The last couple of weeks we are all witness to the turmoil in the financial services industry in US which has global ramifications. First the news of Freddie Mac and Fannie Mae going down before they were given a lifeline by the US Federal Reserve. Then we saw Lehman Brothers going down without any assistance from the US Fed. Simultaneously, Merill Lynch was acquired by Bank of America for US$45 billion. The final episode in this series was American Insurance Group (AIG) being saved by a loan of US$85 billion by the US Fed. It doesnt seem to be the end of the show with more such bankruptcies, mergers and break-downs are expected over the next couple of months.
There were questions being asked why the US Fed helped 3 of the 4 institutions to survive and allowing only Lehman Brothers to go down. US Fed Chairman, Ben Bernanke has kept a low profile during this phase but he is scheduled to depose before the Congressional committee next week on the actions taken by the US Fed. At that hearing, probably we may get more to know from him.
Few interesting quotes attributed to the recent financial industry turmoil:
" America has become more communist than China by allowing Freddie Mac and Fannie Mae to survive" - Jim Rogers
" With the FED supporting the failed entities in financial services industry, this may open the doors for other players in other industries like Airlines, Automakers etc to come to Fed's doorstep in future" - Nouriel Roubini, a professor at New York University's Stern School of Business.
What are the implications in India?
1. Number of job losses are expected particularly in Lehman Brothers India Operations. It employs close to 2500 people in their back end operations and another 700 in its India and global operations. There is lot of uncertainity among the employees and temporary job loss for many of them.
2. Lehman, Merill Lynch, AIG have lot of investments in Indian equities and they may resort to bulk sale to generate as much cash as possible. There is an adage which says "Sell what sells", so there may be more pain in the near term on account of unwinding of long positions.
3. With lack of clarity on future course of direction for financial industry, fresh FII inflows may dry up. No FII money, more pain in the markets. This also results in Rupee depreciating against the dollar.
4. With 3 of the top 5 investment banks going away from the scene, IT companies would have really tough times ahead. BFSI domain is one of the predominant ones for all the IT companies. Now almost all the companies have come out and said that they dont have big exposure to the fallen giants. But hard to believe as I was told that each one of them have a dedicated team running into hundreds if not thousands of headcounts. With the landscape being very hazy, there is going to be slowdown in new order flows which affects new hiring and laying-off of existing staff.
5. Lease rentals for IT/ITES space is already showing signs of dropping drastically and this kind of news is not going help the cause.
What are the other things you are expecting to happen?