It’s time investors asked questions, real fast

It’s time investors asked questions, real fast
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First Published: Thu, Jun 26 2008. 11 14 PM IST

Updated: Thu, Jun 26 2008. 11 14 PM IST
I’ve stopped going to the movies.
It’s an utter waste of money and there isn’t enough drama. The plots are predictable, bordering on the incredulous and even if I’m willing to suspend disbelief, sometimes, it’s altogether too much.
Take Indiana Jones and the Kingdom of the Crystal Skull. Why should I believe that Harold Oxley wants to stake his life to return a crystal skull to its rightful place when we all know the British have a tradition of taking and hoarding other people’s treasures and not returning them?
If it’s drama I’m after, there is lots to be had on Wall Street. Even Nariman Point might offer us some in weeks to come.
For a start, the characters in this story are real. So is the setting. There are bankers, hedge fund mangers, traders, chief executives—people we all read about and people who are in some ways causing the collapse of financial systems not just in their home countries but right across the globe. And there is every reason for us to watch them closely. There are valuable lessons to be learnt, though none worth repeating.
My first character, Ralph Cioffi, is 52. He has spent 30 years at Wall Street. Last week, he got arrested but he wasn’t the only one in handcuffs.
Matthew Tannin, 46, co-hedge fund manager was also in the dock. Both these senior employees of Bear Stearns Cos Inc. juggled computer trades, cigars, vodkas and fat bonuses while they talked up their tanked-out funds. In the process they helped global markets slide into meltdown mode and forced Bear Stearns to stand in the dole queue, until the US central bank came along.
Prosecutors have now charged the pair and claim they lied about liquidity and redemption requests—a bit like taking grandmother’s gold and promising to return it as platinum. Except, the value of the investments managed by these two managers weren’t worth the paper they were written on. By then, investors had lost $1 billion (Rs4,270 crore today).
The markets have lost nearly $400 billion in losses and write-downs, prompted by similar bets gone wrong. I see two lessons in this.
First: Don’t believe what they tell you.
Second: Ask plenty of questions.
Which is why I have a hard time believing it when Indian companies pretend business is coasting along, albeit at a slower pace.
Nothing at all points to it being business as usual. But Indian companies seem to be in no hurry to call investors aside to tell them about the usual stuff—in unusual circumstances.
Indian firms are getting slammed by high rates of borrowing, inflation, which is at a 13-year-high, a wage spiral, slowing consumer demand and knock-on slowing growth. Even classroom economics will point to the fact companies must have plenty of bad news lined up. There is enough in the recipe for lower margins and higher interest payouts. In short—sharp profit declines and in some cases, losses.
Even those companies that have closed the latest earnings season with losses seem to stick to tame warnings such as “it is a challenging time for industry’’. Surely, by now we know that.
Indians companies typically have not followed the Wall Street or European tradition of more exact profit updates and warnings, which can either come every quarter or out of turn when things start to sour.
It’s just good governance, even though sometimes it comes in a bit late, and there will always be executives who hide more than they tell.
With Indian companies getting aggressive with their global ambitions, there is every reason for them to start working their way towards a more transparent disclosure on profitability, and in a timely way.
Stock investors, who make money because they are canny and impatient, have already marked the course for the season ahead. They’ve lost the “bull energy”, and, as a result, the once distended benchmark index, Sensex, has shrunk by about 30% since January. The rupee, last year’s darling, is some 7% lower this year.
Some sectors have been punished more than others. Real estate, market players have guessed right, may be in some trouble because it is dogged by project delays, punitive funding rates and soaring construction costs. Yet, in the earnings season that is winding down, not one of the developers has sounded a sharp warning bell. Airlines are bleeding and saying it will lead to consolidation but who will buy whom if everyone is losing money?
By all accounts, makers of everything from television sets to trucks should be bracing for production cuts, not just more efficiencies, yet few of them willingly proffer that information. Most chiefs of Indian companies are discussing severe margin pressures in boardrooms but by the time that reaches our living rooms, it doesn’t quite sound like the worst confidence-buster for well over a decade.
Investors need to sit up and ask plenty more questions— real fast. Otherwise, their movie-going habits will turn as bad as mine.
Anjana Menon is national editor for corporate coverage at Mint. Her column looks at the wider implications of the twists and turns of business as it happens. You can respond to this column at firmfooting@livemint.com.
Should Indian companies have tighter disclosure rules? Share your thoughts with her on her blog, Cabbages & Kings, (blogs.livemint.com/cabbages).
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First Published: Thu, Jun 26 2008. 11 14 PM IST