What is happening in the financial world?
Probably all of you must have heard of what is happening in the financial world, or atleast you would know that something is happening. Here is a small attempt to simplify some of the things for you.
Baer Sterns is the, sorry, was the 5th largest Investment Firm operating in the US and around the world with 14,000 employees on its payroll. Some time ago the sub-prime crisis took place in America.
What is this sub prime crisis? Sub-prime means below average. American Banks have a fascination to give out loans to people who do not hold the capacity to repay them. What the banks do is that they take as guarantee the Homes or other assets of the person and give him a loan. This person now goes and spends out the money given to him and keeps paying the money back to the bank. All goes well, till it goes well. Now what happened in America is that the home rates started crashing rapidly. Hence the banks began to demand other assets from the person, which he didn’t have. So the banks took over the homes of these people and began to sell them irrespective of the price of that they got. This increased the supply in the market and the prices crashed further and became a self feeding loop. Investment Firms and Banks that had given loans to these people had to incur these losses themselves. This coupled with the crash in the stock market was much more that what the banks could handle.
This firm Baer Sterns was badly hit by this sub-prime crisis. Last year the stock of the company had rocketed to $171 a piece hitting an all time high. As this crisis began to unfold, the stock began to crash. There was another firm named Carlyle Capital in which Baer Sterns had a 15% stake. Last month Carlyle Capital went Bankrupt and Baer Sterns lost a lot of money in that.
Friday – 7th March Morning 9:00 AM American Time.
Baer Sterns is now trading at $30. One-fifth of is all time high. As soon as the market opens the stock crashes to $15 in a matter of minutes.
Saturday – 8th March.
The management of Baer Sterns now knows that there is no other way to bail out their firm than to file for Bankruptcy. The rush to the Federal Reserve which is like what Reserve Bank of India is for us. The Fed immediately understands that if they do not bail out this firm, this firm will tumble and will take along with it the whole of the American Financial System. It called up JPMorgan Chase, another top American firm and asked if they would like to buy Baer Sterns. They came, they saw, and they quoted a price. A price that was one-tenth of its actual value. By Sunday evening the deal was done. JPMorgan announced that they would buy each share of Baer Sterns that was trading at $15 for $2. Just for 2 dollars. Imagine the erosion of wealth for the investors there. The 14,000 employees of Baer Sterns had got paid in stock and not cash so they have lost all of their salary for the past few months. Obviously, only a few of them would be still having their jobs by now. Millions of share holders who had the stock lost all their money. A billionaire on Friday became a measly millionaire on Monday. This is America and this is what happens there. Do not look at this as 14,000 employees loosing jobs. See the 14000 families that have lost a livelihood and the other dependent families like the maid servants and all who would be out on street very soon.
What could happen next…?
There are still many firms on the verge of bankruptcy just in line and they are not small firms- they are among the top investments banks of the world, who have stood out for 100 years or so. The American Financial System is facing a crisis of a life time and there seems to be no way and no one to bail it out this time.
Implications for us…
Satyam had a $10 million contract with Baer Sterns per year. Now only memories of Baer Sterns remains and so does the paper contract. A 1000 employees at Satyam wait for their Pink Slips (bye-bye letters) just in case their management finds them to costly to maintain. The axe supposedly has begun to fall…