The debacle of the 5 giants - Lehman Brothers, Morgan Stanley, Goldman Sachs, Merrill Lynch and Bear Stearns, of which the first sank, the fourth and the last had a clemency mergers, and the remaining two convert themselves into conventional banks - is an interesting development. Some six months back these IBs (Investment Banks) had a Bond Credit Rating of AAA (Credit risk almost zero), but now its been down-graded to BB (Speculative investment). This change, just under a span of six months. Now, no longer the concept of Investment Banks exists, at least in the US. The reason behind this down-fall, according to the experts, is the torpidness of the US government. Experts chastises the US Government for allowing these IBs to become Mega Financial Centers. The assets of each of the big five is more than the nominal GDP of 183 countries. Their assets are worth more than a trillion dollar. Mind, the GDP of countries like Russia, India and Brazil is about a trillion dollar. How could a private institute manage assets tantamount to that of a nation like India or Russia. These companies were allowed to grow with no restraints, culminating into a disaster. Analysts believe that this is the main reason behind the collapse of IBs; this intensified by the subprime crisis.
With the Big Fives gone, some augured that the Credit Crisis is abating. Is their prognosis correct? I guess not, even though I hope for it. The pinch-effect, till now, was felt only by the investors and home loan takers. The real crisis begins only when its effects are catholic. Catholic in the sense, felt by every level of the community: from the affluent to the bourgeois, to the poor. That happens only when the universal financial system breaks. In layman’s language this financial system is nothing but Retail and Commercial banks. These banks boasts of their ability and prowess to effectively contain the financial crisis with only a little damage. Giants among the whole of financial sector like Citi, Bank of America and Wachovia reported huge losses. This American triggered ripple-effect has steadily, yet quickly propagated to other parts of the world as well. Now it is a pandemic. European banks like UBS, RBS, HSBC and Barclays are now feeling the pinch. Also, some Japanese banks are reporting huge losses. This is inevitable, since any crunch in the world’s largest economy will definitely hit other economies as well. With the acquisition of Wachovia by Citi, this tremble is very evident. If this wobbling continues in the Retail Banking sector, it is sure that the world could see much worse that what it had seen till now.
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