When US Markets Go Bust

8/14/2019 When US Markets Go Bust

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Why Lehman and Merrill fell

The full story.Deepa Venkatraghvan | Wednesday, September 17, 2008

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IT all began with the sub-prime crisis.

If you lost your money in the market crash of January 2008, here'sthe route to your loss, in chronological order.

2001-2005: House prices in the US begin to rise rapidly. Banks lendaggressively and create a sub prime industry.

Sub-prime lending refers to lending (at slightly higher interest rates)to people who may not be eligible for a loan under normalcircumstances. Maybe they dont have a regular job or income, orhave defaulted in the past.

Banks traditionally did not lend to such people due to high risk ofdefault. But since these loans were mortgaged against property andproperty prices were rising continuously, banks started doing so. Ifcustomers defaulted, they could sell the mortgaged property.

2005: The booming housing market halted abruptly in many parts ofthe US.
http://en.wikipedia.org/wiki/Subprime_mortgage_crisishttp://en.wikipedia.org/wiki/Subprime_mortgage_crisis


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2006: Prices are flat, home sales fall.

February 2007: Sub-prime industry collapses in the US; more than25 sub-prime lenders declare bankruptcy, announce significantlosses, or put themselves up for sale.

While they were lending, banks did not factor in the possibility of a fallin property prices. When the Federal Bank (the US equivalent of RBI)started increasing interest rates, the sub-prime borrowers starteddefaulting and banks started selling off the mortgaged properties. Asmore and more properties came into the market for selling, theproperty prices fell.

August 2007:Many leading mortgage lenders in the US filed for

bankruptcy

March 2008:Bear Sterns falls.

September 2008: Lehman Brothers file for bankruptcy. Merrill Lynchsells off to Bank of America.

Between 2001 and 2006, the US financial markets had developed anew product a bond securitised against the mortgages.

In simple terms it means that the mortgage banks borrowed moneyagainst the mortgages on the condition that they would repay tolenders as soon as they recovered their mortgages. The lenders inthis case were financial institutions (like Bear Sterns, Lehman andMerril Lynch) who in turn sold retail bonds to individuals.

Sadly, the repayment never happened. And institutions like BearSterns, Lehman, Merrill Lynch and AIG were the casualties. Since themortgages were not honoured, the banks could not repay thesefinancial institutions who in turn could not repay retail investors.

(With inputs from our expert, Sanjay Matai)
http://en.wikipedia.org/wiki/Bear_Stearnshttp://wealth.moneycontrol.com/expertcolumns.php?authid=252http://en.wikipedia.org/wiki/Bear_Stearnshttp://wealth.moneycontrol.com/expertcolumns.php?authid=252


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When US markets go bust, refer to these 5 basics

Sandeep Shanbhag September 22, 2008

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LEHMAN Brothers has filed for bankruptcy. Merrill Lynch was boughtby Bank of America. And America's largest insurer AIG is in need offunds.

This is a result of what has come to be known as the sub-prime crisis.

Sub-prime lending refers to lending (at slightly higher interest rates)to people who may not be eligible for a loan under normalcircumstances. Maybe they dont have a regular job or income, orhave defaulted in the past.

When the Federal Bank (the US equivalent of RBI) started increasinginterest rates, the sub-prime borrowers started defaulting and banks
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started selling off the mortgaged properties. As more and moreproperties came into the market for selling, the property prices fell. a

In the meantime, the mortgage banks had borrowed money againstthe mortgages on the condition that they would repay to lenders as

soon as they recovered their mortgages. The lenders in this casewere financial institutions (like Bear Sterns, Lehman and MerrilLynch) who in turn sold retail bonds to individuals.

Sadly, the repayment never happened. And institutions like BearSterns, Lehman, Merrill Lynch and AIG were the casualties.

So, where does this leave you (the investor) and your money?Well, the good news is that if America has caught a severe infection,we have got away with barely a sneeze. There is only indirectcollateral damage such as: Foreign Institutional Investors (FIIs)pulling out (which will leave the Sensex volatile for now), employeesworking in the India offices of these three organisations facing a jobloss, and credit cards and loans costing more.

So for most part you are safe, if you have stuck to the investingbasics. wealth revisits the basics andgives you five tips on what youshould be doing to insulate yourself from this financial meltdown.

1. Invest 10-15 per cent of your portfolio in gold; it's an effectivehedge during uncertain times. And,do not buy physical gold. Instead Exchange Traded Funds (ETFs).

2. Allocate 15 per cent to relatively safe gilt funds.

3. Cash can command around 10 per cent.

4. Invest the remaining 60 per cent in equity, but not as a lump sum.But as Systematic Investment Plans (SIPs).

5. Hold fast, hold tight and hold out. If you are a long term investor,don't scramble to exit investments. Just stick to these basics and thestorm shall pass.


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3 ratios that tell if your bank is safe

Suraj Anand October 20, 2008

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STOCKS are battered down, food prices have shot up and loanshave got pricey.

And if all this isn't enough for the common man to fret, there is the allimportant concern if the money in his bank is safe or not!

Recently, we carried a story on how Indian banks are safe. However,most bank customers are still anxious about the safety of their banks.

wealth addresses your grievances and offers a solution.
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6/16

Grievance 1: I have no inkling about the bank's fate, until it hascollapsed. And then, it may get too late.

Solution: Do some number crunching

Look at the banks' key ratios and parameters (such as net worth andprofits). This will tell you about its financial health.

According to Himendra Hazari of Karvy Consultancy, you can look atthe following ratios:

-- Capital Adequacy Ratio: Commercial banks need to maintain aminimum capital to risk-weighted assets ratio (CRAR) of 9 per cent.In simple terms this means that if the bank has given out Rs 100, itshould have at least Rs 9 with it as capital.

Here's a brief snapshot of the CAR of some banks:

Private sector banks* CAR (In per cent)

ICICI Bank 13.97

HDFC Bank 13.60

Axis Bank 13.73

Public sector banks* CAR (In per cent)

State Bank of India(SBI)

13.53

Bank of India 13.01

Punjab National Bank 13.10

Foreign banks* CAR (in per cent)

Citibank 12

Standard Chartered 10.59

HSBC 10.59

*Top three banks by market capitalization in that category.

Source: A Profile of Banks - Reserve Bank of India


7/16

Ten tips to cope with the pink slip

Suraj Anand October 21, 2008

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EIGHT months ago Sangita Chawla* weighed about 85 kgs. Despitethis she had a dream of making it big as an airhostess. So this 24year old Mumbai girl went on a rigorous diet and exercise regime tocut out all the flab. Within six months, Sangita weighed just 50

kilograms and was all set for her dream job. She was hired by aleading aviation company, since she met all their requirements now.

Unfortunate for her Sangita's job was one of the many jobs hercompany decided to take away, but later give it back. "I'm thrilled toget my job back, but of course uncertainty still looms," confessesSangita. She is not the only one. Across sectors there are fears of
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8/16

cost cutting and consolidation.

"Most people never predict a job loss," continues Aruna Sampat ofHR consultancy firm Career Catalysts, "and are caught off guardwhen they get laid off."

Sampat cuts the bull and tells you what you should do if you lose yourjob.

1. Don't panicA job loss has nothing to do with performance, or your ability. Itsmore about redundancy of your role in the company. Once thisunderstanding seeps in, you will you be able to concentrate on findinga new job.

2. Make a listUpdate your resume and follow a daily schedule. Now that you havetime on hand, set aside at least five to six hours a day on job hunting

including research, calls, interviews etc. Make a list of the peopleand companies which can help you. Be specific on how they can helpyou.

3. Get aggressiveMake sure that you have your detailed resume up on every job portal

there is. Some portals you can put your resume arejobstreet.com,monster.com, naukri.com, yellowjobs.com, timesjobs.com, shine.cometc.

4. Talk to other prosFocus on what kind of job you want. Assess market situation andmake your plan. If a role is interesting but the company is not somuch a brand name, are you willing for a lateral move, or would youlike to take a cut in salary for a brand? Think through. Talking to

senior professionals may help to give you a perspective

5. FreelanceDo not hesitate to take up freelance assignments. Look at it this way.
http://www.jobstreet.com/http://www.monster.com/http://www.naukri.com/http://www.yellowjobs.com/http://www.timesjobs.com/http://www.shine.com/http://www.jobstreet.com/http://www.monster.com/http://www.naukri.com/http://www.yellowjobs.com/http://www.timesjobs.com/http://www.shine.com/


9/16

You will keep your skills up to date and it will bring home a few bucks.In the meanwhile keep hunting for a job.

6. Be transparent

Most people don't want to mention they have been laid off. Buthiding it will only complicate things," continues Sampat, "being laid offis not a taboo anymore amongst companies. They will hire you foryour skills." So be transparent in your next job interview and tell themwhy you were laid off.

7. No blame-gameBlaming the company or your luck during an interview is a strict no-no. Companies like hiring people with a positive outlook. After all, thiscan happen to any company.

8. Reference friendlyMake sure that you have all your references ready when you go forinterviews and do not hesitate to give them if asked. Inform yourreference in advance so that they are not caught unaware and willable to contribute in getting you a job.

9. NetworkYou have the time to go out, so make use of it. Network like crazy.Nothing has more impact than a meeting. Also make sure you followup with your contacts so that they think of you the first time anopportunity springs up.

10. Stay healthyLast but not the least you have to stay fit and keep healthy. Only thiswill keep you motivated and mentally fit.

"Getting a new job can take time from a week to several months,"continues Sampat, "but the real test is to stay put in these times andfocus on sailing through this crisis."

Marcel R Parker, Chairman, IKYA Human Solutions Pvt Ltd , hassome tips on how you can safeguard your current job.
http://www.ikyaglobal.com/http://www.ikyaglobal.com/


10/16

--Under promise and over deliverWalk that extra mile for the organisation with a smile as though yourlife depended on it. You are bound to get noticed for your attitude.Stick to your targets and deadlines consistently.

--Get proactiveVolunteer for new tasks/responsibilities, no matter how mundane oronerous they may be. Look at it this way- Can I add value to myselfand my organisation by doing these tasks?

--Get StingyTry and find ways to save and reduce wasteful expenditure no matterhow silly they mayappear-this demonstrates concern for theorganisation in hard times. For example, conserving energy, printingonly what is essential, recycling water etc may seem petty but thesecosts if well managed can have huge saving potential.

See: Simple tips to battle a layoff

Disclaimer: While we have made efforts to ensure the accuracy ofour content (consisting of articles and information), neither thiswebsite nor the author shall be held responsible for any losses/incidents suffered by people accessing, using or is supplied with thecontent.

Market crash: Tips to cut losses

Team Wealth October 27, 2008Email Print

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11/16

ETF Investor Newsletter Monthly buy and sellrecommendation on Exchange Traded Funds (ETF's)

THE market's blows are only getting harder.

The bad news is that the worst may not be over yet. Amidst all thisturbulence, only one thing can save you: The right advice.

Heres how you can limit the damage, straight from wealth's experts.

Scenario 1: I invested in the markets for the short term; what

should I do now?Right now, the markets are driven by global sentiment. And, financialplanner Arvind Rao reckons that it may take up to the fourth quarterof 2009 for the global market to pull up. On the domestic front too,things may look brighter only in the third or fourth quarter of 2009."This is mainly because of the huge input costs and high interestrates as of now, " he says.

In such a scenario, you have 2 options:Option 1: If you are hard pressed for money, you have no choice but

to withdraw.

PV Subramanyam, financial domain trainer, says, If you need moneysoon, say in a year or two, it is better to sell now even if that meansbooking losses. Theres no way of predicting how the markets wouldbehave.
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Option 2: Sandeep Shanbhag, investment expert and Director,Wonderland Consultants, says, If you initially invested for the shortterm but can weather the storm, then wait, provided you havefundamentally good stocks. However, if you need funds, then exit asearly as possible and treat this as a mistake not to be repeated.

Caution: Do not play the markets on a short term basis simplybecause of the looming uncertainty.

Scenario 2: I am a long term investor: What to do now?To begin with, relax. If you have invested, you should continue doingso. India has a number of things going in its favour:

-- Among all emerging economies, our export to GDP ratio is thelowest. Consequently, even a full blown US recession will shave onlyaround 40 to 60 basis points off our GDP growth rate, which was ahealthy 7.9 per cent for the first quarter. Our economy isfundamentally strong; the situation right now is nothing but aslowdown and it will recover soon.

-- Commodity prices have started to decline, with oil last being tradedat USD 90 per barrel. So, going forward, inflation will not be a bigthreat.

-- Our regulators, SEBI and RBI are proactively taking measures tocontrol the situation and ease capital flows into India.

Sanjay Matai, financial advisor, says, Long term investors need notworry. In fact, its a good time to invest since stocks, expensive at onetime, are now available at huge discounts.

Strategy: You can file away a proportion of your money for the long-term through SIPs. If you are single and salaried, put 70 per cent of

your money in large cap stocks and the remaining 30 per cent in midcap stocks.

Shabhag suggests that this is an ideal time to average out and makepiecemeal investments on every fall. "You can invest around 20 percent of investible funds into equity / equity MFs. Another 20 to 25 per


13/16

cent of your surplus can be invested in gold through gold exchangetraded funds (ETFs)."

Theres a simple theory behind investing: You invest your way up,and you invest your way down.

What NOT to do

-- Don't enter the market for a quick buck.

-- Don't look at borrowings for a while, since interest rates are quitehigh. Especially stay away from borrowing to invest in volatile assetslike equities or even property.

-- Avoid investing in Unit Linked Insurance Plans (ULIPs) if you do notunderstand the scheme in detail.

-- Don't invest in lump sum.

-- Don't stop your systematic investment plans (SIPs), becausemarket fluctuations can average out your losses with SIPs.

Disclaimer: While we have made efforts to ensure the accuracy ofour content (consisting of articles and information), neither thiswebsite nor the author shall be held responsible for any losses/

incidents suffered by people accessing, using or is supplied with thecontent.

1 |2 | 3 |
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14/16

Financial crisis FAQ centre

PV Subramanyam October 16, 2008

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ETF Investor Newsletter Monthly buy and sellrecommendation on Exchange Traded Funds (ETF's)

BUY, hold or sell?When will the markets recover?Shall I stick to fixed deposits or invest in stocks?

Financial advisor, PV Subramanyam, answered these and manymore reader queries on stocks, mutual funds, insurance anddeposits, in a live chat on IBNLive.com.

wealth brings you excerpts from the chat.

On stocks and funds:
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Anita: I had invested Rs 15 lakh in equity funds in 2006. Now, theNAV has come down by almost 50 per cent. How long will it take torecover at least my capital and get returns?PV Subramanyam: In case you have monies to invest, you shouldcontinue your SIPs. Your question regarding timing is difficult toanswer!

Anita: Is it safe to invest in a debt fund right now? Should I stopinvesting in funds altogether and only put my money in FDs?PV Subramanyam: It depends on your tax slab. You can invest infloater, liquid schemes and good quality FMPs. Income funds are ok ifyou think that interest rates have peaked. As for investing only inFDs, its a difficult view to take.

Hansa: Is the right time to enter the share market for novices?PV Subramanyam: Anytime is a good time if you know what you aredoing. Start a SIP in a good fund, have a five-seven year view andpray to God!

Siva Perumal: I have invested around Rs 90,000 in stocks of apremier construction company. In a months time, my portfolio nowstands with an unrealized loss of 54 per cent. I am trying to averagethe price by buying more shares when the price goes down. Is it rightto do so or shall I exit, with a huge loss?

PV Subramanyam: Just stay with your losses. If it is a goodcompany, prices will recover; if it is a bad company, it will justdisappear. So, selling might make sense. Always stick to a mutualfund -- the spread of risk will benefit you.

Preetam: I have just begun my career. Should I invest in shares nowor go for bank FDs?PV Subramanyam: You should invest in shares through exchange-traded funds. Choose large cap funds for 70-75 per cent of yourportfolio.

Bhaskar: Is it true that a depressive cycle in the market like this onelasts about 16 months? Is that a statistic?PV Subramanyam: Your guess, my guess, my daughter's guess willall be guesses. No, any statistic is history, and may not repeat. So, itis, at best, a useless number.


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Nihar: I wish to invest in blue-chip stocks. Should I go ahead now ORwait a little longer for the market to settle?PV Subramanyam: Do a SIP in an exchange traded fund. You canconsider Benchmarks ETF.

Documents

When US Markets Go Bust