WALL STREET CRISIS AFTER LEHMAN BROTHERS IN BANKRUPTCY

MOHAMMED ARIFEEN
Oct 13 - 19, 2008

Hearing the news on Monday September 15, 2008 of the failure of a deal to purchase a 158 year old America's fourth largest Lehman Brothers Investment Bank by the Bank of America and the subsequent filing for bankruptcy protection by the Lehman Brothers the Dow industrial dropped more than 500 points and the US 30 years Treasury bond yield declined to its lowest level in 45 years. This was the worst financial crisis since the great depression of the 1930. It was another black Monday in the history of the Wall Street after 1987 collapse in America's hub. Financial market crumbled 21 years ago on a Monday. In this financial collapse, the losses in market capitalization at the world top 16 banks were to the tune of $ 347.3 billion.

S.NO.

BANKS

IN BILLION DOLLARS

1.

Citigroup (USA)

55.1

2.

Merrill Lynch (USA)

52.2

3.

UBS (Switzerland)

44.2

4.

HSBC (UK)

27.4

5.

Wachovia

22.7

6.

Bank of America (USA)

21.2

7.

Washington Mutual (USA)

14.8

8.

IKB Deutsche Industriebank (Germany)

14.5

9.

Morgan Stanley (USA)

14.4

10.

JP Morgan Chase (USA)

14.3

11.

Lehman Brothers (USA)

13.8

12.

Royal Bank of Scotland (UK)

13.8

13.

Deutsche Bank AG (Germany)

10.2

14.

Credit Suisse (Switzerland)

10.1

15.

Wells Fargo (USA)

10.0

16.

Credit Agricole (France)

8.6

Lehman is one of the biggest banks to collapse since 1990. It survived during the world wars and the Asian financial crises. It had $ 600 billion of assets financed with just $ 30 billion of equity as of the end August 2007. At the time of filing Lehman had about $ 639 billion in assets which compared with world Com had about $ 107 billion when it filed for bankruptcy protection in 2002. The other bank that collapsed in the Wall Street financial crisis was Merrill Lynch-USA second largest bank. This bank which was worth $ 100 billion last year sold out to Bank of America for a paltry $ 50 billion. The US government rescued mortgage giant Freddie Mac and Fannie Mae who owned or guarantee about half of the American $12 trillion mortgage market. Over the past year the two mortgages increased their lending by about $ 600 billion.

In this financial crisis American International Group, the biggest American insurance company and the world's largest super market strived for its survival. Its strenuous efforts failed when its rescuer Bank America gave up to save Lehman bank. Its credit rating was downgraded when it was desperately in need of $ 75 billion credit line. The US government came to rescue and took over it for $ 85 billion.

The panic in world credit market reached it zenith which was never witnessed since the second war. The World Central Bank injected multi-billion dollar lifeline to global market in a frantic effort to save the financial crisis. In an unprecedented move the US Federal reserve pumped an extra $180 billion to major Central Banks affected by the financial crisis. Europe and Japan provided desperately needed $160 billion in liquidity.

World stocks markets tumbled for a second straight day on Tuesday 16, September 2008. The Dow Jones Industrial Average slid on 0.54 percent in early trade. The Standard & Poor's 500 index lost 58.06 points. The NASDAQ composite shed 81.36 points. In London the FTSE 100 index closed down 3.43 percent to 5,025.6 points. In Paris CAC 40 shed 1.96 percent to 4,087.40 points and in Frankfurt the DAX was off 1.63 percent at 5,965.17 points. In Russia the main RTS stock market suspended trading after falling by more than 11.47 percent.

Asian stocks slumped on Tuesday following the collapse of US Investment Bank Lehman Brothers. Japanese share dropped almost five percent to close at a three years low, while Hong Kong was off 5.4 percent and Seoul lost more than six percent. Singapore share prices closed 1.01 percent. Indian shares ended flat. The BSE benchmark 30 shares Sensex index fell 0.09 percent to 13,518.8 points.

Pakistan remained free from this recent financial crisis. It did not have any impact on its domestic market because in August 2008 the government imposed a floor of 9114 for the market's benchmark KSE-100 index.

Australian shares closed down 1.4 percent. New Zealand share prices fell 2.87 percent.

New York Crude prices fell by $5.47 to settle at $ 95.71 a barrel. London Brent Crude fell $5.55 to $92.03 a barrel.

The US dollar fell 2.8 percent to 104.92 yen. Australian and New Zealand currencies fell sharply versus both American dollar and Japanese Yen.

Gold futures ended 2.9 percent higher in volatile trade.

The collapse of the American financial system was brought about by the irresponsible lending by financial institutions and the invention of credit instruments that concealed the extent of bad debts. Further excessive greed and slack supervision also led to the crash of American financial giant system.

Senator John on September 15 said he believed the fundamentals of the economy were strong but later on he has to take back his own words and dubbed the economic situation a "total crisis" and condemned the greed on Wall Street and Washington.

On Thursday 18 September 2008 Wall Street jumped on major measure taken by US government to stabilize the financial system. The Dow Jones industrial average was up 353.7 points or 3.3 percent. The Standard & Poor's 500 index was up 41.07 points or 3.5 percent. The NASDAQ Composite Index was up 74.89 points or 3.57 percent.

On Thursday 18 September US President George Bush expressed concern about turmoil in financial market and said his administration is prepared to take the "extra ordinary measures" to stabilise the market in the face of crisis that has shattered the confidence in America's financial system.

The end of the era of financial turmoil came to an end on September 23 Monday when Wall Street two big Investment Banks Goldman Sachs and Morgan Stanley secured Federal Reserve approval to become banks.

On September 24 Wednesday US Federal Bureau of Investigation confirmed that it was probing allegation of fraud by 24 Wall Street Firms. This investigation comes as lawmakers rush to agree to a $ 700 billion bailout of the turmoil in US financial sector.

It is now the proper time for the US and west financial experts to see that this capitalistic financial system of greed will work smoothly in the near future or the state should have the full control of the financial system. If both systems are not workable they should evolve a new system based on moral integrity, free from greed and fraudulent practices.