Ambreesh Khanna's Weblog: Ambreesh Khanna's Weblog

As the Copenhagen Climate Change summit kicks off, the US Environmental Protection Agency declared carbon dioxide to be a pollutant dangerous to human health, thus giving itself power to regulate CO2 emissions. President Obama preponed his trip to the summit, his previous arrival date being the last day of the summit. A glimmer of hope that something might actually happen? A big change since the APEC conference, where the backpedaling from various APAC leaders was already starting on what could - or more appropriately - could not be accomplished in Copenhagen.

This month's travels took me to Edinburgh Scotland, where I spoke at RBS's International Risk Congress on "Innovation in Mobile Financial Services". Speaking to the audience on Mobile Payments, NFC payments, non-traditional players in payments such as Telcos, PayPal, Apple etc. made for an interesting talk. Using an example of location based services often given by my colleague Carl Morath - a movie poster over which you would wave your iPhone, which would pop up a list of theaters within a mile of your current location, allowing you to buy tickets using your phone, storing the tickets on your phone, and offering you coupons for restaurants around the theater where you use your tickets - made everyone realize the power of mobile payments.

I then headed over to London, and repeated the talk at one of RBS's many locations. I had an interesting debate with someone from the audience about the core competence of established banks, and whether transactional banking was moving into an area where banks did not have much value-add. We also had a conversation about Web2.0 properties and virtual monies - why would Facebook need anyone to go to a bank to send e-flowers to a facebook user? For those of you who are not following statistics, Facebook now as 350M registered users. That by the way, is the population of the United States.

The best part of this trip - the two excellent bottles of Distiller's Edition of Lagavulin gifted to me, yummy!

Monday and tuesday of this week were spent in Toronto, meeting with some key partners and customers. Fidelity Information Services is a great partner, we work on lots of initiatives together including their core banking and wealth management platforms. I had a very interesting and thought provoking conversation with Interac - the Canadian equivalent of NYCE and PLUS - a non-profit organization connecting the Canadian financial institutions together. We spoke about all the non-traditional players in payments like Telcos, Paypal, Apple and NFC payments and location based services etc. etc. I ended the day with ITG, another great customer that supplies solutions to Capital Markets companies for Trading, Wealth Management, Risk etc. We spoke at length about Solaris on x86 (HP or Sun), their market data infrastructure that runs entirely on Solaris, and other new projects that they are planning.

The Canadian banks just keep chugging along. They are seriously revamping their capital markets operations, spending lot of time and money on all trading desks - Derivatives in particular.

Oh, and I did get to see a hockey game - Canadians as as nuts about this game as us Indians are about cricket. The local team won, which I am sure was why I could make it back to my hotel by 10:00pm!

Been a while since I was here, lots of things to talk about, lot has happened, the biggest of course being the impending Oracle acquisition. While the EC mulls over MySQL, morale within the company continues its precipitous drop. I have no issues with anyone doubting Oracle's intentions with a product that supposedly competes with their core IP, the problem is with the elapsed time. With holidays abutting both sides of the decision making process, employees, customers and partners continue their wait. Customers and partners have the ability to move on, to make decisions that might not involve Sun, but employees don't really have that option. The market is tight, some of us are die-hard Sun fans, some of us do want to work for the combined company. The longer the wait though, the worse it gets for those of us who want to stay.

So I have been doing what I do best - meeting with customers and partners across the globe. As the market starts its rebound - which is a topic in itself - business is picking up. My travels this month and last have taken me to Canada, Toronto specifically, and Singapore. The set of customers and ISVs are different, the market dynamics are different, however there is one common theme between both places - the dominant domestics locals and the ISVs both, are seeing a massive resurgence in business. I met with Scotia, CIBC, Oanda and Algorithmics in Toronto, and with Standard Chartered Bank, CSC, Fundtech, BCSIS and Distra in Singapore. They are all growing, and are looking to make large investments. They are all way beyond asking about the Oracle acquisition and what Oracle will do with our products. I would have expected ISVs like Algo, CSC and Distra to start to push us back, and I was ready with my corporate lines, however was pleasantly surprised that I did not have to use them. They all continue to view Sun as a vibrant platform to sell their stuff on, and continue to look at the SMI sales force as a extension of their sales teams. They all see Dell as irrelevant, HP as missing in FSI, and IBM too complex to do business with.

APAC continues to astound me with its growth. The financial crisis seems to have just glanced by. One lagging indicator of how well an economy is doing is the job market - all the large global banks - Merrill, SCB, Barclays, UBS - have 100s of jobs open in Singapore. We all have known for a while that APAC would be the next market, the difference now is that all the large globals are establishing large physical presence in APAC. They are now installing large datacenters, and are placing executives in APAC. ISVs and our other partners are growing their presence, in particular hiring local talent, replacing the expat personnel that had previously established satellite offices in APAC.

We all the know about the growth rates of China and India, there is a new statistic that came out earlier this week - the World Wealth Report released its annual report which states that the number of millionaires in China now exceeds the number in the UK. The only countries with more millionaires than China today are US, Japan and Germany. The number of high net worth individuals (those with USD1M or more in investable assets) are expected to grow at a rate of 12.3% a year in Singapore, versus 7% in the US. This shift of wealth from "west to east" is likely to continue, with APAC predicted to overtake North America as the largest center of wealth by 2013.

The current problem for the global and regional banks? They don't have enough individuals to satisfy the demand for private banking services. The "back to basics" approach with a renewed focus on long-term client relationships, due diligence, comprehensive assessment and management of risk, a need for transparency and liquidity over "black box" complexities in product offerings is making wealth management a key investment area for all banks.

Final note before I sign off - Goldman Sachs doing "Gods work"... wonder how much capital GS actually generates for the market it purports to support? ummmmm NONE.. it is a glorified hedge fund that generates most of its profits from proprietary trading... "Gods work" indeed.. makes me feel warm and fuzzy all over...

"That which does not kill us, makes us stronger" - Friedrich Nietzsche. Watching the rapid onset of recession over the past 6 months would make anyone humble. Anyone would look around themselves, be apologetic about breeding a culture that needs instant gratification, instant wealth, the microwave generation. And then we would pick ourselves up by the bootstraps, tighten our belts, work hard and get ourselves into a somber but positive frame of mind, walk out of this morass.

But not so. We spend months pointing fingers at each other, someone attempts to find a solution only to get quashed by 10 others. Economists make magazine covers, not because they propose solutions, but because they tear down propositions made by others. Bankers are now the pariah. The Chinese are the ones that caused this crisis, did you not know? The fact that they suggested an alternative global reserve currency to the US dollar might have something to do with it. The sense of entitlement is strong here, we deserve the best. It is all someone else's fault.

This recession might not be a bad thing for my country. It will force us to press the reset button, force us to do what we do best - come from behind and walk alongside other leaders, bring the world out of this self created mess.

Wells Fargo reported surprisingly good earnings last week - $3B. This despite the Wachovia anchor. We were all expecting the investment banks to do well this Q, but for a retail bank to start off the earnings season with a bang was unexpected. JPMC, Citigroup, Goldman Sachs all report this week, things are looking up.

As I start this new Q with a new job, I feel energized. I sense a pervasive positive urge around me, as long as I have the right people next to me I will get the job done.

I spent all last week in Singapore. The company, food and weather notwithstanding, it was the crowded malls, restaurants, shopping centers, food marts and streets that grabbed my attention. Will the Asian consumer get us out of this mess?

Lets think about this - the US debt-to-disposable income ration current stands at about 1.3 (from 0.62 in 1975). What that means is that for every $1 of disposable income (income after taxes that is available for spending/saving) a US consumer has, they owe $1.3! Might sound unusual, however we in the US are well used to the highly leveraged model This model has worked well for the globe, the US consumer has kept buying and has kept the global economy chugging.

This phenomenon however has come to a grinding halt, as is evident from lots of recent statistics, or just from store closings around where I live - which BTW is one of the densest living areas in the US. So the cycle continues unabated - consumer stops buying, business stops building etc. etc.

Does the Asian consumer have the wherewithal to kick start the global economy? Just in terms of pure market capitalization, some of the Asian banks are now the largest on the planet - ICBC (China) has a market cap of $183B. Compare this to Citigroup at $18B, Bank of America at $35B. Their lending practices have been a lot more prudent. The Asian consumer tends to save far more than their western counterparts. Savings rates for some countries are below.

US 0.7
UK 2.7
France 12.8
China 24

China is looking to its populus as consumers for its goods. India is doing the same, the banking build-out in the domestic dominants is to address the 1B people, 82% of whom are still un-banked. As the local businesses start to view Asia as a consumer market (as opposed to the low cost manufacturing and service base), the western businesses will not have an option. Their local consumer bases have dried up, they now need to compete with the Asian businesses in their backyard.

The recovery for the US and the western countries will be slow, recovery in Asia on the other hand will be rapid - the region will charge ahead. Can I convince my loved ones to move to Asia for a few years to see this recovery first hand?

Literally a cut-n-paste from this article from yesterday....

"Among the changes just since that finding: Egypt has imposed duties on sugar, and the U.S. has levied new tariffs on Chinese goods it contends are being dumped on the market, including mattress springs and graphite electrodes, used to conduct electricity in factory furnaces."

"The U.S. is planning retaliatory tariffs on Italian water and French cheese to punish the EU for restricting imports of U.S. chicken and beef. India is proposing to increase tariffs on foreign steel at the request of its steel industry."

"The EU is due to decide by March 12 whether to levy duties on U.S. biodiesel imports, in retaliation for a $300-a-ton export subsidy Washington pays to U.S. producers -- roughly half the selling price of a ton of biodiesel in Europe. EU officials say the bloc is likely to vote in favor of the duties."

Not good...

With the governments plunging copious amounts into local industries, what will the result on free trade be? Simple example - everyone and their uncle is applying for the US TARP (Troubled Assets Relief Program) funding (there is a form below that even you can use to apply). The US automakers take the cake - they build products that are unappealing, unmarketable, unreliable and anachronistic - and then go for a handout asking for taxpayers $$s so they can continue to build the same products? And they get it!

OK so now think - the government props up a domestic industry which is uncompetitive in the global marketplace. This is the classic definition of Protectionism, without the tariffs/duties on the imports of the same product.

We are faced with a global problem. It will *not* be solved by any one country. There needs to be a coordinated effort - fast, massive and systemic. Protectionism will only slow down this process, and make governments wary of each other. Bad time for this, really bad.

"The occasion is piled high with difficulty and we must rise with the occasion. As our case is new, so must we think anew and act anew" - Abraham Lincoln

And for those of you who want to apply for tarp funding - read on..... and when you do the cheque, don't forget who gave you the pointer!

Junoon, an urdu word, the language of poets, poorly translates to mania. Mania - that of a child who believes that self immolation will solve the problems of his generation, that of a lover who waits for his beloved to come, never to accept that she is forever gone, that of an entire populus towards a single man and his perceived ability to solve all of our woes.

Barack Hussein Obama goes from president-elect to president in 2 days. The junoon of the world must weigh heavy on his shoulders. He walks in with the economy in a complete mess, the current US debt edging towards USD11T (this from a projected surplus of USD10T in 2010 after the Clinton presidency), the Israel-Palestine conflict renewed afresh, the Afghanistan/Pakistan/India mess, Iraq, Iran, instability in Africa, North Korea etc. etc. etc.

The expectations on him are high, the whole world is watching. I actually got a call from my father in India congratulating me on Nov 4, when Obama became the president-elect. The world blames us for the mess we all are in, they all want us to fix it.

Any economist will tell you, fear feeds on itself. In the simplest case, a run-on-the-bank proves the point - if depositors fear that a bank will fail, they will cause an otherwise healthy bank to fail. The same holds true for any economy - if a workforce believes that prices will rise due to perceived inflationary pressures, they will demand higher wages, which will result in the firms raising their prices, which will result in real inflation. If the consumer believes that the economy is bad, they will likely slow down or stop spending, which will result in firms cutting down their output by laying off workers, which now starts a downward spiral.

Governments intervene to stop these spirals - short term interest rates are a tool that they use to discourage (to control inflation) or encourage (to control deflation) borrowing, which results in spending. Hence the near zero interest rates now-a-days, to encourage firms and individuals to borrow and spend, urging an upward spiral to begin.

Another tool, which also we are seeing in use now for a while, is deficit spending. The governments are spending more than they can afford, expecting their spend to result in increased demand and spend by businesses and individuals. Keynes wrote about the income multiplier, whereby deficit spending by the government would increase the GDP by more than the deficit spend. If consumers get more income, they spend more, which results in more goods and services, which results in more income, which results in more spend.... all about expectations.

So President Obama - the expectations on you are high, there is a junoon associated with your ascendency, but not without reason. You usher in a new era for this world, you are the silver light in this otherwise dark cloud - you have the ability to create that upward spiral.

Best wishes and God speed to you.

The control of a large force is the same in principal as the control of a few men: it is merely a question of dividing up their numbers.
- Sun Tzu (The Art of War)

A sudden fascination with Thoreau - "The mass of men lead lives of quiet desperation", he writes. In these times, rather apropos. As this year comes to an end - atleast for me, I leave for a warmer place in about 12 hrs - I have mixed emotions about this year. Lots of good things happened for me personally, and in my career. A lot of hard work was put in, and it paid off in more than one way.

But then the market correction, which put my - and a lot of others - faith in the power of free markets in question. All of us lost a lot in the last 3 months.

And then the Mumbai tragedy in the midst of it all. It was a sudden shock to the system, a slap in the face, almost as a reminder of what is really important.

As I look forward to 2009, I have hope. I have hope that the world will come together and solve these problems together, as one. Thomas Friedman writes in "The World Is Flat" that the only thing that will break apart the globalization phenomenon is terrorism. I hope the other way holds true - terrorism will bring the globe together to solve this problem.

I have a lot of faith in hope, it has worked for me before. It must again. I wish you and your loved ones a very health, safe and happy new year.

As people in the United States recover from a weekend of gluttony, I watch the coverage of the carnage in Mumbai. Sometimes I stare at it, sometimes I try to avoid it. Sometimes I look at it from the corner of my eye. Depression sets in.

Why? Why do we do this to ourselves? Lest a reader think that this is a problem "over there", I shake my head when I hear about a stampede that killed a guard in Long Island, when people - living in the land of plenty, living in a first world - broke down the doors of a Wal-Mart to shop. And no, this was not for food, this was not because they were starving - this was because they wanted to get to the bargains - LCD televisions and mobile phones. Elsewhere, people were beating each other up in order to grab the deals. Black Friday indeed.

Media is gleefully reporting that Black Friday was a success. How sad. What a state we have reached - should we consider ourselves any better than the mobs that slaughter each other in third world countries? Atleast they do it for the basic necessities - water, food, shelter. And now we do it for washing machines and dryers. Jared Diamond wrote about the Collapse of societies, natural disasters and constrained natural resources being primary factors. But low cost LCD TVs?

I had Thanksgiving at a friend's house, been doing it for 10 years now, a lovely friendly family that has nothing but smiles and hugs for everyone. I have a lot be thankful for this year, a lot of love and and lot of friendship. It was good to be with friends this weekend, else depression would have won.

After China, my team trained our UK sales force in London. I have had an on-and-off love affair with London, there are times that I have never wanted to leave, and times when I never wanted to visit again. I am "on" again, hopefully for a very long time. The urge to go visit Botswana for some reason, seems to be gaining. Perhaps too much McCall Smith?

Some more market updates below (click here to jump there). Going back to my favourite topic of Low Latency, look at what we were able to do with our Blades and Reuters RMDS. Amjad "the machine" Khan did all the work and put these tables together.

1. The table below shows the most recent published RMDS numbers using Blades - SunBlades+Intel+Solaris vs. HPBlades+Intel+Linux. Both use 1GbE. Green cells are world record numbers. For some reason - and you can guess at this - Solaris is the only platform to date that is able to capture RMDS latency at 700,000 messages/sec.

2. This is an interesting comparison - its Solaris using GbE vs. Linux using IB vs. Linux using 10GbE. We did this just to see what we were up against, while we did our 10GbE benchmarks. Again, Linux seems to be missing at high message rates with IB, and good old 1GbE with Solaris beats 10GbE with Linux at high throughput rates.

Oct 13
- Morgan Stanley stock nearly doubles after Japan's Mitsubishi UFJ Financial Group Inc (MUFG) completes its $9 billion investment in the bank on Monday.
- Markets globally up - Europe, Japan, HK, Korea, Thailand, India jump at prospect of Governments intervening.

Oct 14
- President Bush announces a $250 billion plan by the government to directly buy shares in the nation's leading banks, saying the drastic steps are "not intended to take over the free market but to preserve it."
- UK Government announces emergency plan to rescue RBS, HBOS and Lloys TSB by taking a stake in the banks in return for GBP37B in cash. The FTSE-100 climbs 8.26%, Dow Jones 6.89%. Barclays, HSBC and Standard Chartered say "thanks but no thanks", worried about being "hobbled" by the government.
- US government release plan to take equity stakes in 9 banks - Goldman, Morgan Stanley, JPMC, Bank of America, Merrill, Citigroup, Wells Fargo, Bank of New York Mellon and State Street.
- Spain's Banco Santander SA buys US's Soverign Bancorp
- GBP is worth USD1.74, Euro is worth USD1.36

Oct 15
- Fears of a global recession clobber markets globally - UK down 7.2%, US 7.9%, Russia 9.3%, France 6.8%, Gernmany 6.5%, Hong Kong 5%, Shanghai Composite 1.1%.

Oct 16
- Hungary currency and market falls sharply, 5.3% and 11.9% respectively. Similar trends follow in Poland, the Czech Republic, Romania and Ukraine.
- Bank run on Globex, a mid-size retail bank in Russia spans fears of widespread panic. It loses 15% of its deposits, this following 13% in the previous month.
- KBC Group, the only major Belgian Bank not asking for a government rescue, takes E1.6B in write-downs on CDO investments, and warns of E900M loss. Its shares drop 19%, total of 61% for the year.

Oct 17
- Swiss central bank plans to take USD60B of toxic assets off UBS's balance sheet, and to invest USD5.3B for a 9% stake.
- Credit Suisse rejects a capital injection from the Swiss government, instead opts for private equity of USD9B from the Qatar Investment Authority.
- Citi posts a USD2.82B quarterly loss, making it about USD20B for the year so far. Merrill loses USD5.15B for the quarter, for a grand total of USD23.8B this year.
- South Korean currency suffers its worst one-day plunge in a decade, falling 9.7%. This is on the heel of the S&P putting seven Korean banks on its negative watch list, citing growing foreign currency funding pressure.
- Bank of England curbs disclosure of emergency borrowing and reduces the penalty charged on overnight loans in a bid to repair its money-market operations and eliminate the stigma on central bank assistance. The new standing facility, which allows banks to borrow from the central bank overnight, will carry a penalty rate of 25 basis points, down from the previous standard of 100 basis points. A record of each month's average borrowing from the facility will be published the following month, a change from the current policy of publishing the borrowing on a daily basis.
- Oil drops to USD69.85/barrel.
- GBP is worth USD1.72, Euro is worth USD1.34

Oct 20
- The Netherlands inject USD13.4B into ING.
- South Korea announces a USD100B guarantee on foreign currency loans, and a USD30B infusion into the Korean banking system.

Oct 22
- Wachovia announces a $23.9 billion third-quarter loss on Wednesday as it prepares to be taken over by Wells Fargo. Wachovia projected an additional $26.1 billion in mortgage-related losses in 2009. And it only wrote down a tiny portion of its $219 billion commercial real estate and corporate loan portfolio. Analysts expect that to significantly deteriorate as the economy plunges into a recession.

Oct 23
- Once the world's most powerful man, the champion of free markets, Alan Greenspan admits he had put too much faith in the self-correcting power of free markets, admitting to making mistakes during his tenure. Scary stuff.

Oct 24
- PNC Bank buys National City, US Treasury facilitates the deal by providing USD7.7B to PNC in capital. Why? A part of the US bailout package is now being used to eliminate smaller "weaker" players from the market. This is the government trying to reshape the market - while trying to preserve it. They have also created tax incentives to encourage these acquisitions - PNC will be able to write down all losses on the books of National City, amounting to several billion dollars.
- Markets get hammered globally - South Korea down 11%, Japan 9.6%, Hong Kong 8.3%, Singapore 8.3%, India 11%, UK and Germany 5% each, US 3.6%.
- Oil falls to USD64.15/barrel even after OPEC decides to cut production.
- Currencies fall globally, as investors move monies into USD and the Yen. GBP falls to USD1.63, Euro to USD1.26. Yen reaches a 13-year high against the USD, causing headaches for Japanese exporters as a stronger Yen will make their products more expensive overseas.

Oct 28
- Japanese government considers intervening to stop the continued rise of the Yen (a stronger Yen makes Japanese exports more expensive overseas). One reason for the rise is the reversing of the "carry trade", in which investors borrow money from a country with low interest rates (Japan in this case) to invest it in other countries with higher interest rates. Due to the current market volatility, these traders are now unwinding these carry trades, buying Yen to return them, thus making the Yen stronger. If the government does intervene, it will do so by selling Yen thus stabilizing the currency.
- Mitsubishi UFJ, Japan's largest bank, says that it needs to raise USD10.7B in capital. It will do so by issuing preferred and ordinary stock.

Oct 29
- Dow Jones jumps up 10% on hopes of a fed rate cut possibly to 1%.

Oct 30
- Sumitomo Mitsui, Japan's second largest bank, announces a 63% drop in revenues for the current fiscal year.
- The International Monetary Fund announces a USD100B loan pool for countries "that are in trouble but are basically sound". These loans would be for a three month period, and come without the stringent restrictions that the IMF usually imposes on its loans.
- UK government sits on a loss of GBP2.3B, as HBOS and RBS plan to issue new shares based on its underwriting. The market price falls below the issue price, making these shares unattractive in the primary markets.

Oct 31
- Last day of one of the worst month in the global stock market history closes with most markets up. Happy Halloween!

I saw the South China Sea, ran a couple miles along the beach. Warm breezes, little fishing boats at dawn, large cargo ships along the horizon. Spent the week on Haikou, a northern city on a island called Hainan.

I saw the most beautiful sunset I have ever seen. How long is the horizon? Shades of red that I did not know existed, layered on top of each other, all along the horizon.

I saw the Aurora Borealis - spooked me out completely for a few seconds. The flight back from Beijing took the polar route, and I was just too disturbed to sleep. Luckily, I was forced onto a window seat and was looking out for hours when I saw these lazily dancing rays of lights, weird shapes, ethereal colors, like ghosts. I thought I was hallucinating, perhaps too much Stephen King in my earlier days, and then I realized that we must be over the north pole. A quick check and indeed. What a sight. I wish I could have shared these moments with some others.

I saw the Grand Canyon earlier this year, was my fourth time there. Its beauty still astounds. The words that both, the GC and the Aurora conjure in my head - magnificent, epic, spectacular. The difference for me though, the GC invokes thoughts of an old lover, reunited. The timing in my life was such, late April this year. Sadly, the Aurora will always remind me of those beautiful days, forever gone. A sense of loneliness, emptiness.

I saw a spectacular sunrise, on the Arctic coast. Miles and miles of nothing but white, and the sunlight creeping up, glinting on ice. And then, sleep for a couple of hours, the body just seemed to fall into total exhaustion after the last week.

My team and I spent the week in Haikou, meeting the Financial Services sales teams from the APAC countries. We had about 100 people there, with representation from China, Taiwan, Korea, Japan, India, Hong Kong, Singapore, Vietnam, Thailand and Australia. Fantastic crowd, responsible for about USD0.5B worth of FS business to Sun. Most very optimistic, irrespective of the financial correction.

Most countries are modernizing at a rapid rate, and as predicted by yours truly, the smaller domestic dominants are viewing this correction as a way to take market share away from the globals. The Indian government is encouraging the local banks to merge, and create larger entities that can compete on a global level. The use of technologies is rampant, how do you expect to reach a 1 billion unbanked, underserved populus? Not by branches, not by ATMs, not by the internet. By mobile phones. Good that my team has been working on our mobile banking solution!

I come back well fed - tripe, pigs feet and shrimp that looked ready to leap out of the dishes they were served in, not withstanding - well educated and a tad tired. My team is enthused, we have a lot of work to do but the enthusiasm of the APAC sales teams have given us a boost of adrenalin.

And I did play some golf, how can one resist golfing in China? Played at the West Coast Golf Club, where a LPGA tournament kicks off at the end of this month. Hopefully Michelle Wei will not be too upset by the divots I left behind! I am the one in the bright red shirt, with my good friend and irritatingly good golfer, Samad Ali.

Oh, and a quick recap of the markets thus far in October.

Oct 3
- Congress passes USD700B bailout package.
- Citi fights the now proposed Wells buyout of Wachovia.
- US loses 159K jobs in September, 2x that of August, most in the last 5 years
- Mitsubishi UFJ Financial Group Inc. mulls merging its securities unit, Mitsubishi UFJ Securities Co., with Morgan Stanley's Japanese securities unit.

Oct 4, 5
- The German government guarantees all private checking and savings accounts.
- European countries, one after another announce deposit guarantees. Iceland and Denmark issue guarantees on monday after Germany, Ireland, France, Greece and Sweden did the same on sunday.
- Germany's private financial sector promises to put up an additional E15B, in addition to the E35B already pledged, to help Hypo Real Estate bank, one of Germany's largest housing lenders.
- BNP Paribas takes control of the Belgian and Luxembourg businesses of troubled financial group Fortis in a complex rescue that makes Belgium the French bank's biggest shareholder. BNP Paribas buys a 75 percent stake in Fortis' Belgium and 66 percent of the bank's Luxembourg banking activities.
- China's second largest insurer Ping An Insurance reports a loss of about 15.7 billion yuan (USD2.3 billion) on its investment in Fortis. The loss is one of the largest suffered by a Chinese financial institution so far in the turmoil.

Oct 6
- Allianz SE invests USD2.5B in Hartford Financial, a large US based Property and Casualty, and Life insurance carrier, after Hartford announced a USD2B loss for Q3 (most from its investments in the Capital Markets industry).
- On a positive note for us end user consumers, Oil prices drop to USD88/barrel (high was USD147 in July 2008) on concerns that demand would slow globally.
- Bank of America reports a 70% drop in Q3 profits, again as a result of losses stemming from mortages and other debts.

Oct 7
- Saying Iceland was at risk of "national bankruptcy," Prime Minister Geir Haarde prepares to give regulators authority to take over the nation's ailing banks as a worsening financial crisis all but cuts off the island from the global financial system.
- U.S. Treasuries soar as worries about a global credit crisis and a slow economy slam stock markets around the world and sends investors scurrying for shelter in low-risk government debt. US dollar posts a sharp rise against other world currencies.

Oct 8
- Indonesia's markets are suspended after its key index falls 21% after the first hour of trading. They remain closed for the next 3 days.

Oct 9
- Citi backs out of the Wachovia deal. Interestingly, Wells Fargo came back to the table after the IRS introduced a regulatory clause that allowed Wachovia's losses to be taken as a tax write-off. This prevented the feds from buying out these losses, which is what Citi had negotiated (see my previous blog).
- Hong Kong's Hang Seng index hits 3 years low amidst global sell-off.

Oct 10 - Black Friday
- Credit Suisse shares plunge to five-year lows, falling faster than Swiss peers and the European banking sector as investors fret over the impact of the financial crisis on the bank's earnings.
- Dow Jones Industrial Average finishes the worst week in its 112 year history (18% decline). The 1018.77 point swing on Friday October 10th was the largest ever. 11.16B shares traded on the NYSE, the largest ever.
- While in China, I was watching Bloomberg TV and saw every single stock market get pummeled. Nekkei fell 9.6%, Singapore down 7.3%, HK down 7.2%, India down 7.1%, Australia down 8.8%.
- Yamato Life Insurance of Japan files for bankruptcy
- The Group-of-7 (G7) countries, which I believe is an anachronism in this century, gather to try and put together a coordinated response. As expected, no concrete steps are agreed upon.
- US, Germany and UK start to put plans together to nationalize the banking system - "King Henry" Paulson says he will use government power to buy assets - not just the bad ones! - and look to invest in banks. The British government may end up owing as much as 30% of 4 of the largest banks - RBS, Barclays, Lloyds TSB and HBOS. HSBC, Standard Chartered Bank and Abbey National refuse capital infusion from the government.

Oct 11
- The G20 meet, their jointly issued communique is here.
- The International Finance Corporation (IFC), the private-sector lending arm of the World Bank, plans to launch a $3 billion fund to capitalize small banks in poor countries that are battered by the financial crisis.

Oct 12
- The 15 countries that form the Euro zone announce 3 key measures - they agree to guarantee new bank debt issuance until the end of 2009, which should spur interbank lending; permission for governments to shore up banks by buying preferred shares; and a commitment to recapitalize any ``systemically'' critical banks in distress. How much will this cost the taxpayers? Unknown.
- Oil falls to USD77.70 a barrel.
- Morgan Stanley's woes intensify. The infusion of USD9B from Mitsubishi UFG is expected on tuesday (Oct 14), the worry is that MS might not survive that long. Antitrust regulations in the US require a 5 day waiting period.
- IMF says the worldwide economy is heading towards a recession, with global growth falling. The WHO says the rates of depression and suicide globally are expected to rise.

Solvency vs. Liquidity

Lets get this one straight - this is *not* a stock market crisis. The stocks are down because of negative sentiment all around. If I had liquidity - liquid cash I could move around - I would be buying right now, a lot of good stocks are being hammered by association.

Everyone keeps saying that this is a liquidity crisis. That the US government bailout is to inject liquidity into the financial system. Really? Is this really a liquidity problem? I disagree, to a certain extent. I think there is enough liquidity around, banks are actually hoarding cash. Data does seem to suggest that banks have added USD442.5B in new capital, while posting losses and writedowns of USD592B. So there is a liquidity problem however that is not the real issue here. The real issue is the fear that if I loan money to my neighbour, he might never pay it back, that he might be insolvent and even he might not know it! Why is that? Because if he is invested in the original CDO toxic assets, he has no clue what they are worth, and how solvent he actually is. So even though I have money to loan him, I will not do it. So even though there is liquidity, it not really liquid - its not moving around. Fears of solvency are preventing it.

The US government is looking to buy these insolvent assets, using a reverse auction scheme. If there is a large enough sample, reverse auctions work well. That is the hope here, and that seems to be the only way to put a $ amount on the worth of these assets.

I was with friends last night, a couple of whom are in the business. They claimed that the only way to get the credit markets - which are used to make loans - moving is by the governments guaranteeing these loans, especially the short term ones. Not unlike the FDIC insures your bank accounts. Note the entry for Oct 12 above!

The fun continues, and moves eastwards at a rapid rate.

Its been a while, lots changed. I now head up the Global Financial Services organization for Sun, the team for which I was the CTO last year - a win for the geeks, you could say. Or "were you careful what you wished for?", is the other thing you can say.

One thing I will tell you, I have been on the road for the last quarter and have racked up more miles than I did all of last year. And I did travel quite a bit last year. Last quarter - Singapore, Paris, London (3 trips), Vienna, Toronto, Florida, California (3 trips), Washington DC and Boston. Food in Singapore was the best.

OK, but the fun bit is the Great Market Correction. This entry is likely already out of date, this is worse than going to Frys and buying a TV, to find out that Samsung has shipped a new one already! I will make another entry to update this, and then another one, and likely one more after that.

What is the crisis all about?

One cannot isolate any one sector of the Financial Markets - the Capital Markets (Bear Stearns, Merrill Lynch, Lehman Brothers, Morgan Stanley, Goldman Sachs), Banking (Washington Mutual, HBOS, Wachovia, Bank of America, Lloyds TSB, Barclays, UBS) and Insurance (AIG) sectors are all affected.

Where did all this start? Likely with the "credit crisis" caused by the "subprime loans" late 2006. Subprime loans are loans made to a high risk portion of the market, which would typically not qualify for conventional "prime" loans. Subprime loans are considered high risk, and the borrowers are typified by poor credit status, job history etc.

The fun begins when these loans are packaged together and "securitized" into "investment vehicles". Terms like Structured Investment Vehicles (SIVs) and Collateralized Debt Obligations (CDO) abound. Put simply, some really smart traders in the Fixed Income units of these banks create instruments from these loans that can be traded in the Capital Markets just like a stock or a bond. What complicates these instruments though is the fact that all sorts of mortgages, subprime and prime, are lumped together and onerous mathematical models are put into place to try and price them. Terms like tranches are used to describe the ratings of the assets used to create these instruments.

What is the size of this market? About USD7 trillion. Yup, its gigantic. Banks and other institutions across the globe traded and bought these instruments. Hedge funds in particular - and this is important for the Bear case - have been heavy traders of these securities.

Good so far, except for the fact that the defaults on the subprime loans got to unprecedented levels. Yes one always expects risk with subprime, that is the definition. The mathematical models expect a certain %age of these mortgages to default, and insurers (this is where AIG comes in) offer insurance against these defaults (using very complicated instruments called Credit Default Swaps). In this case, the defaults were much higher than expected. "Predatory lending practices" were blamed. The fall of housing prices was blamed (a lot of the subprime mortgages were made based on "ever increasing" house prices, so you could afford a USD1M home on an income of USD50K, because the house value would increase forever!).

Late 2005 - US housing bubble beings to fizzle out, with the market falling
Q1 2007 - about 30 subprime lenders declare bankruptcy
July 2007 - Bear Stearns hedge fund investing heavily in subprime, collapses
Aug 2007 - the largest mortgage lender in the US, Countrywide, comes very near to declaring bankruptcy (it is bought by Bank of America in early 2008)
Aug 2007 - large mortgage lenders, Ameriquest and American Home Mortgage, go out of business
Sept 2007 - UK's Northern Rock gets into trouble as its involvement in the US Subprime crisis becomes apparent, causing a "run on the bank", it is taken over by the state in Jan 2008
Aug, Sept, Dec, Jan - Fed cuts various borrowing rates, and injects nearly USD50B to encourage banks to borrow to keep the credit markets going
Mar 2008 - Bear Stearns tries to hammer out a deal with the Fed and JPMC to get emergency funding to improve its liquidity position
Mar 2008 - Bear gets bought by JPMC for USD2/share

Now for the month of Sept 2008

- Two mortgage lending giants, Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation), are taken into conservatorship by the federal government. USD200B *each* is injected into the firms.
- Lehman Brothers, established in 1850, files for bankruptcy, the largest ever in US history. Lehman's demise is directly related to their heavy investments in the subprime markets, they lost USD2.8B in Q2 and another USD3.9B in Q3 prior to them declaring bankruptcy.
- Merrill Lynch, facing a similar crisis, decides to sell itself to Bank of America for USD50B, which translates to USD28/share. At the end of 2007, Merrill was trading at USD98/share.
- Bank of England extends its emergency scheme for inter-bank lending, to try and boost liquidity.
- UK's #1 lender HBOS looks to a rescue deal from Lloyds TSB. Cause? HBOS's heavy dependence on the inter-bank money markets, having the largest wholesale funding requirement in the industry - of GBP200B (difference between loans made and customer deposits). With the funding lines drying up (counterparty risk being at historic levels), HBOS feared a "run on the bank" and started lobbying the government.
- UK government will overlook its anti-competitive measures to effectively allow the creation of a monopoly in the UK lending market.
- Money Markets, considered to be "as safe as a bank account" since they invest in very short term debt instruments, fall below the NAV $1/share. Cause? Some of the short term paper was Lehman debt.
- Barclays buys Lehman's American investment banking and capital markets businesses to add to Barclays Capital.
- Russia halts trading on two of its exchanges to stem panic selling, and injects USD70B into the market to prevent a free fall.
- Short sellers have a field day with the stocks of the last two remaining standalone investment banks - Morgan Stanley and Goldman Sachs.
- UK and US regulators impose curbs on short selling
- Australia, Taiwan and Netherlands do the same
- AIG effectively gets taken over by the US government, which makes a USD85B loan to prevent bankruptcy. The Federal Reserve makes a two year loan at a punitive interest rate of Libor (the London inter-bank offered rate, a short term lending rate) + 8.5%, for a 80% stake in AIG. Thats is a very very high rate, and AIG is now looking to sell off assets to pay if off quickly. Cause for AIG bankruptcy? Its Capital Markets division primarily (AIG Financial Products, all of 389 people), and their links to Credit Default Swaps and Subprime. AIG invested heavily in an arcane (yet worth USD45Trillion!) market of CDS, where they issued contracts that act like insurance against defaults in a range of assets. As the defaults increased, AIG had to write down the value of the protection it sold and post collateral to the counterparties. Take a look at this article from Feb 2008.

Why did the feds rescue AIG, and not Lehman? Because AIG is huge, gigantic, enormous, and has its fingers in all aspects of global financial markets - and it *insures* numerous financial institutions against defaults! I was at SIBOS when all this occurred, and the joke was that if AIG went belly up, we would not be able to fly back home as AIG likely owned the airplane which was leased by the airline we were flying. The bigger joke is - the larger you are, the more risk you take, the higher your chances of being bailed out. The smaller guys, they get taken care of by the markets themselves!

- US federal government puts together a bail-out plan costing the US taxpayer USD700B, to buy out the bad mortgage based assets. Will this solve the problem? Highly unlikely, a lot would depend on how they would price these assets, chances are still that the price will not be enough and some banks will still go bankrupt.

If this move had happened when it was proposed, Lehman and Merrill would still exist.

- Morgan Stanley and Goldman Sachs become banks, "scrap Wall St. model" - according to the Wall Street Journal dated Sept 22. Meaning? They need the primary source of money today - Direct Deposits. They now come under a lot more scrutiny than before - the federal reserve oversees banks, as opposed to the SEC for the securities firms. And they are likely getting ready to acquire. This move also helps their books - banks can classify assets as "held of investment", as opposed to "mark to market", which forces firms to value their assets based on current market price - not good now-a-days.
- US Treasury Secretary ("King" Henry Paulson) and Chairman of the Federal Reserve Bernanke further solidify plan for bailout - offering a "reverse auction" to price the bad assets and buy them.
- Washington Mutual tries to sell itself - suitors are JPMC, Wells Fargo and Banco Santander of Spain. Unsuccessful, after Wells and Banco Santander walk out.

And now for September 29.

- The largest bank failure in the history of US - Washington Mutual fails and is seized by the FDIC. Why did it fail? Too much exposure to the mortgage crisis, no more credit, run-on-the-bank etc. etc. Shotgun wedding with JPMC arranged for USD1.9B.
- The House of Representatives rejects the bailout plan, causing a 800 point drop in the Dow Jones Industrial average.
- Wachovia gets bought by Citigroup - which now puts Citi in the "too big to fail" bucket. Perhaps it was already there, but this definitely guarantees it.
And this news is wrong already!
- Belgium, the Netherlands and Luxembourg pledge more than E11B to Dutch-Belgian bank and insurance giant Fortis NV to keep it from insolvency.

- Dexia, the French-Belgian bank, gets essentially nationalized. The Belgian, French and Luxembourg governments inject E6.4B into it.

And October 2008

- Ireland guarantees the debt of its top 6 financial institutions - the sum of money is E400B, which is 2x the country's GDP, yikes!
- Central Bank of India promises to pump in cash to prevent a run-on-the-bank on India's second largest bank - ICICI.
- Short term lending gets hit hard - the "commercial paper" market completely jams up, with no one willing to give out loans.
- LIBOR - the London interbank lending rate - for overnight loans hits 6.88% from 2.57%. The US overnight rate hits 7%, should be around 2%. No one wants to give anyone any money, banks are hoarding cash.
- Korea worries about short term loans, and guarantees to help small and mid-size businesses.
- Hong Kong has a run-on-the-bank on Bank of East Asia Ltd.
- US, UK governments increase the guarantee limit on bank deposits, hoping to encourage savings and preventing run-on-the-banks.
- Wells Fargo says they will buy Wachovia... what will Citi do with all the placards and buntings at the Wachovia branches? tsk tsk tsk...

Final thoughts.

1. At the heart of capitalism is the ideology that "free markets always self correct". This is a correction, yet the governments everywhere are intervening - by injecting liquidity, by nationalizing firms, by putting curbs on specific aspects of the markets, by easing regulations that they should be imposing. "Why would anyone provide equity capital to listed companies if the government can ride roughshod over them and destroy shareholder value?" - was the sentiment of a trader at the forced HBOS takeover by Lloyds TSB. Are we looking at an era of market nationalization? This is a very scary path we are going down.

2. "US presidential candidates vow broad changes for Wall St.", "Obama pledges end of 'anything goes' culture". Not just the feds and regulators, but presidential candidates are jumping into the fray, and will be forced to take some action to show that they are for the "little guy".

3. The OTC Derivatives market and Hedge Funds are essentially an unregulated industry, and will likely start to come under heavy scrutiny, either directly or indirectly.

4. The relationship of the SEC and the FSA (in the US and UK respectively) with the markets will be redefined, and will likely start to get marginalized with the federal government "taking over".

5. The era of the standalone investment banks comes to an end, will the creation of exotic trading instruments that Wall St. prided itself on, also end? The large bank philosophy is more conservative, and nimbleness is not a forte. Will they look to manage risk, or avoid it? No one can make money without taking risk.

6. Regulations are king again, and with the federal governments bailing out the markets, they will impose tougher regulations.

7. Globalization is imminent - the acquisition of Merrill by BofA brings BofA into 40 new countries, where Merrill has retail presence. Barclays buying up Lehman's US businesses gives a UK based bank a very large footprint into the US capital and investment banking markets.

8. Spending across retail and wholesale banking will continue since 85% - 90% of the spending is non discretionary. This spending supports compliance, risk, core and transactional systems. So the industry's aggregate spending will remain fairly constant, but as banks consolidate, there will be large variabilities in spending between banks with strong balance sheets that will benefit from the consolidation and the losers which will likely be sold to stronger players.

9. Direct Deposits will be a primary source of capital for the banks and capital markets - look to your bank to encourage you to leave your money in your savings accounts. I just experienced this today at Wachovia.

What does this correction mean for Sun?

First and foremost, we need to consider that this a major opportunity for Sun, not just a challenge. Yes, there will be some restructuring of our account coverage in finance, and many IT projects may be cancelled. But there will also be feverish activity of on-boarding a huge amount of employees and integrating lots of systems at the merged firms.

This plays right into Sun's core competencies: VDI, IdM, SOA, and Data Center consolidation/virtualization (especially with the new xVM release) are all key enabling technologies. We know what it takes to absorb a Merrill-size company from the IT perspective, and our recent involvement with the Bear on-boarding at JPMC can attest to that.

We position Sun as a leader and trusted advisor in reducing the on-boarding and integration pains at these firms. This is not going to be business-as-usual: we'll need to frame these competencies in the new context and have conversations at the executive levels of the organization as well as the IT/technical levels. Still, these conversations will focus on areas where we have a tremendous amount of expertise. Lets not forget that Sun was able to grow our business in this industry at 3 times the rate of IT spend last year because of our focus.

Risk Management is going to play a critical role in this industry going forward, and all these areas all play a strong role in reducing operational risk:
- Data center modernization/virtualization targets it directly by increasing the manageability of the data center
- IdM tightens the security of the enterprise, ensuring proper authentication and authorizations
- VDI reduces the latency and improves the functionality of critical applications for remote workers
- SOA enables flexible integration of core IT systems while increasing their manageability as well as the visibility and agility of the business processes they support.

Market and credit risks are obviously at the hart of this crisis, and this is probably one area where IT spend is likely to increase going forward. Sun has very strong relationships with the key ISVs in this spaces and the my team is developing a strong Risk and Analytics program around them.

Besides risk, another likely spend area in many of these firms will be customer retention and satisfaction, particularly customers on the retail and commercial sides of the banks - remember Deposits are king! Banks are likely to focus on their core competencies in these areas (such as Payments), and Sun's strong focus on payments and banking in general over the last two years is likely to continue to pay off. Our strong account coverage of the big banks will enable us to have the right conversations with the right people.

Finally, the banks will shore up their efforts with the retail and wholesale sides of the business and refocus their non-discreationary spend in areas such as core banking systems and payments, where Sun has a strong presence.

Had no idea on the variety of Kimchee one could eat. Had no idea Kimchee could be served for breakfast, lunch, pick-me-up snack, and of course between dinner courses. "Deep fried kimchee rice" for breakfast! Only in Seoul.... yummy.

Spent the day yesterday listening to all the interesting work going on in Korea. Some of you might know, the Texas Advanced Computing Center (TACC) Ranger supercompting cluster went live - the numbers are astounding, as expected - 52K compute cores interconnected with no more than 2 microsec latency between cores with a supporting filesystems delivering greater than 10GB/s to the nodes. A paper on the topic is here. We just closed on the largest cluster in Korea, all Sun x86 systems, Magnum IB switches etc. Nice.

Flying to Mumbai tonight, not at the latency I would like. How can it be 10 hrs to get from Seoul to Mumbai?

Talking about latency, the graphs below are not new, you have seen the raw numbers on previous posts from me. Give us a few more weeks and we'll add lines and bargraphs with 2 more entries - RHEL and SuSE-RT. Hopefully 3 weeks from now.

Not looking forward to the loooong flight and trip ahead, but atleast ending up in a bunch of exciting places. Sitting at Newark airport right now, checked into flight to Narita, Tokyo. From there to Seoul, Korea. From there to Mumbai, to Delhi and finally to Singapore for the week of March 10th, back home March 16th.

Seoul is an internal staff meeting, where we are trying to figure out engineering coverage models for APAC. Sun, not unlike other global providers, is investing heavily in APAC, and my job is to make sure that we cover the Financial Services accounts well there. The Globals, like Citi, JPMC, Goldman, Merrill, AIG, AXA etc. But also the dominant locals, like Mitsubishi, Bank of China, Reliance Capital, Reserve Bank of India and so on. Temasek made news not long ago, with its investment in Merrill after the CDO debacle. Temasek is owned by the Singapore Govt., and we should be covering them, alongwith other Soverign funds. Most exchanges in APAC are modernizing at a phenomenal rate, and after our work with the US based exchanges like PHLX, NASDAQ and NSX, we know a bit about exchange infrastructures. I am hoping to especially speak with the commodities exchanges in some of these cities

Mumbai will be meetings with customers looking to build out new infrastructures, Singapore is primarily Standard Chartered Bank and prep for the Asian Bankers Summit - Microfinance is big, Islamic Banking and Insurance are big and we have been investing in these trends. David Piesse is a colleague, he heads up our Insurance business and writes regularly on Microfinance and Islamic Insurance. Technologies like Open Storage and Blackbox are exciting to them - why would you invest in proprietary technologies today, if you had a greenfield environment? Alternative distribution and service channels are critical, and technologies like SOA and Identity Management enable these.

Selfishly, I am really looking forward to Mumbai, Delhi and Singapore. Yes I have family there, but the weather! I am leaving New Jersey right now with sub-zero temperatures (Seoul will be similar), but Mumbai and Singapore are hot! Delhi is beautiful. Maybe a little golf.... now to just get there!

Why can't a body actually get used to jetlag? I have been doing reasonably intense global travel for the last 2 years, the first couple days on either side seem to get completely butchered.... and it seems to be getting worse

London and Zurich were very successful, met with a bunch of Capital Markets customers, spoke at 2 large (100+ developers in each) sessions, one in London with Lehman and other in Zurich with UBS. The title of the presentation was - "Managing Moore's Law - How to handle massive data volumes". Its posted here.

The idea was to tell the developers that the days of just waiting for Moore's Law to kick in and give them a faster clock to make their application run better, are kinda over. Getting 2x the clock every couple years is not going to be the case going forward. Thats the bad news. The good news - they will get lots more cores, lots more integrated ASICs on the CPUs. So what do they do to make their software scale to a larger number of execution units?

The presentation ends with talking about some newer concepts - what happens when you throw 10,000 cpus at a problem? or a 100,000? Will todays MT programming concepts and languages scale? Peta-scale software is lagging peta-sclae hardware, severely. Transactional Memory and Fortress address this problem.

Intel was also kind enough to have me speak at an event in London last week where they got 8 different firms together to discuss the Intel and Sun relationship, and what the two firms are doing together to help Capital Markets firms with their number crunching problems.

Its 4:25am ET, any point trying to go back to bed? Naaah... markets in Europe are already open, time to watch some CNBC and see which scandal is breaking in Europe now!