Monday, September 15, 2008
The Fall of Lehman Brothers
Many economists have been lamenting about the fate of Lehman Brothers since the first sign of the economic downturn in the first half of the year. After a long drawn back and forth saga, its spokesperson today announced that Lehman Brothers is set to file for bankruptcy in order to protect the value of its remaining assets. Other victims of the crisis include investment banks Merrill Lynch and Bear Stearns, each of these being bought out by Bank of America and J.P. Morgan respectively.
We only now begin to appreciate the full extent and impact of the subprime crisis on the economy, with three former banking powerhouses disappearing from the street in the span of a year. Nothing like this has ever been witnessed in history and that goes to say alot about the damage effected by the subprime mortgage fiasco.
It all came about when banks and other mortgage brokers decided to securitize mortgage loans with poor credit ratings (high risk of default) and sell these structured investment products to individual and institutional clients. The structural problems inherent within the US banking system were then exposed as these re-packaged products were given ratings of AAA (high investment grade) by rating agencies such as Moody's or Fitch. Therefore, how they could substantiate such ratings will always remain a mystery for most of us, up till now, when we realise that the fees paid to these rating agencies were from the people responsible for coming up with these investment products themselves.
We also notice that the widespread dissemination of these products to investors all over the world has led to another huge problem of tracking the extent of losses. This has led to continuous speculation that there are further losses and write-downs to be witnessed, and this consequently caused a lack of investor sentiment throughout the globe.
I believe we have yet to see the final act of this spectacular fall-out from the subprime crisis and there will be further casualties in the pipeline (AIG?, Wachovia?, Washington Mutual?). The Federal Reserve will stop bailing out institutions who are poor capital positions for political as well as, economic reasons and hence we will indeed see more blood being shed on the streets.
In such a state of economic emergency, i think we should continue to save more money and invest it in relatively safe asset classes such as 1-yr governement bonds etc to protect our capital and earn slightly above interest rates. This will ensure we still manage to grow our wealth, as little as it may seem, slowly but steadily.
So what are your views on the latest world economy?
Sources: Channel News Asia, 15th September 2008
BBC News UK, 15th September 2008
Bloomberg.com, 15th September 2008
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7 comments:
Hey widya. I personally feel that it is important to pick and choose wisely where u invest. u need to know when to stop. Im sharing from an experience of a friend who used to play in the stock market. As simple as it seems, people buy shares. and wait for the value to rise before selling them. However. money come and go like the wind. we need to be really really sure about what we are doing. many have tried and succeeded however those who failed sometimes are not able to pick themselves up!
I had no idea that market was coming down hard... and so quickly at that. Needless to say, I am suffering from the investements I've made - it doesnt matter which powerhouse we are in, at the end of the day, if more than one goes down, alot of others are bound to follow.
But that's a risk everyone in the market should have known before they took that step into it.
:p
anyways... you sound like you're writing theses on world events babe!
love love,
your auntie.
hey!
its scary how big name banks and financial companies come falling down like that. makes every so uncertain.
and talking about AIG, when i walked past the SG office in Raffles place today, there were aunties and uncles waiting to either terminate or cash out their policies.
some even laid cardboard and newspaper on the floor to sit. its sad and ironically ridiculous how people can be so ignorant and crowd following. but sometimes you really cant blame the uneducated. oh well.
vanessa
i guess lehman could have stayed afloat if their CEO had less of an ego. should have listened to offers from acquirers in the earlier stages of the subprime crisis instead of taking a gamble to improve its financial situation internally, and ultimately letting the situation deteriorate into this sorry state.
hey all,
thanks for all the inputs. all of you are right in every way.
To vanessa:
Yes i think it is ridiculous that people are all out rushing to cash out their premiums without first understanding and observing the next movement in the market. but i guess they just can't help. naturally, i think people are afraid of losing what they have.
Everything is more complex now that globalisation has occurred. All the countries will be affected much more since we all depend on each other for imports and exports as well as through shares held in companies. People have predicted that the worst recession since the Great Depression is about to come. The world will be a very sombre place indeed if that prediction holds true.
The Federal Reserve did save the AIG recently but that's only because they knew that the huge backlash (even greater than the Lehman Brothers falling down) that would occur if they didn't save AIG would certainly plunge the economy much closer to the Great Depression because AIG is such a far-flung company with connections all around the world. But the question is.. how do we resolve this crisis? And how many more companies will the Feds save? That's not one for me to answer. I really don't know how things will turn out.
More shit is about to hit the fan.A safe bet in the investment world would be to wait around 6 months to see if the market stabilizes again,which I am predicting not.
More so with the elections coming along in the States.And if the Republicans win,I can predict a shitstorm in the financial sector.
And the supposedly impending war with Iran and the whole George-Russia conflict.
Yes,my furry friends,the end is nigh indeed.
Either way,we are all doomed.
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