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The anniversary markets dread - Views on News from Equitymaster
 
 
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  • Sep 9, 2009

    The anniversary markets dread

    It was around this time last year when two dozen of the world's most powerful bankers huddled up during a weekend. Brought together by the US Treasury Secretary Henry Paulson and Federal Reserve Bank of New York President Timothy Geithner, they were to devise a method to save an entity that had a balance sheet size of US$ 691 bn. Everyone assembled at the New York Fed was aware that the subprime-mortgage lending and the packaging of such inferior loans into investment papers had pushed the financial system to the breaking point. However, what followed created history in global financial catastrophe.

    Of all the quakes of 2008 this was the worst. Even worse than the fall of Bear Stearns in March and the takeover of government-owned mortgage lenders Fannie Mae and Freddie Mac and the salvaging of American International Group (AIG) in September. The bankruptcy filing of Lehman Brothers on 15th September 2008 brings back the most vivid memories of the crisis. This is because its aftershocks came closest to wrecking the world economy. The crisis that ensued from the frozen credit markets after the Lehman bankruptcy engulfed several other large entities. It even dwarfed the failure of Washington Mutual (WaMu), the sixth biggest bank in the US with assets of US$ 328 bn that the regulators sold off to JP Morgan Chase for US$ 1.9 bn. The move wiped out WaMu's 56,000 shareholders of record and left bondholders nursing billions of dollars in losses.

    The fallen giants
      Bankruptcy Pre - bankruptcy
      date assets (US$ bn)
    Lehman Brothers 15-Sep-08 691
    Washington Mutual 26-Sep-08 328
    Chrysler 30-Apr-09 39
    Thornburg Mortgage 1-May-09 37
    General Motors 1-Jun-09 91
    Source: CNN Money

    Experts believe that what followed in the aftermath of this crisis only served to heal the wound rather than cure the ailment. Rather than strictly regulate institutions such as Bank of America and Citigroup or limit their expansion, the tax incentives and loan guarantees given to them by the US government gave an indication that these were entities that were just 'Too Big To Fail' .

    Almost years after this crisis, the US and most large economies in Europe have managed to recover from recession. Global and particularly emerging markets have again limped back to optimism. Our domestic benchmark index - the BSE-Sensex - has crossed 16,000 levels. Does this mean that we have left behind the risks that surfaced a year ago? While the massive correction in real estate prices has certainly tempered greed, there is a collective opinion amongst bankers that bailing out large entities at the cost of taxpayer money is not in the best interest of the nation. The G-20 finance misters have a clear resolve to ensure that entities that put the interest of the economy at risk for their vested interests will be brought to task.

    Is it time to change the idiom from 'Too Big To Fail' to 'Too Big May Fail'?

     

     

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