I wasn't too surprised to see S&P end positive w-o-w last week. My previous experience was the week of August 6 2007. However in a week's time, it turns out of that 4 of the major investment banks get wiped off the street - Lehman which will be sold in parts, Merrill which got sold in whole and Goldman - Morgan which are now full banks and no longer just independent investment banks.
It also turns out that for the first time in American history a 700 billion dollar rescue package has been annouced. Paulson is undoubtedely going to be the biggest trader of all times. There is no doubt that if any one were to buy these subprime mortgages at 20 cents on a dollar; give a consumer the time he needs to fulfill his obligations; he would profit from the 80 cents he is going to earn. Even if this were to happen in the next 20 years, US treasury earns a 7% r-o-r on their invested capital. However, the only trader who could have bought this market was the US treasury.
Whether it means good or bad for the markets? - difficult question to answer! ... is Socialism the pivotal issue and Capitalism always secondary? or is Socialism always the last resort for all Capitalist wrong doings of the 20th and the 21st century? take a guess ... few men take risk, they get paid for that .. when their trade falls out to be wrong government raises its hand .. wrong doings are never punished for it means bigger harm to the larger society. Isn't that really good .. you may do whatever you want, there's no punishment ... you lose money .. you get more to lose. "Regulations" is an economic term used for Socialism and we will surely witness regulation play a bigger role in shaping financial future. If regulators drive away speculators, an important part of the markets will go missing. Indeed, speculators who failed need to be driven out. Bigger question though is why pull out swords on the successful one's.
Past week wasn't huge because 4 investment banks failed ... it was big because we saw a glimpse of time to come .. time where businesses will be guided by regulations, time where central banks would decide market actions and who know's time where free economy will go back to the books again ...
Sunday, September 21, 2008
Monday, September 15, 2008
Few greedy men!
So there it is.... Lehman Brothers is history now. The stock trades at 21cents (closing 15th Sept 2008), down 94% over the previous day. The institution which ran for 158 years was finally brought down by greed of few traders who traded mortgages.
In a way I would say this is a good thing to have happened. Somehow the concept that Leverage mangifies losses was forgotten in the first decade of this 21st century and the financial market did require a sanity check. However, the magnitude of this lesson is certainly glorified by the write off's we have seen over the last one year in the subprime credit markets. Estimates suggests this figure to be somewhere around USD 600 Billion (FED's balance sheet size is USD 800 Billion) and may be there are more losses coming our way. Unfortunately this isn't just a US story any more. It is now going to be a global contagian, Europe has to follow next; no doubut on that. Chineese (Asian) real estate; god save 'em ... Middle East; I dont want to hear about it any more .... It is going to extremely hard to think of new money making opportunities in the next 2 years or so.
The crux of the problem is excessive liquidity. Dick Fuld - CEO of Lehman had mentioned in one of the meetings that ample liquidity is hiding a lot of evils. He was so true. Unfortunately, Investment Banks were the greedy men who gave markets excessive liquidity speaking purely of mortgages. As the velocity of money increases when you package CDO's / CMO's, it free's up capital to be re-invested and if you dont have enough deals to re-invest your money you have two options - one to sit on TIPS or second to make a bad deal look good. Everyone choses the second (after all its a question of pay and perks) :-)
In a way I would say this is a good thing to have happened. Somehow the concept that Leverage mangifies losses was forgotten in the first decade of this 21st century and the financial market did require a sanity check. However, the magnitude of this lesson is certainly glorified by the write off's we have seen over the last one year in the subprime credit markets. Estimates suggests this figure to be somewhere around USD 600 Billion (FED's balance sheet size is USD 800 Billion) and may be there are more losses coming our way. Unfortunately this isn't just a US story any more. It is now going to be a global contagian, Europe has to follow next; no doubut on that. Chineese (Asian) real estate; god save 'em ... Middle East; I dont want to hear about it any more .... It is going to extremely hard to think of new money making opportunities in the next 2 years or so.
The crux of the problem is excessive liquidity. Dick Fuld - CEO of Lehman had mentioned in one of the meetings that ample liquidity is hiding a lot of evils. He was so true. Unfortunately, Investment Banks were the greedy men who gave markets excessive liquidity speaking purely of mortgages. As the velocity of money increases when you package CDO's / CMO's, it free's up capital to be re-invested and if you dont have enough deals to re-invest your money you have two options - one to sit on TIPS or second to make a bad deal look good. Everyone choses the second (after all its a question of pay and perks) :-)
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