Being Dheeraj

The Meltdown

This story is about a tragic mistake for the United States and the rest of the world, about a bank which busted the world. The day was September 13, 2008 and Lehman brothers was hemorrhaging money. CEO of various banks like Merrill Lynch and Barclays were told to be at Fed and everyone had a feeling that this is gonna be Armageddon which might shake the American economic might. Prices are dropping since May but in the last 10 days before the collapse, it has been a free fall as shareholders were dumping stocks. This marked the beginning of Sub-prime mortgage crisis and two rivals – Bank of America and Barclays were eager to sue. Because of the Lehman's massive property investment and expanding into lucrative new products, less regulated market and highly complex products led to an unforgettable event in the history of credit crunch. Richard severin a.k.a "Dick fuld" the then CEO of Lehman was admired and feared in equal measures was held responsible for this catastrophe. Investing in the commercial property seems to be the tipping point for Lehman brothers, risk was the name of the game.

American real state prices sky rocketed after 9/11 because government was supporting home ownership since it is good for families, economy. Loan was imparted to risky clients which were also called NINZA loans – No income jobs or assets loans. Banks traded these with each other calling them high quality, low risks assets. Lehman Brothers was borrowing, which we call leverage, which he used to play the property market and it multiplies profit/loss when prices of properties rises/fall but that oasis was a mirage. Dick fuld looked forwarded to Bank of America and Merrill Lynch to rescue, but unfortunately Bank of America bought Merrill lynch and all the hope rested on Barclays. There was a lot of Lead weight on the balance sheets. Lehman is so big to be allowed to fail or pass away and If the Lehman couldn’t be rescued before the markets open, it will be too late but deal cannot be closed with Barclays even. After Merrill Lynch and Barclays walked away, it was time for plan C, but there was no plan C. 158 year old firm which survived the great depression and two world war passed away. The share prices which were at 4 $ in 1994 raised to 85$ and finally plummeted to 3 cents. This was an end of an institution which was one of the originators of Wall Street and it sent shock waves across the world. This was single largest bankruptcy in the history of mankind, 10 times larger than what I remember the case of Enron was when I was in school. Lehman’s transactions worldwide are really complicated and few really understood them. Housing market damaged financial system which ultimately damaged the economy and this led the shutdown of day to day funding of the businesses which gets their basic funding from these financial institutions.This was an extraordinarily loss of confidence. No one anticipated that they were in the midst of more severe world wide economic crisis. Finally Barclays purchased European operations of Lehman at much lower prices than what it would have taken if bank would have been sold. The biggest reason for this was they thought they were invincible and everyone knew that the world will never be same again.

Summer of  ‘08 - Mistakes which worsen the crisis - The good times

This was the time when you can have investment tips from the road side paanwaala as everyone thinks of himself as being enlightened with all the worldly knowledge of share market. People were making lots and lots of money and spending as if there is no tomorrow. London and NY which were known as Jewel centers of the world. On both sides of Atlantic more people are buying their homes since banks had started lending this “free money” practically to almost everyone. A new generation of lending companies cropped up targeting common public who could be land owners having bad credit rating and to the banks the borrowers are known as “Sub Prime”. It all started when I was an year old, i.e. in the year 1987 when Alan Greenspan was elected the chairman of Federal reserve, a person who thinks that market can take care of itself. After the 9/11 interest rates gone down and With the low interest rates, investors had started searching for new lucrative investment options and here comes the option of investing in Real state. Investment banks like Ameriquest mortgage were paying agents heavy bonuses to give away the loans to sub-prime borrowers which made them less interested in doing the background checks and thus risky lending practices became the commonplace in the mortgage industry. The banks repackaged and resold the products among themselves and the risks attached to the financial products were hugely under estimated but they forgot that we are operating in an integrated world economy and they all went down with the fall of real state prices and this is the time they realized that deficit do matter. Fall of Berlin wall was obviously one of the most critical geo-political events and the reasons for this crisis were geo-political, triggered by sub-prime crisis as markets were deregulated more than ever leading to losing the quarter of their value overnight and brought global economy to its knees. This was the first when NYSE closed for the first time after our own great depression.This was one serious loss of confidence and banks stopped lending to each other and interest rates for the business houses also raised, this was an emotional drain in a panic driven market.

Fall of 2008 - Back from the brink

The financial engine bringing down the country and leaders sitting in the national capitals thought we really are at the verge of great depression. Stock market was in a nosedive, it was definitely a financial tsunami. Banks lost confidence in banks and charged each other double for short term loans overnight as 20 year global boom was over. There was no credit in the world and stable flow of US dollars froze and not just in US of A. The self-regulating market is finished  and banks capital was spiraling down and the simplest solution was to pump in the money i.e. "Re-capitalizing the banks" as the stakes for the whole world were huge. US treasury had to come up with a plan to buy these toxic assets and spent 85 billion dollars to save AIG but there is no white solution and it has been 10 days since the bill was stuck in the political corridors for the amount to be finalized. The motion was not adopted after voting in the senate, 11 days wasted and still no solution was reached and stock market crashed once again, the lending rates between the banks sky-rocketed. It took almost 4 more days to pass the bill and by then damage was done. All over the europe governments were bailing out banks after banks to avoid the complete shutdown of the banking machinery as banks like RBS, Barclays were running out of US dollars. It was a bold move with far reaching consequences. This first line of defence was led by Britain and US followed. Treasury will purchase the equities in wide varities of banks and diverted the money from buying the toxic assets to buying the shares. Loan guarantees and money injection finally stablized the economy. Had we not have that British announcement, we would have been in a very different place and by the end of the year, policy makers were assured that cash machines will stay open. Governments of various nations had pledged or spent 6 million dollars to get out of this chaos and now every single government profess the need for a strong regulation.

You didn’t have to have a fancy financial degree to know that rates cannot grow always(I-am-saying-so-because-I-don't-have-one) and anticipating that something is terribly wrong. I think there should be more regulations along with liberalization and any Crisis is because of human nature and no one can escape a situation like this unless we find a way to change the human nature. I think US Treasury should have stepped in the turmoil as the destruction followed is many fold as problems need to be fixed before they get out of proportions. No two crisis has anything in common, except for humiliation and reckless love for the money(again-love-is-injurious-to-health). My father says that the ecnomies and most of the trade runs on trust which we held in each other and this is one single thing which was shaken to the very core and the final cost will not be known for years.