Financial Innovation? ‘Bull’ Shit!

Innovation – it had made our life better; it had made the world better; it had carried world’s great economies through decades. But why is the same making us all very jittery and shaking right now? As you think of innovation, invention of the wheel is the most fascinating innovation ever by human beings. Invention of the wheel is what drives the tangential impetus of the earth today. It is the reason why we can go across the globe before the sun rises again. It has generated fortune for the world over the past several centuries. It has been such an essential building block of our everyday life.

If you take any great innovation and pay a closer look at it, you can derive the very same characteristics among them, which actually make each of them an Innovation. Take the invention of electricity, the invention of telephone, the invention of computing device or understanding of genetics; you can realize how these innovations have built the world better for us to live. An innovation should have the inherence to produce healthy generations of applications that are useful to mankind; It should have the critical character of centrality; It should have the power to be a building block.

Why should an innovation be a building block? Because it has to necessarily build the world! You take a wheel, attach it to another one and use it to move things from one place to another. You build carts, bikes, cars, buses etc. around the wheel. You can add value and create newer, better and useful utilities and applications. You create a true demand for it as it is after all useful for the world. The world consumes and the cycle of innovation, value addition and application continues to move the world forward and build it higher.

How and how much more the world remains to be built is a very important question? Only this question could rightly answer the mankind who are in the quest of more innovations. Those innovations will not only continue build this world better but also our life too. But why has the latest innovation – financial innovation - faltered miserably and caused the world to destruct instead of building it? The reason is very simple – it did not have the power to be a building block. What could you build around the baseless speculation of mortgage-backed securities keeping gaining a value that are neither worthy to start with it nor It being added any value later on!

Most importantly, nothing can be innovated out of money as it is an outcome of value-addition but not a value-addition itself. One innovation gave us a wheel; another one has made us a wheel. MAY GOD BLESS THE WORLD!

The Spy who shagged US, Inc.

A funny line but a serious matter! For the last few days, the global media have been preoccupied with the sudden fall of two Wall Street giants – Merrill Lynch and Lehmann Brothers. It has become 'the talk of the break room' at my workplace. There has been sense of uneasiness – a desperate usage of euphemism for panic here - in every square inch of financial space right now. As a blissful ignorant of the intrinsic details of ongoing mess melodramatically addressed by the global media as “The financial meltdown”, “The change in financial landscape of Wall Street” and “Why the Bull run ended?”, I want to do a quick search on who the spy is.

I recollect an incident in my life that happened almost couple of decades back. My aunt asked the help of my dad – a private financier then - to broker one of her gold jewels and wanted him to invest the money obtained into something that could generate an income for her. My dad went on to broker the jewel with a private pawn broker for a particular interest and lent the money received out of the pawn brokerage to couple of persons for a higher interest. My dad ultimately assumed the responsibility of getting the difference in interest earned to his sister. It is a simple example of the primary business by a typical Investment Bank.

In this case, my dad was comparable to a broker; my aunt was comparable to a banker backed by an asset – the gold jewel; the pawn broker was comparable to an investor investing money on an asset-backed-security; the two persons whom money was lent to were the end borrowers. My dad played a pivotal part here as he‘d assumed the risk involved with both the brokerage and creditworthiness of the borrowers.

Let’s look into the potential risk modes here. What if the value of gold had started plummeting sharply? The pawn broker‘d have got panicked and tried to liquidate the security as soon as possible – it means he should either ask my dad to return the money ASAP or sell the jewel in the market. My dad could not have repaid the money to the pawn broker unless the borrowers had repaid the loan to my dad. The borrowers could not have repaid the loan to my dad unless they had used the loan prudently. If my dad could not repay, the pawn broker would take a loss by selling the jewel at a lower price and my dad would lose the confidence among investors like the pawn broker. If the borrowers could not repay, they would never be able to barrow money from my dad again and my aunt would take a loss. It is very cyclic and everyone would get affected if anything goes wrong here.

Let’s look into risk mitigation strategies here. First of all, the pawn broker should be careful about how much money can be invested on a security - I remember the pawn brokers used not to invest more than half of the value of a jewel in my town. My dad used to be very careful about the brokerage interest - the return on investment for a broker. My aunt chose my dad to do this job as he is after all her brother – that is her confidence on my dad. My dad also used to be very careful about whom he lends money to – being prudent about the creditworthiness of a borrower. If any of these of risk mitigation strategies is not strong enough, the failure is quite imminent. Here, it is only a question of a personal responsibility and business acumen to make sure everything goes right. If this business is done in a much larger scale, something similar to Lehmann Brother’s, whose responsibility and business acumen it should be?

Lehmann Brother's business involves not only thousands of investors, an extraordinarily wide variety of asset-backed securities and a large customer base but also multiple nations across the globe. This is very analogous to the two borrowers buying an asset using the borrowed money and forming another transactional cycle similar to the one explained above and the borrowers from this new cycle also forming another transactional cycle and so on and so forth. It does get complex. does not it?

How could you keep forming this seemingly-endless sub-transactional cycles? You could keep doing as long as a net earning - a difference in interest as in the case explained above - is sustainable. There is obviously a limitation to it, as governed by "Law of diminishing utility". It is very similar to how many coke you can drink at a time or how much juice you can squeeze out of a sugarcane!

Lets just talk about the responsibility part alone as business acumen part is beyond the scope of this blog. Responsibility is as important as business acumen in running any business anywhere. It is very difficult for both to coexist especially in capitalistic economy and more specifically in trying times when companies are struggling to sustain the growth. It is very obvious both can't be taken care of by a single person or entity. This is exactly where a government comes into the picture taking care of the responsibility part while a CEO takes care of the business. You can certainly not expect a CEO of a company like Lehmann Brothers to be as responsible and emotional as my dad was to my aunt. Its is ultimately the responsibility of a country's President, to take care of the responsibility part in running a business. What is our President's response to the ongoing mess in Wall Street? How is he going to explain the giants of wall street crashing like a pack of cards?

In a global economy, a person in arizona defaulting a mortgage payment could lead to a person in chennai losing his/her job. With companies like Lehmann brothers in the business, the cause-and-effect relationship is even more significant as investment banking in a global economy fundamentally builds its business through connecting the epicenters of world economies one over the other in the name of trading asset-backed securities. You can obviously see a high chance of domino effect if anything goes wrong in this framework.

A government has to be as prudent in setting the policies for how a company can do its business as the pawn broker was by only investing less than half the value of a jewel. A government is the ultimate authority in making sure that a company's business solution fits into the fundamental governing laws. It is strongly evident in the ongoing mess that our President played a significant role in pushing things beyond its limits breaking himself the laws of government. He has simply acted as a CEO of US, Inc. but not as a President of United States.

To avoid similar collapses in the future, It is necessary a right candidate rule this country who not only understands the business but also socially responsible; It is also necessary people becomes more aware of the intricacies of economy, more importantly the dynamics of capitalistic economy and most importantly the challenges of global economy for them to elect a right candidate.

BTW, would Michael Moore's next venture be titled 'Washington Powers: The spy who screwed me' glorifying Mr. Bush's extraordinary achievements as a President in the ongoing developments at Wall Street? I am also wondering if Mr. Bush himself would be cast in the movie as he won't have anything to do after his retirement. If happens, would he be cast as a hero or a villain? Well, It does not really matter, does it?!

The evolution of Truth

Rather an incomplete representation yet?

“Does Truth exist?” - an exasperated statement emanating out of frustration, anger, exhaustion and or depression because of losing out too many battles in one's life. But wondering whether “It is not true!”, “It is true!”, “You don’t know the truth!”, “I am very truthful!”, “You better know the truth!”, “She is not truthful!” and many more statements involving the truth is absolutely true or not is an experience itself.

“Does Truth exist?” is utterly a meaningless question. It is neither an object nor a concept for it to prove its existence. It is rather a continuum of realization and reflection of your inner self and the outer world surrounding you. Hence truth has been evolving ever since the universe has been! The evolution happens both over the time and across the universe. What you perceive at a particular point and moment could be completely not true. Truth is simply as old as the universe is and takes different forms in different parts of the universe. The evolution is the result of realization of truth and realization of truth is what makes an entity of this universe evolve!

If you take any entity that is a part of this universe, you can realize the evolution happening continuously. If you observe ‘a tree’ in some part of the world during a spring season, you might perceive it shorter, lush and lively. If you observe ‘the same tree’ in another part of the world during the fall season, you might perceive it to be taller and empty. Which is true here? – Trees are usually taller and have nothing but branches; or Trees are usually shorter and can never be imagined without leaves.

Why evolution of a particular entity in a particular time and in particular place is particular way? It is the ultimate result of an entity’s self-realization and self-reflection. The tree’s self-realization of its immediate world’s time changing from spring to winter and its eventual self-reflection is what make its leaves fall off. It is the same survival attempt that grows it either shorter or taller in different parts of the universe. The evolution is nothing but an entity’s survival through adaptation in an attempt to coexist with the Mother Nature which is changing over both the time as well as the place in a continuum fashion. Realizing this is what Truth is!

Is Lord Ganesh also evolving?!

But the order of complexity associated with the evolution is not the same for all the entities in this universe. The order of complexity of evolution is directly proportional to the order of layer of existence of a particular entity. Let us hypothesize water, air and sunlight which are actually part of the nature, as forming the zeroth layer of existence. Trees, plants and shrubs are followed next in the first layer of existence. Followed in the second layer of existence are animals. The highest layer of existence is occupied by Humans.

Just imagine how simple are the evolution of water, air and sunlight. They don’t need to adapt to survive as they form the basis for rules of evolution! For example, water just need to flow, evaporate or freeze mostly forever and everywhere! The trees and plants whose evolution is controlled by zeroth layer of existence come next. Truth for the first layer of existence is the all about realizing the zeroth layer of existence and eventually reflecting on itself. The animals come next which form the second layer of existence. It interacts with both zeroth and first layers of existence. That itself explains the order of complexity of evolution that animals need to adapt.

How about Humans who form the highest layer of existence? It has to interact with all the three layers of existence below it. It has got the most complex evolutionary process to undergo! Hence, “Does Truth exist?” pops up very frequently among them. It has got nothing to do with truth itself but only with the complexities of the evolution that defines it!

The complexity of evolution associated with human beings are not only due to the highest order of their existence but also due to the multi-layeredness of their existence. Human beings are the only type of entities in this universe who exist in three layers - physically, mentally and emotionally. All other entities exist only physically. Human beings realize and reflect primarily mentally. Their mental evolution is what ultimately controls the rest of their existence too. It is their mind which realizes and reflects on the truth. What you know is truth for you!

Not long ago, that earth is flat is what was truth for human beings because they had only known so! Over the years, earth has acquired its new dimension as truth about earth has evolved over the time due to human's continuous realization and reflection on it! Human beings are evolved tremendously due to this great piece of realization. Truth has completely been redefined. They are no more afraid of hitting a dead end! It has lead to a lot of inventions and innovations. Human beings have also realized the universe is not confined not only to earth but also to nothing!

As we look at the evolution of truth at universal level, it is also important to understand it at a personal level. That how truth is perceived between two humans of a different times and parts is very interesting to ponder! Each human of particular time and particular time realize and reflect on the things in a way that is only controlled by their time and place. The gap between their time and or their place largely decides the gap in their perception of truth here. One might even look an alien to another!

There are so many other factors that could increase the gap too. The changes in level of realization and reflection as well as the stochastic nature of incompleteness associated with realization and reflection could completely change one's perception and conflict with another's truth! So, what could be true? Well, It could only be what you would realize and reflect when this universe would have stopped evolving!