Mad Mad West...

The credit for this title goes to my colleague Archana, who suggested the title the moment i said i'm going to update my blog. What a weekend it has been....our entire team was away in Kuala Lumpur, oblivious to the changing landscape on Wall Street. Though the problems with Lehman Brothers were well documented, the announcement regarding Merrill Lynch's acquisition by the Bank of America was a bolt of lightning from the blue.

Lehman's problems were heightened as the Fed refused to bailout the troubled investment bank. Reading a news item on Bloomberg sounded like a virtual obituary on Lehman, only one amongst four purely Investment banks in the US. The fall from grace for Lehman has been swift yet stunning. It typifies problems with the investment banking industry. An article in the Wall Street Journal made an interesting observation. It likened investment banking to a casino, in case a trader made a profit its the bank's profit if its a loss its the shareholder's loss.

In hindsight, it looks like the root cause of the whole subprime and subsequent credit crisis has been complacency and greed. Most of the banks made huge profits from structuring and selling complex derivative instruments related to the housing markets. The fantastic returns saw a complacency setting in, as it was believed the stupendous returns would continue. And what followed, well as the saying goes.... the rest is history. The crisis has shaken the financial sector to its cores.... more than $ 500 billion in write offs, three large US investment banks going under. The investment banks have become favorited whipping boys for the markets, well almost!! Apparently the pain isnt over as yet, there's more trouble in store ahead. A pointer to this fact is a concerted effort from Central Banks globally to boost liquidity. Earlier only the Federal Reserve, the European Central Bank and the Bank of England had boosted liquidity this time the banks of Japan, South Korea and China have joined in as well. Its an alarming sign, as the credit crisis seems to be spreading its tentacles globally.

The recent problems have seen global equity markets getting pounded, it seems like an orchestrated atmosphere of fear has gripped the global markets. Equities are not the only ones taking it on the chin, Commodities and the Foreign exchange markets have well and truly been a part of the massive readjustment in the markets. What next from here..... the picture doesnt look good at all, its almost like the markets have come full circle i.e. back to where it all started from. The turbulence witnessed in the markets recently looks like going on for a while longer. Looking at it on a contrarian basis, i believe this could signal the beginning of the end for the crisis, though its clear its way too early to get gung ho on the markets at this point.