A high profile bankruptcy, a traded giant and a goliath of a financial institution arbitrarily bailed out from similar fate by FII. All's not over yet as some other big shots like Morgan Stanley and Goldman Sachs are in the line of Fire. With Stanley already in talks with Wachovia, HSBC Holdings and China based CITIC Group, it all boils down to who will eventually take over the reins of a troubled organization.
AIG was saved from a certain bankruptcy by FII, perhaps they may have considered saving Lehman as well. But when it comes down to chosing one of them due to paucity of funds, it had to be AIG. AIG bankruptcy would have meant that millions in the states would suddenly be without insurance which would have been a mighty blow on the face of the federal government.
Why did it Happen:
The cricis has been lingering for quite a while, the major IB's had been reporting significant losses ever since the sub prime cricis surfaced. The sub prime cricis surfaced due to overambitios banks fiddling with proven banking methods and risking customer investments in high risk loans. Banks with large amounts of cash earmarked for investment, bought a lot of Mortage Backed Securities. With more people buying MBSs and improper valation methods, more and more loans were given for construction. Targetting Sub prime loan markets wasnt really an outrageous idea as intense competition in prime markets had minimized the profit potential of the markets(Money lent in Prime markets is proportional to the repaying capability of an individual or an organization while in the sub prime markets the loans offered can exceed the cutomer's paying ability exponentially). There was an obvious temptation in front of the banks to make excellent profits with higher rates of interest, while taking real estate as security.
The misconstrued assumption at this stage was that the land and property rates will continue to rise. But the recent slump in property prices in US due to some very evident political policies ensured that the fall of the financial giants to be brutally fast.The loan given against mortage was never recovered and hence tradional heavyweights surrenderred meekly.
Was it Unexpected: Pretty unexpected, if you rewind back by a few years. But ever since 2006 sub prime cricis has been one of the most important issues in world finance. Since late 2007 many investment banks have continuously reported towering losses. The crucial mistake committed by Lehman Brothers was that its CEO Richard Fuld, rejected a previous buyout offer citing that the value offered was too low.
After Shocks: Despite of the fact that the losses were evident for t
he past few years, the sudden turn of events took everyone by surprise. The effects are visible not only on the plunging markets, but also in the general mindset of a common investor. Investors are clearly looking for safer investment options( gold being the primary choice). Even the high end bank to bank transactions have taken a beating and almost stopped.Thousands of employees around the world have lost their jobs and quite a few are seriously pondering on their future, Lehman brothers have already stopped operating with employees told to leave with one month's salary.
Indian context:
The recent events definitely had a bearing on the Indian stock exchange, and considering that Lehman, Meryll Lynch and Morgan Stanley are all highly operational from India it has hit the employees quite drastically. Some of the highest salary packages were offered to IIM students by Lehman, who will have to look for better and safer options.
Many Indian IT giants most notably Satyam and TCS had Lehman and Meryll Lynch as their most significant clients, rumours are that the particular organizations will be effected by the bankruptcy and the sell out.
