Wednesday, September 17, 2008


Found a very interesting observation by Sudeshna Sen in the ET today. This actually sums up the last weekend in an excellent manner.
Lives lost at one end of the world; livelihoods lost at another.
As she aptly puts it, the bad news has kept lining up and observations of the experts around the world suggest that there is'nt a silver lining in sight. Sterns became history last year. The U.S govt was quick in lending it a financial bailout (liquid cash to enable Stern to pep up its assets to match its liabilities). This gesture was somehow absent this time around and Lehman had to face the ignominy of filing for bankruptcy protection.

One thing I fail to comprehend is : How did the creme de la creme of the best business schools in the world fail to anticipate a capsizing of their boats? The entire success or failure of any firm cannot be attributed entirely to it's CEO, I agree. However i would like to assume a behavior of insolence here and ask Mr. Richard Fuld : "When economists and industry analysts all over the world were of the opinion that you should have sold out when your share price reached less than $25 per share, what is it that kept you from taking that route?"

You can safely assume that when a minion like myself has the gumption to question Mr. Fuld, it is natural for the self proclaimed business experts all over the world to vie for his head.

I am basing this article on whatever i know or have read about the debacle. In the last decade, Lehman assumed its role in the financial markets as a financial advisory firm and an underwriter.To mitigate risks, all the major underwriters started to form larger syndicates. As the number of stakeholders of that 'commission' pie increased, the profits out of the exercise were bound to decrease. Now, Lehman, along with other IBanks, saw a way to increase its' net operating profits by a diversification methodology. The firm started putting its capital on the line and juggling with private equity and fixed income securities. Incidentally , a number of bonds and fixed/floating securities they bought were pertaining to the real-estate in the U.S. The sub-prime mortgage crisis that rocked the U.S in the same period, caused securities associated with real-estate and mortgage loans to be considered as high risk with passing time. Another gargantuan investment banking firm Bear Sterns saw it's downfall as a result of this crisis. When a firm (Lehman) continues to deal in high risk securities and in the process, puts its retained earnings and stockholder's equity (indirectly) on the line, it is bound to infuse a sense of insecurity in its investors. This, coupled with a number of its acquired assets being declared 'unfit for liquidation' ,is what took Lehman down.

So why didn't Lehman sell out to BOA or Barclays when there was a definite downtrend in its' EPS? Well, I feel, this is the point where a criticism of Mr. Fuld would be well justified. No person at the helm of affairs wants to have a black mark of succumbing to a hostile takeover in his portfolio and Mr. fuld here, might not be an exception. Instead of selling Lehman's assets off to a competitive bidder/competitor, I am sure he must have tried to revive the sinking fortunes of his firm. The adage 'a drowning man catched a straw' would have manifested itself in all of the Lehman management's actions. Courtesy freelance writers in ET, i am aware of two alternatives that Mr. Fuld had looked at, when he saw his firm turning turtle. As reports go, there was a definite attempt to convince Warren Buffet of Lehman's rising fortunes and get him to invest about $5 billion and acquire 33% stock of Lehman. Allegedly, this happened close on the heels of the Bear Stern debacle. In a letter to the iconic investor, Richard Fuld had claimed that there was a proven redirection of Bear's business towards Lehman. Alongwith his exemplary acumen in financial investments , Warren Buffet is famously quoted for his prognostications about how Derivatives are factors that would lead to a financial apocalypse one day. I am sincerely not trying to establish a causal relation between these views of Buffet and his alleged refusal to accept Richard Fuld's offer. I am plainly hypothecating. Unconfirmed reports are that Lehman had also approached Barclays for an LBO (leveraged buy-out) transaction (Barclays buying out Lehman). The offer does not seem to have evinced any interest in the aforesaid prospective buyer.

Post Lehman's 'cave-in', the financial crisis is said to have deepened so greatly that there are sure signs that giants of the IB market such as JP Morgan, UBS (among a few) will be brought to their knees. Expert observations state that many European firms who had exposure to Lehman's finances are in dire straits and there is a lot of more bad news waiting in the offing. Incidentally, India has only $81m exposed to Lehman and as a result, it is not going to be affected to that great a deal. Amazing!, isnt it? that situations sometimes force us commoners to attach an 'only' to a sum to the tune of 100 million dollars.

This might be a very good time for India. It gives us a chance to project ourselves as a stable investment field. In the past two days, FII outflows have reached a total of $2.2 billion and if this is not stemmed soon, the rupee might depreciate to new lows.Steps are being taken by the FM to build some confidence among foreign investors but i guess this would have to be coupled with a concentrated effort to garner more FII inflows into the country. This can be done by appropriately projecting and aggressively marketing ourselves as a stable investment destination.

At this point one really cannot anticipate what the future will look like. Fusion and fission of entities is definitely on the cards. Pay packets that allow you to accumulate as much that you can buy 20 Ipod shuffles in a month might be on their way out. There are sectors that have been less affected or indirectly affected ; there is none that has been left untouched. Increasing the supply of cash might temporarily soothe the situation but it surely will not fix the situation completely. Fusion of entities is bound to trigger a mass resource-cutting by firms with a view to reduce their operating expenses and SG&A. With more and more candidates specializing in varied aspects, the high demand-low supply relationship in the Job market shall in all probability create a condition wherein even deserving/ capable candidates shall not be paid 'the moon'.

Jagapathi Kondragunta, the host of a popular quiz show tells me, " This is your final question for a million dollars?"

"Do you think everything will be back to square one soon? Options are:
1. Yes
2. No
3. Maybe
4. Maybe not "

I reply "Well JK, this truly is a million dollar question. I'd like to quit the show because i really Can't say"


Pagan Winter said...

I'll pay you 23 Rs. for not forcing me to read this...
Unlike Vasu's, there is not enough sex in your blog...

vinod said...

nice one..a little too much of verbal diarrhoea maybe when it comes to using synonyms.and just for the record it is Stearn not stern.

@Vaidu..Neha Dhupia once told "only sex and shahrukh khan sells"..and i aint gonna write abt shahrukh anytime soon..