Mighty investment banks flourished for a long time, landing headline grabbing deals and advising companies and government around the world on mergers, stock offerings and restructurings. But now it seems that the doomsday for the investment banking sector has arrived.
What exactly is this crisis all about?
It is centered around US housing bubble. Starting in the late 1990’s,under the noble idea of expanding home ownership, US banks and financial institutions began lending money at low interest rates with little due diligence to just about anyone including new immigrants. Easy credit and low adjustable mortgages generated massive demand, accelerated home price increases and created a bubble. When it became unsustainable and housing prices started to drop, system collapsed bringing down with it financial institutions which held these bundled mortgages worth billions. Overnight, storied firms such as Bear Sterns, Lehmann brothers and AIG which was the 18th largest company in the world till recently, neck deep in housing mortgage, sank.
What has Bush done?
What exactly is this crisis all about?
It is centered around US housing bubble. Starting in the late 1990’s,under the noble idea of expanding home ownership, US banks and financial institutions began lending money at low interest rates with little due diligence to just about anyone including new immigrants. Easy credit and low adjustable mortgages generated massive demand, accelerated home price increases and created a bubble. When it became unsustainable and housing prices started to drop, system collapsed bringing down with it financial institutions which held these bundled mortgages worth billions. Overnight, storied firms such as Bear Sterns, Lehmann brothers and AIG which was the 18th largest company in the world till recently, neck deep in housing mortgage, sank.
What has Bush done?
In the 1st grim week, bush administration is buying up all the bad mortgages, insured the money market funds with government money and curbed stock speculation by banning short selling. It is government intervention at highest and some people are calling it the death of the free market economy and end of capitalism. Consequences of taking no actions even now would be massive job losses, devastated retirement accounts, erosion of housing values and drying up of loans for new homes. So, government intervention is not only warranted, it is essential.
Effect on India……
India is relatively insulated from developments because of its modest exposure to US financial world. But in this era of global trade and finance, any slowdown or contraction of US economy is bound to hurt India.
What else is in store…..?
Just when it seemed like there was nothing left to boggle the mind, the titans of Global finance, Goldman Sachs and Morgan Stanley concluded that there is no future in remaining investment banks now as model has broken down. By becoming bank holding companies, firms are agreeing to significantly tighter regulations and much closer supervisions by bank examiners from several government agencies. Firms requested the change themselves. Their model of finance and investing has become too risky and they need cushion of bank deposits that has kept Bank of America and JP Morgan relatively safe amid recent turmoil. So, firms will be more like commercial banks, with more disclosure, higher reserves and less risk taking. In exchange they will have access to full array of Federal Reserve Bank’s lending facilities.
It is a turning point for high rolling culture of Wall Street with its 7 figure bonuses and lavish perks. It returns Wall Street to way it was structured before congress passed a law during Great Depression separating Investment Banking from commercial banking.
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