The US slowdown has started, affected by a series of events which have left the investors perplexed. In the first quarter of 2008 the investment bank The Bear Stearns filed for bankruptcy, which was later acquired by J P Morgan, a leading global financial services firm with assets of $1.6 trillion, having operations in more than 60 countries. Little did the investors realize that this was just the beginning of the industry convulsions but later on one after the other, major players in the financial industry went for a toss.
The cascading effect continues¦ and so does the protection plans
Another major event that shook the stock market was the news of US mortgage giants Fannie Mae and Freddie Mac filing for bankruptcy. The U.S. government seized control of these companies, placing the liabilities of more than $5 trillion of mortgages onto the backs of the U.S. taxpayer. Both companies have now been placed into a government conservatorship under the recently created Federal Housing Finance Agency, in a plan announced by Treasury Secretary Henry Paulson and FHFA Director Jim Lockhart.
If this was not enough, New York-based Lehman Brothers Holdings filed a petition under Chapter 11 of the U.S. Bankruptcy Code with the United States Bankruptcy Court. The company is more than a century-and-a-half old and serves the financial needs of corporations, governments and municipalities, institutional clients, and high net worth individuals worldwide. The news set the US stock market on a downward move.
Another historic event was the sale of investment bank Merrill Lynch to Bank of America for $50 billion. Under terms of the transaction, Bank of America would exchange 8595 shares of Bank of America common stock for each Merrill Lynch common share. The price is 1.8 times stated tangible book value. The transaction is expected to close in the first quarter of 2009. It has been approved by directors of both companies and is subject to shareholder votes at both companies & standard regulatory approvals.
But, the respite came with the news of Barclays set to acquire Lehman Brothers' American businesses & assets. Barclays Capital, the investment banking division of Barclays Bank PLC, has signed a definitive agreement to acquire substantially all of the North American businesses & operating assets of Lehman Brothers Inc., a wholly-owned subsidiary of Lehman Brothers Holdings Inc., & certain related assets of Lehman Brothers Holdings Inc. & its affiliates for consideration consisting of assumed liabilities, $250 million in cash & certain contingent considerations. The businesses to be acquired will include Lehman Brothers' Investment Banking, & Fixed Income and Equities Sales, Trading & Research operations, as well as certain supporting functions. These operations will be acquired by Barclays Capital, accelerating the growth of a formidable player in the global marketplace. Approximately 10,000 employees of Lehman Brothers Inc. and Lehman Brothers Holdings Inc. in North America and certain of its subsidiaries will join Barclays upon the closing of the transactions.
As another strategic move, Nomura Holdings, the Japanese investment bank, has also agreed to buy Lehman Brothers' Asia-Pacific units. And the grapevine is that the bank was close to sealing a similar deal for Lehman's businesses in Europe as well.
World's largest insurer on sale¦
Another repercussion of the US real estate meltdown was on AIG, the world's largest insurer, which was hit hard by credit crunch because its derivatives unit sold guarantees on securities tied to the American mortgage market. As a result, the company decided a $20 billion (£11 billion) asset sell-off. The federal government has offered AIG a loan of up to $85 billion to prevent the company from falling into bankruptcy. But, the fate of the company has been kept on hold for sometime.
Struggle continues¦
Not only this, Washington Mutual, America's largest savings and loans company - the equivalent of a building society in the UK - is also struggling under a collapsing share price.
More recently, Morgan Stanley has entered into a letter of intent to pursue a strategic alliance with Mitsubishi UFJ Financial Group, Inc. ("MUFG"), Japan's largest banking group & the world's second largest bank holding company with $1.1 trillion in bank deposits. The letter of intent relates to an investment in Morgan Stanley that would eventually reach 20 percent of its equity on a fully diluted basis. Earlier, Morgan Stanley was granted approval by the U.S. Federal Reserve Board of Governors to become a Federal Bank Holding Company.
In view of the prevailing market conditions, The Goldman Sachs Group, Inc. has announced that it will become the fourth largest Bank Holding Company and will be regulated by the Federal Reserve.
Impact on Indian stock market¦
It is often said that the stock market is ruled by sentiments and it has been proved as well. As soon as the US stock market tumbled, the Indian counterpart followed suit, leaving investors in a jittery. But, things in the US markets started improving and so did the sentiments of people back home. Even though global events are currently driving the Indian financial industry, and growing inflation rate, terrorists attacks and upcoming elections are making the matters worse; India still has a lot of potential to grow. It may be a bearish phase for the time being but Indian stock market will shine again. I feel after signing Indo-USA nuclear deal, sentiments in India will improve as investments around Rs. 2,50,000 Cr. is likely to make inroads in India for nuclear power generation. It will be a boom time for Indian engineering and electronic industries. Stocks picked at these levels would definitely grow. The success mantra is to invest wisely and carefully to reap the maximum benefits in the stock market. We conclude with a famous saying of John Templeton, "The time of maximum pessimism is the best time to buy and the time of maximum optimism is the best time to sell." Happy investing!
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