'Impact of Wall Street crisis will be marginal on India'

The great tsunami that started on Wall Street has become a global crisis. The suddenness with which some of the biggest Wall Street firms like Lehman Brothers, Merrill Lynch and American Insurance Group (AIG) collapsed like a house of cards is unbelievable. Lehman, after 158 years of high flying, filed for bankruptcy a little over a week ago. Merrill Lynch, Wall Street’s third largest investment bank, worth more than $100 billion last year, was bought by Bank of America for just $50 billion. AIG had to be bailed out by the US government with a $85 billion loan in exchange for nearly 80 per cent shares of the company, by far the biggest act of nationalisation in Wall Street’s history. As the contagion started moving across the globe like a giant hoover, gobbling many small and big-sized banks in other countries and forcing countries like Russia and Japan to inject massive sums into their financial systems, share markets tumbled everywhere. Inevitably, comparisons were drawn with the Great Depression of 1929. But this analogy is not correct. The world’s capacity to deal with such crises has increased enormously since 1929. To take one example, the massive intervention by the American government in the present crisis is unheard of. Already, the total bailout package by the US has crossed the $1 trillion mark and President George Bush has spoken of the urgent need for a new law to unclog the markets. Such acts of nationalisation of private debts would make past leaders of the US turn in their graves. Thus, corrective mechanisms are already in place and hopefully the crisis would be overcome sooner than later, albeit with many job losses and many stockholders losing money. How did this crisis arise? It started from retail banks lending enormous housing loans to borrowers with inadequate security and uncertain credit histories. These banks repackaged these doubtful loans as tradable securities and sold them to investment banks, such as Merrill Lynch and Lehman Brothers. Inevitably, when these borrowers defaulted, the market for these securities crashed. Some of the investment banks, like Lehman, had also invested substantially in the booming property market. When the housing boom went bust, the property market also collapsed, adding to the losses of the investment banks. The fact that in March this year the US government rescued Bear Stearns had raised fond hopes in Lehman Brothers that a similar rescue package may come their way. But this time, with elections around the corner, the American government refused to use public funds to absorb Lehman’s losses. The US Federal Reserve did not realise at this stage that this was only the tip of the iceberg and that they would have to intervene in a few days’ time. With an accumulated debt burden of $613 billion, Lehman Brothers had no other option other than to file for bankruptcy. This triggered a downward spiral in share prices and a crisis with others like Merrill Lynch announcing bankruptcy soon after.