I appreciate that some of you have pointed out that the $700 Billion bailout is not exactly a "grant" in the literary sense. Guess I got too carried away with my cynicism:) I agree that the U.S. Govt will get a share of ownership in these banks or in their "troubled assets" (toxic mortgage related securities such as CDO's whose value only God can ascertain at this point) in return for the money that they are giving away. Whether this is a judicious thing to do -either as an investment or even as a gesture – only the future will tell. I hate to imagine a CEO of the same bank, 5 yrs down the line say: "I can do whatever I want because mommy (U.S. Govt) will bail me out, even if I lose all my money through creative lending/speculation/ trading". Then the Govt would have achieved exactly the reverse of what it set out to do.
It would be good for the taxpayers if the money that the Govt is spending to invest in troubled U.S. Banks, appreciates in value. But the issue is: if the banks in question are such juicy investments at this point – then why are the leading investors around the world, including Warren Buffett, not buying up all the banks in trouble? (Warren Buffett is a legendary billionaire investor, who has smartly offered $5 Billion to a popular U.S. Investment Bank - Goldman Sachs, not in return for equity shares but at 10% p.a. interest rate).
It looks like investing in the troubled U.S Banks or in their toxic mortgage securities today, in return for getting ownership shares in them, is an extremely risky bet that many prospective investors (or other banks) are not ready to take on their own – so the Govt has offered to stick its neck out as an investor of last resort – which is not really the best position to be in.
The other worrisome part is…in addition to the hefty bailout package by the Govt., the Federal Reserve Bank (Fed) in U.S. (similar to RBI in India) has cut its interest rate to 1.5 % on Wednesday (Oct 8th, 2008) , to save the economy. This means that once again (after the 2002-2004 period) funds have become artificially cheap for borrowers, tempting them to load up on cheap loans. Remember, I had written in my previous article that the beginning of the chain of events that ended in the current mess was that, after the Dot com bust, the interest rates were cut to an abnormal low of 1% to perk up the economy. Now it’s like déjà vu all over again…does this mean in the future when the Fed increases its interest rate to the normal level, the entire episode will repeat? That would make it a perfect vicious circle. I don't know why I suddenly feel like humming “Merry go round the Mulberry Bush…Mulberry Bush…Mulberry Bush…”
Okay, enough cynicism for the day – I bet the economics experts running the show would know better than us. Let’s not distract them with our common sense. Hope all these billions can somehow buy peace :)
Friday, October 10, 2008
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7 comments:
I dont think there would be another vicious cycle like the current situation . Even though the fed rate has been cut, no the Investing banking firms and insurance companies must take correct decision because they owe the credibility to world which they cant risk , else they will be 100% out of the market and no one will bail them next time .
Manish
http://finance-and-investing.blogspot.com/
what's happening now could already be a repetition of the past:
http://en.wikipedia.org/wiki/Savings_and_loan_crisis
sir,
I am a normal person who is unable to keep pace with the present market situation, even though interested. Because I am unable to understand all those terminology used in the articles related to finance.
But I read your column in the last sunday edition of
"The Hindu". It made me understand the scenario as a fairy tale. You are a great writer. Because many people in India may not understand the market correctly, then I simply suggest them of reading your articles. Really till now I didn,t get information so clearly as yours. Thank you very much.Now I feel that I too can understand the present changing condition and its consequences. I think you are from Andhra Pradesh. Me too. If at all posibile please send me your photograph. Thank You once again.
The present crisis is due to speculation and going against the basic such as Depreciation for building/housing. These are brought in by bschool graduate out of colleges.
As you rightly pointed out, bailing out is going to be vicious circle, and you will again have the Bschool chaps in action, when there get back money into the institution.
Instead allow the system to correct and not support speculation (probably speculation is termed innovation/creative by the US, further the simple basic rule is what go up has to come down). Offcourse, bank will fall, if this action is taken. As per law, Bank depositors should be given higher important. Here is where the Govt can step in and provide the depositors their share on maturity of funds. For the Shareholder(who are suppose to be the owners of the company), they can get there share after liquidation.
Otherwise, the bail out is going to lead to another round of speculation.
First, Congratulations on the article on 5th Oct 08. I have made scores of people read it.
I am sure our financial experts in India will avert a disaster.
I remember an advice given to me when I started my career 25 years back
"1. don't tell lies
2. if you have to, remember they are lies.
3. it will be disaster, when you start believing in your own lies"
Somewhere along the line the I bankers started believing in their own lies.
as you have given in the article 0n 12th Oct 08, I hope common sense will not become uncommon.
mouli
What a bunch of Poop!
well articulated and easy to grasp blog. But one word of advice it is not "merry go round the mulberry bush" but "Here we go round the mulberry bush" :) (on a lighter note)
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