Swine flu links

This blog had posted a long article from Dr. Vidyasagar of TCS (with his permission) on the bird flu and its various dimensions. He says the following of the swine flu and recommends two articles:

This is the best article I found today on Swine Flu.  Of course I have not had the chance to read *everything*!

Unlike the largely fictitious “bird flu,” the swine flu pandemic possibility needs to be taken more seriously.  Fortunately, as this article points out, the virus is NOT mutating, and is the same in all the individuals infected thus far.  So that would in principle make it easier to defend against.

Dr. Sagar also commended this article with the following preface: 

This is a very balanced look at “the epidemic that never was.”  I strongly recommend it.

I read that piece and I found it utterly fascinating. It has moral and managerial dilemmas written all over it. It would not be fair to sit in judgement with the benefit of hindsight on the decisions taken then. With more factual embellishments, it could become a fantastic case-study for decision-making in business schools. Perhaps, it already is, in the US.

Dr. Sagar also recommends this ‘debate’ or ‘panel discussion’ in New York Times

h..mmm.. what have they learnt?

Mack, Lewis Blame Pay Limits for Executive Departures (Update3) 

April 29 (Bloomberg) — John Mack and Kenneth Lewis, the chief executive officers of Morgan Stanley and Bank of America Corp., said pay limits tied to federal rescue funds have prompted some top employees to leave the companies.

“I had a hedge fund say to me, ‘I can hire anyone I want from you and Goldman,’” Mack said at the bank’s annual meeting today in Purchase, New York, referring to rival Goldman Sachs Group Inc. Some units lost a dozen people, he said, without identifying them. Lewis, speaking at his annual shareholder gathering in Charlotte, North Carolina, also blamed the restrictions for departures.

“We have lost strong revenue generators over the past three months to competitors that are not facing the same compensation restrictions that we are,” Lewis said.

Morgan Stanley’s first-quarter compensation and benefits expense fell 46 percent from a year earlier, less than the 62 percent drop in net revenue. At Goldman Sachs, the first-quarter compensation expense rose 18 percent even though the number of employees declined 12 percent.

U.S. regulators and lawmakers are seeking to curb pay at financial firms after the credit crisis forced them to use taxpayer funds to rescue the industry. The American Recovery and Reinvestment Act of 2009 requires the top five executives at banks that receive at least $500 million of bailout funds, and the 20 top-paid employees at those companies, to forgo cash bonuses.

TARP Payouts

Bank of America received $45 billion in government funds and Morgan Stanley took $10 billion under the Troubled Asset Relief Program, or TARP.

Mack, who agreed to forgo his bonus for the second year in a row, still receives an $800,000 salary. He agreed this year to begin reimbursing the company for his personal use of the company jet, which cost the company $368,675 last year. Lewis recommended to the board in January that he and other senior executives not be awarded bonuses.

Bonuses typically make up about two-thirds of a banker’s total compensation. Salaries have ranged from about $80,000 to $300,000, with bonuses often climbing into the millions of dollars, according to compensation consultant Alan Johnson. The five biggest Wall Street firms awarded their employees a record $39 billion of bonuses in 2007.

Morgan Stanley’s average bonus in 2008 was $143,000, Chief Administrative Officer Thomas Nides said at today’s meeting.

Employee ‘Exodus’

Some Morgan Stanley employees left for non-U.S. companies, Mack said, responding to a question regarding the effect of compensation restrictions on the firm’s ability to retain workers. After calling the departures an “exodus,” Mack later said, “exodus is too strong a word.”

Lewis told lawmakers in Washington in February that while it’s appropriate to restrict compensation at the highest ranks of companies, lower-level employees may be tempted to quit for foreign competitors rather than face a pay cut.

Citigroup Inc. is seeking U.S. Treasury permission to pay special bonuses to stop employees leaving its Phibro energy- trading unit, the Wall Street Journal reported today, citing people familiar with the matter.

Several investment bankers have left firms that have received government money in recent months. Credit Suisse Group AG hired health-care banker Thomas Davidson from Bank of America, and Citigroup’s Richard Landgarten, who was a health- care banker, departed to join Moelis & Co., the advisory boutique founded by Kenneth Moelis. Citigroup lost automotive banker William Kohr to Sagent Advisors Inc. in February.

‘Balancing Act’

Mack told shareholders at today’s meeting that his company is trying to strike a “balancing act” between fulfilling its obligation to shareholders by retaining good people while also responding to public anger about bonuses. “The American people are upset,” he said. “We are not deaf to that.”

Asked about succession plans at Morgan Stanley, Mack said it was up to the board and has been under discussion at board meetings since he took the job in 2005.

“Even people like me, who work for free and love this business, have to step down someday,” he said, without elaborating.

Kenneth Stuart, a 63-year-old certified financial planner who attended the meeting, said afterward that he didn’t find Mack’s comment funny.

“His comment that he’s working for nothing — I wish I could work for nothing like he is, with an $800,000 salary and other compensation,” Stuart said.

Morgan Stanley gained $1.99, or 9.4 percent, to $23.07 at 4:13 p.m. in composite trading on the New York Stock Exchange. Bank of America advanced 53 cents, or 6.5 percent, to $8.68.

To contact the reporters on this story: Christine Harper in New York at charper@bloomberg.net; Josh Fineman in New York at jfineman@bloomberg.net.

Last Updated: April 29, 2009 16:14 EDT 

The book that we have been waiting for?

Well, if you read the (mostly) glowing tributes paid by Prof. Charles Goodhart to the book written by Viral Acharya and Mathew Richardson of the Stern School of Business at the NYU, it appears that this is going to be the best reference possible on the (still unfolding) financial and economic crisis that started (or, appeared in public vision?) in 2007.

This paragraph alone should persuade us to buy:

This book is the best available on this extraordinary and fascinating subject. Indeed, I would rank the Prologue, on ‘The Financial Crisis of 2007-8: Causes and Remedies’, (which is the longest chapter in the book, pp 1-56), as the best single paper yet written on the background and development of the crisis. The book is worth buying for this one chapter alone.

Oops, the full reference for the book is as follows:

Viral Acharya and Matthew Richardson (eds), New York University Stern School of Business (2009) Restoring Financial Stability: How to Repair a Failed System, Wiley, March

Update: There is an article by Professors Viral Acharya (did not expect him to be this young) and Matthew Richardson on their book in VoxEU. I particularly like this observation on financial innovation:

The goal is not to have the most advanced financial system, but a financial system that is reasonably advanced but robust. That’s no different from what we seek in other areas of human activity. We don’t use the most advanced aircraft to move millions of people around the world. We use reasonably advanced aircrafts whose designs have proved to be reliable. The same is the case with ethical drugs. Although we are now in a golden age of biomedical research, our goal is to sell only products that have been tested extensively. [More here]

Pandemic risks – how real are they?

Recently, ‘The Independent’ Newspaper had published an article on human deaths arising out of the Bird Flu virus in Egypt. Dr. Vidyasagar, renowned mathematician/scientist, currently at Tata Consulting Services in Hyderabad sent me a well-reasoned response and I have his permission to reproduce that. See below. I was reminded of his response and the article when I saw this news item today about Swine Flu deaths in Mexico City.

Here is his response to ‘The Independent’ article:

This article in the Independent starts by reporting a potentially interesting development in the evolution of the H5N1 virus, also known as the bird flu virus. Unfortunately, it then goes off into wild sensationalism unsupported by science or facts.  As a result it is total drivel.

In contrast, a very reasonable and balanced (and highly understandable) discussion of the topic can be found in the Wikipedia at:


The potentially interesting development is that the H5N1 infection is becoming less deadly.  This is potentially serious because in earlier instances, those infected died very rapidly before they could infect others.  If the infection becomes less deadly then it has greater potential to spread.  That point is uncontestable.  Implicit in that is the confession that *the existing* mutations of the H5N1 virus can’t spread amongst humans.  This fact does not, however, prevent motivated manipulation of ignorant and/or lazy journalists by vested interests. This story is an example of this kind of thing.

What is the basis for the claims of a “bird flu pandemic” cooking in Egypt?  There are a princely total of eleven, count them eleven, infections in Egypt.  On the basis of this ridiculously tiny sample, various “experts” are trotted out say that (i) the disease is becoming less deadly, (ii) the disease is infecting children and not adults, etc.

The author himself says that bird flu could “turn into the greatest plague to hit Britain since the Black Death,” and speaks of 750,000 Britons dying, not to mention hundreds of millions worldwide.  This is sloppy journalism at its worst. The author assumes a 5% mortality rate if and when an outbreak occurs at some unspecified time in the future (perhaps OK), but assumes a 100% *infection rate*!  In other words, he assumes that *every single man, woman and child in the world would will become infected* to come up with inflated numbers.  This is complete garbage. Even HIV has an infection rate worldwide of less than 1%!

To see what is really happening, we need to understand what the H5N1 virus is, how it infects humans, and how humans can be protected against viruses. The H5N1 virus is just eight different pieces of RNA.  It is a parasite and cannot replicate by itself; it needs a host on which it can reside and replicate.  So in principle some mutation of the virus could actually replicate and spread in humans.  If the mutated virus doesn’t kill the host very rapidly, then in principle more humans could get infected.  That is the fear on which the journalists and the vested interests play.

Now let me make another very strong statement.  It is not at all difficult to come up with drugs that are very effective against simple organisms like viruses.  The real challenge is to come up with drugs that are effective AND SAFE.  The overwhelming majority of drug candidates (more than 90%, perhaps more than 95%) fail not because of lack of efficacy, but due to toxicity.  Under normal circumstances, all regulatory agencies around the world follow the principle “First, do no harm.”  They will not approve any new drug for general use until it has been proven to be safe.

And that is of course absolutely the right thing to do — under normal circumstances.  But if for some reason the virus is extraordinarily virulent, the regulatory agencies would put aside all concerns of safety, and rush all sorts of experimental drugs to the market.

How long would it take to find such experimental drugs that are very effective (but, as stated above, not necessarily safe)?  Let us use the precedent of the SARS (Severe Acute Respiratory Syndrome) virus that caused so many newspaper headlines in 2003.  Though it was supposed to have occurred first in mainland China in November 2002, the syndrome was first identified in February 2003 when a person in Hong Kong died from it. By April 16, the DNA sequence (known as the genome) was already sequenced by various laboratories around the world.  By May the operative genes were also identified.  Indeed the mechanisms of the SARS virus were well-known by then.

So why weren’t experimental drugs rushed to market to combat the SARS virus?  The reason is simple: The SARS “epidemic” was mostly media hype and was not a real epidemic in any sense of the word.  Until September 2003, when even the scientific community lost interest in the SARS virus, the total number of reported deaths was 916.  Dividing this number by the roughly 180 days from March 2003 to September 2003, this works out to *five deaths per day* around the world.  This is hardly an epidemic.

The point therefore is that it took a mere eight weeks for the mechanisms of the SARS virus to be identified, at which time the scientific community was in a position to put out effective (but not necessarily safe) drugs against the SARS virus.  How long would it take for the H5N1 virus?  The genome (DNA sequence) of the SARS virus consists of more than 30,000 “base pairs” (the symbols A, C, G, T that make up the four constituents of DNA).

In contrast, the H5N1 virus has about 14,000 “base pairs” and a mere eight genes; in other words, the H5N1 virus has a DNA sequence that is roughly half as long as that of the SARS virus.  So I would venture to suggest that it will take only a few weeks to find effective (but not necessarily safe) cures for bird flu, should it ever hit humans.  At this point the regulatory agencies would have to take a call on whether to permit these experimental drugs to be used for treatment.  

If there are only a handful of deaths as in the case of the SARS virus, the regulatory agencies would not permit these experimental treatments.  But if we make the wildly fantastic assumption that thousands will die daily (an assumption that ‘The Independent’ correspondent seems to have no difficulty making), then these experimental treatments would surely be rushed to market.  Because all the cures would be only experimental, they may have some side effects and thus would not prevent all deaths.  However, it takes an extraordinary imagination to predict that “750,000 Britons” would die from bird flu under the right circumstances.  The health care community would simply not permit such a thing to happen.

In general, prevention is better than cure, and this is certainly so in the case of viral infections.  This means that, once we know what we are up against, we should start constructing effective vaccines against H5N1.

Not all viruses can be combated by vaccines, the HIV virus being a prime example.  Given that the H5N1 belongs to the family of influenza viruses, I am optimistic that suitable vaccines can be constructed against any future strain of H5N1 that spreads amongst humans.  More to the point, the time to construct vaccines is *after* the virus strain that affects humans becomes known, once we know what we need to defend against, and not now!

Hence I am of the view that efforts to construct and market bird flu vaccines at the present time are premature and of limited utility.

Dr. M. Vidyasagar

Executive Vice President

Tata Consultancy Services

No. 1, Software Units Layout, Madhapur

Hyderabad 500081, INDIA

Tel: +91 40 6667 3001; Fax: +91 40 6667 2222


Update: Worryingly, the plot is thickening.

Reading links

Professor Martin Feldstein writes a thought-provoking piece in FT on inflation risk in the US.  ‘When?’ is the question. It appears safe to ignore the risk when capacity utilization rate is below 70% and the economic unemployment rate is around 16%.

But now the large US fiscal deficits are being accompanied by rapid increases in the money supply and by even more ominous increases in commercial bank reserves that could later be converted into faster money growth. The broad money supply (M2) is already increasing at an annual rate of nearly 15 per cent. The excess reserves of the banking system have ballooned from less than $3bn a year ago to more than $700bn (€536bn, £474bn) now. [More here]

Certainly, it remains a possibility but would turn into probability as we enter 2011. Inflation, let us not forget,  offers a easy way out for repudiating much of the debt.

Swaminathan Aiyar puts it bluntly in Times of India:

So, India is getting re-hyphenated with Pakistan as a place where international cricket faces grave security risks. South Africa, whom nobody has ever hyphenated with China, is streets ahead of India in this respect. So, let’s say farewell to the illusion of Chindia. The reality is Chimerica. [More here]

It should hurt, it does but he is right, for now. America and China need each other, if only to postpone much needed rebalancing in both the countries and sticking as far as and as long as possible, to ‘business as usual’ (one that prevailed up to end-2007 or slightly longer). I had written about it in my MINT columns. Contexts change, however.

Of course, given the email from Mr. Jairam Ramesh, in his capacity as the co-ordinator for election affairs of the Congress party challenging BJP on its support to the public sector, questioning its ‘non-transparent and  indiscriminate privatization’ and daring it to do more on farm loan waiver, one should not be surprised that there is only Chimerica for now.

An article in ‘Wall Street Journal’ that begins with a such clear message as below is circulating quickly and widely today:

Lending at the biggest U.S. banks has fallen more sharply than realized, despite government efforts to pump billions of dollars into the financial sector. [More here]

My problem is in determining whether it is a bad thing for lending to decline, given the debt overhang in American households and bloated balance-sheets of American banks.

Talking of American banks, Bloomberg featured prominently comments by the Goldman Banking analyst Richard Ramsden on Citigroup results:

While Citigroup posted first-quarter net income  of $1.6 billion last week, the New York-based bank suffered an “underlying” loss of 38 cents a share, Richard Ramsden , a Goldman Sachs analyst, wrote in a research note dated yesterday (19th April).  Ramsden halved his estimate for Citigroup’s 2009 loss to 25
cents a share, while keeping unchanged his forecast for net income of 20 cents a share for 2010. He expects the bank to earn 40 cents a share in 2011. [More here]

Just to put these earnings estimates in perspective, Citigroup earned per share (EPS) US$0.80, US$4.22 and US$3.88 in 2007, 2006 and in 2005 in that order (figures from Bloomberg).

Those of us who are betting on financials in the West to lead us into light should not fail to read this paper. I had mentioned it more than once in this blog.

A great piece of research on China

The post was small but it makes the point that even pages of analysis would not make as effectively. It is worth reproducing in full:

April 16, 2009, 10:23 AM

Chinese Efficiency

China is becoming the world’s most energy-efficient economy.

Or maybe its statisticians are just the most creative.

In recent years, China’s reported economic growth tended to be a little lower than the increase in its electricity consumption. But that relation has completely turned around.

Following are the year-over-year increases in its gross domestic product and electricity consumption for first quarter of each year.

2002: Electricity up 9.4%, G.D.P. up 8%
2003: Electricity up 14.7%, G.D.P. up 10.3%
2004: Electricity up 16.7%, G.D.P. up 9.8%
2005: Electricity up 14.3%, G.D.P. up 9.9%
2006: Electricity up 13.4%, G.D.P. up 10.4%
2007: Electricity up 12.4%, G.D.P. up 11.7%
2008: Electricity up 16%, G.D.P. up 10.6%

Today China reported that its G.D.P. was up 6.1% year-over-year through the first quarter. It has not yet reported March electricity consumption, but during the first two months of the year electricity use was down 9.2% from 2008’s first quarter.

Based on the official G.D.P. numbers, China’s growth has slowed in the worldwide recession, but remains very impressive. The electricity data paints a different picture.


My colleague calculated that y-o-y nominal GDP growth in China was around 3.6% and that means that the real GDP of 6.1% (y-o-y) was due to the GDP deflator contracting by 2.4% y-o-y. Further, he managed to extract q-o-q changes in both real and nominal GDP that he had re-constructed and found that China has had two consecutive quarters of nominal GDP contraction.

Of course, you would not have guessed them from all the upward revisions to China’s growth estimate for this year by many research houses – well, housed in banks

A good look at US banks’ results

James Kwak over at BaseLine Scenarios does a good job of capturing JP Morgan’s results in the last quarter. Now, what was it about the last quarter that made it so special for fixed income trading? Can some one shed some light on it, please?

While you are on the subject of bank results, do not fail to visit Barry Ritholtz and Floyd Norris for some trenchant or incisive commentary on Goldman Sachs’ results.

This comment by Norris today featuring two readers’ letters is worth ruminating over, especially if you are a leading light in an American bank in America. As Chrystia Freeland some time ago in FT, many senior executives do not seem to appreciate that there is an image problem, regardless of whether they think it is justified or not.

Good recap of what went on in India

Morgan Stanley’s Chetan Ahya’s post on Indian growth prospects post-elections is a good one. The summary looks harmless.

The recent period of strong global growth, which was premised on widening global imbalances, is over. Contraction in global growth has resulted in a major reversal in capital inflows into India and other major emerging markets. This, coupled with a sharp contraction in exports, has caused an unprecedented growth shock. The worst may now be behind us, and we do expect a gradual recovery from 2H09. However, investors’ focus will shift to the pace and strength of recovery. We believe that the weak global growth environment will affect the pace of recovery. Our economics team expects global GDP growth to recover to a tepid 2.7% in 2010, well below the average of 4.9% between 2004 and 2007 (a period of strong global growth). Moreover, India needs to pay back from its own credit cycle excesses and has limited flexibility to further increase its fiscal deficit. In this environment, we believe that a quick recovery to 7.5-8% GDP growth requires a stronger pace of structural reforms. [More here]

In my view, he gets it right. His conclusion is more benign than his analysis leads up to.