Global financial crisis: The 'culprits'

The financial crisis continues to jolt the world's most developed economies.
Many companies have declared bankruptcy in the United States, millions of jobs are being lost and the government has the mounting challenge of reviving the economy.
The crisis, that has also rendered so many people homeless, certainly did not happen overnight. So who is responsible for it?
Time magazine has a listed some people who have been blamed for this gargantuan crisis.
Time names former Federal Reserve chairman Alan Greenspan and former US Presidents George W Bush and Bill Clinton in the list. Meet the other key players who have been blamed.
Christopher Cox
Christopher Cox was the 28th chairman of the Securities and Exchange Commission. He was a 17-year Republican member of the United States House of Representatives, and member of the White House staff in the administration of President Ronald Reagan. Prior to this, he was a practicing attorney, teacher, and an entrepreneur.
Today, he hits the Time magazine's list of people blamed for the financial crisis mainly because of the SEC's inability to enforce stricter norms against fraudulent companies.
The SEC also failed to detect Bernard Madoff's $50ibillion Ponzi scheme. So the SEC's role in the financial crisis has been questioned. Many feel that the SEC failed to act when the financial companies were involved in huge financial irregularities
Angelo Mozilo
Angelo R Mozilo was the co-founder and chief executive officer of Countrywide Financial until July 1, 2008. He started the company in 1969.
The company soon grew to become one of the biggest mortgage lenders in the US. Countrywide was listed on the New York Stock Exchange in 1984. They granted huge loans to borrowers without verifying their repayment abilities.
Promoting risky loans, the company played a crucial role in huge subprime mortgage crisis. Finally, this led to the collapse of the company. The company was subsequently taken over by the Bank of America. CNN named Mozilo as one of the 'Ten Most Wanted: Culprits' of the 2008 financial collapse in the United States.
Joe Cassano
Joe Cassano's introduction of credit-default swaps led to a financial crisis at AIG. AIG offered insurance protection to buyers against losses on debts and loans of borrowers, amounting to $447 billion.
The housing crisis led to a fall in value of the assets insured. After the company lost $11 billion, Cassano quit in February 2008. Cassano faces lawsuit for cheating investors who suffered huge losses due to the company's downfall.
The American government finally granted $150 billion to revive the insurance company. PricewaterhouseCoopers, who audited AIG said there were discrepancies in financial reporting at Cassano's division. Cassano is blamed for leading AIG to bankruptcy.
Franklin Raines
Franklin Raines was the former chairman and chief executive officer of the Federal National Mortgage Association, commonly known as Fannie Mae.
Fannie Mae's mission was to ensure more people get the opportunity to buy homes. Franklin Raines, started a programme in 1999 to issue bank loans to individuals with low incomes and eased norms on loans to enable more people benefit from the programme.
Many feel that the plan of offering easy credit to home buyers who were not creditworthy led to the subprime mortgage crisis.
Phil Gramm
Phil Gramm was former Senator of Texas and John McCain's former economic adviser. He left the campaign in July 2008 after his comments on recession came in for much criticism.
He had said, the 'US become a nation of whiners' and the nation is in a 'mental recession'. His comments during the campaign became an issue.
In his response, Barack Obama, stated, "America already has one De Phil. We don't need another one when it comes to the economy."
Some economists believe that the 1999 legislation put forward by by Gramm and signed by President Clinton - the Gramm-Leach-Bliley Act -- was also responsible for the 2007 subprime mortgage crisis and the global economic crisis.
The Act is most widely known for repealing portions of the Glass-Steagall Act, which had regulated the financial services industry.
Kathleen Corbet
Kathleen Corbet served as president at Standard & Poor's. She was held responsible for giving top AAA rating to collateralised debt obligations (CDOs).
Collateralized debt obligations are a type of asset-backed security and structured credit product. CDOs have become an important funding vehicle for fixed-income assets.
Dick Fuld
Richard Fuld hit the headlines when he sold a $14 million Florida house to his wife for $100. Many see this as a move to protect the house from future legal action against him.
Fuld joined Lehman Brothers in 1969 after giving up his career as an air force pilot. He turned around the fortunes of the company after he took over but soon risky mortgages backfired.
He ignored warnings from experts on several issues. He refused to talk to buyers and finally the company had to declare bankruptcy. Fuld earned about $45 million in 2007.
From the years 1993 to 2007, he is said to have received nearly half a billion dollars in total compensation. CNN named Fuld as one of the 'Ten Most Wanted: Culprits of the Collapse'.
Ian McCarthy
Ian McCarthy is the president and chief executive Officer of Beazer Homes March 1994. Beazer is in trouble with the Federal Bureau of Investigation (FBI), Department of Housing and Urban Development and IRS investigating cases related to employees of its mortgage unit violated regulations, says the Time magazine.
Bernard Madoff
Bernard Madoff, former chairman of the Nasdaq stock exchange founded the Wall Street firm Bernard L. Madoff Investment Securities LLC in 1960 and was its chairman until December 11, 2008.
He was charged for committing the largest investor fraud.
Bernard Madoff, a former chairman of the Nasdaq exchange, was arrested for running a $50-billion Ponzi scheme. His operation is said to be the largest Ponzi scheme in history.
He is under house arrest until his indictment, which is likely by mid-March 2009.
Herb and Marion Sandler
Herb Sandler together with his wife Marion Sandler purchased Golden West Savings and Loan in Oakland California and created Golden West Financial Corp, the parent company of World Savings Bank.
It was one of the largest S&Ls in the US with assets of almost $80 billion and deposits of $46 billion as of 30 November 2003. In the early 1980s, the Sandlers' World Savings Bank became the first to sell a tricky home loan called the option ARM.
They offered ways to cut down on early payments with misleading advertisements. The couple made a whopping $2.3 billion when they sold their bank to Wachovia in 2006. But losses on World Savings' loan portfolio led to the downfall of Wachovia, which was sold in 2008 to Wells Fargo.
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These Wall St bosses took home over $1 bn!

In the midst of a financial turmoil that has raised questions, among other things, about fat executive pay packets, a media report listed out 12 top Wall Street bankers who collectively took home over $1 billion (yes, $1 billion!) in the past five years.
The total take-home pay of the 12 bankers, current and former chiefs of some of the biggest names in the US financial space, stands at $1.053.15 billion during 2003-07, as per data compiled by The New York Times.
The report listed out Citigroup's India-born chief executive Vikram Pandit, JP Morgan Chase's James L Dimon and Goldman Sachs' Lloyd C Blankfein, among others.
Fuld, who is also the chairman of Lehman Brothers, took home $256.41 million.
'As recently as June 2008, Fuld said he was confident that Lehman was sound even as the bank posted a second-quarter loss of $2.8 billion. But, on September 15, Lehman filed for bankruptcy and began sliding towards an eventual liquidation,' the report said.

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Market fall continues: what to do?

The heavens are falling!! Heavens are falling!! Such a headlines will surely catch your attention, will it not?
Media TRP / clicks are a function of excitement in the market - not a bull run or a bear run.
Similarly brokers` revenues are a function of frenzied activity by the client. Not just a buy and hold theory.
First it was Lehman. Then Merrill was taken over by Bank of America. That will stretch its ratings - it has still not ingested the countrywide take over. Then it was AIG. Now there are rumors about Washington Mutual and Morgan Stanley. Then the bluest of them all Goldman Sachs. Will investment banking as a standalone activity die? I know not. Is it the end of the world? I think not. Are equity markets bleeding? Yes.
Equity markets need 2 things to do well. One they need fundamentals - good growth, decent management, good people, etc.
The other major ingredient is of course liquidity. When both of these are available in good supply, markets will thrive.
This is like a runner - he needs to keep on working on his fitness. He should eat right, exercise right, and have a good coach. This is a throughout the year effort. He cannot be lax, or feel ``bored`` doing it.
On the day he gets the motivation, his fit body is ready to take the opportunity, and win.
In the Indian market too, the fundamentals were good in 1999, 2000, 2001. However, it was in 2002 the cash flow (motivation) was provided and the inflows came in thick and fast - and provided momentum for the market to go from 3000 to 21000.
Now the fundamentals are in place. The motivation (cash flow) is missing. In fact it is negative. Nothing can be done to bring it back. The ``gora`` investor needs money back home. It is irrelevant that this is a small portion of his money. When Morgan Stanley, AIG, Merrill, Blackstone invested, we rejoiced. Now when they need to sell, and are therefore selling, we cannot mourn.
So, remember, the fundamentals are in place, the motivation is gone. Will it come back? Of course, the cash will come back. First in trickles, then in a flood.
However, the turmoil could take the index from 14000 to 9000 and then in 2013 to 30,000. Will this happen? I know not. Will it not happen? I know not.
But I know something. Just like the runner, you need to be there doing your bit every day. If you think you can get out at 13000 and come back at 9000 that may not be possible. Just continue doing your SIPs. Invest when the market is at 13000, at 12000 and at 11000. Because the market is capable of doing funny things - it might turn back from 9123 and you might be waiting for 9000. However, if you continue your SIPs you will be investing small amounts at all prices, and the index reaches 30000, you can feel happy and satisfied.
Just notes though, please do not hold me to any of these numbers!!

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Seven days that shook the financial world

It was the week that shook the financial world to the core. On Friday, Sept. 12, traders left the New York Stock Exchange for the weekend. But key banking officials, facing the impending failure of the venerable Lehman Brothers investment house and a shaky outlook for two other huge financial players - investment firm Merrill Lynch and insurance giant American International Group - began a series of weekend meetings in an effort to prevent a possible collapse of the global financial system.
Over the next seven days, the nation's financial leaders, captained by Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke, produced a rapid succession of moves that reversed a decades-long trend toward financial deregulation and fundamentally changed the face of the American financial system.
Lehman failed and Merrill was sold to Bank of America. The government took effective control of AIG in an $85 billion bailout. And, in the biggest intervention of all, officials proposed to purchase the troubled mortgage assets of financial firms, a move that could cost hundreds of billions of additional dollars.
Meanwhile, worried investors sent the stock markets into a dizzying ride of huge gains and losses.

Friday, September 12:
The trading week ends with the fate of 158-year-old Lehman Brothers in grave doubt. Its stock had fallen sharply due to fears over its financial condition. Paulson, Bernanke, and New York Fed President Tim Geithner begin a series of meetings in Lower Manhattan with top bankers in an effort to engineer a bailout of Lehman, which had bet heavily in the subprime mortgage market.
Two possible buyers emerge: Britain's Barclays and Bank of America.

Saturday, September 13:
Talks on a possible Lehman buyout continue. The would-be rescuers look to the government to take on some of the risk, as it did in the shotgun sale of Bear Stearns to JPMorgan Chas in March and the effective nationalisation on Sept. 8 of mortgage giants Fannie Mae and Freddie Mac.
Government officials hold fast that there will be no federal bailout. Talks are inconclusive.

Sunday, September 14:
The negotiators continue meeting, facing a deadline to act before Asian markets open for Monday morning trading.
But government officials insist there will be no federal backing of a Lehman rescue. With no help from Washington forthcoming, Barclays - the only possibility left after Bank of America leaves the table - withdraws.
Lehman is done for.
Meanwhile, Merrill Lynch CEO John Thain, seeing the writing on the wall, arranges the sale of his company to Bank of America for about $50 billion. In one day, the fates of two storied companies are sealed.

Monday, September 15:
Lehman Brothers Holdings, the bank's holding company, files for Chapter 11 bankruptcy protection and says it will try to sell key business units.
Investor concern now turns to the fate of AIG, fearing a liquidity crisis. Rating agencies cut AIG's credit rating.
Despite reassurances about the economy from Paulson and President George W. Bush, the stock market plummets. The Dow Jones industrial average drops more than 504 points, or 4.4 per cent, the biggest loss since right after the September 11, 2001, terror attacks.
The failure also roils overseas stocks, sending them plunging. Meanwhile, concerns about a slowing economy take oil below the psychological benchmark of $100 a barrel, its lowest level since February.

Tuesday, September 16:
The Federal Reserve meets and keeps the federal funds rate unchanged at 2%. Asian markets, some of which had been closed for a holiday on Monday, plummet.
The Russian stock market goes into a tailspin, with the largest exchange down more than 17 per cent before the Russian government halts trading. Managers of the Primary Fund, a supposedly supersafe money market fund, say that shares have fallen below the sacrosanct $1 valuation.
Meanwhile, Goldman Sachs and Morgan Stanley, the two remaining independent investment banks, report stronger-than-expected results. However, investors continue to beat down the companies' shares.
Amid all the turbulence, US officials decide that AIG is indeed "too big to fail." In a move that would have been unthinkable before the credit crisis began, the Fed arranges to lend $85 billion to AIG in exchange for a 79.9 per cent equity stake.
The deal is announced Tuesday evening. Even before the deal is finalised, the Dow reverses an earlier loss and gains 141 points.

Wednesday, September 17:
The government bailout of AIG fails to stem investor fears as they flee to safety. Credit markets tighten.
The New York Times reports that Washington Mutual, the nation's largest thrift, has put itself up for sale. The Dow plunges 449 points.

Thursday, September 18:
The New York Times reports that Morgan Stanley has "stepped up" merger talks with Wachovia. The Fed moves to pump money into the financial system through lending programs operated by several overseas central banks and the Fed's own moves.
At the same time, the government begins action on the hugest bailout of all, committing hundreds of billions of taxpayer dollars to buy troubled mortgage assets from beleaguered financial institutions.
As word of the evolving plan spreads, stocks rally. The Dow closes up 410 points.
In the evening, Paulson and Bernanke and Securities & Exchange Commission Chairman Christopher Cox go to the US Capitol to brief lawmakers on the plan, which requires congressional authorisation.

Friday, September 19:
The buyout plan - with few firm details - is announced and stocks soar worldwide. President Bush says the move puts "a significant amount of taxpayer dollars on the line," but he says the risk of not acting "would be far higher."
In additional actions, the Treasury and Fed act to guarantee the assets of money-market funds, which had been threatened by the meltdown of the financial markets, and the SEC places a temporary ban on the short-selling of nearly 799 financial stocks.
The Dow closes up 368.75 points, 45 points below where it was a week earlier but still 911 points over its bottom on Thursday morning.

A momentous week indeed, but there is no sign the economic drama will limit itself to a mere seven days.
Lawmakers and regulators are to work through this weekend in an effort to devise bailout plan legislation that can come to a vote next week.
The bipartisan consensus surrounding the deal can come undone as the details are ironed out.
But for drama, it will be hard to match events that have reshaped the US financial landscape for years, if not decades to come.

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America's largest bankruptcies

Greed, arrogance, indiscretion and a large chunk of bad luck: this deadly concoction led to America's fourth-largest investment bank Lehman Brothers biting the dust and sending tremors across the financial world.
With even the giants of this world unsafe from the uncertainties and complexities of a global economy, the questions that are uppermost in everyone's mind are: who will be the next to go bankrupt and when will this fiscal tempest subside?
Frankly, no one knows for sure who will be the next to go belly up or when will the world economy return to normalcy. But then for Corporate America, bankruptcies or vagaries of uncertain economy are nothing new.
Over the years, the world has been witness to many an irresponsible management policy and greed that wreaked havoc on 'super' companies that folded up. In the process, billions of dollars -- both investors' money and employees' pension -- went down the drain.
So here is a list of the biggest bankruptcies to hit America in the last two decades

1. Lehman Brothers Holdings Inc; $639 billion
The Lehman Brothers bankruptcy, is without a doubt, the largest bankruptcy ever: the size is estimated between $613 billion and $639 billion!
What began life as a general store set up by three German immigrant brothers to the United States, over the years turned into one of US's largest investment banks.
The amazing story of Lehman Brothers' story started in 1844, when 23-year-old Henry Lehman, son of a cattle merchant, emigrated to the United States from Rimpar, Bavaria. He settled down in Montgomery, Alabama, and opened a dry-goods store -- H Lehman.
Later, when his brothers, Emanuel and Mayer, joined him the company changed its name to Lehman Brothers.
The global financial-services firm, which did business in investment banking, equity and fixed-income sales, research and trading, investment management, private equity, and private banking declared itself bankrupt on September 15, 2008.
Why it collapsed?
The fourth-largest investment bank in the United States, and one of Wall Street's biggest dealers in fixed-interest trading, was heavily invested in securities linked to the US sub-prime mortgage market.
As the crisis in financial markets gathered momentum, it saw its share price collapse from $82 to less than $4.

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Why Lehman Bros went bust; what it means for you

Lehman Brothers is no more. Merrill Lynch has gone down the Bank of America maw. AIG too could go belly up. With a doubt, these developments in America are the most shocking events to have hit global financial markets. So where did it all begin? And what does it mean for the Indian stock markets? Find out. . .
What is (or was) Lehman Brothers?
America's fourth-largest investment bank Lehman Brothers Holdings Inc has filed the biggest bankruptcy petition known to mankind.
The 158-year-old firm was founded by brothers Henry, Emanuel and Mayer Lehman, Jewish immigrants to the US from Germany, in 1850. Henry set up a general store in Alabama in 1844 and was later joined by his brothers. In 1850 they set up the merchant bank in New York after having made money in railway bonds. So what went wrong?

Lehman Bros, which till June 2008 had not reported a quarterly loss even once, had earlier survived many an economic crises, like railroad bankruptcies of the 1800s, the Great Depression in the 1930s, and the collapse of Long-Term Capital Management in the 1990s.
Thus the collapse of the giant investment bank came as a major shock for the entire world markets that plunged after Lehman filed a Chapter 11 petition with US Bankruptcy Court in Manhattan.
The $613 billion (some estimates put the size at $639 billion) bankruptcy thus throws up the question: why did the Wall Street giant go bust? Here's why. . .

Why did Lehman Brothers go bankrupt?
The giant investment bank succumbed to the sub-prime mortgage crisis that has rocked the United States and the global economy. Lehman was strangled by a massive credit crisis and fast plummeting real estate prices.
The gargantuan $60 billion loss in bad real estate loans forced the bank to file for bankruptcy.
However, the fall of the 158-year-year institution that started cotton trade in US before the American Civil War and financed the railroad that built a nation, got hit by a large dose of bad luck, pride, arrogance and greed. Primarily, the pride of its chief executive office Richard Fuld.
But there were more reason. Check out what they were. . .

Lehman's collapse was also triggered by the refusal of other banks to do business with it because of its complex and, at times, opaque ways of trading. Housing loans made by the bank to people with little support made these loans very risky, and when interest rates rose, these borrowers could no more repay Lehman. This led to huge losses, the extent of which is not yet clear.
Thus other banks stopped trading with Lehman. This led to it losing almost all business and triggered its fall.
The final straw for Lehman was the fact that both Barclays Plc of the United Kingdom and Bank of America Corp pulled out of takeover talks. BofA bought out Merrill Lynch for $50 billion.
However, Barclays has now said that it is in discussions with Lehman Brothers about buying certain assets of the stricken US investment bank.
"Barclays confirms that it is discussing with Lehman Brothers the possible acquisition of certain Lehman Brothers assets on terms that would be attractive to Barclay's shareholders," Britain's third largest bank said in a statement.

When other banks do not want to buy Lehman, why is Barclays interested?
Barclays wanted to buy Lehman out at a discount, so to speak. But when Lehman CEO Fuld decided that his bank was worth much more than what Barclays had apparently offered, Barclays stepped back.
Now that Lehman has filed for bankruptcy, its assets are available fairly cheap. However, the biggest problem is to take on Lehman's enormous liabilities.

How far is the CEO of the company responsible for Lehman's fall?
Wall Street analysts believe that it was the 'hubris' of Richard Fuld, the 62-year-old CEO of Lehman, who did not take the telltale signs of impending doom very seriously. Fuld, nicknamed The Gorilla for his foul temper, intimidating presence and tough talk, rejected many bids to save Lehman because he thought that the sinking giant was much bigger than Wall Street was giving it credit for, and wanted to get more price for the sale of the company.
Analysts say if the bank was sold just a week before it went kaput, it could have been saved the ignominy of a bankruptcy, but Fuld was far too adamant to see reason. Result: the end of a 158-year-old financial giant.

Could the United States government helped, like it helped Bear Stearns in May this year, and Fannie Mae and Freddie Mac earlier this month?
The US government could have helped, but US Treasury Secretary Henry Paulson said that it would not use up any more taxpayer dollars to bail out Lehman Brothers as it would lead to investment banks getting away with their gambling ways. Paulson had bailed out Fannie Mae, Freddie Mac and Bear Stearns, saying that if the government had not done so, the US housing loan market would have collapsed leading to gigantic losses for hundreds of banks all over the globe that have invested in US property.
Paulson, however, believes that a brokerage major like Lehman, which does not have a direct connection with ordinary people who have taken on home loans, need not be bailed out as it would not cause any systemic damage to the US economy.

Will the whole bank be liquidated?
Unlikely, at least for now. The US Chapter 11 that deals with bankruptcy says that PwC, the administrators, can go about taking its time to find good offers and buyers for Lehman's 'least affected businesses.'
The entire exercise can take months before all of Lehman's assets are sold, given the complexities linked to the bankruptcy

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Did Warren Buffett hang up on Lehman phone call?

Failed American investment bank Lehman Brothers, voted the best in the business many times, is rumoured to have made a distress call to Warren Buffett to rescue it, but the legendary investor politely hung up as he did not see good returns.
Days before filing for bankruptcy protection from its creditors to whom it owes over $600 billion, Lehman Brothers wrote to Buffett for help, according to a mail currently doing the rounds on the Internet through blogs and forwarded e-mails.
Buffett, the world's richest person with over $60 billion of net worth, is said to have replied: "Thank you for your recent letter for my company to invest some funds into Lehman Brothers. . . Unfortunately, I do not see good return on my money if I invest into your company."
Although its authenticity is yet to be proven, the mail has Lehman CEO Richard Fuld's name as the sender, while the reply carries the name of Buffett.

"Lehman's books are bleeding. The stock is a falling knife. You are peddling your crown jewel, cash cow, money management division at the wrong time to get market value," Buffett's reply says further.
In his request to Buffett, Fuld says, "I firmly believe that an investment in Lehman Brothers by Berkshire Hathaway is a classic opportunity for your great company to, once again, buy a fabulous global franchise at a very fair price."
Fuld further says, "Over the past year, our firm's market capitaliszation has shrunk by more than $30 billion (about 75 per cent). All of the shareholder wealth that we've created over the past 10 years has been completely erased in a matter of months, and yet our firm has never had brighter opportunities nor a stronger safety net."
"This is the investment opportunity that we see for you and the rest of the Berkshire family. You have the opportunity to invest in the brokerage industry at prices not seen for a decade," Fuld says in the e-mail.
"Our firm is poised to return to greatness, and many of Bear's clients are coming our way," he goes on to say.
Bear Stearns was one of first major casualties in the ongoing crisis in the American financial market and was eventually purchased by JPMorgan.
According to reports, Buffett has also been approached by AIG, which is also on the brink of bankruptcy, for sale of some of its units. Prior to its collapse, Lehman Brothers is also said to have approached Barclays and Bank of America, which on Monday bought over another distressed financial major Merrill Lynch in a no-cash $50 billion deal.
Reports from the United States said that AIG was in discussions with Buffett over the weekend and was negotiating sale of its aircraft leasing business. As Berkshire also owns some large insurance businesses, the core insurance business of AIG could also have been discussed for a distress sale.
The Wall Street and the authorities in the US are said to be currently working on a rescue plan for AIG with firms like Goldman Sachs and JPMorgan, while names of Washington Mutual and Wachovia are also emerging as next distress candidates.
Earlier this year, Buffett had said a financial crisis reveals who have been 'swimming naked' and it has now emerged 'Wall Street has been king of a nudist beach.'
In the midst of the subprime crisis, Buffett said during a media interview in June that he sees investment opportunities in the subprime market. He has been known to make investments in some of the most beaten-down industries, which has further added fuel to rumours about him picking up some investments from the debris of the current financial turmoil.

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