World Financial Crisis

World Financial Crisis

Today’s breaking news Sensex

11,328

      

Nifty

3,514

Global indices SHCOMP NIKKEI HSI STRAITS DJIA NASDAQ FTSE S&P 500

2,092 9,203 15,432 2,034 9,447 1,755 4,626 996

U.K. Treasury Will Inject About $87 Billion to Prevent Collapse of Banks Nikkei Drops Most Since 1987, Japan Corporate Bankruptcies Jump 34% Indonesia Exchange Halts Stock Trading After Benchmark Index Plunges 10% HSBC, RBS in Financing Double Whammy as Rates Rise Venture Funding May Fall This Year for First Time Since 2003 Airline Downsizing: High Fares and Packed Flights NSE, Banks Work out N600bn Bail-out Package

Of late we have become habituated to read and hear news like above mentioned. Last month was very frightening for us as every morning we woke up to learn that ABC or XYZ bank went bust or bankrupt or being acquired by another. This was followed by more banks collapsing due to liquidity crunch and the contagion of that ilk reached to European shores this week creating more havoc in the markets across the globe. Global indices are collapsing like castle of cards breaching new lows every day. Panic is such that newspapers are fraught with bailout plans being announced every now and then by various governments to rescue respective banks. Such bailout programs are not new but the scale and depth of them this time are really a matter of great concern. Few quarters ago, some veterans had warned us that failure of some of the banks like Bear Stearns was just a tip of the iceberg. Even now we don’t know what lies next or who is going to collapse. Since 1970 the US Govt. has had a history of 13 bailouts amounting to $ 1,388 billion in 2008 terms including the much hyped $ 700 billion bailout program recently passed by the US Congress. Out 1388 billion, $1,040 billion pertains to current subprime crisis. Many giants that ruled the financial markets for decades are now a thing of past. In Europe too, several banks have either failed or are struggling with liquidity problems. The equities have plummeted violently across the globe reacting to over $690 billion bailouts announced both in the US and European countries. There are experts engaged in wild guessing how long it will take when the dust will settle and economies will stabilize. The truth is nobody knows it. Fortunately, Indian banks have little exposure to the sub-prime crisis. ICICI Bank has reported maximum exposure of $80 million which means the expected loss of $28 million followed by Bank of India and Bank of Baroda whose expected losses are of $ 5million and $4 million respectively.

Deepak Tiwari Research Analyst [email protected] T: + 91 22 4063 3032

October 8, 2008

For Private Circulation only

1

The Chronology of 2008 bailouts worldwide:

Cost (in $ billion)

Date

Corporations

Business

Bailout/ acquired by

Oct. 5

Hypo Real Estate

German mortgage lender

69

German State and other banks

Oct. 5

Fortis NV

Belgium-based bank

20

BNP Paribas, the French bank

Oct. 3

Wachovia Corp

Bank

Sept. 30

Dexia SA

Belgian bank

Sept. 29

Glitnir

Iceland's third-largest bank

Sept. 29

Bradford & Bingley

Mortgage lender

Sept. 26

Washington Mutual

Bank

2

JP Morgan Chase & Co

Sept. 23

Goldman Sachs

Investment Bank

5

Berkshire Hathaway Inc.

Sept. 23

Lehman Brothers

Investment Bank

0.25

US business by Barclays

15.1 9.2 0.878 124

Wells Fargo Govts. Of Belgium, France and Luxembourg 75% bought by Iceland Govt. British government

NA

Asia specific operations by Nomura

Sept. 17

HBOS

Mortgage lender

22

Lloyds TSB Group PLC

Sept. 15

Merrill Lynch

Investment Bank

50

Bank of America

Sept. 7

Fannie Mae and Freddie Mac

Mortgage lender

200

Aug. 1

Bank of Venezuela

Bank

Jul. 11

IndyMac Bank

Mortgage lender

8.9

JP Morgan Chase & Co

Apl. 30

WestLB

Bank

7.8

German State

Mar. 16

Bear Stearns

29

JP Morgan Chase & Co

Feb. 22

Northern Rock PLC

Bank

107

British government

Feb. 13

IKB Deutsche Industriebank AG

Bank

1.5

German State

over 11

US Govt. Govt of Venezuela

The History of US Government’s Bailouts: Industry/ Corporation

Year

Cost in 2008 ($)

Penn Central Railroad

1970

$3.2 billion

Lockheed

1971

$1.4 billion

Franklin National Bank

1974

$7.7 billion

New York City

1975

$9.4 billion

Chrysler

1980

$3.9 billion

Continental Illinois National Bank and Trust Company

1984

$9.5 billion

Savings & Loan

1989

$293.8 billion

Airline Industry

2001

$18.6 billion

Bear Stearns

2008

$30 billion

Fannie Mae / Freddie Mac

2008

$200 billion

American International Group (A.I.G.)

2008

$85 billion

Auto Industry

2008

$25 billion

Troubled Asset Relief Program

2008

$700 billion

October 8, 2008

For Private Circulation only

2

Sub- prime exposure to Indian banks:

Companies

Reported exposure

Expected Loss

ICICI Bank

$80 mn

$28 mn

SBI

$5 mn

$1.5 mn

PNB

$5 mn

$2 mn

BOI

$11 mn

$ 5 mn

BoB

$10 mn

$ 4 mn

Axis Bank

$1.5 mn

Negligible

Source: Dawnay Day AV

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October 8, 2008

For Private Circulation only

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