End of an Era?

Last two weeks have been one of the most volatile periods for the entire global economy for this century. The global leaders in economy fell as pack of cards while everyone was acting as a spectator watching them falling helplessly. The turmoil which burned and took all the heat off from Wall Street could be termed as end of an era, an era of Investment banking: The most lucrative place to be in last half of century.

One couldn’t have thought in their wildest dream that the investment banking giants like Bear Sterns, Lehman Brothers would be vanished like this. More difficult is to see Merrill Lynch surrendering in front of Bank of America and now Goldman Sachs and Morgan Stanley doing the same to US Federal Government. The fate of AIG is merely saved but surely not for too long. I am sure now many of you would also like to get answers of below questions as I do.

1. With so fruitful and impressive past for these investment banks, what is the reason of them to be in this spot?
2. Is this something which is going to expand its wrath grabbing the entire world economy?
3. Are we India also under the cloud of uncertainty that we may be next in line of this collapse?
4. How safe are our investments?

With my understanding I would be answering these questions:

1. Great power comes with great responsibilities, when the global economy was commanded by the investment banking, they literally had all the power to work with the assets they possessed of public and other organizations. While quarter to quarter and year to year these companies were making record breaking profits no one noticed that in fact they were putting the hard earned public assets on risk. The greater the risk the better the returns, so these companies didn’t even bother for the future forecast of their investments. They although had a unit called RAM (Risk Analysis Management) in place for risk mitigation on which I had worked previously while I was working with one of the best in business investment banking but I am now sure that this system was only to divert federal government’s attention, not for taking advice. As the sub-prime mortgage crisis spread and balance sheets of these companies started showing red marks due to their most of investments were in the toxic assets (mortgage and real estate), they started loosing the numbers the same way they earned them, record breaking losses quarter to quarter were posted but this time it didn’t take year to year since these companies lost their identity & existence in a matter of two years. While I was reading articles on the risk exposures for these companies I found Lehman was open to risk exposure 4 -5 times on each asset than its near rivals. Merrill Lynch has this counter as 2 times which was good enough to get a bankruptcy in near future. The only two leaves left on the investment banking tree fell this Sunday in front of federal government. Investment banking runs on trust and the day they lost trust of common man by sinking their hard earn money; they started their descent. They didn’t play a fair game and not only lost the game for themselves but also left millions of people helpless and in uncertainty of what future has for them. This is not something which took place as a catastrophe but was a chronological decay in the investment banking tree which at the end made it bow and touch the ground. Surely this puts an end to era of investment banking.


2. Impact and aftermath of this event surely going to hit many global economies and will also expose them under great risk of similar catastrophes; especially to the economies which rely heavily on the investment done by US in them. We are also one of such economy as we have a considerable amount of money coming from FII (Foreign Institutional Investor) largely from US market. Still the risk exposure in all the countries are far less than what US investment banking had put US economy under. For short to long run, every economy will run under pressure and margins will be very thin but with their government’s intervening into the matter they should be able to get away with hard lessons learnt from this.


3. India and Asian markets are the least likely to be hit by this global turnaround, India especially thanks to the strict RBI and government policies for which one must thank Dr. Manmohan Singh and Late Prime minister Narasimha Rao who redefined India and opened gates for the world for investing, these are the "Fathers of Indian Economic Reforms" best remembered for launching India's free market reforms that rescued almost bankrupt nation from economic collapse, The real “Chanakya” of modern India. The legacy has been carried forward by the forthcoming reserve bank governors namely Vimal Jalan, Y.V. Readdy. When this ultimate power was given to these gentlemen they not only made it count but also were responsible enough to safeguard public investment. In India no foreign company is allowed to do business on their own, they need to collaborate with one of Indian firm and do their operations. The loss/profit sharing guidelines are clearly mentioned to ensure that any down side in their global operations should impact least to the interest of Indian investment. High risk exposure is only at stock market where the gates were opened little too far for FII hence we see volatility in our stock market at each global turmoil, barring this the fundamental of other financial institutes in India are very strong. The underlying assets are very less exposed to risk and also the liquidity is very high for all the financial institutes thanks to RBI and their commitment to make India a safer economy. But if I say that India is not going to see the impact then it will be an understatement. Highly impacted area would be service sectors. The biggest gaining sector from foreign is IT and outsourcing which is going to feel the heat starting from now till about a year or so. The worst hit area is realty since they rely heavily on these investment banks to avail funding for their projects. This means more delay in their project, also this slowdown can cause them to close some projects in order to save them getting the same fate investment banking had. For sometime India would feel the heat but surely not for too long.


4. Invested in stock market then I need not to tell that investment is on toss until you are ready to hold for a year or so when we can expect things to settle down globally. I don’t see any other sector is exposed so much to the global cues that could cause meltdown in them. Right now best investment should be in FMP (Fixed Mutual Fund), FD (Fixed Deposit) and any government bonds. One might also think of buying a property as the rates surely going to come down in this sector. Those who can mitigate risks can surely look to invest in stock market; one can expected 20-40% returns in one year from the equity market but again this investment is subjected to market risks which need to be calculated properly before investing in equities.

Disclosure: Neither do I work for any financial institute nor I hold any degree on global market assessment, I am just a watchdog for the global market & trends.
It’s my interest to keep track of such events and learn more and deeper about them. What ever I have mentioned above is constituted mostly from my own understanding.