From the frying pan onto the fire.

Global financial markets are in the midst of a credit crisis. A crisis of mammoth proportions, one which has never been witnessed in the past. The global economy has been dealt a double blow, even as the recovery from the sub prime has been underway. The history books of the financial world have been well and truly rewritten over the past 9 months, what has transpired over the past year surely has given us Analysts a lot of fodder to chew upon, probably even for a lifetime. One line which best sums up the mood in financial markets presently in my view is, from the frying pan onto the fire.

The conversion of Goldman Sachs and Morgan Stanley into banks marked the end of pure investment banks on Wall street. Gone are the days when banks used leverage as a weapon to make profits. The destructive power of leveraging has unfolded with deadly conseqeunces for several banks. No wonder, Warren Buffett realised the destructive power of Derivatives labelling them " Weapons of mass destruction. The latest instruments of destruction are Credit Default swaps, instruments which were originally conceived to protect banks.

An offshoot of the subprime crisis has been a reluctance by banks to lend money, even in the inter bank money market. This has resulted in a sharp rise in the Libor and Euribor, rates which are used as benchmarks by banks when transacting in the money market. The cost of insuring companies debts as indicated by the Credit default swaps have now become a lead indicator of sorts with respect to a bank's financial health. To cite an example, the CDS for Goldman Sachs and Morgan Stanley surged to over 800 points before their conversion into banks. The lower the CDS, the lower is the risk of insuring a company's debt which translates into a greater confidence on a company's repayment capacity. The CDS for Lehman, AIG & Washington Mutual all shot through the roof as problems intensified.

The path to recovery from any disaster can be painful and very long at times. The costs of the present crises have been horrendous to say the least, writedowns of more than $ 500 billion, more than 100,000 jobs lost. Even a $ 700 billion bailout package from the US Government has been unable to instill confidence in global markets. Apparently though i would like to believe the worst of the crisis is behind us, the problems are not yet over by any stretch of imagination.