Economy and the Meltdown
How it all started?
It all started with lending money to Subprime borrowers or at least as the world knows how it began. Next in line was Credit crisis, as a result of freeze on lending. Banks, financial institutions and businesses across the world have lost tons of money causing the economic tectonic plates to re-adjust, drifting the financial world as we know as far back as 90’s, wiping out close to $5 trillion market value.
The technology boom of the late 90’s followed by the financial prosperity over the last decade had created numerous jobs raising the per capita and thereby standard of living of every individual. Are jobs an exaggerated response to what we thought the marketplace was? Are jobs another bubble waiting to burst? The answer only time can tell.
Investor Dilemma:
Market collapse has raised awareness on the financial model and prevailing regulations. Diverse viewpoints of each analyst is often confusing; I’ve heard one say that in a un-regulatory environment, everything could go wrong and others say that in a tightly regulated markets, nothing functions as expected. Now, how can you stay in between the two conditions and expect nothing to go wrong. Isn’t that confusing (inevitable)? Excessive greed coupled with that mystification marked the genesis of various investment vehicles such as Mortgage backed securities, Collateralized debt obligation (CDO), Credit default swaps (CDS) etc. These asset-backed securities, typically big buyers of subprime mortgage backed securities, are sliced, diced and sold to institutional investors. As subprime delinquencies soared in the year 2007, major rating agencies such as Moody’s and Fitch have downgraded some of their AAA rated CDOs to Junk; as a result their market value slumped. Insurance companies like AIG, Security Capital that guaranteed interest and principal payments in the event of default have lost their market capitalization as they began writing off the billions in their quarterly filings. Risk transferred from one institution to another without much accountability has brought down the entire market.
The crash seems to have heard every nook and corner of the world including a small and peaceful seaport town of Narvik in Norway, where the municipalities and civilians have lost millions in such complex derivate instruments.
Who has the courage to invest or spend in a market that has lost more than a decade of positive performance? During the time of enormous economic distress, Investors need confidence that most institutions that they invest in are sustainable and viable long term. Jamie Dimon, CEO of JPMorgan Chase had delivered a terrific speech at US chamber, which was meant to restore confidence in the market. When asked about Executive compensation, he aptly said that Government, Treasury or Federal reserve should not intervene or guide them to run their businesses and that institutions cannot retain talented resources if the government were to lay out stringent policies on executive compensation. I am in full accord with Jamie Dimon and other CEOs that restricting compensations would in fact prove to be deterrent for businesses on the long run because compensation and bonuses if paid for better performance over an extended period of time, are basic incentives to actuate individuals to strike better deals. Do we not have better things to do at this point than to talk about compensation?
Fundamentals fell off the cliff?
When I first started investing, I spent a great deal of time and effort in understanding what market indicators are- behavior of Stocks vs. Oil, Dollar vs. Oil, Commodities vs. Stocks, quarterly earnings, ramifications of dividend cut etc. Well, I now know what they are however they are no longer fundamentals in the current circumstances.
Considering the numbers are bloated over the years I ask myself, is this the true market value? If so, will the market ever see the heydays of the years 2007-2008?
Tags: Asset Backed Securities, Banks Financial Institutions, Business, Cdos, Collateralized Debt Obligation, Credit Crisis, Credit Default Swaps, Featured, Financial Model, Financial Prosperity, Institutional Investors, Investment Vehicles, Last Decade, Lending Money, Market Capitalization, Market Collapse, Mortgage Backed Securities, Mystification, Quarterly Filings, Security Capital, Technology Boom, Tons Of MoneyRelated posts
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Good overview of current market conditions and investor confidence and expectations.