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Posts Tagged ‘Financial crisis’

 

US-Financial-Crisis

The slide tries to explain the US financial crisis in nutshell. The direction of arrows shows the money flow.

Abbreviations:

MBS: Mortgage Based Securities

IB: Investment Bank

CDS: Credit Default Swaps

SIV: Special Investment Vehicle

EMI: Equated Monthly Installment

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If you purchased $1,000 of Delta Airlines stock 1 year ago, you would have $49 today.

If you purchased $1,000 of AIG stock 1 year ago, you would have $33 today.

If you purchased $1,000 of Lehman Brothers stock 1 year ago, you would have $0.0 today.

But, if you purchased $1,000 worth of beer 1 year ago, drank all the beer, returned the aluminum cans for a recycling refund, you would have $214.

Disclaimer: Investments are subject to market (and now, health) risks. Please considered this as a pure email forward!

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Financial quote

A great quote on the current financial conditions, courtesy a foward by Priya Khanna:

There are two sides of a balance sheet: Left (Liabilities) and Right (Assets). These days, on the left, there is nothing right, on the right, there is nothing left

Cheers!

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Today a news popped up, the Mutual Fund market is going to collapse. MFs were always considered a safer bet for investment among all the high risk ones. The assumption is that there are people who are putting stakes to manage your investments. But, no longer true!

It’s not even a month before it all began. During one of the classes of our orientation came the news of the great Lehmann collapse. Since then a string of events in the finanical world (bubble burst – remember dotcom burst) have brought upon a never seen before liquidity crisis. The world is panic stricken and everybody has stopped cribbing about the rising crude prices (they have dropped now actually) and inflation.

Many of my friends have opted for a SIP (or Systematic Investment Plan) and I was really surprise to hear them talk about losses. I have stayed away from MFs only because I believe I can earn more by investing directly into the stock exchange (of course even I have lost money). Every time a stock falls, I feel encouraged and buy more – only needing to buy even more. The colors of the week are RED,

Despite this, we always find time to talk about cricket. Sloppy fielding, Australian (cribbing) media, Spinners vs. Pacers, Sehwag…

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I was looking at our blog’s stats and found a very strange search engine query that led to our blog – what does bankrupt country do. I read it, re-read it! Still clueless, I recollected a news item on TV that talked about Iceland’s financial crisis. The country fears it may go bankrupt.

Now, how would a country go bankrupt? The answer lies in an earlier post by Sankar. The banks of the country have assets (read liabilities under the current situation) that are 9 times in value to the country’s annual GDP of 16 billion euros. The Prime Minister of Iceland, Geir Haarde, in an address to the nation said that if these banks collapsed, the entire nation shall go bankrupt. The banks are not getting financial help from other international banks due to the development of a complete lack of confidence in business between the banks.

However, Russia has come to the rescue of the country with a 4 billion euro state loan to Iceland, this inspite its own banks ailing. Even a Swedish bank has provided a loan to a top Icelandic bank. The situation is still critical and Icelandic economy is still under a lot of pressure.

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General Electric (GE) is a giant of a conglomerate and surprisingly at a time when most financial firms are crumbling, GE Money is still showing profits. But, sooner or later the cash dearth is going to catch up and to challenge it, GE plans to raise around $12bn in cash through the sale of stock.

It will also allot preferential shares to Warren Buffett’s Berkshire Hathway to the worth of $3bn, at a discount. It may also allot a further $3bn, taking the total investment to $6bn. Buffett calls GE as the “symbol of American Business” and believes that it has a “staying power” to withstand the economic downturn. Buffett recently gave a similar financial backing to Goldman Sachs.

Warren Buffett may now be compared to J.P. Morgan, who took similar actions during the Panic of 1907. It seems that Buffett took the decision to invest such a huge amount within hours of a request from GE through his banker at Goldman Sachs.

GE is supposedly today’s only listed company that was also listed on the original Dow Jones index in the 19th century. It has survived various economic downturns in its hundred plus years of history and is most likely to survive a few more.

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I was astonished to read that the much hyped $700 billion bailout bill had been rejected by the US house of Representatives earlier this week. The ostensible reason for the defeat of the bill was: negative public opinion. Representatives were reluctant to have the lay American taxpayer bail out firms on Wall Street any more after the expensive AIG affair. Mainstream media outlets reported about how people got in touch with their local representatives through email, phone and post and conveyed quite plainly, their umbrage at having to bear the consequences for Wall Street’s perceived lack of prudence. People mobilized themselves on an unprecedented scale to have their voices heard and in the end; their voices were heard loud and clear on Capitol Hill, with the bill being defeated by a margin of 228-205.

Does the rejection of the bill, although painful for Wall Street and other financial markets world wide, have a silver lining? I think this incident actually stands testimony to the power of the democratic setup in the US. Credit goes to the American public for making their voices heard, discounting bipartisan political support that the bill enjoyed. Whether it made sound sense or not, people thought it unfair on the part of the Government to pump in such massive amounts of taxpayer money and frowned at attempts to buy out distressed financial assets. For people who were reared on ideas of free market capitalism, the very idea of Government intervention was anathema.

Does this mean that the US Government will do nothing to bail out Wall Street? The answer should be a “No”. There is a new much “sweetened” bill being circulated that has already been passed by the Senate. There is also talk about this bill getting passed in the House of Representatives tomorrow. So what changed during the course of the week? Per some media reports, after the massive 777 point drop on the Dow Jones index, the American taxpayer has now begun to feel the effects of a liquidity crunch with loans being difficult to come by and mortgage payments due. More and more people have now begun to realize that the crisis is no longer an academic problem of a few firms in faraway New York, but a real and alive issue threatening not just Wall Street, but also Main Street. Therefore, in all probability, people’s opposition to the bailout package is now expected to be more toned down with the realization that immediate action is the need of the hour.

Whether the bill eventually gets passed or not is irrelevant. What is evident is that America has a mature and active democratic setup wherein policies are framed to reflect the will of the people- policies that evolve to reflect what the American people think. Tabling two bills with such massive financial repercussions within the course of a week is a clear case in point. Despite the first bill being defeated, financial markets world wide are optimistic of the second one going through because of the change in perception among the American public.

Aside question to Finance Gurus: US taxpayers were reportedly incensed at the attempt of companies on Wall Street to localize profits and distribute losses. Which makes me wonder, does the Windfall Tax that the Government of India planned to levy on private firms that make a windfall profit, qualify as an attempt to distribute profits to the Indian exchequer? Hypothetically, do companies that pay such a tax have a legal entitlement to a Government brokered/sponsored bailout in case they flounder? Comments welcome…..

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