November 27, 2008

Terrorist attacks in Mumbai

While we celebrate Thanksgiving during this long holiday weekend in the U.S., half way across the globe, the largest democracy in the world faces its toughest challenge yet in its war against terrorism. What has been unfolding over the past 36 hours in Mumbai (formerly, Bombay), India's largest metropolitan city with a population of 19M and the hub of its commercial and entertainment industries, is outrageously shocking. Terrorists had literally taken seize of South Mumbai, the city's richest and most popular area, and went on the rampage with indiscriminate shootings and bombings with a focus on city's several symbolic targets. The last count of casualties showed 134 dead and 308 injured, including 12 foreigners and Mumbai's Anti-Terrorism police chief. At this hour, some terrorists are still holding out their positions with sufficient armaments inside the Taj Mahal Palace hotel, arguably the city's most popular spot amongst rich, celebrities and foreign tourists.

I extend my solemn condolences for all who lost their loved ones. My wife is from South Mumbai, but fortunately everyone from her family is safe. Her relatives live in and around Colaba, which was the ground zero for the deadly attacks. But some of my wife's friends and relatives have been directly affected.

The map below shows a timeline of the synchronized terrorist attacks and affected areas of Mumbai. Click on the map to enlarge it.


While Mumbai has been repeatedly hit by terrorism in recent years, the difference in the attacks this time is the scale of coordination across simultaneous multiple locations, targeting of foreigners, and the choice of the picked iconic landmarks in the city. Another major difference, a disturbing one, is the possible emergence of internal Islamic terrorist groups aligned with al-Qaeda and its agenda from within India, the home to 140M Muslims, third largest in the world. A little known Indian group by the name of Deccan Mujahideen has claimed responsibility for the Mumbai attacks, but we cannot be assured whether these claims are true and/or other external terrorist groups are not involved. India has a history of being targeted by Islamic fundamentalist terrorist groups based in Pakistan, Afghanistan and Middle East.

I hope the Indian government takes tough, concrete actions this time. It has been rather soft after previous terrorist attacks on its soil, when despite having definitive proof of the involvement of specific groups based in Pakistan and Pakistan-occupied Kashmir (PoK), the Indian government, sometimes under pressure from the U.S., restrained from retaliatory actions due to the fear of escalating wider tensions with Pakistan. But the time has come when Pakistan has to match its rhetoric against terrorism with actions on the ground. It got to fully cooperate with India in investigating the Mumbai attacks, and aggressively go after every terrorist group in Pakistan that may be involved in these deadly attacks.

In parallel, India will need to work extremely hard in restoring the confidence, especially overseas, in its ability to keep its cities and people safe and secure. The psychological damage to the country's reputation cannot be overstated. With the Indian economy already slowing down amidst the ongoing global recession, the timing of these terrorist attacks on India's commercial capital could not have been worse.

November 21, 2008

Death of Investment Banking - The New Wall Street

September 21, 2008 will be etched on the tombstone of the investment banking industry. The day marked the death of investment banks in America. On that day, the last two remaining independent U.S. investment banks, Goldman Sachs and Morgan Stanley, converted themselves into commercial banks, which take consumer deposits, a more conservative source of money. With the move, Wall Street as it has long been known - a closed group of independent financial institutions which advise clients, buy and sell securities, provide brokerage services, etc, and are less regulated than traditional, old-fashioned banks - will cease to exist.

Goldman & Morgan will now be under stricter Federal regulations that govern bank holding companies. This followed the earlier transforming events with the other three major Wall Street investment banks: Merrill Lynch, Lehman Brothers and Bear Stearns sought bankruptcy protection or merged into larger commercial banks. The immediate motivating factor for the move by Goldman & Morgan, given their precarious financial health, was to gain eligibility for the Federal financial support that is available only to commercial banks.

The two main reasons, in my opinion, that brought the end of investment banks were:
  • High financial leverage: Banks operated by borrowing extremely high level of debt compared to their asset value. Lehman Brothers financial leverage was 32 to 1 when it was swallowed from the brink of bankruptcy by Barclays Capital - meaning, Lehman held $32 of debt on its balance sheet for every dollar of equity. Bear Stearns' leverage was 33 to 1 when it failed, and during the last quarter, Goldman Sachs and Morgan Stanley had leverage ratios of 24:1 and 25:1, respectively.
  • Playing with complex derivative securities: Banks engineered complex financial derivatives - securities that derive their intrinsic value from other underlying assets - which were too difficult to fully comprehend, and hence manage. As it turns out, some of my undergrad engineering classmates from IIT were among the architects of these financial instruments. In recent years, many investment banks had hired a slew of mathematicians and engineers with PhDs and other advanced technical degrees to design new, complex financial derivatives in order to spread risk of their bets and increase liquidity. These derivatives were openly traded, changed hands several times over, and ended up finding home into the balance sheets of banks and even some non-financial institutions all over the world. The process got so deep rooted, that at some point it became impossible to estimate the true risk exposure of institutions holding these securities. Risk management function therefore got severely compromised. So, when the underlying assets of these derivatives, the U.S. real estate, crashed in value, there was a domino effect across all entities holding assets tied to it.
Let me share a personal account about my own career decision. In the summer of 1996, I did two internships while I was in the business school. I had moved to the U.S. from India a year earlier for my MBA, and had never worked before in the U.S. I therefore wanted to maximize my industry exposure in the country before picking up my career field upon graduation. One internship was in investment banking with Smith Barney, and the other was with an Internet start-up. Smith Barney paid me three times more money than what the start-up could, but I had at least three times more fun with my start-up gig. I felt I added significantly more value at the start-up - I helped it grow revenue by 50%+ and played a key role in its successful IPO later that winter. Upon graduation, I chose a career in the Internet/technology space. Investment banking, a much more financially rewarding career, was however never going to be personally as fulfilling for me.

Investment banking is a support industry that provides services for corporations which build real products for the consumers. That notion somehow got lost in the era of excess over the last couple of decades, when investment bankers took home obscene amounts of cash by taking unduly high risk with other people's money. Twenty-something years old making seven figures trading mortgage-backed securities was an example of such excesses.

Risk taking was encouraged, with limited downside. If your bet worked, you could make several multiples of your base salary in bonus. If your bet failed, you could still walk away with the salary, loosing just the bonus. That is assuming the results of the failure showed up during the same period when the bet was made - in many cases, the incentive structure allowed bankers to postpone repercussions of their actions sometime in the future while reaping the rewards today.

This mismatch in the real world between activities that allowed accumulation of significant personal wealth and activities that created and sustained real value in the economy obviously affected how young students made their career decisions. Investment banking became the most sought-after and glorified job in business school campuses.

I don't have any objection with, for example, hedge fund managers making ten figures - that's right, over billion dollars a year - gambling with rich people's money (only high net worth individuals or institutions are allowed to participate in hedge funds). Until, of course, hedge funds become "too big to fail" and taxpayers have to bail them out (remember Long Term Capital Management), but that's a debate for some other time. The investment bankers however were playing around with funds tied to the Main Street, e.g., pension funds and 401ks of the common man. No wonder there is a huge public outrage with current bail-outs being handed out at taxpayers' expense to the Wall Street.

In a related distortion, CEOs of corporate America started demanding higher salary seeing tens of hundreds of million dollar payouts to their Wall Street counterparts. In 1970, CEOs in America were paid 28 times more than the salary of an average worker (vs. lowest paid worker) in the country. By 2005, the salary gap had ballooned up to 485. That's right, a CEO got paid more in one day than what an average worker earned during the entire year.

So, what will change now. The new Wall Street is going to look very different. The industry will be much smaller. Excess risk taking is a thing of the past. Since high risk enables high rewards, executive payouts on the Wall Street will reduce substantially. The party is over. Many old functions and practices will no longer exist.

The most important change however will be in the new funding architecture of financial institutions. Until now, banks operated in a totally free market funding environment that provided plenty of sources with just-in-time capital availability and extreme liquidity. That will change. In the current crisis environment, central banks globally have become the sole source for large funding needs of financial institutions. FDIC insurance is needed if large debt has to be raised in the U.S. This is, obviously, not sustainable.

The President-elect Barack Obama's new administration will need to work with financial institutions to establish the norms of a new funding architecture for the industry. Given the global nature of today's capital markets which enable global access and movement of capital, a level playing field will need to be created across different jurisdictions globally. The G-20 countries will need to work together to ensure this. The joint communique issued by the G-20 leaders during this month's hastily arranged economic summit by President Bush in Washington D.C. seems to be a good start, but real work has been postponed until April 2009, in order to let Barack Obama settle down in the Office after assuming the U.S. Presidency in January. Lastly, the new Wall Street will have to settle for much greater Federal regulations, and higher transparency, at least to the regulators who will provide the oversight.

November 11, 2008

Web 2.0 Summit 2008

I attended the Web 2.0 Summit in San Francisco last week. Despite the name, the conference has now broadened to cover everything and anything about digital media, consumer Internet, Enterprise software, cloud computing, clean technology, and, of course, Web 2.0.

Here are some quotes and facts from the conference that I found worth sharing, though I would admit that I did not sit through most of the sessions inside conference rooms. Given the wide attendance at the Summit, I mostly go to meet folks from the industry, catch-up with partner firms, see interesting startups, and network, which happens outside in the lobby. In fact, many just show up for the "lobbycon" - hob-nobbing in the lobby for free, instead of doling out a few grands on the conference pass.

Al Gore, the former Vice President of the U.S., presenter of the Oscar-winning environmental documentary, The Inconvenient Truth, and the Noble laureate, urging for a higher purpose of Web 2.0:
“The purpose, I would urge all of you — as many of you as are willing to take it up — is to bring about a higher level of consciousness about our planet and the imminent danger and opportunity we face because of the radical transformation in the relationship between human beings and the Earth.”
Talking about his crusade on preserving our environment, Gore said:
“I feel, in a sense, I’ve failed badly.” “Because even though there’s a greater sense of awareness, there is not anything anywhere close to an appropriate sense of urgency. This is an existential threat.”

Mark Zuckerberg, the CEO of Facebook, presented his Web 2.0 corollary to the famous Moore's law (the processing power of chips double every two years):
“I would expect that next year, people will share twice as much information as they share this year, and next year, they will be sharing twice as much as they did the year before,” he said. “That means that people are using Facebook, and the applications and the ecosystem, more and more.”
I don't think anybody will dis-agree with the above position. The social media revolution will involve more and more people sharing more and more of their thoughts and experiences using Internet as a medium and leveraging its various tools (Facebook/MySpace, Flickr, Twitter, YouTube, Tumblr, etc.). I'd submit that the pace of information sharing may in fact more than double every year as the ubiquity of broadband access, Internet and the means/devices to access it spreads globally. It definitely has in my case.

Ariana Huffington, Editor-in-Chief of the The Huffington Post:
“Were it not for the Internet, Barack Obama would not be president. Were it not for the Internet, Barack Obama would not have been the nominee.”

John Doerr, Venture Capitalist, Kleiner Perkins Caufield & Byers (KPCB), was interviewed by John Heilemann, a contributing editor at the New York magazine, who had been covering the election campaign of the President-elect Barack Obama.

Q: Who should Barack Obama select for the position of the Chief Technology Officer, Unites States, a position that Obama has promised to create?
A: John Doerr suggested Bill Joy, Partner, KPCB, and the co-founder of Sun Microsystems, in which Doerr had invested.

Q: Will Mr. Doerr ask Senator John McCain or Governor Sarah Palin to join KPCB, given the company's history of hiring former politicians like former Vice President Al Gore and former Secretary of State Colin Powell?
A: “If you put lipstick on that, it still won’t work at Kleiner.” John Doerr is a politically active Democrat.

November 8, 2008

America is ready for a revolution...

As my plane landed in New York at ~5:00AM today after a red-eye flight back from San Francisco, I opened my eyes and looked through the window. It suddenly sank through what this nation, and the world, had witnessed this week. The Unites States of America had overwhelming elected a black man named Barack Hussein Obama as its next president. I was indeed looking at the dawn of a new era.

On Tuesday night, while packing for my next day's early morning flight to San Francisco, I was twittering away as poll results started trending decisively towards Obama by 9:30PM. I went to bed after my last twitter at 11:03PM - Obama wins! Take a moment to reflect - history is made today!! It was however me who did not get a chance to reflect amidst the last three days of meetings and the Web 2.0 Summit in San Francisco. Until this morning.

Senator Obama's landslide victory is historic and a source of much needed hope on several counts, but I'll let the press and political historians ponder through that. Many feel that the most significant outcome of the Obama Presidency will be the final end of America's Civil Rights movement. I'm not so sure about that. I think Obama's victory is mostly a symbolic proof of the change on the race front that has already been happening in the U.S. for the past several decades. Today, for most part, race is a non-issue for the majority of Americans. The three main reasons why I supported Obama did not include race. Tom Friedman argued the same in his Op-Ed column in The New York Times after the victory. He wrote:
"But my gut tells me that of all the changes that will be ushered in by an Obama presidency, breaking with our racial past may turn out to be the least of them."
My biggest fear now is the loss of the momentum after Obama's victory. The momentum amongst millions of citizens who came out to vote for the first time, hoping for a change, and willing to devote their time, energy, and even careers. The work has just started. That is probably the reason why I thought President-elect Obama was so somber in his victory address Tuesday night at the Grant Park in Chicago (below is the video). While almost quarter of a million Americans cheered and celebrated (some in tears), there were hardly any triumphant or festive signs in Obama's tone or gestures as he delivered an inspiring speech. He apparently canceled the fireworks planned at the Park. The weight of all the expectations and the responsibilities ahead probably robbed Obama of even a brief moment of public celebration with his supporters after a historic victory.

I think this country is ready for a revolution - led by young and old who hope for a change, and want to live a purpose-driven life. The crumbling of the rampant greed-driven, unfettered free market-spurred, investment banking industry (more on that later) is watched by young Americans who are getting ready to make their career choices. A message of hope, inspired by a young leader, is reverberating through the air at the same time. Several long-impacting, critical issues loom in front of them (environment, energy, economy, terrorism, etc.). I think a perfect storm is brewing...the groundwork is done, and the recipe for change is there. Time has come to lay out the mission.

I heard Al Gore speak last evening at the Web 2.0 Summit in San Francisco. He provided an interesting factoid. When President John F. Kennedy presented a bold challenge to the American people forty seven years ago - America should, within that decade, land a man on the moon and return him safely home - many derided the dream as lunacy. Eight years later when Neil Armstrong stepped on the surface of the moon, the team that cheered the achievement at the Houston mission control center had an average age of 26 years. Many of those engineers were less than 18 years old when JFK inspired them to "dream" the moon mission in 1961. That's what leaders do.

President-elect Obama, who has often been compared to JFK, needs to now lay out the mission for his eager "troops," who are thirsty to make a difference.

November 4, 2008

Election day

Today is election day. Please vote.

We just got back home after voting at Ward 1, District 1-2 in West New York. They had moved the election booth at the last minute from its original location (a school) to the lobby of a high-rise apartment building across the street, so it took us a bit to locate it. But otherwise the process was smooth. As newly minted U.S. citizens, we were voting for the first time, but we found the new electronic voting machines pretty simple to use. They could have however posted clear, step-wise, voting instructions at the top of the machine inside the booth. But they had a helper standing right outside each booth for any questions.

We were in and out in ~20 minutes. I'm not an early morning person, but I think going early was a good lines.

November 2, 2008

SNL continues to deliver - John McCain & Sarah Palin (Fey)

It's safe to say that the U.S. Presidential election campaign has been the biggest reality show on the TV over the past few months. All three Presidential debates, the sole Vice Presidential debate, Senator Barack Obama's 30-min, prime-time TV commercial this past Wednesday, and candidates' appearances, interviews and sketches during various talk shows have all achieved unprecedented ratings bonanza compared to those from previous elections. These shows have also beaten ratings of regular entertainment TV programming during the same time slots.

No other show in my opinion has benefited more than the Saturday Night Live, a cultural & comedy icon whose ratings otherwise have been on the decline for past several years. Presidential elections, a new breed of talented writers, and Tina Fey have catapulted SNL to a point where it has a perfect opportunity to regain its lost glory in a sustainable manner well beyond the elections. Tina Fey's SNL sketches mimicking Governor Sarah Palin, the Republican Vice Presidential nominee, have been instant hits on the Internet almost every single weekend.

Below is the sketch from yesterday's SNL. It's hilarious. I wish Senator John McCain looked this relaxed during his entire campaign.

Here are my few other favorite election-themed SNL clips.

Gov. Palin and Senator Clinton address the nation:

Gov. Palin and Katie Couric get real and adorable:

Governor Palin pays a visit to SNL:

President Bush endorses McCain and Palin:

November 1, 2008

U.S. Presidential election - I support Barack Obama

Readers of this blog must have guessed it by now that I support Senator Barack Obama to become the next President of the United States. If not, here is my unambiguous support for his candidacy.

The 2008 U.S. Presidential election, and the last 21 months of campaigning by the two major parties, has been truly historic for several reasons. Millions of voters participated in an unprecedented Democratic party primary. And now, history will be made irrespective of who wins the election on Tuesday, Nov. 4th. We'll either have the first-ever African-American President in the U.S., or its first-ever female Vice President.

The great news is that even if the Republican candidate Senator John McCain wins, which is looking increasingly unlikely, we'll be better off than the last eight years of his party's U.S. presidency under President George W. Bush.

I guess candidates during every U.S. Presidential election claim that "stakes are the highest," but I truly believe it is true this time. While I support Obama's candidacy for several reasons, here are the three most important ones:
  • Foreign policy: Today we live in a global, connected village, where several aspects of our daily lives can be impacted by decisions taken thousands of miles away in countries on the other side of the planet. The ongoing global financial crisis provides a perfect example of this phenomenon. Senator Obama's foreign policies, temperament, and deliberative approach are the best hope for America to regain the admiration and leadership this country enjoyed throughout the world before September 11, 2001. There were always differences on specific issues, but overall, U.S. enjoyed a very positive image globally, which unfortunately has taken a severe beating during the last eight years of President Bush's administration. America remains the sole super power on the earth, and is also its largest economy. It therefore has the opportunity to be a global leader on critical issues whose impact go beyond national boundaries. With leadership and power, however, comes the responsibility. Even though Senator McCain has better foreign policy credentials and clear advantage in experience over Senator Obama, it's Obama who got widespread endorsements worldwide, not just by global leaders but also by the masses. I believe Obama is the better candidate to heal relations and be the real change agent the world needs at this crucial hour when we're going through a severe global financial crisis, energy shortage, rising food prices, spreading terrorism, and an environmental catastrophe.
Senator Obama addressing a rally in Berlin, Germany on July 24, 2008. Almost ~200,000 Germans showed up. Photo: Jae C. Hong/Associated Press
  • Economy: Senator Obama's economic policies, in my opinion, are more progressive and will achieve a greater balance in creating opportunities and wealth for everyone. Relying solely on the free markets to affect the trickle-down economic benefits has simply not worked. U.S. is the richest country in the world, but while the growth in the U.S economy over the years has been impressive, the fruits of this wealth have not benefited everyone equally. There is now almost an universal acknowledgment that our nation (and planet) are pulling apart economically. The divide between rich and poor has been growing dramatically over the past several decades. By some measure, in real-terms (adjusting for inflation), poor have actually become poorer. If we look at the total wealth, the richest 1% of U.S. households now owns 34.3% of the nation's private wealth, more than the combined wealth of the bottom 90%.
Source: Economic Policy Institute, State of Working America 2006-07, Table 5.1, citing Wolff (2006).
  • Stronger American democracy: The right to vote is probably one of the most important fundamental rights for citizens in a democracy. This is one time when they get a chance to ensure that folks setting and administering policies in their society represent its citizens' interests. However, almost half of the total eligible voters in the U.S. typically do not vote. They don't feel their politicians work for them anymore, and have somewhat lost faith in their government. Senator Obama has energized the masses and provided hope to millions of citizens across the country like not seen in decades. We've witnessed massive surge in new voter registrations all over the country. The picture is especially encouraging amongst young voters, who represent the country's future, and had historically been more dis-enchanted with the electoral process. Higher voter turnout during elections will ensure that the elected President and Congress members represent a greater proportion of our population. This will go a long way in strengthening the U.S. democracy even further.

I lived in the largest democracy in the world (India) for over twenty years before moving to the most effective democracy in the world (U.S.) thirteen years back. This country has provided me tremendous opportunities, and I proudly chose to become a U.S. citizen last year. I am looking forward to casting my first vote in America on Tuesday. I want this government to work for me. I'm sure you also want the same. I therefore urge you to go out, and cast your ballot on Tuesday. If you don't, you lose your right to complain if your leaders disappoint you in how they run the country.