Subprime Nemesis

This quarter earnings have been very unkind to the global financial giants. The global corporate world witnessed billions of dollars write off, staggering losses in quarter earnings report, ouster of CEOs and top honchos.
When we had thought, the worst was over the ugly head of Subprime has again raised. The same rating agencies which few months back rated Subprime bond with highest grade has cut down its rating. Its biggest impact was felt by Investment banks which had high exposure to Subprime backed CDOs . The Investment Banks unable to find buyers for its CDOs have started writing it off from the books. The first jolt came in August when BNP Paribas wrote off $ 2 billion, which gave jitters to the global financial market.

But recently(18th Oct) the huge write off by Merril Lynch of $ 7.9 billion has left the financial market stunned. Adding to wound was the report that Merril Lynch still has a huge exposure in Subprime market and it is cleaning its balance sheet by transferring its Subprime investments to a hedge fund. Though the securities giant has vehemently denied the acquisition but still the damages were gigantic. The chopper fall on CEO Stan O’nell and board voted him out. The crisis triggered a alarm bell to Fed also which cut Fed rate by 0.25% to wade off the looming crisis. The rational of Fed’s rate cut has been questioned by many analysts who felt that with booming asset prices it will further fuel the inflation.

The report cards of all the financial giants across the globe has come as a dampener. The total reported losses till now due to sub prime has reached a gigantean aggregate of $ 55 billion. When every time we thought that the mess of Subprime was over more write offs resurfaced. No one for sure knows how big and how much more of sub prime is left in the books of the financial giant.

The current crisis has also questioned about the rationality of the investment banker. From the annuls of the history all the major crisis has been exacerbated by the investment bankers. The investment banking business got a major setback during 1998 financial crisis by the collapse of Long Term Capital Management. The dot com bust in 2001 again brought huge losses to the investment banks. Post dotcom in soft interest regime investment banks raised like phoenix and made huge profits. It lead to huge build up across many asset classes but soon bolt in the blue came from Subprime defaults. Till now investment banks were making hay but the sun has set now. The banks are playing safe by focusing on asset management and wealth management and avoiding risky assets. But investment bankers have always reverted back from the lows and have created new booms. It will be a eager wait to see what will be the next bubble that investment bankers spawn.