was a mix of research and GMAT.
The second was totally research and recommendations!
The third has been the apps process! I must say that it has been a great experience as of now. Hopeful that it will be fruitful and that will probably make all the difference between a wide smile and a weak one!
Stern! here I come!

Loved NYC any which way! It was an amazing experience that I had there! Sad that it had to last for a short duration!

But hey, that is in the past! for now, have to click on the submit! that is onething that does not psyche me! hehehe!

NYU Stern remains

four done and one to go!
NYU Stern now remains.
Not because of any order or preference that has been followed.
It has been a simple logic!

It is the only one with a 15th Jan deadline.
which means that I still have a few days to review and make changes if any!

Which means that my friends are in for another round of versioned and tagged documents! :)
I wonder why is it that I am the only one who would be shouting yippee!!!

hehehe!