Sub Prime woes

For the past few weeks the stock markets around the world have been highly volatile due to what is known as "Sub prime mortgage crisis".

I remember BusinessWeek broke the story on subprime mortgages some last year and since then one by one a lot of sub prime mortgage lenders in the US have gone bust. Here is a explanation of the issue.

What is a sub-prime mortgage: Unlike India or other developing countries the United States has a very structured credit reporting mechanism, Nearly every US resident having any economic activity has a credit history based on the his/her past record in paying the past loans. This credit history is assigned a score known as a credit score (also known as FICO score). A good credit history and score is seen as a sign of financial responsibility and gives lender a good idea of how risky a borrower is.

People having good credit histories and scores are clubbed into a category known as Prime borrowers, whereas those having a poor track record are in sub-prime category.

Obviously Prime borrowers command the best interest rates and terms from lenders for their mortgage/auto or any other kind of loans, sub prime borrowers on the other have to contend with much higher interest rates and terms, Many reputed lenders lend to only Prime market.

For the past few years the US has seen a robust real estate market, During this phase, some lenders started what is called “Predatory lending” practices to the sub prime borrowers, new exotic varieties of mortgage products like Option ARMs were cooked by these lenders. To illustrate in one variety of these mortgage products the lender would offer a introductory 1% interest to the borrower in the first year of the loan, or for the first year the borrower would have to pay only the interest part of the mortgage that too only partially, as a result unsophisticated sub prime borrowers made costly mistakes and took decisions to take mortgage loans they could have never afforded, after the initial year or so when the loan installment started going up sharply (2,3,4 times in many cases) the borrowers started defaulting on the loans, and hence this whole mess.

In the US the mortgage lenders sell their mortgages as securities on wall street and US being the financial superpower financial institutions from across the world puts money in these securities. Nobody realized that the assets behind those mortgage backed securities were such risky mortgages and this is how the whole chaos spread across the world. Even now we don’t know exactly which banks and FIs are affected.

Related articles on Bullish Indian blog:

What is sub prime lending
How does global markets gets affected

US Presidential elections 2008

In the past few weeks, There have been a series of controversies related to comments made by Presidential hopeful Barack Obama. In the earlier days of his campaign I liked the guy but his recent comments increasingly shows that even with all the right and honest intentions he lacks maturity to fit into Presidential shoes.

Hillary Clinton on the other hand is presidential, smart, sensible and gives the impression of being far above the pettiness of the issues her democratic rivals are raising against her. She is emerging as the front runner in the race for the white house.

Overall its fascinating to watch the American democratic system unveiled in the form of Democratic and Republican Debates. The candidates might be good at spin but are still made to answer pretty tough questions.

I hope that some day India also adopt this kind of transparent election campaign system in some form. What we have currently is a system which lacks this kind of transparency and honestly.
I think this is due to the Indian electorate, a majority of which remain illiterate or semi-literate and are oblivious of the real issues country faces, they just vote on cast line or some petty issues created by our politicians, and these are perhaps the only people who go to vote, the educated middle and upper class remain away from voting

But that too some extent is due to the arcane system of electoral set up as well, Myself for example have never voted, I don't know where should I vote as my place of residence keeps changing every 2-3 yrs or so and I don't know when the electoral lists are prepared and how to get my name added/deleted to those, Perhaps a ration card will be required or proof of residence at the new place, The point is that the sheer idea of going to a government office to get something done puts me off, and I know I am not alone.

Mush in trouble

Past few months have brought what looks like a heap of troubles for Pak President Musharraf.

It all started in march of this year when in all his wisdom he decided to suspend the CJ of the country and the rest is history. The whole country stood up in CJ Choudhary's support and turned him into a instant hero.

Obviously, Mush didn't expect the kind of uprising across the country against this decision, added to it was the whole case of Lal Masjid terror crisis, uprising in NW frontier province (with the collapse of nearly a year long agreement with tribal elders) and recent strains in the relationship with US with the United States increasingly getting impatient over Pakistan's inability to do "enough" towards its promises - fight against Taliban and Al Qaeda on its soil.

Musharraf game plan was to get elected for another term as president while also retaining his army uniform, few would have called it improbable before march but now the situation has changed entirely, to the extent that even the option of imposing emergency was considered but given up due to US pressure and domestic resistance.

US finds that Musharraf is the only option left for it in Pakistan, and if his regime topples the country might fall in the hands of extremists. This is the prime reason Mushrraf is exploiting to get US backing and remain in power.

This reasoning is nothing new to Pakistan, even Nawaz Sharif used the same reasoning for demanding help from US during the Kargil war.


In his book "Engaging India: Diplomacy, Democracy, And the Bomb" Strobe Talbott describes the whole sequence of diplomatic exchanges between Sharif and the US administration led by President Clinton.

Talbott points out that whether it was the issue of Nuclear Tests or Kargil war the moment US tried to push Pakistan, Sharif used to come up with this "Suicidal" argument that if his government is pushed too much by US, Pakistan will be in chaos and will collapse.

According to My Talbott, India on other hand tackled US as an "equal".

Coming back to Pakistan, as things stands now options are very limited for President Musharraf; Chances of him getting elected by the present assemblies are remote, even though he has enough votes but any such move will result in a huge uprising against him; he is negotiating with Benezir Bhutto for her return and an electoral arrangement for power sharing but Bhutto insists on Musharraf quitting the army uniform and dilution of presidential powers (particularly the one by which a president on his whims and fancy can fire an elected prime minister and his cabinet)

If the deal with Benezir Bhutto doesn't work out for Musharraf, to remain in power he will have to impose emergency and get elected, or he will have to quit and go into exile, both the options are pretty depressing for Pakistan.

On the other hand if the deal with Bhutto works out, situation seems slightly brighter but Musharraf will have lesser powers and another power center of a new Army chief may emerge.

Even after 60 years of independence Democracy remains a distant dream in Pakistan, I was shocked when I came to know of the fact that no elected government or assembly (either at a state or national level) has ever completed a full five year term in that country.

On a lighter side I find the main headline on Pakistan TV website really amusing. It never changes, it always remain either "President General Pervez Musharraf" or occasionally "Prime Minister Shaukat Aziz" with the story below highlighting what the president/PM said or did that day :-). This is the face of government owned media.

Mercifully India's Doordarshan is still not so bad.