Sunday, 5 October 2008

Strictly Business: What Dreamworks Can Teach Us About Global Trade

According to the inestimable Nikki Finke DreamWorks' independence from Paramount will be without the drama just about everyone, me included, predicted.

I'm disappointed, Hollywood is a place where you can't even order a coffee without a legion of litigators, or at least a brigade of barristers, getting involved, so seeing this once tangled relationship dissolve as close to amicably as anything in Hollywood can get is surprising. Well, you learn something new everyday.

Everyone is expecting that Spielberg will be naming Universal as the company's next distributor, and thanks to $1.5 billion in financing, half from the Reliance media empire of India, they should have no problem filling their distributor's slate.

Now folks are wondering why a major Indian company is investing so heavily into Hollywood, despite the ongoing "credit crunch." Well, it's simple economics, and probably best expressed,
in paraphrased fashion, by the character of Jensen, played by Ned Beatty in the movie Network.
The Indians have taken billions of dollars out of this country, and now they must put it back! It is ebb and flow, tidal gravity! It is ecological balance!
You see, Indian companies, doing everything from running call centres, to medical research, programming computers, and advanced aerospace engineering, have been making billions of US dollars from selling their goods and services to customers in the United States.

Now since countries dropped the gold standard for measuring currencies and international trade, such business means that billions of American dollars are now being held by Indian companies.

What are they going to do with all these greenbacks?

They can't spend them at home, Indian currency is the rupee, and with the inevitability of tidal gravity, it must eventually be exchanged in the United States for American goods and services. Hence you get... holistic system of systems, one vast and humane, interwoven, interacting, multivariate, multinational dominion of dollars. Petro-dollars, electro-dollars, multi-dollars, euros, yuan, yen, rupees, rubles, pounds, and shekels.

It is the international system of currency which determines the totality of life on this planet. That is the natural order of things today. That is the atomic and subatomic and galactic structure of things today!
So, unless one side does something stupid for political reasons, trade goes one way, then it goes another, promoting growth and prosperity for both sides. And with India rapidly becoming a first world nation, with a vastly growing middle class, healthy banking sector, and billions in American currency in the bank, they're going to have to find investment and trade opportunities, and those opportunities are in America.

Now you might be wondering why those opportunities are in America, considering the current shenanigans over sub-prime mortgages, and bailouts and whatnot.

Well, take a gander at the current situation of Wachovia Bank. On paper Wachovia is supposedly bankrupt, holder of $270 billion in allegedly worthless mortgages. Yet two major banks, Citibank and Wells Fargo, are getting into a cat-fight over who gets the right to spend billions of their own good money to buy this supposedly worthless institution.


It's because of "marked to market" accounting. By the rules of accounting these mortgages are worthless, because no one will pay money to buy them as securities. That is because foreclosures, and mortgage defaults have tripled, but remember, that adds up to about 6% of all mortgages.

That means around 94% of mortgages are being paid. On paper they're worthless, and their owner is a bankrupt, yet cash keeps flowing in. Even with a drop in property values, which were over-inflated anyway, and even if the new owner renegotiates new terms with the mortgage holders, they still stand to make profits in the tens of billions of dollars. Because the underlying assets are still worth way more than the price they will pay for the securities. Look at the math.

Wachovia holds $270 billion in mortgage backed securities.

Wells Fargo wants to pay $15 billion for the whole kit and kaboodle. (Citi wants the courts to let them have it for $2 billion.)

Even with the 6% default, they will still have $253 billion in mortgages still being paid.

And the 6% that default, their property still has value, and the banks can sell them, even at fire sale prices, for hundreds of millions more than they paid for them.

Even the worst case scenario of 20% defaults means that the winner will still have around $216 billion being paid, and property still worth hundreds of millions more than they paid for.

Don't believe me.

Can you guess how much of the $200 billion earmarked to bail out Fannie Mae has been spent?

Let me tell you.

Nothing, nada, zip, zilch, zero.

Because while on paper the company is technically bankrupt, it still has a healthy cash flow. The majority of mortages are still being paid.

So expect a buying frenzy, especially from foreign businesses, liquidity will return, and eventually the credit markets will balance themselves out. For smart investors, who know that America is a paragon of economic stability compared to most countries, it is a great time to buy.

And India is looking to buy American.

Because that's the natural order of things.

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