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After Investment Banks, Its now Retail Banks - Xte

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 converting themselves into conventional banks - was an interesting development. Some ten 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 experts, is the torpidness of the US government. Experts chastise the US Government for allowing these IBs to become Mega Financial Centers. The asset 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 virtual time-bomb. Analysts believe this as the main reason behind the collapse of IBs, intensified by the subprime crisis.

With the Big Five 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 boast 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. Insurance companies are also not immune to this crisis. AIG, America’s largest Insurer suffered a quarterly loss of nearly US$ 62 bn. This is probably the largest corporate quarterly loss of any organization in the world. Other Insurance giants like the Dutch ING, German Allianz and French AXA desperately need bailouts. If this is the condition of the insurance companies, the insured are doomed.

This collapse and plummeting profits are not only restricted to financial sector; Manufacturing, IT Service and Real Estate sectors are also feeling the pinch. With no money in hand and indebted, individuals are not willing/able to buy new house, thus rendering the Real Estate Sector’s growth almost vertically downwards. With no advance booking and no takers for build houses, Real Estate companies virtually halted all constructions. This severely hit the manufacturing sector, which has its order books vacuous. The IT sector’s trouble is very evident from the fact that most of their high revenue clients are Banking and Financial Market companies. This pinch-effect is rapidly infecting other sectors as well. No one particular sector is immune to this.

Economies, which are export-driven, are highly affected by this crisis, since every one has become very cost conscious now. Japan, US, Russia and almost all of the western European nations are reporting contracting GDP. While developing countries like China and India reports slowing growth. It seems the global economy is heading towards turmoil, before recovering from this Economic Cataclysm. But its effects, for sure, will leave a scar that can be used as an analytical tool for molding and regulating corporates, and their growth.

Posted by harivis on 2009-03-06 01:33:09 | Rating: