Friday, January 9, 2009

Satyam - what were the lenders thinking?

I remember once having a very serious look at a particular (non-US) mortgage lending operation owned by Citigroup. I came from a banking culture where the first question you asked someone who wanted a loan was "why?"

Citigroup lent money in this operation purely against assets.

It was a great place to go if you wanted to borrow money no questions asked. It was "asset based lending".

Margin loans are always "asset based lending". You borrow against seemingly good security and they sell the security if the collateral isn't sufficient. Nobody asks you what you want the money for.

But perhaps they should. At least sometimes...

The broad outline of the Satyam fraud was that B. Ramalinga Raju produced fake accounts - with fake profits. The auditor however didn't pick up the fake accounts because the fake accounts accorded with actual cash flows.

The actual cash had to come from somewhere. It was injected by B. Ramalinga Raju and he obtained it by margining his shares.

He margined his shares for a billion dollars. A billion. Its a lot of money to just about anyone in the world.

And because they were margin loans nobody asked what he was doing with them.

But think about this rationally. Was he borrowing a billion dollars to spend? Well he didn't seem to live that lifestyle - and besides it probably really is impossible to spend that much.

So - presumably he was borrowing to invest...or so the bankers thought. The bankers should have asked for collateral - even secondary collateral - against what he was investing in.

But because it was a margin loan they didn't think to ask!

If only they had asked what B. Ramalinga Raju wanted a billion dollars for? No good answer probably means that there was no good reason to lend the money.



Anonymous said...

J, i hail from same state (andhra pradesh in india) as raju. Based on his family connections i bet all that money went into his proxy real-estate ventures.

real-estate in AP state(hyderabad) literally increased 10 times or more in the last 5-10 years. I repeat, TEN TIMES or more. (even bigger multiples in prime areas).

In AP state politics and rich people schemes(black money, swiss accounts, assets outside country - like singapore hotels etc), it has been the real estate the money multiplier and driver. Everybody from politicians to Film Actors (google search tollywood) literally made out 100s of millions.

I am sure raju wanted piece of that. His family(his sons etc) saw the lucrative real-estate crazy returns...and when compared to "public" company satyam and its money making abilities, i am sure it was very disappointing.

Currently there are rumors he might have already converted all of this made out money (1B dollars u say?) into black-money or proxies. black-money, swiss accounts is very normal in India for rich folks.

Add corruption in gov(applies to all of india) to the above mix, you will have full picture how rich-folks, if crooked enough, can make out like bandits.

obviously this whole thing is deliberate and well planned.

(real estate in india is under considerable pressure, but it did not burst...yet.)

Sandeep Parekh said...

I'm a regular visitor to your blog - see my op-ed in the FT today on Satyam:

General disclaimer

The content contained in this blog represents the opinions of Mr. Hempton. You should assume Mr. Hempton and his affiliates have positions in the securities discussed in this blog, and such beneficial ownership can create a conflict of interest regarding the objectivity of this blog. Statements in the blog are not guarantees of future performance and are subject to certain risks, uncertainties and other factors. Certain information in this blog concerning economic trends and performance is based on or derived from information provided by third-party sources. Mr. Hempton does not guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based. Such information may change after it is posted and Mr. Hempton is not obligated to, and may not, update it. The commentary in this blog in no way constitutes a solicitation of business, an offer of a security or a solicitation to purchase a security, or investment advice. In fact, it should not be relied upon in making investment decisions, ever. It is intended solely for the entertainment of the reader, and the author. In particular this blog is not directed for investment purposes at US Persons.