Something went wrong. The whole world economy is just shaky now, rather at a downfall. There is total chaos in the financial world. With this the tremors are spreading to every domain now. Slow down, recession, economy crisis, bail outs, bankruptcy; these are the every day news.
Actually I wasn't following anything of this and I was just too happy in my world. Slowly I started reading all about it. How it started and how things are getting worse day by day. I used to hear in US that real estate market is down and US economy is not doing well. But as a common man the repercussion to day today activity was not that high. I don't know somehow I getting the feel of it mentally.
Just in 5 weeks there was a financial turmoil. How it started, here it goes in simple terms a company of worth some x billion borrowed 25 times its net worth creates funds to lend and invest. In 2005-2007 the real estate market was on a steep growth and it was assumed that this will continue forever. Mortgage lenders became lenient in their lending standards with the greed of making more money without worry much about the repayment as this can be recouped with the property itself. Now the property bubble burst lead to steep depreciation in the property prices. People could not repay their loan on time and repayment defaults kept increasing leading to those huge chunks of toxic mortgages. These investment banks purchased the mortgages from banks thus freeing them to lend more money. Investment Bankers used these as assets and sold them to various institutional investors like hedge funds, pension funds, mutual funds, and banks in all parts of the globe including Europe and Asia. The real risky mortgages were charged with very high interest rates. Overall approximately $1 trillion was invested in securities thinking they get huge returns later. As the tide turned down, all institutional investor suddenly faced this erosion of the capital. This big chunk of money was all sold and chained through the whole financial system and then there was no real value in those mortgages at all. Now there is no real money with these financial institutes at all. Suddenly everything started falling with huge deficiency in the liquidity and every major company started declaring as bankrupt. Now the government had to come to rescue the whole economy by bailouts and buying the banks the financial institutes.
The two hedge funds owned by Bear Sterns collapsed. The Federal Reserve staved off a Bear Sterns bankruptcy by assuming $30 billion in liabilities and engineering sale to JP Morgan Chase for a price that was less than worth of Bear's Manhattan skyscraper. The biggest American lending companies, which I consider them as the main cause for all of this, Fannie Mae and Freddie Mac were in big trouble with their stock prices falling out. On September 7th the Treasury Department took over them for some $200 billion. One of biggest investment banker Lehman Brothers was totally wrecked and it filed bankruptcy. Merrill Lynch which is again one more big icon of investment banking sold off itself to Bank of America to avoid similar fate of Lehman Brothers. Washington Mutual was down; Barclay Capital bought bits and pieces of Lehman Brothers. On September 16th American International Group, AIG an insurance giant was on the verge of failure which was bailed out by Fed again for $85 billion. The $700 billion bail out plan which was rejected was finally passed. How much this would rescue the economy is not really known. The Dow Jones has fell to 9200 odd points, BSE yesterday had gone below 11000 mark. Strange it has reached to roaring 20,000 points but now down to this level. European markets are down, Asian markets are down. There are many financial institutes in bankruptcy in Europe. Yesterday Kamal Mehta and P.Chidambaram were giving repeated press conferences to build the confidence in the investor and Indian Economy is very much in convergence with the Financial Institutions and we are in a growing economy and we won't face such a situation.
Bus yaar! Yeh saab hogaya. Finance ke bahut sare funde bol raha huun. If you don’t understand anything of the above I conduct special classes on the weekends. Special rates available if you call within the next 24 hours… ;)
Chal abhi aramse chai peeta huun.
