Why the Bailout Failed and Ideas for Fixing Wall Street and its IT

Congress's failure to pass the Treasury's proposed $700 billion financial bailout package today came as no surprise to Anil Kumar, global head - financial services group at IT services giant Satyam. "They didn't do a good job of summarizing the plan," Kumar says. "They've got to redefine the plan to be more consumer-oriented, rather than solely based on removing toxic assets from banks' balance sheets." He adds, "Unless the housing problems are addressed, I don't think it will pass."But we don't really need a "bailout" plan at all from the government, Kumar believes. What we really need from the government is a comprehensive set of rules and pricing for buying and selling distressed assets and around operational and financial risk management. "Someone has to decide what the fair price for these assets should be," he says. If the Treasury were to offer 10 cents on the dollar for the assets, a hedge fund might bid twelve cents. Institutional investors might even get in on the act. "Fortune 500 firms have lots of cash," Kumar notes. "Ironically, it's only the banks that don't have cash." Hedge funds haven't been buying the toxic credit default swaps and collateralized debt obligations due to fear of offering too much for them and losing money. "It's all about timing - when will the market hit bottom," he says. Fort Worth, Texas-based TPG, for instance, thought the mortgage market had bottomed five months ago when it bought a $1.35 billion stake in Washington Mutual; that timing turned out to be wrong and TPG lost all of its investment.

Kumar, who manages a staff of 15,000 within Satyam, stopped by our office this afternoon to discuss the financial crisis and a related topic - IT efficiency models he's developing with groups of financial IT executives, especially in the areas of derivatives handling, wealth management and legacy modernization.

There's a staggering amount of manual labor involved in handling derivatives in the U.S., Kumar says. "The cost of managing a derivatives contract is $700," he says. "That's one reason firms are getting loaded with administrative costs that are affecting P&L." He notes that some firms are starting to automate credit default swaps. "Firms can automate these instruments in a phased manner, but there has to be a centralized body - for instance, it could be SWIFT - that could drive a framework around pricing and a broad set of financial risk measurements." In current practice, the two parties to a contract make up their own rules, making it extremely difficult to automate. "The application scope changes from transaction to transaction," he says.

Another efficiency model Kumar is developing is around wealth management. "At large broker/dealers, the cost of opening an account is $250 and this cost is billed back to the consumer," he says. "That cost should be about half what it is today." Kumar's group is trying to define a framework for how wealth management accounts should be opened and managed. "There's a need for shared services and a common set of goals," he says. For example, every wealth management relationship requires a client reporting tool to show the customer how his investments are performing. That could be one automated building block that firms could share in order to save money and pass that savings on to consumers. "Firms are unwilling to share, thinking that they have a competitive advantage," Kumar notes. "But once you ask them what that competitive edge is, it turns out not to be in things like the account opening process."

Legacy modernization is the third area for which Kumar is working with financial executives to build a framework. "No one on Wall Street is buying new software, that's not happening for three to six months," he says. "CIOs have to leverage existing infrastructure to make it more SOA-centric, customer-centric and scalable, and that's a significant challenge in some environments, especially where they still have mainframes."