|»5 Minute Wrap Up by Equitymaster|
On This Day - 16 SEPTEMBER 2008
Morgan Stanley next?
In this issue:
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A deadly cocktail of risk taking investment bankers floored by 'fast bucks' and unabashed investments in highly risky and bad mortgage assets have now bought these institutions down on their knees causing them to literally run around with a begging bowl. These developments come at a time when the developed nations in particular are already sinking into a recession. When this crisis will end is anybody's guess.
The present crisis has been a series of rolling crisis. Any period of calm is followed by new causalities. In fact, the period of calm is getting shorter. There was barely a week's gap between the take over of Fannie Mae and Freddie Mac and the Lehman bankruptcy. Mr. Jansen believes that the next casualty of the ongoing credit crisis could be Morgan Stanley. He also thinks that this crisis will come to an ugly end with a sharp contraction in lending activity. However, commercial bankers like JP Morgan and Citibank will fare better than the investment banks on account of a more stable funding from their retail customers.
This is because as per the International Herald Tribune, the capitulation of Lehman Brothers and Merrill Lynch is likely to exacerbate the oversupply situation that is prevailing in the US financial services sector. It has to be noted that the sector has already shed more than 100,000 jobs this year and with the demise of these two banks, 50,000 more employees will have to be added to that list.
And the tremors are not restricted to the US alone. The overseas offices of these firms like the one in India are already witnessing exodus of some key executives. For years, the employees at these places had become the envy of their peers for their lavish lifestyles and extravagant pay packets. Going by the damage done, the return of the envy looks unlikely any time soon.
Basing its findings on four economic factors namely GDP growth, inflation, unemployment, demand for manpower and pay hike trends in the past, the report further expects the country's economy to clock a growth of 7% to 8%. More importantly, given that inflation has been raging above 12%, employers are expected to come under pressure to raise salaries. A healthy demand for labour and shortage of manpower having the requisite skill sets is also expected to advance the case for higher salaries.
Persistent dollar selling by the RBI has now depleted the forex reserves from US$ 316 bn in May to US$ 289 bn in the first week of September. Given the crippling effects of the credit crisis on the investment banking sector, stockmarkets across the world including India had to bear the brunt of money being pulled out of equities propelling the decline in the rupee. FIIs in particular have sold Indian equities worth US$ 8 bn after pouring in more than double the amount last year. Crude oil imports also exacerbated the fall in the rupee.
While growth in China continues to be robust, the pace of the same has reduced. The Asian Development Bank expects the Chinese economy to grow by 10% this year and has lowered its forecast for next year to 9.5% from 9.8%. Against a backdrop of inflation cooling to 4.9% in August, the Chinese authorities are now focusing on bolstering economic growth and protecting jobs as exports fall and the credit crisis deepens.
Property prices too are witnessing a meltdown. As per reports on Bloomberg, prices in 70 major cities across the nation rose by 5.3% in August from a year earlier, compared with 7% growth in July. In fact, property price increases have slowed for seven consecutive months from the strong gain of 11.3% in January. China had earlier outlined infrastructure spending as a likely tool to speed up growth and is said to be working on a plan for about US$ 58 bn of spending and tax cuts.
Readers would do well to recall the fact that the bank had made headlines early this year when a leading daily had reported that the bank's profits had taken a hit of US$ 264 m in FY08 due to the subprime crisis. This was at a time when it was presumed that Indian banks were insulated from the crisis as compared to its US and European counterparts. While the bank reiterated that it had neither invested directly in the US market nor dabbled in the subprime market, it has failed to provide any clarity with respect to its derivatives portfolio.
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