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News from The Globe and Mail

THE WORLD'S SUBSIDIARY: Father of outsourcing pushes India into the 21st century
MARCUS GEE


00:00 EDT Thursday, April 10, 2008

BANGLALORE -- On Aug. 11, 1966, Azim Premji got the phone call that would change his life. The 20-year-old was studying for summer exams at Stanford University in Palo Alto, Calif., just two terms short of graduation. It was his mother on the line. His father, M.H. Premji, had died suddenly of a heart attack at the age of just 51.

Summoned home, he discovered himself in charge of the family business, a small vegetable oil concern called Western India Vegetable Products, Wipro for short. He found its methods primitive at best.

One of its lines was making cakes and shortening from peanut oil. Its buyers would test a farmer's peanuts by biting them to gauge how much oil they might yield, then make the farmer an offer. Mr. Premji, then just 20, had a better idea. Why not ask the farmer for a sample of his peanuts, weigh them to gauge their oil content, then strike a deal.

That simple step to upgrade methods and measure results laid the foundation for what Mr. Premji calls the Wipro Way. A cerebral, fastidious man who often seems more college professor than tycoon, he has built a $5-billion (U.S.) information-technology outsourcing company on a cult of continuous self-improvement.

In the process, he has helped invent an industry that is launching India into the 21st century. Once, when people imagined India, they pictured rajahs and beggars. Today, the icon of the new India is the bright young techie in his office cubicle in Bangalore.

Mr. Premji was one of the first to see an opportunity for India as more and more work shifted to computers and the cost of transmitting data among them dropped. Why not take repetitive work like writing software, maintaining computer systems, handling company payroll accounts or answering consumer complaints over the phone and export them to India, where a huge pool of educated, English-speaking workers could do it for a fraction of the cost?

Wipro, the industry's third-biggest player, has grown from 350 employees when Mr. Premji inherited it to 80,000 today. Mr. Premji, now a white-haired 61, is reckoned to be the fourth-richest Indian, trailing only steel maker Lakshmi Mittal and the industrialist Ambani brothers, Mukesh and Anil. According to the Forbes magazine billionaires list, his $17.1-billion fortune puts him at No. 21 in the ranks of the richest people in the world.

"We have been one of the pioneers in the global delivery model, which is really bringing to services what came to manufacturing 15 years back," Mr. Premji said in a recent interview in his Bangalore offices.

But after growing 30 per cent a year for 10 years, the good times may be ending for the Indian outsourcing industry. The rise in the value of India's currency, the rupee, is putting the industry at risk as the cost of farming out back-office work to India soars for American, European and Japanese firms. The cost of employing educated Indians has increased as big Indian firms compete for scarce talent.

Seeing India's vulnerability, other emerging countries from the Philippines to China to Eastern Europe are snapping up more of the outsourcing trade. At the same time, giants such as IBM and Accenture have opened bases in India to compete with Indian firms such as Wipro, Infosys and Tata Consultancy Services on their home turf.

Mr. Premji is responding with the same determination to raise quality that led him to weigh peanuts in the 1960s. Wipro, he said, must move from low-cost provider of IT and back-office services to valued consultant and partner for its customers, helping them not just cut costs but manage and even reimagine how they do business.

When the outsourcing got started, the work was fairly straightforward. Big companies in North America or Europe that wanted their computer software upgraded or maintained hired Indian firms to do the grunt-work of programming and coding. End of transaction.

Today, instead of just making new software for a company's payroll department, Wipro will help redesign the payroll system, create new software for the task and even run the system from afar. It is helping deliver legal and accounting services, and is now moving into pharmaceutical and biotechnology research.

"It significantly expands our breadth of offering to the customer," Mr. Premji said. "Where we were working before with his left arm, we'll be working with his whole body."

To get closer to its customers, Wipro is stepping outside its Indian base and opening new offices in places as far flung as Saudi Arabia, Portugal, Romania and China. (In Canada, it has staff in Toronto, Windsor, Calgary and Ottawa). In January, it scored its biggest contract yet, a nine-year deal worth up to $600-million to handle business transformation for the Indian telecom company Aircel.

In his book on Wipro (pronounced whip-row), Bangalore Tiger, Businessweek reporter Steve Hamm said Wipro's transformation was like moving from an electrician to an architect. If anybody can accomplish such a protean feat, it is Mr. Premji.

He began transforming Wipro almost as soon as taking over in 1966. An engineering student at Stanford, he knew nothing about business, so he bought arm loads of business textbooks and stayed up late plowing through them. His first step was to diversify, moving beyond Wipro's vegetable oil products and laundry soaps to toilet soaps, then light bulbs.

"What struck me even then was his high degree of professionalism and ethical standard," said leading Indian banker K.V. Kamath, who sat on the Wipro board 20 years ago. Unlike many leaders of family businesses, who surrounded themselves with relatives and yes-men, "he went out and got people with qualifications in every field, whether it's accountancy or engineering or management."

His big break came in 1977 when the Indian government shut IBM out of India. Leaping into the gap, he had his engineers knock off an Indian version of a popular computer and launched Wipro onto the path to become India's leading seller of computers, scanners and printers. From there it was a natural step to outsourcing.

For Wipro, says Mr. Premji, the process of transformation never ends. Progress "is not a snapshot; it's like a movie."

You can't tell if you're improving unless you have something to measure yourself by, so Wipro measures everything - not just its earnings and productivity, but customer satisfaction, employee engagement, managers' performance and the results of its business rivals. It even measures the amount of food wasted in the company cafeteria.

Training is close to an obsession. New recruits - Wipro inducted about 20,000 last year - get between 12 and 21 weeks of full-time training before they start work. All employees get another 9-15 days a year - not just lunchtime seminars, but full-time classroom work. This comes on top of periodic, on-the-job training.

Mr. Premji has sent more than 7,000 Wiproites (as its employees call each other) to learn Six Sigma, a data-driven system developed by Motorola Inc. to improve processes by eliminating defects.

Under Mr. Premji's stern direction, the company was one of the first in India to refuse to give or accept bribes, a bold step in a country where payoffs were the grease of business life.

The company once fired a man who claimed expenses for a first-class train trip when he actually rode second, a difference of a few rupees. When the man's union called a strike and stayed off work for three months, Mr. Premji refused to back down.

To set a tone of modesty and discipline, Mr. Premji, a billionaire many times over, rides economy when taking flights around India and drives a four-year-old Toyota Corolla - purchased only when his nine-year-old Ford Escort gave out. He lives in a large but unostentatious bungalow on the leafy Bangalore campus, walking the few steps to his office, a bright penthouse with wood floors, a walkout patio and walls covered with Asian art. His only indulgence seems to be good tailoring. He favours pin stripes and formally cut suits. His swept back snow white hair has a distinctive blue rinse.

Unlike other Indian tycoons who have passed on their companies to their sons, he has no dynastic ambitions. When his son Rishad joined Wipro last year, the company said he would be taking a post "commensurate with his background and experience."

"I couldn't induct my son into top management without causing chaos in the company," said Mr. Premji, "because it's too professionalized."

These lessons seem to rub off on Wipro's employees. Bhavani Latha, 21, an electronics graduate, joined Wipro last year and now writes software for a Japanese consumer electronics form, and revels in the education she is getting. "I just want to excel at what I do," she said.

By the numbers

Name: Azim Premji, chairman and chief executive officer of Wipro Ltd.

Age: 62

Net worth: $17.1-billion (U.S.)

Residence: Bangalore

Main Industry: Information technology, outsourcing

Family: Married, two grown sons

Education: Studied engineering at Stanford University in California

Biography: Took over as head of Wipro at the age of 21 when his father died suddenly. Turned it from a $2-million company making hydrogenated cooking fat into a $5-billion multinational with a presence in 50 countries.

Financial results

for Wipro Ltd.

2007 profit

$3.75-billion

up 83 per cent from 2005

Market cap

$15.16-billion

Current value by market capitalization (on April 4, 2008)

The series

Tuesday: Anand Mahindra, the tractor maker who has John Deere on the run.

Yesterday: G.M. Rao, building a modern nation in an ancient land.

Stories and audio: ReportonBusiness.com

Tomorrow: Industrial magnate Ratan Tata shakes up the global auto market by launching the world's cheapest car.

© The Globe and Mail

http://www.globeinvestor.com/servlet/story/RTGAM.20080411.wrtycoontata11/GIStory/

Breaking News from The Globe and Mail

Game changer
An empire of big ideas and very small cars
MARCUS GEE


Friday, April 11, 2008

MUMBAI — The story of the world's cheapest car begins on a rainy day in Bangalore.

Ratan Tata was in the south Indian city on business and on his way to the airport. The head of India's most famous business empire told his driver to be careful on the slick roadway.

As usual in India's crazy traffic, the streets were full of dodging scooters, many of them carrying whole families: father at the controls, mother holding on behind, children riding on their laps. Typically, none of them were wearing helmets.

Suddenly, a scooter turned in front of the Tata car and lost control, sending a family of four spilling onto the pavement.

“No one was hurt, but we could have run over the whole family; we were just behind them,” remembers Mr. Tata. He had seen before how vulnerable scooter riders were in the traffic, “but that was the first instance that scared me.”

He began to think: How could he make driving safer for Indian families?

His first notion was to build a safer scooter. Trained as an architect, he made notepad doodles of new designs – a scooter with two wheels at the back, a scooter with a protective cage – none of them very practical.

Then he played with the idea of an open-sided “rural vehicle” with safety bars in place of car doors. He decided “no one wanted a half a car.”

Finally, he hit upon the simplest and most audacious idea of all. Why not simply build a tiny car – just big enough to carry a family like the one that crashed in front of him that day in Bangalore, but cheap enough for a scooter-driving family to afford.

Thus was born the one-lakh car.

In India, one lakh means 100,000, so the car would cost 100,000 rupees, or about $2,500 (U.S.). No one had ever built a car for less than twice that much. Critics, including some within his own company, said he could never do it.

So it was with obvious pride that Mr. Tata drove the one-lakh car, rechristened the Nano, into the television lights at the New Delhi Auto Expo on Jan. 10. “A promise is a promise,” the Tata Group chairman said as he announced the price of the car: 100,000 rupees for the base model (tax not included).

The announcement made headlines around the world, supplying new evidence of India's dramatic rise from impoverished economic laggard to industrial and technological dynamo. It also drew attention to the quiet tycoon who conceived and nurtured the phenomenal car.

Mr. Tata was born into one of India's oldest and wealthiest business dynasties. The group was founded in the 1870s by Mr. Tata's great-grandfather, Jamsetji Tata, son of a Parsee merchant and banker. He made his fortune in cotton, an industry then dominated by imported textiles from Britain, then India's colonial master. Travelling to England to study the mills of Lancashire, he set out to beat the English at their own game, then rigged in England's favour. He later moved into iron and steel, laying the ground for what today is India's largest private business house, with 98 companies in everything from cellphones and hotels to tea and trucks.

Mr. Tata was raised by his grandmother after his parents, Naval and Soonoo Tata, divorced. Lady Ratan Tata, who had adopted Naval, presided over a stately Mumbai mansion, Tata House, where Mr. Tata grew up surrounded by British nannies, chauffeurs and footmen. He left India at the age of 15 to study in the United States, eventually completing a degree in architecture and structural engineering at Cornell University in Ithaca, N.Y.

“It was a great thing to be a in a place where you were just another person,” he recalled in a recent interview at Bombay House, the colonial-era sandstone pile where Tata has its headquarters. “For 10 years of your formative life you were just another guy and you'd be punched in the nose as easily as someone else if you did something wrong.”

Today, his style and mode of living are modest in a country where the rich aren't usually shy about flaunting their wealth. He carries his own bags into airports and insists on paying the bill when he visits one of the company's grand Taj hotels. A lanky, athletic-looking 70-year-old, he lives in a simple, three-bedroom apartment in old Mumbai, occasionally escaping with his dogs to a weekend beach house near the city that he designed to his own plan.

Called back to India from the United States by his ailing grandmother, Mr. Tata worked his way up the ranks of the firm, starting with “drudgery” on the shop floor at Tata Steel and Tata Motors. He got his first interesting job when the firm put him in charge of a failing electronics company. “You didn't know where the month's payroll was coming from,” he says. “You were fighting for your life and I think that's a great learning experience.”

When he was called to take the reins of the whole company from his uncle J.R.D. Tata in 1991, he wondered: “How do I fill his shoes?” The senior Tata was an outgoing, larger-than-life figure who bombed around Mumbai in Italian sports cars. He had ruled the company for more than half a century. “Do I mimic him and be his clone or do I just be myself?” Mr. Tata asked himself. “I chose the latter.”

Adopting a leadership style more “inspirational than dictatorial,” he got rid of extraneous businesses such as cement, paints and cosmetics. He halved the bloated work force at Tata Steel. He built Tata Consultancy Services into Asia's biggest software firm. In 1998, he took a gamble by launching the first Indian-made “people's car,” the low-cost Indica.

Looking abroad to hedge the company's risk in a volatile home market, he launched a go-global strategy that saw the company snap up Britain's Tetley Tea, Anglo-Dutch steel giant Corus and, finally, last month, two of the world's most famous luxury car brands, Jaguar and Land Rover.

When he told fellow executives the company should strive to get at least 30 per cent of its revenue from abroad, “one was told that it wasn't possible.” Today the figure is 60 per cent.

Mr. Tata does not like being told that something is not possible. Associates and rivals alike say that behind his gentlemanly demeanour lies a ferocious competitor. Nothing underscores that like the launch of the Nano, his most daring move yet.

When he first announced the venture, no less a figure than Suzuki Motors chief Osaka Suzuki said flatly that “Tata will not be able to make a one-lakh car.” That quotation flashed on the screen behind Mr. Tata as he unveiled the car in January – sweet revenge.

“A lot of personal success or failure revolved around what happened on a project that, rightly or wrongly, was connected with me,” Mr. Tata admits. “There would have been a great deal of attention if we'd fallen on our face.”

To make sure they didn't, he took intense personal interest in the project, travelling at least once a month to the design centre in Pune near Mumbai to huddle with the 500-member Nano team.

Project leader Girish Wagh says Mr. Tata often grabbed a pencil and a notebook to sketch out ideas, encouraging everyone to speak up. “Even a junior engineer could talk to him,” Mr. Wagh says. He wanted to be sure the car came in at 100,000 rupees, but “when we tried to compromise on customer requirements, he would say no.”

He drove a prototype of the car and thought it was underpowered, so the team added horsepower. The team had almost signed off on the styling of the car when Mr. Tata decided it wasn't bold enough and ordered another try, resulting in the rounded, futurist look of the Nano.

To save on costs, the team gave the car a windshield wiper with one arm instead of the usual two and one side-view rear mirror, too. They even attached the wheels with three bolts instead of four.

Along with the engineering, Mt. Tata hopes to change the manufacturing process. The company will produce a ready-to-build version of the car that can be distributed in kits. With help and training from Tata, groups of entrepreneurs could buy the kits and assemble the cars themselves, creating new businesses across India – “my idea of dispersing wealth,” he told a British newspaper.

The little, 33-horsepower, twin-cylinder engine is mounted in the rear, like the original Volkswagen Beetle. The base model has no air bags, air-conditioning, radio or power steering (later, upgraded export models may get them). Its top speed is 105 kilometres an hour. But, then, for the price of one Rolls-Royce Phantom, you can buy 240 Nanos. The first cars are expected to roll off the assembly line in October and the company plans to produce 250,000 a year to start.

Whether the company can make money on the car at the one-lakh price remains to be seen. Even on the Nano team, “people right up to the day of the launch said that we were giving it away,” Mr. Tata concedes.

But the car may already have achieved greater things. It has made the dream of car ownership a possibility for hundreds of millions of striving families in India and around the world. It has showed companies the value of pitching products to the lower end of the market – illustrated in C.K. Prahalad's book, The Fortune at the Bottom of the Pyramid. Perhaps most important, it showed that bold, innovative thinking – not just cheap goods from cheap labour – can come out of emerging economies like India's.

Auto maker Anand Mahindra, who competed against Tata for Land Rover and Jaguar, calls the Nano “a shot that was heard around the world.”

“Maybe it won't have great margins, or replace as many motorcycles as it would like to, but it was a game-changing move,” he said in a recent speech.

Billionaire Baba Kalyani, head of auto parts maker Bharat Forge, says that before the Nano, if you wanted to make a car, “you set up a big factory, you cut a lot of metal and off you went,” charging customers enough to cover your cost and make a profit. Mr. Tata turned things around, setting the price and adapting the product accordingly. “They started with a clean piece of paper.”

In Mr. Tata's case, that is quite literally true – a doodled superscooter on his notepad, then a doodled minicar, then the Nano itself.

Next time Ratan Tata has an idea, don't tell him it can't be done.

© The Globe and Mail

The end of the financial world as we know it:


http://www.nytimes.com/2009/01/04/opinion/04lewiseinhorn.html?goback=%2Ehom%23comment_6

a long read- enjoy!

Quote:

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Originally posted by investpro

The end of the financial world as we know it:


http://www.nytimes.com/2009/01/04/opinion/04lewiseinhorn.html?goback=%2Ehom%23comment_6

a long read- enjoy!

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http://www.thestar.com/article/570532


When commodity and financial stocks were booming, the Toronto Stock Exchange was a great place to invest your money.

But those days are long gone. The credit crisis, which started around August 2007, depressed bank stocks and helped deflate the commodity boom.

The index fell 35 per cent last year – hit harder than the major U.S. stock index (S&P 500), which fell 24.9 per cent in Canadian dollars. But while gnashing your teeth about short-term returns, don't overlook the big picture.

Over the past 10 years, you would have done better putting your money into three-month Treasury bills than Canadian stocks.

Ouch.

Here's the lowdown on Canadian stocks versus T-bills.

The 10-year annualized change in the TSX composite index: 3.3 per cent. Average three-month T-bill yields over the 10-year period: 3.5 per cent. If you include dividends, the total return on Canadian stocks is just over 5 per cent.

This was the weakest showing since the 1970s, says BMO economist Douglas Porter, and less than half the trend in the 30 years leading up to 2007.

Still, you were better off investing in Canadian stocks than U.S. stocks. The 10-year annualized change in the S&P 500 index in Canadian dollars: -5.5 per cent. The total return on U. S. stocks (including dividends) in Canadian dollars: -3.7 per cent.

The U.S. stock index never recovered from the tech wreck, which started in 2000. And while the Canadian stock index was dragged down by Nortel Networks' dramatic decline, it was boosted by a rise in energy stocks at the same time.

The growth in commodities reversed last year, despite predictions that demand from China and India for Canada's exports would offset slowing U.S. demand.

"We learned that the widely touted notion of `decoupling' was a myth," says CIBC Wood Gundy in a letter to clients this month.

Instead of decoupling, world economies are becoming more integrated through trade and financial markets.

No TSX sectors were unscathed in the 2008 meltdown. Consumer staples had the smallest loss at -7.8 per cent, compared with -37.5 per cent for consumer discretionary stocks (which are sensitive to economic fluctuations) and -54.3 per cent for technology stocks.

Canadian small-cap stocks had "a brutal year," says CIBC Wood Gundy, as investors desperately sought security during a time of unprecedented uncertainty.

The S&P/TSX small-cap index fell 47.9 per cent, surpassed by a stunning 71.9 per cent drop in the S&P/TSX venture composite index.

So where did investors make money last year?

Bonds outperformed stocks, as central bankers slashed interest rates to boost borrowing.

The Canadian bond index (DEX universe) rose 6.4 per cent in 2008, while the short-term bond index was up 8.5 per cent.

Gold bullion rose 5 per cent last year in U.S. dollars.

That was a muted performance because of extraordinary demand for U.S. dollars in a credit crunch, Nick Barisheff, president of Bullion Management Group Inc., told an Empire Club investment outlook luncheon last week.

Gold rose by 31 per cent in Canadian dollars and 45 per cent in British pounds, he added.

So what lies ahead?

Stocks outperform Treasury bills "in the long run," says BMO economist Benjamin Reitzes. Investors demand a premium for buying more risky company shares.

But a 10-year holding period is no longer enough to see stocks outperform T-bills. I'd say 15 or 20 years may be closer to the mark.




the comment below more or less reflects what came to my mind immediately.

Shame on you, Ellen. You state the return on T bills was 3.5% and the return on stocks was 3.3% over the past 10 years. Oh yes, including dividends, the return on stocks was over 5%. The return on any investment, T bills and/or stocks, should be calculated after taxes. You have completly forgot the tax advantage of the dividend tax credit on dividend income and the fact that 50% of capital gains are tax free. In addition, you have forgotton the effects of inflation on both types of investments. I feel certain that taking the three factors listed above that stocks have outperformed T bills over the past 10 years. Even using your figures of T bills (3.5%) and stocks plus dividends (5.0% plus) I calculate stocks returned 1.5% more (42.9%) more than T bills

On another thread, a link to an article on Canada's banks stocks being given the thumbs down -also from the Star.

In October Canada effectively gave the banks the right to change accounting standards retroactive to July 1 (not given as news here). The banks jumped on this and in their last quarter declared profits as they changed their assets from held for trading (mark to market) to AFS (available for sale).
So based on mark to market they are unsound- so the grapevine says. However based on normal depreciation procedures (old system-toxic assets instead of being valued at 20 cents to a dollar were valued at 80 cents) banks are sanguine.

But Dig this.

The world really does need more Canada.

For years, we've been told Canada's banks are too puny to survive in a globalizing world. That our governments are not sufficiently frugal. That we stint on research and development. That we have something of a monopoly on lax regulatory protections for investors.

So let's look around.

Banking: The global banking system has effectively failed. After losing upward of $1 trillion (U.S.) by taking leave of prudent practices in pursuit of a quick buck, it continues to function only by the grace of emergency government bailouts in the U.S. and throughout Europe.

Rank mismanagement has characterized the operations of the world's most prestigious banks this decade. The pantheon of the world's most prestigious banks engaged in cowboy antics. They amassed ultimately unmanageable risk, as they created and traded in "collateralized debt obligations" and other fancy new financial instruments that even the chief executives of Citigroup Inc., Wachovia Corp., Merrill Lynch & Co., Royal Bank of Scotland PLC, HSBC PLC and UBS AG either didn't understand or realize their institutions held in their portfolios.

Public finances: By now, it's well known that U.S. President George W. Bush, abetted by a Congress controlled by fellow Republicans during his first six years in office, somehow managed to more than double the U.S. national debt to about $11 trillion. No mean feat, considering it took the republic 224 years prior to Bush's first inauguration to accumulate the $5 trillion debt that Bush inherited. And about two-thirds of U.S. state governments, including California and New York, cannot balance their budgets and are appealing to President-elect Barack Obama for a bailout.

The phenomenon of spendthrift governments is widely evident in Europe, as well. Earlier this week, Standard & Poor's said Spain's triple-A ratings might soon be downgraded. S&P also issued similar warnings to Greece and Ireland. Debt-laden Italy and Portugal are expected to soon follow.

Even Britain, the most robust of European economies earlier this decade, is facing a downgrade on its government paper with the collapse of the overheated British housing market and the expense of nationalizing a crippled RBS, the nation's largest bank, and other financial institutions. Iceland is effectively insolvent, the victim of a local banking collapse brought on by reckless overexpansion.

Ireland deserves special attention. Personal-computer maker Dell Inc. last week announced the relocation of its Irish operations to lower-cost Poland. Ireland's magic elixir of huge tax breaks and corporate subsidies was for years urged upon Canadian policy-makers by right-wing think-tanks that faulted Canada for being too costly a jurisdiction to do business. Well, here's some news for the Chamber of Commerce keynoters from Belleville to Kelowna, and authors of the Fraser Institute scripts they read from: Ireland, whose own overheated housing market has imploded, is now a basket case. Out-migration of the kind James Joyce bemoaned has resumed.

R&D: American government financing of research – and most basic research in the U.S. is financed by government – has dropped every year since 2004 in real dollars for life sciences, and for much longer in the physical sciences.

The private sector – everyone from Merck & Co. to Hamburger U. at McDonald's Corp., which exploit that research – is suffering a long-term decline in global competitiveness as a result. Forty-nine Nobel laureate scientists have signed an urgent plea to Obama to restore basic-science research funding "to the levels needed to maintain the vitality and leadership of U.S. scientific research."

Investor protection: Recall that the U.S. Securities and Exchange Commission was so understaffed in the late 1990s that it could not scrutinize the flood of prospectuses from Enron Corp., WorldCom Inc. and the hundreds of upstart dot-coms. So soon after that epic loss of about $8 trillion in shareholder value when those firms collapsed, the SEC was AWOL again as America's leading banks and brokers hid ungainly risks in the same off-balance sheet devices that Andy Fastow used at Enron.

The SEC first learned about Bernard Madoff's recently uncovered $50 billion Ponzi scheme in the papers. And where was the U.S. Federal Deposit Insurance Corp. while depositors' funds were being put in jeopardy? Where was Britain's Financial Services Authority when RBS and mortgage leaders HBOS PLC and Northern Rock PLC were playing with fire?

So much for the unassailable virtues of national securities regulators.

No argument is made here that Canada is an oasis of best practices in these matters, not after the fiascos of Livent Corp. and Bre-X Minerals Ltd.

But consider: none of our Big Five banks is in the slightest danger. In fact, each is poised to pluck off weakened U.S. banks at deep-discount prices, possibly with U.S. government assistance.

Why? Because our legislators and banking regulators aren't in the back pocket of a powerful banking lobby. They're more assiduous about scrutiny. They take a dim view of mortgages with no down payment, no collateral and no proof of income. And they aren't shy about demanding that banks increase their capital to cover writeoffs, well ahead of trouble. Each of the Big Five is blessed with a stable retail-banking franchise. Each is truly national, while even after several rounds of consolidation, the U.S. has not one bank that can boast the geographic diversification of the Toronto-based banks.

And because back in 1998, then-finance minister Paul Martin killed the Big Five's ardent desire to merge. We now know that the so-called "money centre" banks on Wall Street were so preoccupied with Pac-Man acquisitions they lost sight of their basic business.

There is such a thing as getting too big to be able to manage yourself, as General Motors Corp. has learned and Wal-Mart Stores Inc. eventually will.

"Martin should get some of the credit for the current soundness of Canada's banks," says Michael Bliss, University of Toronto professor emeritus and a leading business historian.

Bliss, incidentally, is a conservative who otherwise found little to admire in Martin at Finance or at 24 Sussex.

"Martin and Parliament stopped the banks from merging, and I would bet my house that if we had created a couple of superbanks here they would have flown high and now been a ghastly mess," Bliss said.

"Parliament and Martin rightly realized they needed to save the bankers from themselves."

Robert Kelly, chief executive of U.S. banking giant Bank of New York Mellon, spoke recently at the Canadian Club of Toronto on what to expect of the Obama administration.

The former TD Bank executive, noting the strength in product-line diversity and geographic reach of his former Canadian peers, said one of the lessons learned by the roughly 7,000 U.S. banks is the virtue of branch banking and a stable retail-deposit base. The upshot, he said, is that in post-recovery mode, the U.S. banking system will be more modelled on ours.

And what of our public finances, as current Finance Minister Jim Flaherty prepares a stimulus budget to be unveiled late this month that might push Canada into deficit of $30 billion (Canadian) or so?

To start with, it's almost quaintly modest relative to the triple-figure stimulus packages in America, Europe, China and Russia. Using the usual rule of 10s in comparing Canada and the U.S., Obama's imminent stimulus proposal should be on the order of $300 billion (U.S.), but will clock in at above $1 trillion by the time Congress lards it up. That's in addition to America's $700 billion banking bailout of late last year.

Fact is, after a decade of consecutive federal budget surpluses – a record unmatched among our G8 peers – Ottawa is in far better fiscal shape than other industrialized nations to cushion the blow for Canadians of the U.S.-originated global recession. Problems we have in abundance, perhaps none more disgraceful than the estimated 900,000 Canadian children living in poverty, the wretched conditions in many aboriginal communities, and our failure to take a leadership role in curbing global warming. But in crucial ways that other nations can only envy, this country is built on a rock.

Amid the daily headlines of a world gone haywire, the continued blessings of this country remain an untold story.

http://www.thestar.com/article/572995

Economictimes

Crisis may lead to creeping US protectionism

WASHINGTON: The world economic crisis has increased chances the United States will erect new barriers to trade but broad tariff increases, like
Brown and Bernanke those often blamed for causing the Great Depression, are unlikely, analysts said.

President-elect Barack Obama's criticism of China's currency practices, the North American Free Trade Agreement and other trade deals have raised concern his inauguration on Tuesday could usher in an era of U.S. protectionism.

"I think President Obama is going to talk more about getting tough on trade than actually doing anything because I think he and his economic advisers realize it would be bad for the U.S. economy to raise costs for U.S. consumers and jeopardize U.S. exports abroad," said Dan Griswold, head of the free market Cato Institute's trade policy shop.

The U.S. recession increases the temptation for politicians to shut out imports as unemployment rises. Last year, the United States lost more jobs than in any year since 1945, at the end of World War Two.

That could lead to protectionism in a number of guises, even if the United States steers clears of anything like the 1930 Smoot-Hawley Tariff Act that prompted a series of retaliatory tariff hikes around the world.

One of the worst things lawmakers could do is to include highly restrictive "Buy American" provisions in a proposed $825 billion economic stimulus package now taking shape in Congress, Griswold said.

Lawmakers from steel-making states introduced legislation on Thursday that would require the Departments of Defense, Homeland Security and Transportation to buy U.S. steel in any construction jobs they execute.

Senior Democrats on the House of Representatives Ways and Means Committee also introduced a bill on Thursday to give the incoming Obama administration new tools to ensure that other countries play by the rules.

But "enforcement" can easily become protectionism if the executive branch is allowed too much discretion to decide other countries are pursuing unfair trade practices that warrant U.S. import curbs, said Gary Hufbauer, senior fellow at the Peterson Institute for International Economics.

MORE ANTIDUMPING CASES

Typical of when the economy slips into recession, U.S. industries, like steel, are expected to flood the incoming Obama administration with requests for anti-dumping and countervailing duties on imported goods.

U.S. law makes it relatively easy to persuade the U.S. International Trade Commission, an independent quasi-judicial body, to set preliminary duties that have a chilling effect on trade even if it ultimately decides that a domestic industry is not being badly damaged by imports, Hufbauer said.

Likely U.S. action this year to address climate change or to protect consumers from "unsafe" foreign products provide other opportunities for both Congress and the Obama administration to slip in trade-restricting measures under the cloak of higher-sounding objectives, Hufbauer said.

Some members of Congress may push for broader import curbs. But it is hard to argue that would help the U.S. economy since imports are already falling sharply and new curbs could lead to retaliatory actions against U.S. exports, said Ed Gresser, trade director at the Progressive Policy Institute.

There is no sign that key lawmakers like Senate Finance Committee Chairman Max Baucus, a Montana Democrat, or House Ways and Means Committee Chairman Charles Rangel, a New York Democrat, want massive tariff hikes or favor restrictive quotas on imports, Gresser said.

WILL CHINA TRIGGER
A bigger concern is whether China, whose exports have plummeted, will take action like devaluing its currency to prop up exports, triggering protectionist responses around the world, said Greg Mastel, a senior policy adviser at Akin Gump.

"I think that's a much more realistic fear than the U.S. moving unilaterally toward trade protectionism," Mastel said.

Obama is likely initially to take a go-slow approach to new trade liberalizing agreements combined with more aggressive enforcement of existing pacts, he said.

Meanwhile, Congress appears to be on the verge of passing a major expansion of federal retraining and unemployment assistance to help workers who have lost their jobs because of imports or jobs moving overseas.

An improved U.S. safety net would ease, if not eliminate, pressures for protectionism, both Mastel and Gresser said.

Still, Obama will face major tests early on.

Many U.S. lawmakers believe China's currency is already significantly undervalued and want Obama to formally label Beijing as a "currency manipulator" in a semi-annual Treasury report due out in April.

If he does, many in Congress will see that as a green light to pursue bills -- such as one co-sponsored last year by Obama -- that would treat currency manipulation as a subsidy under U.S. countervailing duty law.

Obama will also meet in April with other leaders of the Group of 20 nations to discuss world economic woes.

When President George W. Bush hosted the G20 meeting in Washington in November, leaders agreed to refrain for 12 months from raising new trade or investment barriers or adopting World Trade Organization-illegal measures to stimulate exports.

Obama should push for language to strengthen that pledge, which already shows signs of fraying, and to set up a monitoring program, Hufbauer said.

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