About Patrice Sarath

January is named after Janus, the Roman god of doorways and gateways, looking forward and backward at the same time.  Since this is a time of reflection on the past and predictions for the future, let’s crank up the Wayback Machine (or at least a few previous blog entries) and take a look at what the past year has wrought.

January: Last year at this time, the world and I were agog over Robert Nardelli’s payout from Home Depot for a lackluster year. The answer to the question, “what is bad-to-mediocre leadership worth?” was, “about $210 million — and the CEO-ship of Chrysler.” Pretty nice work if you can get it.

February: Hah! This is where I blithely predicted that the subprime mortgage crisis will go away by itself, and we would all learn a lesson by the closing credits. That’s why I get paid the big bucks for my trenchant business analysis. My neighbor did sell her house, though.

The spring and summer saw the growing effect of the subprime mortgage meltdown. By the fall, deals were collapsing left and right. Additionally, Barclays surrendered its bid for ABN AMRO, and I, well, declared my love for Tata.

Even more tellingly, in May, Bear Stearns-funded Everquest Financial announced its IPO, in June it withdrew it, and by August Bear Stearns co-president Warren Specter was fired.

So how about some predictions? Well, let’s see. We won’t see any more high-profile resignations, as all the lambs have been sacrificed, but I for one will be very interested in Ralph Cioffi’s career over the next year. Virgin Money will buy Northern Rock. Residential housing will recover in fits and starts, with some markets recovering sooner than others. And (really going out on a limb here) Tata will buy Jaguar and Land Rover.

Do you know what they say about buying a Jaguar? That when you buy one you better also get the little trailer that comes with, so you can bring your mechanic with you everywhere!

OK, enough Jaguar-bashing. Although American Jaguar dealers have expressed concerns about brand dilution if the luxury car maker is bought by Indian conglomerate Tata, I refuse to sink to their level. (Yes, technically, I just did, by leading off with aspersions on Jaguar’s quality. Hey, everyone has her breaking point.)

But seriously. Just because Tata makes the world’s cheapest car, which costs about $2,500, doesn’t mean it can’t also successfully manage the luxury Jaguar and Land Rover brands. After all, it’s not like Ford didn’t find itself in over its head. The US dealers say they prefer the offer by One Equity, a private equity firm advised by former Ford head Jacques Nasser. Is this a case of “better the devil you know than the devil you don’t?”

Adding insult to insult, Tata took it on the chin again when luxury hotelier Orient-Express rebuffed its offer of taking equity stakes in each other’s companies. Tata runs a luxury hotel chain itself. Orient-Express’s CEO Paul White said, “any association of our luxury brands and properties with your brands and properties would result in a reduction of our brands and of our business and would likely lead to erosion.”

Well. There has been a heated exchange of stiff notes and whatnot between the firms. I am sure Tata will take the high road — and then buy Orient-Express at a discount when the once proud hotel chain falls on hard times. Oh, we’ll see who is sneering then, Mr. Paul White!

(Sorry, got a little overwrought there.)

The good news is that the unions and some European auto dealers have endorsed the Tata bid. So that’s something. Tata remains the frontrunner, but we all know how that works — in mergers and acquisitions as well as in politics, there’s always a dark horse waiting in the wings. Just ask Barclays. Or better yet, don’t. They might still be a little sensitive about it.

If so, who exactly is getting bailed out here?

The solution du jour to the subprime mortgage crisis is to freeze those introductory rates so borrowers won’t be hit with a huge monthly payment when their ARMs reset. The move does a couple of things: It slows down the default rate which has been staggering in recent months. Borrowers who qualify (and this is important, as not every subprime borrower would) could maintain their mortgage payments and not lose their homes or their investments.

For lenders, whether they be banks or mortgage companies, the freeze will ensure a continuing flow of income from their mortgage lending operations. The amount will be less than planned, since those higher rates won’t have kicked in, but at least they won’t be hit with defaults and foreclosures. Banks really don’t want to foreclose on houses since they get stuck with real estate they then have to unload in a down market.

For hedge funds and investment banks, the deal is not so good — they invested heavily in those high-risk loans in the form of CDOs and other exotic investments. Freeze the rates, keep those high payments from coming due, and they might as well have invested in stodgy old regular mortgages taken out by people with solid credit. You know, like banks used to do.

As always, the plan, which involves lenders, borrowers, and Federal regulators, has detractors. Some say that the proposal coming out of the Bush White House will not help out the borrowers who were hurt the hardest, nor will it punish (yes, punish) the lenders for their irresponsible actions. For an interesting online conversation on the rate freeze, I suggest taking a look at a discussion on The Perfect World (yes, that’s the name) about its pros and cons.

What it will do is soften the blow for the economy, which otherwise is facing a rude awakening. Now maybe we should let the law of natural consequences take its course, and allow lenders and borrowers who were involved in this folly get what they deserve. The problem as I see it is that their punishment takes out a lot of innocent bystanders as well. Real estate, banking, and construction are an enormous part of the economic landscape.  If they go, we might all go with them.

Movie trailer guy voiceover:
“In a business world fraught with peril, only one company can save capitalism.”

So I haven’t written about my favorite company in the whole wide world, Tata Group, in a long time. No bursting into song, no groupie-like adulation (okay, I guess there’s still a smidge of groupie-like adulation). I don’t know about you, but I’ve been suffering withdrawal. So I had to see why Tata wasn’t making news, aside from its bid for Jaguar and Rover.

Let’s see: Have they been exposed to the US subprime mortgage meltdown that shook the foundations of investment banking to its very core? Oh, yikes! They were — turns out that Tata Steel’s acquisition of Corus was jeopardized by the subprime crisis, which reduced the availability of credit. Tata had to reorganize the financing as a result.

Okay, well, what about the ABN AMRO takeover? Did Tata have anything to do with that? Nope, looks like Tata had nothing to do with that story, which was the the soap opera of the summer, what with the Barclays bid, the Royal Bank of Scotland consortium counteroffer, and the Bank of America acquisition of LaSalle. Fireworks aplenty, that one, but not for Tata.

China, Inc. has been in the news lately, what with reports of recalls of unsafe toys and other products. Tata and China have a history, one that stretches back more than a hundred years to the Opium Wars. Seems that Tata might have supplied the opium the British forced on the Chinese. (Finding out that Tata was on the wrong side in this unjust war almost made me reconsider my deep and abiding love for the company. Almost.) Did Tata get burned by this news?

Nope, looks like Tata is clear. China, you can’t blame this one on Tata!

Aside from the Jaguar bid, it looks like there’s a good reason that I haven’t written about Tata lately. They have just been doing what they do best, going about their business. That doesn’t get the headlines, good or bad. I’m sure it suits Tata just fine too.

And you know what? If it’s good enough for Tata, it’s good enough for me.

Stan O’Neal’s departure from Merrill Lynch had an air of efficiency about it. When the last straw broke the camel’s back — his lone wolf conversation with Wachovia regarding a possible merger — he was gone, baby gone.

Charles Prince’s exit from Citigroup had the same inevitability about it, although Prince never had a grace period at all during his tenure. The banking behemoth had struggled under his years of leadership, and never soared, as befitting the bank that was once the largest in the world.

Surely there is despondency on Wall Street these days, that and fear — who’s next, bankers must be asking. Bear Stearns‘ James Cayne had the dubious honor of being profiled unflatteringly by the Wall Street Journal, but there’s no indication that he’s on his way out. That could be because Bear Stearns has already sacrificed its lamb; Warren Spector was sent packing after two Bear hedge funds failed so spectacularly.

This reminds me of the so-called butterfly effect. Not the dismal movie of the same name, but a rather interesting take on the classic trope — a butterfly flaps its wings in Asia, causing a sequence of events that results in a hurricane brewing in the Atlantic. In this case, I imagine the butterfly to be one of those telemarketing mortgage brokers in a boiler room somewhere in California. He sells the subprime ARM that gets bundled into a bunch of CDOs that investment banks, hedge funds, and financial services companies all over the world invested in, all shiny with its high rate of return, and it’s an investment that can’t fail, right, because these are all masters of the universe.

Except that the masters forgot a very important thing. Two important things, actually: One, that the butterfly effect is another name for chaos theory, and you can’t control chaos. And two, that ARM? It was a loan to a real person, who never should have qualified for the loan in the first place. When the mortgage broker made the loan it was a good investment, but as soon as the homeowner defaulted, it was a chill wind that blew from that butterfly’s wings, first a puff of air, then a breeze, and finally a gale.

One thing is for sure — Prince and O’Neal will have plenty of time to catch up on their reading. I suggest Ray Bradbury’s A Sound of Thunder.