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At least Bear and Merrill found buyers, the former with support from the Fed. Lehman has suffered the ignominy of having to file for bankruptcy. Only Goldman Sachs and Morgan Stanley are left standing and now they are becoming banks!!!
Billions of dollars and thousands of jobs have been lost.
The demise of three top investment banks has several implications. First, it calls into question the standalone model of investment banking. For most capital market activities, a stable base of funds makes sense. Banks, with their access to deposits, are better placed to succeed. That is what the acquisitions of Bear and Merrily Lynch by J P Morgan Chase and Bank of America respectively signal. In other words, ‘financial intermediation’, on the wane for many years, is back with a bang.
Secondly, leverage in banking itself may have to fall from the present levels. Thirdly, when investment banks come to be part of banks, investment banking too comes under the purview of central bank regulation.
Now US congress is finally acting to save US and world economy.It has proposed to create a RTC (Resolution Trust Corporation) that would buy bad assets from banks at an appropriate price.It would auction those assets later once markets have stabilised.How will this help the economy?It helps stabilise the value of assets of financial firms and prevents the collapse of highly leveraged institutions. Hopefully, the RTC will make a profit later; if not, the government incurs a cost equivalent to the losses on sale of assets the RTC has bought.
So far so good,but does not it end up rewarding the worst performer?
Will this model address the basic problem which is lack of capital at financial institutions.Whatever,US FED is hell bound to save these financial institutions and will do whatever possible to buy them.
AIG is already under US with 80% stakes and Freddie & Fannie now too belongs to US govt.
US is planning to pump at much as $1 trillion to save these corp.But the question is- can US afford this?
A trillion dollars is under 8% of US GDP. That is big but still falls in the lower end of bank recapitalisation costs consequent to economic crises- the range is 5-45% of GDP.US public debt, at $ 4.4 trillion, is 32% of GDP, pretty much on the low side considering that the limit for EU economies under the Maastricht Treaty is 60% of GDP (India has over 70% of GDP in debt). That means there is room for another $4 trillion of US debt. So, even if the bail-outs were to amount to $1 trillion, the US and the world economy can take that cost in their stride.
But now comes the tricky question, How will this nationalization of big financial firms going to affect the world.
This is something very few people are really looking into.This $1 trillion RTC will own the assets of these companies(like AIG,Freddie & Fannie).Now look at this scenario: AIG thru its JV with TATA,i.e TATA-AIG holds good percentage of equity in the companies like Reliance industries, RCOM, ONGC, BHARTI, BHEL, MINDTREE, INFY, MMTC, MTNL, NTPC, DLF, SBI, ICICI et al.
In short,most of the companies in India will have US govt. as its direct owner in some percent of equity.This is the data available with the SEBI, we still dont know the exact extend of investment of these US companies.This data is only for India.Extrapolate it to the whole world and you would see the US is probably creating the largest sovereign wealth fund (SWF) of this world.It will soon hold a sizable amount of equity in companies throughout the world.
Be it it India, China, Russia, Brazil or Argentina, US govt. may soon have a direct ownership of their companies(in small proportion though)
Imagine US holding stakes in China mobile and NTPC.It can then directly gain from the growth of both India and china's infrastructure.So the next time world bank sponsors a NTPC plant, we would know where its real profits are going?
The worst case would be, US starting to manipulate the working of these companies.
The sub prime crisis might end up being the blessing which will ensure a US supremacy over the world in this century too.But before that a lot of mess has to be cleaned otherwise before we can see a US diplomat in the board meeting of DLF we might see US borrowing from IMF and world bank to clean up its roads!!!!!!!
I just got this cartoon on net,i think the blog's idea can be captured in it
Billions of dollars and thousands of jobs have been lost.
The demise of three top investment banks has several implications. First, it calls into question the standalone model of investment banking. For most capital market activities, a stable base of funds makes sense. Banks, with their access to deposits, are better placed to succeed. That is what the acquisitions of Bear and Merrily Lynch by J P Morgan Chase and Bank of America respectively signal. In other words, ‘financial intermediation’, on the wane for many years, is back with a bang.
Secondly, leverage in banking itself may have to fall from the present levels. Thirdly, when investment banks come to be part of banks, investment banking too comes under the purview of central bank regulation.
Now US congress is finally acting to save US and world economy.It has proposed to create a RTC (Resolution Trust Corporation) that would buy bad assets from banks at an appropriate price.It would auction those assets later once markets have stabilised.How will this help the economy?It helps stabilise the value of assets of financial firms and prevents the collapse of highly leveraged institutions. Hopefully, the RTC will make a profit later; if not, the government incurs a cost equivalent to the losses on sale of assets the RTC has bought.
So far so good,but does not it end up rewarding the worst performer?
Will this model address the basic problem which is lack of capital at financial institutions.Whatever,US FED is hell bound to save these financial institutions and will do whatever possible to buy them.
AIG is already under US with 80% stakes and Freddie & Fannie now too belongs to US govt.
US is planning to pump at much as $1 trillion to save these corp.But the question is- can US afford this?
A trillion dollars is under 8% of US GDP. That is big but still falls in the lower end of bank recapitalisation costs consequent to economic crises- the range is 5-45% of GDP.US public debt, at $ 4.4 trillion, is 32% of GDP, pretty much on the low side considering that the limit for EU economies under the Maastricht Treaty is 60% of GDP (India has over 70% of GDP in debt). That means there is room for another $4 trillion of US debt. So, even if the bail-outs were to amount to $1 trillion, the US and the world economy can take that cost in their stride.
But now comes the tricky question, How will this nationalization of big financial firms going to affect the world.
This is something very few people are really looking into.This $1 trillion RTC will own the assets of these companies(like AIG,Freddie & Fannie).Now look at this scenario: AIG thru its JV with TATA,i.e TATA-AIG holds good percentage of equity in the companies like Reliance industries, RCOM, ONGC, BHARTI, BHEL, MINDTREE, INFY, MMTC, MTNL, NTPC, DLF, SBI, ICICI et al.
In short,most of the companies in India will have US govt. as its direct owner in some percent of equity.This is the data available with the SEBI, we still dont know the exact extend of investment of these US companies.This data is only for India.Extrapolate it to the whole world and you would see the US is probably creating the largest sovereign wealth fund (SWF) of this world.It will soon hold a sizable amount of equity in companies throughout the world.
Be it it India, China, Russia, Brazil or Argentina, US govt. may soon have a direct ownership of their companies(in small proportion though)
Imagine US holding stakes in China mobile and NTPC.It can then directly gain from the growth of both India and china's infrastructure.So the next time world bank sponsors a NTPC plant, we would know where its real profits are going?
The worst case would be, US starting to manipulate the working of these companies.
The sub prime crisis might end up being the blessing which will ensure a US supremacy over the world in this century too.But before that a lot of mess has to be cleaned otherwise before we can see a US diplomat in the board meeting of DLF we might see US borrowing from IMF and world bank to clean up its roads!!!!!!!
I just got this cartoon on net,i think the blog's idea can be captured in it
2 comments:
An article which consciously tries to sress out the point that the crisis in US has its effects on a global scale..... I especially loved the part where the domination of US govt indirectly through it s bailout will affect companies globally...... really well written and highly informative.....
hats off to your synchronization of the juggling of numbers ,with their implications .it would be nice if u can post the impact on the common man(a farmer,s/w engineer etc of india/U.S or generalised) of this depression which gives the clear perception of "Privatisation of profits,& Nationalisation of losses".
cheers
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