To Bear or not to...

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According to Nouriel Roubini, Professor of Economics, Stern School of Business & Chairman RGE Monitor, “The credit losses could reach to $1.7 trillion as corporate losses piles up.” With more than 45 of the world’s biggest banks, including Citigroup Inc., UBS AG, Wachovia & Northern Rock reporting a combined $232 billion in asset write-downs and credit losses since the beginning of 2007; the estimates arrived at by the likes of Roubini seem to be more than obvious. For the yet uninitiated (surely there aren’t many of those!), the world’s largest bank Citigroup is in talks to sell $12 billion worth of loans at a loss as part of an effort to shrink its balance sheet, while UBS AG’s share price has plummeted in the recent months after it reported a loss of $18 billion in US subprime crisis.

Is the ghost of 1929 returning to haunt the US? Going by the recent developments in the US it is quite certain that be it Clinton, McCain or Obama, the new American president will be elected against the backdrop of a shrinking economy and on assuming the reins of power corridors, will face months of economic malaise. In all probability, the credit crisis scenario in the US will initially only worsen before improving.

When the leaders of the Federal Reserve Board and the government met on the weekend of March 14-16, they were panicked and fearful of a financial meltdown. A day back, on March 13, 2008; the fifth largest investment bank of US, Bear Stearns, citing reasons of intensified financial constraints, had advised the Federal Reserve and other government agencies that its liquidity position had significantly deteriorated and it would have to file for bankruptcy the next day unless alternative sources of funds were made available. As a part of the conclave, JP Morgan Chase turned out to be the dominating player negotiating and demanding big time collateral and guarantees to buy out Bear Stearns and alleviate the fears of Wall Street. According to risk guru Nassim Nicholas Taleb, “Banking is a very treacherous business, because you don’t realise it is risky until it is too late. It is like calm water that delivers huge storms.” It is ironical that Bear Stearns, regarded as one of the most prestigious on the Wall Street, would become the biggest victim of the credit crunch that has roiled the market since last August, and be acquired for a pittance. Barely a year ago, their shares traded at $159 and JP Morgan Chase left no stone unturned to bring the financial giant to its fold at just $2 a share (share prices were later raised to $10 a share).

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Source : IIPM Editorial, 2008

An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).

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