As I have been continuously posting on the Credit derivatives these days thought of sharing a post that I did early in 2008 when the face of Investment banking completely changed after sub-prime crisis.
There was an era when Investment banking (IB) was on the role … hefty packages, luxurious life, dream job for a financial student were some of the features of IB. Over the years evolved as a very big concept coined by the US, In India we use to call that as a merchant banking .
Goldman Sachs, Bear stern, Morgan Stanly, Lehman Brothers and Merrill Lynch were the 5 icons which use to shine at the wall street over the period of time. But from now onwards none of them will be in existence as an Investment Banker. The credit goes to the subprime crisis which led to this catastrophe, First to be blown was the Bear stern it was all of a sudden in early 2008, US government came out openly, helped JP Morgan to get involved in a shotgun marriage with Bear stern.
Few months after Lehman brothers busted and went bankrupt taking exposure in the exotic derivative instrument. This time the story was quite different US government did not come to bail out Lehman and the 158 years old firm went out off the Wall Street, and the world market collapse. As every body knows the famous saying “US sneezes rest of the world gets cold”. Lehman sustained the Great depression period of 1930s but subprime greed didn’t give any opportunity to survive. Guess What was Lehman‘s Debt ratio!! When it busted it was 30:1. The very same day Merrill Lynch was sold to Bank of America (BOA) which was in existence from 94 years. Here again US government indirectly funded BOA, the largest brokerage of the country taken over by the country’s largest commercial bank.
- The Economist edition of September 20th contains print advertisement which clearly demonstrates the condition of Merrill Lynch. Morgan Stanly started looking for partner Wachovia and Chinese bank were in competition to take over Morgan, Goldman Sachs was standing alone after its peers collapse but all of a sudden on September 22 after noon both these IB giants requested for the image makeover and wanted to turn into commercial banks. With in an hour the request was accepted, this shows that both of these IB institutions are not at all exception to their peer. With the collapse of IB the insurance AIG (American International Group) also got into the trap of Credit derivative swaps, and yet again US fed provided liquidity of 85 million dollar in order to save it. The reasons behind saving it acted as a protection seller in the chain and its collapse might lead to greater catastrophe in the US financial market. The story could be concluded in a way that derivative exposure will be limited for the commercial banks; they are subjected to strict rules and regulations in terms of liquidity, which these institutions enjoyed being an Investment banker. Still the question remains in mind. Is the worst is over or yet to come? The bank panel already raised the questions on the bailout of these institutions…….The policy of privatize profit and socialize loss still continues..