Tuesday, September 16, 2008

Where are we heading ?

No matter where u r in this world u might have heard about the recent catastrophe in USA. A catastrophe which rocked & shook the complete world. No... I am not talking about Hurricane Ike or Hurricane Gustav. This article is on the downfall of 5 giants.
It all started with the Jan 22nd crash. The sub-prime crisis, US economy slowdown, Increasing Joblessness claims etc., by March many global banks have written down billions of dollars. Citi Bank writing off 50+ billion USD topping the list!! followed by companies like UBS. The total estimated losses of all the companies accounted to a whopping 512 Billion USD!!( write offs were approx... 275Billion USD in America, 215Billion USD in Europe & 25 Billion USD in Asia). Citi Bank need to sell some of its assets to come out of this quick sand! Few giant companies survived & few are still struggling & swimming against the tide & few have gone almost bankrupt!! Lets now talk about few of the biggest Organisations( based out of USA) which were washed away in the tide called Sub Prime Crisis.

First up....

Bear Stearns - one of the oldest Investment banks in USA was severely hampered & its stock price came down to 2$/share down from 133$/share. Finally it was acquired by JP Morgan. JP Morgan has paid close to 10$/share.

Next up...

Now its the turn of the US' oldest mortgage firms Fannie & Freddie ! The Fed came to the rescue this time.

The real Carnage begun in mid SEP.

With in a gap of less than a week, first Lehman Brothers made the headlines filling its bankruptcy. Then came the news on AIG, the biggest insurance company in the world !! Merrill Lynch followed in their footsteps. The stock price of Lehman bottomed out! It was almost valueless at 0.12$ last time when i checked. A company which has a successful history of 158 years surviving many financial crashes & world wars has finally bitten the dust :-( Interestingly Lehman has never even reported a quarterly loss till June 08!! More or less same is the case with AIG. Merrill Lynch is slightly in a better position. Luckily Merrill Lynch was taken over by BoA(Bank of America) there by becoming the biggest brokarage house in the world !! Federal Bank again came into the picture. It helped AIG by providing $80B loan after picking up 80+ % stake in the company proving that AIG is too big to fail !!! Parts of Lehman Brothers were acquired by biggies like Barclays. But that was not sufficient. Need to wait and see the future of Lehman :( It definitely looks gloomy.

The story so far :

Till date Investment Banking is the buzz word in any country when it comes to Finance ! Most of the American giants used to recruit grads from our IIMs ! I Banking used to be the most preferred profession for any MBA with splzation in Finance. But with the recent turn around in things it may soon change. There is already an article in TOI which says IIM grads are now shifting focus from IB to Micro Finance. I am totally unaware of what this Micro Finance means :-( But I am sure there is something cooking in every B-School :-) we can smell it :D

Bear Stearns, Merill Lynch, Lehman Brothers...... 3 out of top 5 Investment Banking firms are clean bowled. Left are........the dream company of many young Finance Aspirants (like me) Goldman Sachs & Morgan Stanley. Goldman has announced a 70% decline in profits when compared to last quarter!! which it self is an indication of slowdown. Both Goldman & Morgan used to be individual IB firms which out any tieup till now. But looks like they are reconsidering their independent status. Donno what exactly is cooking inside these firms... but the odour is definitely bad :P

If you think that the list has ended here then u might need to think again ! wait for another quarter or two.... there might be still some bad news left :(

Side Effects:

After all this mayhem analysts have termed this as Financial Tsunami !! & rightly so.
Guru Buffett termed this turmoil in the markets an 'economic Pearl Harbor' ! His quote: "It's not like Pearl Harbor where you could look at what happened with your own eyes and decide you had to do something that day. This is sort of an economic Pearl Harbor we're going through.'' Which only means that this Financial Tsunami has not reached its Climax !

Amid all this chaos, the Bush administration is trying for a $700Billion 'bailout plan' to bring some steadiness in the markets. But things did not turn in their favor till now. Voting went against the bail out plan and the DOW JONES plummeted 777 points on 29th Sep !! The biggest ever single day fall in the history of US. The jitters and tremors are felt across the globe & India is no exception. Now thats really Bad.... in fact its worse.

The aftermaths of these crashes, downfalls are Pink Slips in almost all the sectors which are dependent on US. IT is ahead in the list ! More than 65% of revenues of major Indian IT companies come from USA. which means these companies will get less business in future. Moreover, a significant part of these revenues come from BFSI(Banking,Financial Services & Insurance) sector(anywhere between 20%-45% of total revenues). Now its self explanatory!

He he he .......every second is filled with excitement these days. Its feels just like watching an F1 race! U never know who is going to crash OUT. My company has already started the cost cutting business by sacking jobs!! Is ur company into this business ?? If NO then they might soon learn this ART. BE CAREFUL !!

1 comment:

Narender said...

I am reading your posts after a long time.

You haven't seen anything yet.. We are only seeing the beforeshocks (like aftershocks) of the upcoming Gaint tSunami that can potentially have lasting impact for decades to come. We have seen one on Jan 22 and another around the corner.

Did you know why the Lehman didn't report a quarterly loss? If they had, they would have lasted little longer. The MBS market is dead, no liquidity, they are unable to borrow any more money, They have resigned the game when they lost all pawns in their chess board.

IT companies will see the pain when both from US and Europe. Most of the toxic waste is actually dumped into Europe. US is only next to Europe in terms of percentage loss. So IT companies don't have a respite at all. Except that they will still get orders even when Banks merge, collapse, bankrupt, because even for these they need IT services.

I believe we are going to see more days of panic. Nights with nightmares. I believe 2012 is the deadline for a major transition around the world.

The only countries that are isolated and have any future could be the Islam countries in the Middle East. Their banks/businesses do not involve in lending practices as done elsewhere.