• SEPTEMBER 15, 2008

Wall Street fighting for life

One more heavyweight up for sale
Asian markets are trading mixed at the start of this week. While gains are being witnessed in Chinese and Japanese stocks, selling pressure has marked trading in Hong Kong and Singapore. The US markets closed in the red yesterday, following continued weakness in the financial sector. Now, while market participants still await the rescue plan for the embattled Lehman Brothers, they have something more to chew upon.

In news just released by the Wall Street Journal (WSJ), Bank of America has agreed to buy out the beleaguered investment bank, Merrill Lynch for a record US$ 44 bn. A deal between these two big firms would most likely lift the uncertainty that has surrounded the latter since the stat of the financial turmoil a year back. As a matter of fact, while Bank of America is the biggest in the US in terms of deposits, Merrill Lynch is the world's largest brokerage.

The WSJ reports that - "the deal does not come without risks. Merrill Lynch, like many of its Wall Street peers, has been struggling with tight credit markets and billions of dollars in assets tied to mortgages that have plunged in value. Merrill has reported four straight quarterly losses, and its stock has been sliding."

Even the financial situation of Bank of America is far from healthy. The bank has seen its profits decline over the past few quarters owing to deteriorating consumer credit situation. Also, the bank has still not fully integrated the troubles mortgage lender Countrywide Financial, which it had acquired early this year. Now the opportunity for making it big in investment banking has not necessarily come in at the best time for the bank

  • Also read - 9/11 by Ajit Dayal

    "Once in a century crisis", says Greenspan
    "The US credit squeeze has brought on a once-in-a-century financial crisis that is likely to claim more big firms before it eases," says Alan Greenspan, the former chief of the US Federal Reserve. Greenspan has further indicated that the situation is still not resolved and has a way to go until early 2009. "While recent declines in the prices of oil and food may help avert a recession, I wouldn't put my money on it," he says.

    The Fed's former Chairman's critics have said that he helped inflate the housing bubble by keeping short-term interest rates too low for too long, leading to reckless lending and borrowing in the housing market. However, Greenspan retaliated by indicating that the problem lay not in the loans themselves, but in their repackaging as securities and sale to investors.

    Readers would do well to remember that the current financial crisis has its roots in the Fed's aggressive rate cutting stance beginning 2001, at the end of the Internet boom and following the September 11 terrorist attacks in the US. The Fed pumped money into the US economy and slashed its key short term interest rate - the Federal Funds rate - from 3.5% in August 2001 to a mere 1% by mid-2003. The Fed held this rate too low for too long, thus leading to incessant and reckless borrowing by consumers, even by those without a proper credit history.

    Even commercial and investment banks created new financial mechanisms to expand housing credit to borrowers with little creditworthiness. The Fed declined to regulate these dubious practices. Virtually anyone could borrow to buy a house, with little or even no down payment, and with interest charges pushed years into the future. And the rest, as they say, is history!

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