VR Logo

When Securities Turn Blue & Red

The crisis we're facing today is because securities were disguised & presented as something they were not...

Have you heard the Panchatantra tale about the jackal that turned blue? That story holds an important lesson in trying to understand the root cause of the global financial crisis. Here's my version.

Once upon a time, a jackal from the jungle wandered close to a village and was set upon by a pack of village dogs. While running to save his life, he stumbled and fell into a large vat of blue colour at a dyers' workshop. As he scrambled out, he was surprised to see that the dogs took one look at him and ran away, yelping in fear. He peeped into the water and saw that he had turned into a strange blue being. It was obvious to him that he had fallen into some sort of a magic potion and become a fearsome and powerful creature.

He went back into the jungle and declared himself to be the king. Scared of this blue apparition, the animals hastened to obey all his commands. Soon, using the money he extorted from the poor creatures, he bought himself an apartment on Manhattan's Upper East Side and another one in South Mumbai, probably in the NCPA building. However, he spent most of his time in Dubai. For some reason, he preferred the dry weather there. One day the unthinkable happened. Just as he stepped out of a helicopter after surveying the Burj Dubai-2 (he was planning to buy an apartment on the 8000th floor), it started raining. As the torrential rain poured down, his blue colour washed off and there he stood, revealed in his true jackalness. But it was OK because everyone around him was also a jackal. No, wait, that's a different story. As soon as he was revealed to be a jackal, the animals around him chased him back to the village.

The Jackal's pretence has a great similarity to securities being painted up and disguised into something they are not. When the dust finally settles on the Great Panic of 2008, we will all realise that in almost every part of this crisis, the original sin was investments that were pretending to be something they were not. Take the American sub-prime housing loans, which were the first to collapse. They were risky loans that were hastily given away to people who had no hope of returning the money. But the loans were sliced and diced and repackaged as AAA securities and then bought and traded by institutions all over the world.

Perfectly good banks are in crisis because in modern banking is based on taking short-term money and lending it out long-term. Cash and money market funds promise next-day redemptions to investors but their underlying portfolios are based on investments that could take much longer to encash. I'm sure it's all very innovative, but whenever the rulebook of the financial markets is rewritten, these disguises should be made transparent.

As for our friend the jackal, he went back to the village, ran to the dyers' shop and dived into the vat of red colour. And then, having learnt a trick or two from the friends he had made in Wall Street and South Mumbai, he went straight to a rating agency and got himself certified as RRR+, the grade for absolutely genuine, natural red colour with the highest degree of long-lasting colour fastness.