18 Sep, 2008, 0000 hrs IST,Sudeshna Sen,
And so, it’s been a crazy kind of week, or rather weekend. One that leaves even the most snarky columnist out of funny takes.
We’ve been clutching our mobile phones, checking text messages from friends, acquaintances, and everyone - as soon as we finished the first lot of ‘is everything okay’ series after yet another set of bombs ripped through Delhi, we had to recycle almost identical messages to friends in the banking sector in London and New York. If you live in London, everyone knows at least a few people in the banking sector.
Lives at one end of the world, livelihoods in the other. Body counts, both. At last reckoning, the financial bombs that went off on Wall Street are likely to run up a casualty list of 50,000 worldwide.
The bad news just keeps piling up, and from this part of the world, there’s not even a silver lining.
What happens now? Nobody knows, frankly, though everyone is randomly rewriting financial management books. It’s like a computer virus; it’s infected almost everything, and the world is now in the process of rebooting its entire financial system.
Uncharted territory, is the response I get from most senior economists and bankers here. The only other response they all seem to be agreed on is that it’s going to get a lot worse before it gets any better, at least for developed countries. So far, India is largely still insulated from the mess. Europe, the new thinking is, may have to suffer longer than the US, because the US is still more flexible and has larger resources.
People are making up the rules as they go along, because the old theories don’t seem to work any longer.
Here’s the latest version of theories doing the rounds here, I’m fairly sure they’ll hit the Indian markets soon, they always do.
One, derivatives are a bad thing, not the super financial equivalent of James Bond’s gizmos everyone thought they were. Oh well. Despite various attempts by teachers and harried bosses over the years, I never got the hang of derivatives anyway. Which, generally, seems to be the idea - that if nobody can figure it out, you can keep up the magic trick up for years. Until the juggler stumbles, like now.
As thousands of innocent employees wearily dust off their resumes, the question being asked, as always after any major disaster, is how and why? How, is that a whole lot of hot potatoes got passed around bank to bank in a major juggling act - given the complicated trails nobody knows where those hot potatoes are at the moment, burning holes in which books. Lehman Brothers just happened to be the one which was left holding the parcel when the music died last weekend.
The why is easy to answer; obviously everyone was making loads of money, so who cared? But there really is no free lunch.
Next, the jury is still out on the role of central banks and governments, and exactly how big is Too Big To Fail.
First, the world took its cues from the Fed bailing out one distressed player after another - besides the big names, a lot of smaller mortgage companies and banks in the US have quietly and regularly been going bust over the last year, though these don’t make it to India headlines. Everyone jumped on Mervyn King, governor of the Bank of England, last year when he balked, on principle, at underwriting crazy risk-taking by private banks. Financial institutions, said everyone, are so interlinked and connected that they were TBTF without dragging the rest of the world down with them.
Now, when the US government finally refused to prop up Lehman, that world view is changing again. It’s their greed that did ‘em in, so why should taxpayers pick up the tab for those fabled Wall Street lifestyles, is the question? Not all investment bankers are rich, and one estimate says one Wall Street job supports 4 more in New York. All those will suffer as well.
Who is to blame, though? There’s no point blaming just the investment banks, or central bankers - equally to be blamed are the hordes of consumers who greedily lapped up cheap housing and other loans, without a thought of how and when to repay. And everyone else, including in India who happily jumped on the gravy train when the going was good.
Another theory that’s coming up for severe examination is the whole compensation structure of the financial sector. The high risk, high reward, bonus-based compensation system, say experts, is the one that made all those investment bankers trigger happy. The system itself needs overhauling, into something that will reward risk-taking, but balanced with fiscal prudence, they say now.
And of course, we’re daily seeing predictions about the end of stand alone investment banking. With three big names gone up in smoke, how long can the others last? The fact that the cast of characters in the world of high finance was due to change has been known for a while - the question has just been who, and when.
And finally, it seems as if the harried central bankers and finance ministers are veering around to the view that the developed world needs to get used to being a bit poorer, at least for a while, until the mythical prosperity created by all those derivatives can vanish into the smoke and mirrors they came from.
We’ve been clutching our mobile phones, checking text messages from friends, acquaintances, and everyone - as soon as we finished the first lot of ‘is everything okay’ series after yet another set of bombs ripped through Delhi, we had to recycle almost identical messages to friends in the banking sector in London and New York. If you live in London, everyone knows at least a few people in the banking sector.
Lives at one end of the world, livelihoods in the other. Body counts, both. At last reckoning, the financial bombs that went off on Wall Street are likely to run up a casualty list of 50,000 worldwide.
The bad news just keeps piling up, and from this part of the world, there’s not even a silver lining.
What happens now? Nobody knows, frankly, though everyone is randomly rewriting financial management books. It’s like a computer virus; it’s infected almost everything, and the world is now in the process of rebooting its entire financial system.
Uncharted territory, is the response I get from most senior economists and bankers here. The only other response they all seem to be agreed on is that it’s going to get a lot worse before it gets any better, at least for developed countries. So far, India is largely still insulated from the mess. Europe, the new thinking is, may have to suffer longer than the US, because the US is still more flexible and has larger resources.
People are making up the rules as they go along, because the old theories don’t seem to work any longer.
Here’s the latest version of theories doing the rounds here, I’m fairly sure they’ll hit the Indian markets soon, they always do.
One, derivatives are a bad thing, not the super financial equivalent of James Bond’s gizmos everyone thought they were. Oh well. Despite various attempts by teachers and harried bosses over the years, I never got the hang of derivatives anyway. Which, generally, seems to be the idea - that if nobody can figure it out, you can keep up the magic trick up for years. Until the juggler stumbles, like now.
As thousands of innocent employees wearily dust off their resumes, the question being asked, as always after any major disaster, is how and why? How, is that a whole lot of hot potatoes got passed around bank to bank in a major juggling act - given the complicated trails nobody knows where those hot potatoes are at the moment, burning holes in which books. Lehman Brothers just happened to be the one which was left holding the parcel when the music died last weekend.
The why is easy to answer; obviously everyone was making loads of money, so who cared? But there really is no free lunch.
Next, the jury is still out on the role of central banks and governments, and exactly how big is Too Big To Fail.
First, the world took its cues from the Fed bailing out one distressed player after another - besides the big names, a lot of smaller mortgage companies and banks in the US have quietly and regularly been going bust over the last year, though these don’t make it to India headlines. Everyone jumped on Mervyn King, governor of the Bank of England, last year when he balked, on principle, at underwriting crazy risk-taking by private banks. Financial institutions, said everyone, are so interlinked and connected that they were TBTF without dragging the rest of the world down with them.
Now, when the US government finally refused to prop up Lehman, that world view is changing again. It’s their greed that did ‘em in, so why should taxpayers pick up the tab for those fabled Wall Street lifestyles, is the question? Not all investment bankers are rich, and one estimate says one Wall Street job supports 4 more in New York. All those will suffer as well.
Who is to blame, though? There’s no point blaming just the investment banks, or central bankers - equally to be blamed are the hordes of consumers who greedily lapped up cheap housing and other loans, without a thought of how and when to repay. And everyone else, including in India who happily jumped on the gravy train when the going was good.
Another theory that’s coming up for severe examination is the whole compensation structure of the financial sector. The high risk, high reward, bonus-based compensation system, say experts, is the one that made all those investment bankers trigger happy. The system itself needs overhauling, into something that will reward risk-taking, but balanced with fiscal prudence, they say now.
And of course, we’re daily seeing predictions about the end of stand alone investment banking. With three big names gone up in smoke, how long can the others last? The fact that the cast of characters in the world of high finance was due to change has been known for a while - the question has just been who, and when.
And finally, it seems as if the harried central bankers and finance ministers are veering around to the view that the developed world needs to get used to being a bit poorer, at least for a while, until the mythical prosperity created by all those derivatives can vanish into the smoke and mirrors they came from.
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