Day by day, the world is plunging deeper and deeper into the financial crisis. Bailouts after bailouts, rate cuts (read interest rate) after rate cuts there seem to be no way out of this for some time. Negative economic and financial data galore in government reports and corporate financial statements across the globe. Probably this is the best time for us B-Schoolers to understand the dynamics of global economics and financial markets.
We, B-School students take cue of this opportunity and explore into emerging financial instruments and markets. One of the most innovative instruments that has come out recently is the “Death Bond”. A Death Bond is a security backed by life insurance which is derived by pooling together a number of transferable life insurance policies. The life insurance policies are pooled together and then repackaged into bonds and sold to investors. The peculiarity of this instrument lies in the fact that is not affected by standard financial risks. The only risk of holding a death bond is with the underlying insured person. If the person lives longer than expected, the bond’s yield will begin declining. But the risk associated with one policy is diversified as the number of policies increases in the pool of underlying assets.
Going back to the financial crisis, we pick up some learning and ideas on how to avoid similar crisis in the future. Some suggest the restructuring of the IMF as the answer while some demand the strict adherence to Basel-II norms as the best way to avoid bankruptcy of banks. But are the Indian Banks ready for these strict capital adequacy norms? An article addresses the concerns and challenges that Indian Banks face in toeing the line of Basel. One of us has also explored into the low interest rate regime of Japan for an answer for cheap money.
Sometimes too much of regulation makes an economy shock proof. We have tried to analyze how some regulations have made sure that the Indian economy is not much affected by the global crisis and still grows at a brisk pace of 7%. At the same time we notice that the stock markets of India have crashed heavily despite a decent economic growth. We shall try to chalk out a road to recovery in the sensex. Moreover in this issue, participants from B-Schools across India have also given their perspectives on the future (or The End) of Wall Street and the lessons learnt from the fall of the high street Investment Banks, most notably Bear Stearns. May be after reading this issue some of you will agree with the idea that we put across in the first paragraph of this message.
Wish you a happy reading.
Team Niveshak
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Our last issue was an attempt to capture one of the most fatal events in the history of high street finance – The fall of all the standalone Wall Street Investment Banks. Before they went down, these extraordinary firms had dealt a body blow to many banks and hedge funds which were highly leveraged on their securities, read Collateralized Debt Obligations. There has been no good news from the world of finance since then. Stock markets from Tokyo to New York have hit rock-bottom. Investors with appetite for bottom-fishing are also hardly seen. Consumers and companies are feeling the pinch as sales and profit figures have shrunk. Poor econom¬ic data around the world, another wave of corporate profit warnings and job cut an¬nouncements have intensified fears of deep global recessions. Most of the big corporate houses of the world ended their Q2 and Q3 in the red zone. Most of the European countries have been pushed into recession while some like France have narrowly es¬caped. Currencies have been experiencing unprecedented volatility. Oil and other com¬modities have tumbled on fears of plummeting demand. In short, the world has en¬tered into “The Age of Turbulence” as predicted by former fed chief Alan Greenspan.
Central Banks and Governments across continents have been billing overtime to counter this crisis. Multiple liquidity windows have been opened in order to flush out the menacing “Bear” from the bloodshed financial markets. Governments have an¬nounced billions of dollars of bail-out packages while Central Banks have reduced Cash Reserves Ratio, Benchmark rates and Statutory Liquidity ratios. But No amount of money seems enough, Neither in Wall Street, nor in Dalal Street, Asia or the Euro¬zone. Stock Exchange Regulatory Boards in some countries have curbed short selling while some have tried to open floodgates for foreign investment. The much awaited “Bull” which had shied away from the streets as the Bear ripped apart financial mar¬kets has tried to return on certain occasions. But it ran for cover the very next instant.
The current crisis is more seen as a crisis of confidence and sentiments. Cen¬tral Banks and Treasury Departments have been trying to restore investor confidence with much pep talk but to no avail. Some leaders have also appealed for a new fi¬nancial world order at the G-8 and G-20 summits. The International Monetary Fund has also taken proactive measure to channelize funds from developed nations to cri¬sis hit developing nations. The world is experiencing a series of concerted global ac¬tions to counter the situation. This cover story tries to capture the life after wall street, its impact on corporate results, GDP growth rate, counter actions taken by Govern-ments, Central Banks and Exchange Boards and its faint impact on the markets. This edition does not promise to find the Bull. Some analysts say we may not see the Bull soon. Some wish the soul of the Bull “Rest in Peace”. Lets face the Reality ...
Team Niveshak
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Some events leave their mark on the history of finance and change the rules of the game forever. With stunning speed all the investments banks of Wall Street, the most formidable names in the world of finance, have faded into history. When Lehman Brothers suffered the ignominy of filing the biggest ever chapter-11 bankruptcy, Merrill Lynch disappeared into the embrace of Bank of America in a $50-billion stock deal ,Goldman Sachs and Morgan Stanley swallowed their pride to convert themselves into old-fashioned retail commer¬cial banks, the world watched with shock and horror as the Wall Street got completely wiped out of the species of its standalone I-Banks. Another I-Bank of Wall Street - Bear Stearns had already been sold out to JP Morgan Chase in February 2008. The world of high finance had been turned upside down. If this was not enough, AIG, the largest insurance company of USA got nationalized and Washington Mutual, the largest savings and loan institution and the fourth largest bank in USA was acquired cheaply by JP Morgan Chase in a flash.
These were no ordinary firms. They represented the pride of America’s financial system. They attracted the brightest from the top business schools. They were held up as models of good management, producing returns on eq¬uity that were the envy of their counterparts across all sectors. But suddenly, the Sub-Prime crisis taught them the basics of investment in the hard way.
Hounded by unforgiving investors and ruthless short sellers, they realised that their bets and investments made over the years have gone horribly wrong. For them, it’s now time to walk the long, less glittery road with a bunch of stodgy commercial bankers, who had to work a lot more to earn the same bo¬nus. It’s just not the end of an era or the demise of a lifestyle. It’s much more: It will not only change Wall Street forever, but could also see the Manhat¬tan elite slowly losing the reins of global finance to Asians and Europeans.
We analyse each of the failing financial institution, their global standing before the fail¬ure, their exposure to sub-prime debt, what went wrong, how they failed and what would be the possible implications on the world of finance.
Wall Street, they say, reinvents itself every few decades. This time round it’s not so much reinvention as disappearance. Some say Wall Street will never be the same again.Lets find out...
Team Niveshak
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At the outset, We thank all our readers for contributing to the overwhelming success of the first edition of “Niveshak”. We would like to convey our special thanks to Prof. A. Dash, Prof. R. Dwivedi, Prof. B. Panda and Prof. B.Roychoudhury for their contribution. Appreciation and encouragement mails from our Professors, a place in the IIM Shillong website and Feedback from the FPM cell of IIM Kozhikode from the very first issue took all of us by surprise.
The team somehow brought its feet back on ground only to realize that this appreciation brings with it lots of expectations, a responsibility to improve quality in every step, a responsibility to create a legacy of the first batch, a responsibility to carry it forward, a responsibility to set out in the quest for excellence, a responsibility to live up to the reputation of the IIM brand.
In this issue we have added a few new features. We have an article on PE funds by Prof. Ashutosh Dash, contributions from many students and a comic strip.
Hope you have a pleasant reading.
Team Niveshak.
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It gives us immense pleasure to publish the very first news bulletin of the Finance Club of IIM Shillong. In fact, it is the first students driven news bulletin of IIM Shillong. We would like to dedicate this issue to the Freedom Fighters of India who made this day auspicious. We thank all the Faculty members of IIM Shillong and Prof. A.K.Dutta, Director, IIM Shillong for all their support and encouragement. We would like to convey our special thanks to Prof. Suvendu Bose without whose’ support this bulletin would not have been possible. This news bulletin will be an attempt to capture the true spirit of Finance in its simplest form.
Wish you a pleasant reading.
Team Niveshak
15th August 2008
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