Understanding the financial crisis - Risky Assets

In order to achieve returns, financial firms have to take risks. Over the last several years, securities firms and hedge funds have traded heavily in investments known as mortgage-backed securities. Let us try and understand how these instruments work.

Mortgages are familiar to people the world over. Buyers take a loan in order to buy a home and pledge the home as collateral. They also agree to make regular payments of interest and/or principal on the loan. If they fail to make payments, they are considered to be in default and the lender can repossess the home. Now look at this transaction from the point of view of the lender. A loan is an asset for a lender, because it yields periodic cash flows. Just as other assets can be bought and sold, loans can be bought and sold as well. The widespread availability of home loans in the US has been facilitated by the existence of an excellent secondary market for loans.

The secondary market in the US had its beginnings in the setting up of the Federal National Mortgage Association (FNMA or “Fannie Mae”), the Government National Mortgage Association (GNMA or “Ginnie Mae”), and the Federal Home Loan Corporation (“Freddie Mac”). These organizations have functioned quite well for decades, providing a secondary market for mortgage loans originated by banks and other depository institutions.

The secondary markets have worked well due to the securitization of loans. The concept of securitization is quite clever. A pool of mortgage loans is assembled and claims to the cash flows generated by the pool are sold. These claims, or securities, are like bonds: there is a promised interest paid on the principal amount. Buyers of these securities are protected from losses by guarantees provided by the agencies, Ginnie Mae, Fannie Mae and Freddie Mac. To understand the mechanism in some detail, let us borrow the following example from the Wikipedia article on Ginnie Mae:

For example, a mortgage lender may sign up 100 home mortgages in which each buyer agreed to pay a fixed interest rate of 6% for a 30-year term. The lender (who must be an approved issuer of GNMA certificates) obtains a guarantee from the GNMA and then sells the entire pool of mortgages to a bond dealer in the form of a "GNMA certificate". The bond dealer then sells GNMA mortgage-backed securities, paying 5.5% in this case, and backed by these mortgages, to investors. The original lender continues to collect payments from the home buyers, and forwards the money to a paying agent who pays the holders of the bonds. As these payments come in, the paying agent pays the principal which the home owners pay (or the amount that they are scheduled to pay, if some home owners fail to make the scheduled payment), and the 5.5% bond coupon payments to the investors. The difference between the 6% interest rate paid by the home owner and the 5.5% interest rate received by the investors consists of two components. Part of it is a guarantee fee (which GNMA gets) and part is a "servicing" fee, meaning a fee for collecting the monthly payments and dealing with the homeowner. If a home buyer defaults on payments, GNMA pays the bond coupon, as well as the scheduled principal payment each month, until the property is foreclosed. If (as is often the case) there is a shortfall (meaning a loss) after a foreclosure, GNMA still makes a full payment to the investor. If a home buyer prematurely pays off all or part of his loan, that portion of the bond is retired, or "called", the investor is paid accordingly, and no longer earns interest on that proportion of his bond.

The GNMA said in its 2003 annual report that over its history, it had guaranteed securities on the mortgages for over 30 million homes totaling over $2 trillion. It guaranteed $215.8 billion in these securities for the purchase or refinance of 2.4 million homes in 2003.

These arrangements, especially the guarantees provided by the agencies, allowed a vast market in mortgage-backed securities to develop. In fact, Fannie Mae guaranteed securities were bought even by foreign governments such as China.

Before loans could be packaged into pools and obtain a guarantee from the agencies such as Fannie Mae, they had to meet certain criteria set by the agencies. These were basically designed to limit potential defaults and ranged from a limit on loan size, a minimum credit score for the borrower, documentation of income, a maximum loan-to-property-value ratio etc. There were always some loans that did not meet the criteria laid down by the agencies. These loans were securitized by private companies. The resulting securities are known as non-agency or private-label mortgage-backed securities or as residential asset-backed securities. These securities are based on pools of loans which had

• high loan amounts, such as the ones common in California (known as jumbo loans),
• were issued to borrowers who had good credit scores, but did not meet other criteria such as verifiable steady income levels (known as Alt-A or Alternative-A loans),
• were issued to borrowers who had low credit scores (“subprime” loans).

[In the US, creditworthiness for individuals is measured by a score which is calculated by consumer credit measuring companies. A “prime” borrower is generally one who has a credit score of 660 or higher and usually is able to borrow at the lowest prevailing interest rate at a given time. Hence the terminology of “subprime” borrowers and “subprime” mortgages].

Starting in the early years of this decade, interest rates in the US have been at historic lows. In 2003 and 2004, individuals with good credit scores could get home loans for an annual interest rate of about 4.5%. Since many buyers tend to look at home buying purely in terms of the affordability of monthly payments rather than in terms of the size of the loan, the low interest rates meant that they could get bigger loans and bid up the prices of the houses in the market. What followed was a remarkable real estate boom.

The boom was fuelled by the easy availability of credit, and it in turn justified further lending by the financial firms. Many people were able to obtain several loans in order to buy second and third homes as investments. Some of the most astounding loans made were the so-called “stated income” or the “no documentation” loans. This meant that in order to meet whatever minimal lending standards the lenders required, the borrower could invent any income level and claim any assets. This practice was rubber-stamped by mortgage brokers and lending institutions alike. Because securitization allowed lenders to offload loans, they had little incentive to make sure that good lending practices were being followed.

You might justifiably ask why the buyers of mortgage-backed securities were not insisting on stricter lending standards. One major factor was that non-agency securities (the ones based on pools of Alt-A or subprime loans) were given good ratings by credit-rating agencies such as S&P, Moody's and Fitch. This was in turn possible because the non-agency sponsor would provide credit enhancements or buy insurance to guarantee that the principal would be paid back. In other words, inherently risky investments were dressed up to look acceptable by referring to dubious guarantees.

This kind of game, if played by a few players at a low level, can go on for a while. However, when many firms start doing this, it sets up the system for a major failure.

Understanding the financial crisis - Leverage

The financial crisis currently sweeping the United States and much of the world for more than a year now has claimed many innocent victims. Many people unconnected with the crisis have suffered losses of 40-50 % on their investments. The magnitude of the crisis can be judged from the fact that governments around the world have had to intervene with massive infusions of money, with the $700 billion intervention by the US leading the pack. Many financial institutions and agencies from around the world are tangled up in this mess. Among these are banks in the UK, continental Europe and Asia, sovereign wealth funds from the middle east, Singapore and Korea and governments with large foreign exchange reserves, such as China.

I have been frustrated by the reporting on this crisis, especially by the implication that the whole crisis is too complicated for anyone except the experts to understand. This I hold to be untrue. There is complexity, but most of it lies in the myriad linkages between participants in the world financial system. Part of it also arises from some unusually involved financial instruments. I believe however, that it is possible to get a pretty good grasp of the situation by abstracting those details. Thus, while you may not be able to predict which institution will fail next or which country will be jolted by the still evolving crisis, you should be able to understand why this crisis is taking place at all. Secondly, when you hear competing assertions about this one thing or that other thing being responsible for the problems, you can make your own judgements. Finally, you should be able to see the pros and cons of the proposed intervention schemes.

Leverage and its effects.
Let us first make up a model of how a financial firm works. Our firm starts with initial capital C. It then borrows money. Let us call the amount borrowed D, for debt. It then buys assets, worth A. Initially, C = A – D, or, owners' capital is the difference between assets and debt. After the initial stage, as the assets rise and fall in value, the difference between the assets and debt is referred to as owners' equity, E. So, in general, E = A – D. If the value of assets goes down enough, E can become zero or negative. If this happens, we say that the firm is insolvent. If, as in good times, the value of assets goes up, E can be greater than C, which means that the owners' equity has increased through profits.

All of this is simple enough. In fact, it applies to any entity, including households. What then is specific to financial firms ? Financial firms borrow a lot of money relative to their capital. This is known as leverage (or gearing). Leverage can be measured using A/E, or the assets-to-equity ratio. Leverage has the property of magnifying returns. For our model firm, the initial leverage is A/C. After some time passes, the assets appreciate or depreciate, yielding a percentage return (profit or loss) R. From the firm's point of view, its initial investment was C = A/L. The firm's return, therefore is

Leveraged return = (Amount of return)/(Initial investment)

= (R x A) / (A/L) = L x R

So, if the leverage ratio is 5, an asset value appreciation of 10% becomes a spectacular return of 50% on the firm's investment. The unfortunate part of this is that any losses are also magnified. Continuing with our example, a leverage ratio of 5 means that the initial capital is only a fifth (or 20%) of the initial value of the assets. If the assets fall in value by 20%, the firm becomes insolvent (the return is 5 x -20% or -100%). The creditors then take over the firm in order to try and recoup their money.

[My example of a leverage ratio of 5 is somewhat deliberate. This leverage is common in homebuying, where the buyer makes a 20% down payment. It is interesting to note that historically, real estate returns have been similar to stock returns. It is the leverage effect that makes homebuying such an enticing investment].

This simple principle of magnifying returns through leverage is employed by many financial entities, from banks to hedge funds. The difference lies in the kinds of assets they purchase and in how they borrow money. Commercial banks “borrow” by inviting deposits. Their assets (predominantly) consist of the loans they make to businesses, companies and individuals. The source of funds for insurance companies are policyholder premiums. Securities firms such as Bear Stearns or Lehman Brothers borrow from the capital markets by issuing securities of their own. Many hedge funds borrow from banks or from the established securities firms.

The creditors of a firm see equity capital as a cushion against losses and thus a buffer before their money is at risk. When the assets fall significantly in value, creditors demand that the firm raise additional capital or turn over its assets. If a firm is unable to raise capital, it files for bankruptcy in a court, seeking protection from creditors. Bankruptcy resolution takes a long time, and creditors inevitably lose a significant chunk of their money.

Banks and other financial institutions in the US have usually kept their leverage ratios at about 10. International standards usually specify a maximum leverage ratio for financial institutions of about 12. During the boom years, large securities firms in the US had much higher leverage ratios. In 2004, the US Securities and Exchange Commission, which supervises these firms, approved a waiver for five large securities firms – Goldman Sachs, Merrill Lynch, Morgan Stanley, Lehman Brothers, and Bear Stearns. They promptly took advantage of the waiver. Leverage ratios of 30 and more were not uncommon. At these levels of leverage, a fall in asset values of about 3 – 4 % makes a firm insolvent. It was a disaster waiting to happen.

Sacred Games: a review

Sacred Games is Vikram Chandra's third work of fiction, published in early 2007. It is a large novel, both physically as well as in scope and ambition. Judging by its 900 pages, it doesn't appear that the author was slacking off during the seven years that it took him to complete it . The book is set in turn-of -the-century Bombay and has as its central characters a mafia don, Ganesh Gaitonde, and a police inspector, Sartaj Singh. The broad plot could be straight out of a thousand thrillers: a nuclear device is about to be set off in Bombay. The intention is to make it appear to be the handiwork of Muslims, in order to ensure all manner of mayhem. The don Gaitonde has unwittingly helped in the importation of nuclear material, but panics after realizing this. He builds a bunker in the middle of Bombay to try and survive the nuclear explosions. For some reason, he then commits suicide, but not before tipping off the police inspector to his presence there.

The book has the police procedural and popular detective fiction as its templates, but these are merely structural frames. Chandra's real skill is as a weaver of stories. Much of the book is devoted to the career of Ganesh Gaitonde, narrated in the first person: his rise from a small-time crook to a major don, his criminal exploits, his going international, his living on a yacht in Thailand, and his spiritual awakening and involvement with a guru. This narrative is interleaved with the present, where Sartaj Singh is involved in other police work. In addition, there are so-called “insets” in which Chandra brings in additional stories, of characters who impinge upon the lives of Gaitonde and Sartaj Singh. Here is where Chandra's remarkable skill as a teller of stories is revealed. In particular, his account of the traumas of Sartaj Singh's mother's family during the partition of India is very well done. This inset has little to do with the main plot, but adds immeasurably to the reader's experience. Indeed, this kind of loving attention is lavished upon almost all of the characters in the book. This is really what sets this book apart. Even if you are not particularly impressed with the detective work or titillated by the Pulp Fiction type of gangster narrative, you can soak in the warmth of knowing the characters intimately.

The characters themselves are swept up by circumstances beyond their control. While their stories begin very far apart from each other, they are eventually linked with each other. In one inset, we are told about K. D. Yadav, the intelligence operative, who kills two people involved in the Naxalite movement in the late 1960s or early 1970s somewhere in eastern India. In another inset very late in the book, the son of one of these people recruits a struggling but educated Muslim youth called Adil. After a career as a revolutionary, Adil becomes disillusioned and escapes to Bombay, where he organizes small robberies. We then realize that this ties up with an encounter described earlier in the book, where Sartaj Singh's partner, constable Katekar, is killed. Sartaj Singh has to report upon his progress in the Gaitonde suicide investigation to Anjali Mathur, K. D. Yadav's protege in the intelligence establishment. This is but one of the intricate connections in the book. This common literary conceit, of stories tied together, runs the risk of becoming too obvious and predictable. Chandra's success can be gauged by the fact that the reader never loses interest in the characters or their stories. His dexterity at tying the various strands together is remarkable – the metaphor of a delicately woven carpet comes to mind.

While Mumbai is the setting for much of the action in the book, this novel is not about the city. Nevertheless, it does capture much of the ambience and the lingo, down to the mandatory cussing in Hindi. As far as the cussing goes (and it does go quite far), one does not expect any less in a gangsters-and-policemen saga. I do think though that Chandra's experiment integrating Hindi cuss-words with English is largely successful. The words are not italicised, some of them are used in their verb forms, and the glossary at the end, while reasonable, is not exhaustive. Judging by reader reactions on Amazon.com, this does not seem to be much of a stumbling block for people unfamiliar with Hindi or with the Mumbai variant of it.

Although the tale is told from several perspectives, Chandra is quite sympathetic to the enforcers of the law, be they lowly constables and police inspectors or the cloak-and-dagger types from RAW or IB, India's spy agencies. The regular violence and the petty and middling corruption of the police are depicted in a very matter-of-fact manner. Yet, the policemen turn out to be quite competent, street smart, and on the whole, good guys. The intelligence agencies are shown to be on top of everything. These are the parts that strain credulity, but do not detract much from the book. As with most fiction, we have to allow the author his or her premises, and watch what he or she builds from them. Vikram Chandra builds a very readable novel, but what stays with the reader long after the lurid details are forgotten, are the embedded nuggets of the smaller stories.

Prejudice in Pennsylvania

Today, while driving home from the train station, I heard a segment on the radio that was interesting to begin with, but ended up being deeply disturbing. The segment was from All Things Considered, a tolerable evening program from NPR. The segment aimed to investigate race consciousness in the upcoming US presidential election. For this, they assembled a set of potential voters in the town of York, Pennsylvania. Of the thirteen people, seven were whites. The voters discussed the race of the candidates, denying that it had anything to do with who they were going to vote for. A tally at the end showed that a mjaority of the white voters were planning to vote for McCain and that all the non-white voters (Blacks and Latinos) were going to vote for Obama.

I will let the transcript tell its own tale:

Leah Moreland, a widow and former factory worker, says she grew up on a farm and was very sheltered.

"I really was totally unaware of prejudice," Moreland says.

...............................................................................................

Leah Moreland, the woman who said she grew up sheltered from prejudice, plans to vote for McCain. Party loyalty is also part of her decision. But her cultural compass also comes into play. She says her gut tells her not to trust Obama.

"I look at Obama, and I have a question in my mind," she says. "Years ago, was he taken into the Muslim faith? And my concern is the only way you are no longer a Muslim is if you are dead, killed. So in my mind, he's still alive."

Although Barack Obama has said repeatedly he is not a Muslim and has never been a Muslim, Moreland is still unconvinced.

"There is something about him I don't trust," she says. "I don't care how good a speaker he is, I just can't trust him."

It staggers my mind that in such an ostensibly enlightened discussion about prejudice against Blacks, prejudice against Muslims is accepted so easily. Cultural compass indeed.

Small thrills

As I grow older, I seem to get an unusual kick out of small discoveries - something I remember from my childhood. Maybe it is because I have become cynical about grand insights and world-changing ideas.

Many years ago, I had heard this song, from the Hindi film Ek Musafir Ek Hasina. The song is unremarkable, except for this refrain in Asha Bhonsle's voice:

zaban-e-yaar man turki, man turki namidanum

I never knew what it meant. It was clearly in some foreign language, but it nevertheless stuck in my head. Recently, I was reading a book about the history and culture of the Mughals by Annemarie Schimmel. Imagine my delight when I read that the strange sounding line was a lament first penned by Amir Khusro, the great poet, musician and scholar who lived from 1253 to 1325 CE. He lived during the first century of Turkic rule in Delhi and its environs. Though his ancestors were of Turkic origin, he himself was unfamiliar with the Turkish language as it was spoken by the Turks in India at that time. He wrote this line in Persian, the literary language of northern India from the thirteenth through the eighteenth century. Translated, I believe it means:

The tongue of my friend is Turkish, but I know no Turkish.

I have no idea why Shewan Rizvi, the lyricist, included this line in the Hindi film song. It has absolutely no connection that I can fathom with the rest of the song.

So, Amir Khusro wrote the line sometime in the 13th or early 14th century, Rizvi incorporated it into a ditty in 1962, I heard it for the first time in the 1980s, and finally discovered the meaning in 2008. Thanks to the internet, you can listen to the song (the audio is not great), read the lyrics, and speculate on the beauty of it all.

Just not cricket

In a recent cricket match played between India and Australia in Sydney, the Indian cricketer Harbhajan Singh was accused of hurling a racist insult at Andrew Symonds, an Australian player who, I learnt recently, is of Caribbean descent. Symonds had been the subject of insulting taunts and gestures by some spectators in the stadiums of India where the Australian team had toured a few months ago. On January 4, 2008, in the middle of a tense game situation in Sydney, there was an exchange between Symonds and Harbhajan, after which Symonds accused Harbhajan of calling him a 'monkey'. This was backed up by two of his Australian team-mates, Matthew Hayden and Michael Clarke. Harbhajan Singh denied using any racist insults. The two umpires did not hear anything and the microphones attached to the stumps did not pick up the insult either. Harbhajan's batting partner and cricketing legend Sachin Tendulkar also said later that Harbhajan had not used any racist language. The matter was reported to the umpires, who eventually brought it to the attention of the off-field match referee. A hearing was held by the referee after the match was over; he found Harbhajan guilty as accused and handed out a three-match ban.

The ban unleashed a furore in India. The TV channels were outraged. Predictably, a few effigies were burnt for the benefit of the cameras. Websites were flooded with the outbursts of Indian cricket fans. Everybody and his uncle weighed in on the matter. The Indian cricket board, by far the wealthiest and most influential of such boards in the cricket playing countries, made threatening noises about calling off the tour if the ban were not lifted. An appeals process exists in cases such as these, so an appeal was filed. The international body that manages cricket, the International Cricket Council (ICC), decided to postpone the appeal hearing till the end of the month in order to salvage the two remaining matches in the test series. On Tuesday, January 29th, the appeal was heard by a commissioner of the ICC who also happens to be a judge from New Zealand. He found that the charge was not proven. Harbhajan was however convicted of a lesser charge of using abusive language.

This bare summary hardly does justice to the story. In order to get a fuller picture, we have to recall some background. Cricket is played extensively in very few countries - all of whom were formerly part of the British empire. Introduced by the British into the colonies of the empire, it was initially meant for and played by the elites. From the start of the 20th century, international games were run by the English and the Australians via a body called the ICC - the Imperial Cricket Conference. An Indian team, usually captained by a maharaja, started playing international games in 1932. After the departure of the British, cricket steadily gained popularity in the countries of the subcontinent. Pakistan started playing international cricket soon after 1947, Sri Lanka did so in the 1980s, as did Bangladesh in the 1990s.

The way that the game is played in India has no resemblance to the genteel version of it imagined fondly by the Victorians who played it and built up its mythology and cliches - cricket was 'a gentleman's game'; whatever was not fair was 'just not cricket'. Today, the game is played by large numbers of people in the streets of the subcontinent, most often with barely any equipment save for a bat and a ball and with scant regard for obscure rules, leave alone codes of behavior. Television has taken cricket to rural India as well. The game is easily understood, does not require great athleticism, and captivates people thanks to the many fluctuations in fortune during a typical game. In addition, since international contests are between national teams, there is a great deal of nationalist pride and posturing involved - India-Pakistan games during the 1980s and 1990s were more or less treated as wars by other means. All of this has led the sociologist Ashis Nandy to remark only half-jocularly that cricket is an Indian game accidentally invented by the British.

In the last couple of decades or so, fuelled by the television revolution in India, cricket has meant big money. Players for the national cricket team sign lucrative advertising contracts and become stars in the process. Their record of successes in the game is mixed at best, but the celebrity-obsession of the 24-hour TV channels and most of the print media ensures that they are never out of the limelight. The Indian cricket team also carries the misplaced burden of national pride with it. This has been toned down a little bit in the last year or two, but the players do risk their effigies being burnt or their houses being attacked if they lose particularly badly.

The rivalry between the Indian and Australian teams has been quite intense for the last several years. While the Indian team has many talented players, Australia has quite clearly been the best team in the world for many years. During the last decade, it has won the 1999, 2003 and 2007 world cup one-day cricket championships and has twice had long strings of victories (16 matches in a row) in the five-day version of the game. Yet, India has challenged this supremacy several times. The two long victory strings were broken by India. India was the losing finalist in the 2003 world cup. In 2007, India won the world championship in Twenty20 cricket - the newest, most exciting, and shortest form of the game. It beat Australia in the semi-finals.

A tour of India by Australia in September-October 2007 saw a lot of bitterness. Verbal clashes between players on the field were magnified by the ugly behavior of spectators. Australia won the series of one-day games easily, but lost the only Twenty20 encounter, allowing India to claim that their victory in the world cup clash was not a fluke. It was during the course of this series that Symonds was called a monkey by some spectators. At first, the Indian board denied that such a thing could happen, but upon being confronted with photographic evidence from an enterprising Aussie journalist, belatedly issued condemnations and asked authorities to prosecute the culprits.

The Australian team is notorious in cricketing circles for being utterly and completely obnoxious - several years ago, they elevated the dubious practice of 'sledging' to a regular feature of their game. Sledging refers to insults, abuse and harangues directed by a team's players against an opposing team's player on the field. This is supposed to unsettle the opponent and get him out - and it very often does. Over the years, other teams have also adopted this practice, leading to a great deal of unpleasantness. In the last year or so, some of the Indian cricketers are dishing it out just as well as they are receiving it - in fact, perhaps way more than necessary. Harbhajan Singh is one of them. In October 2007, after the bitter series with India, the Australian captain was surprised by this new found aggression among the Indians, whom he called "fairly passive sort of people".

All of this helps us understand why the reaction in India to one of their players being labeled a racist is so strong. The reaction that I see on the web, in user comments on Cricinfo (an encyclopedic cricket website) and, to take one example, on the Guardian's website, makes for interesting reading after you eliminate the obviously idiotic comments. I think that much of the difference in opinions comes from being unable to recognize that several things are simultaneously true:

• Protestations to the contrary notwithstanding, Indians can be quite racist.
  

Just like any group of people, Indians are capable of enormous amounts of prejudice - on the basis of religion, caste, language, appearance, skin color and nationality. At one extreme, the horrendous mob violence unleashed against minorities every now and then in India is the ugliest manifestation of prejudice. At the other, on a relatively more harmless scale, is the preference for 'fair' skin and 'fairness' creams.

The in-built prejudice is strong and does not evaporate with exposure to greater numbers of people of diverse appearance - I have met many Indians in the US who use the terms kallu for black people and chinku for Asian-Americans.

Of course, this does not mean that all Indians are racists or that Harbhajan is a racist. On the contrary, I think that most Indians are actually very comfortable with differences and actually seek out and love diversity. And many of them are militantly anti-racist. Nevertheless, the point is that just because we are brown-skinned, or that a fair number of Indians are themselves dark-skinned, or that we have a legacy of fighting against colonialism/racism- does not mean that we are immune as a group to racism.

• Australian cricket players have been obnoxious for many years.
  

A famous incident from 5 years ago, involving the now-retired Glenn McGrath sledging Ramnaresh Sarwan of the West Indies, showed that on-field provocation could spiral out of control. Cricket folk lore has added dialogue to the incident which remains unconfirmed, but is probably not far from the truth. Curiously, there was considerable support for McGrath in Australia, despite the fact that he started the whole thing with what was a patently offensive remark - even the Aussie Prime Minister jumped in to defend McGrath.

And just a few months before that, Australia's very own Darren Lehmann became the first player to be suspended for 5 games for a racist outburst in which he reportedly called Sri Lanka's players "black c***s".

• The word 'monkey' may not be very offensive in India but carries strong racist overtones in the English speaking world.

It is true, as many Indians have pointed out, that Indians often call their kids 'little monkey' fondly. In addition, Michael Holding, the great bowler of the 1980s and of Caribbean origin like Andrew Symonds, was quite dismissive of the term being racist. This means that context and intent are critical when deciding if something is racist. Nevertheless, I suspect that Harbhajan was aware that calling someone a 'monkey' was racially offensive - it had already caused controversy earlier. Also, he is familiar enough with English (as this interview shows) to have realized that.
Even though context and intent are critical, the Indian team's counter-complaint against Brad Hogg (later withdrawn) calling them 'bastards' seems a bit disingenuous to me. Among the English-speaking urban crowd in India, from which a majority of its cricket players are still drawn, 'bastard' is used frequently. I remember it being used more or less as a filler among students when I was in college. On the other hand though, you could easily get roundly thrashed for calling someone 'harami' in Hindi.

• There is one likely explanation that reconciles different versions of the event.

Harbhajan Singh may very likely have said 'Teri Maan ki ****' - a common, though harsh, gaali (abusive phrase) in northern India, not unlike the 'Tu Madre' in Spanish. This could easily have been misheard by the Australians as 'monkey'. This is one explanation that squares with all the available evidence - nothing caught on the mikes, nothing heard by the umpires, the strong accusations of the Australians, and the vehement denials by Harbhajan. It is apparently also the version of events given by Sachin Tendulkar in the appeal hearing.

This swearing in Hindi and/or Punjabi is not uncommon on the cricket field - especially in India-Pakistan games. The generously provided voice-over for a video of this clash between Gautam Gambhir of India and Shahid Afridi of Pakistan may have been imagined, but is very close to the truth, as the lip movements synchronize perfectly with very well-known gaalis in India and Pakistan.

The end result is that the Australian team and public are utterly convinced that Harbhajan did call Symonds a 'monkey' and then got away with a rap on the knuckles, thanks to the financial muscle of the Indian cricket board and the small-mindedness of the ICC and Australian boards. Most Indians are equally convinced that Harbhajan is being victimised, and is at most guilty of abuse under provocation. Adding to their sense of injustice is the fact that at the first hearing, the burden of proof was not demanded of the Australians by Mike Procter, a white, former South African player, who has generally been harsh on subcontinental players and lenient with Australians.

What Harbhajan said to Symonds on that day will perhaps remain a mystery, but I am intrigued by how slippery the truth can be. Faced with imperfect knowledge, we imagine what must have happened. This imagination is overwhelmingly based on cultural steroetypes, our experiences in life and our perceptions of the people involved.