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Derived Misfortune

April 29, 2008

When I was an investing noob [a newbie], investing advises used to come a dozen a pence.
“Psst…psst… operator, TTML buy 22.30 sell 55.15 😉 “
“Kiddo, buy Biocon I say, guaranteed returns”
“Chambal Fertilisers,multibagger, I tell you.”

Most of them were duds. TTML is wallowing in bad business numbers, Biocon is riddled with low investor enthusiasm and what more, Chambal Fertilisers was an operator stock.

Well life is like that. Very rarely you get good things for which you don’t have to pay.[but in the era of technology speak, purists may argue, FOSS is good as well as a free thing,but lets rephrase it, good things may be cheap but the best,seldom are]
So when Jasmin Mehta, the CFO of Sundaram Multi Pap Ltd was taken for a ride by ICICI Bank, I felt a tinge of solace and satisfaction on my stupidities. I heeded to the advice on TTML. Ms Mehta heeded to the advise of the ICICI salesman. Mistakes.Period.

Let me start right from beginning. The conversation between Ms Mehta and ICICI bank salesman would have gone something like this.A simulated telephonic conversation

Jasmin Mehta, CFO Sundaram Caps Ltd office

SALESMAN[SM]: Hello, is this Ms Mehta,of Sundaram Caps?

Jasmin Mehta[JM]: Yes it is…

SM:Mam, I am Mr. Effing Smart Kamath calling from ICICI Bank and I would like to talk about a wonderful scheme for assured success of your company.

JM:Mr. Effing Smart Kamath, can I know your credentials please?

SM: Sure mam! Till late last year,I was the Chief Snake Oil Salesman for my organisation, ICICI Ltd and I have handled over sixty top class businesses and ran them successfully (to ground) in the last ten years of my illustrious career. Due to my overwhelming performance, I am now handling Exotic Derivatives account of small and medium [and gullible] businesses.And I am here, to enable you to make the most out of your money, and business

JM: Ahuh… I am listening, what do you have for me?

SM:Ms Mehta, as I understand, you have considerable export business coming in the next few months. Am I right?

JM: Absolutely…. and we are posed to post numbers of YoY growth of…

SM: Thats great mam, now just because of your business model, you are at risks of currency exchange rate fluctuation. But don’t you worry miss, we will take care of it. Don’t you worry, you are in the safe hands of the best snake oil salesman of the biggest bank in India.

JM: I am impressed Mr. Effing Smart, tell me more about it. I am listening

SM: So here it is, Mam. we are presenting to you, a financial instrument called Exotic Derivatives, which will give you an assured 135678953254667% returns in one year but with absolutely zero risk, yes! zero. Zilch, Nada, Sifar. You dont have to pay anything (now) but you will get your returns within the stipulated end of the contract period. Our innovative finance engineers have come up with this wonderful money making instrument, which will help you to grow your topline by an astronomical rate and bottomline by an equal amount. We are not selling you derivatives, we are selling you exotic derivatives. Its smells better, tastes better, feels better but when it stops working, the shit it was trying to cover comes hurling at the proverbial pace of a rocket. But of course zero risk you see.

JM: Interesting, but zero risk you say, do you?

SM: Absolutely mam!

JM: And you say, the shit can come flying if it doesn’t work, eh?

SM: I will be absolutely honest with you Ms. Mehta. It won’t be wrong to call me a born snake oil salesman, and when I assure you of something, I seldom go back. And Ms Mehta, you come across as an honest and an ambitious (and gullible foolish) lady, who will not spare any stone unturned to scale up the business. I can help you in this, our exotic derivatives can help you in this, our Bank can help you in this, for its us mam! who make the money go round and round and round.

SM: Mr. Effing Smart Kamath, you are mighty impressive in your business. You have got our business! Congratulations

So there went, Jasmin Mehta in her, sweet dreams of becoming the star performer of her business, raking in numbers which her boss will be proud of. Almost!Nice story,though isn’t it?
Well… you know what the problem with stories are?They have a nasty habit of turning bad.

Sundaram Caps got a letter from ICICI Bank Ltd, Axis Bank, and a host of other banks, effectively a bankruptcy notice. 6crores from Mr Effing Smart Kamath. God knows about the rest! My sympathies are with Sundaram Caps and Jasmin Mehta but she should have understood that seldom in the world somebody gives you money for free. The economic downturn has extracted a heavy price, coupled with “we-dont-understand-we-will-ban” mentality of RBI. They don’t understand, forex derivatives, they banned it. Well, then do they have appetite for such huge price to pay?I wonder though

In my court of opinion, ICICI Bank Limited is guilty, guilty like hell. It didn’t talk to its clients honestly, and now in the wake of losses its giving their clients a bad time. And you know, Sundaram Caps and ICICI are not the only ones. Renuka Sugars and Axis Bank, and many others are there to give company.

Exotic derivatives!
What a sham!
Its sad, that nobody had the nose to sniff trouble when financial mumbo-jumbos were thrown at them.Mighty sad!

At the end of all this, I dont’ know if ICICI Bank will come with bruises or wounds, but being so very much aggressive about business, giving two hoots to ethics and manners, it is a perfect sin stock to invest in. You know what sin stocks are? Stocks which give you amazing returns, but are detrimental to the fabric of the society, think cigarettes, guns, etc. ICICI Bank has just now hauled itself to that category. If I had the luxury of overlooking those returns, then I would have stayed out of it. But alas! I have invested primarily for this reason, it may be an ethic-less, monopolistic company but while the ride is on, why not enjoy it!

And at the end of all, its really painful that nobody gave Ms Mehta and her ilk the one advice, which I seem to have taken quite to my heart. It goes like this: Derivatives: Dangerous Curves ahead. Go ahead at your own risk!

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