Black Monday : The Lehman Domino Effect

We did mention earlier that the entire structure of the World Economy is changing and this change has brought about a high impact casualty. The US investment bank Lehman Brothers which survived many a downturn including the Great Depression Of 1929 has announced today that it had filed for bankruptcy. The going bust of Lehman is an indication of the US Sub Prime Crisis and the effect it has on the rest of the world including India. Our Sensex was hammered even before Lehman formally declared bankruptcy, simply anticipating the news of their bankruptcy.

The reason this particular event has led to such a reaction is because of the amount of ‘panic selling’ it has managed to generate. In simple words it has been anticipated that the bankruptcy of Lehman is only the first in a long list of casualties which will at the end of the day prove the weakness of the American Banking and Financial System.

Some of the biggest firms in the world including AIG, Merrill Lynch and Washington Mutual face the prospect of significant financial losses, even more than what they have already incurred.

It is this reasoning that has managed to create the amount of hysteria we have seen in the world markets, Most of the Asian markets were closed. Those however which were open like the Bombay Sensex and the Nifty were beaten down almost mercilessly. Foreign firms were intent on selling their significant holdings in Indian companies.

What followed was a systematic downturn in stocks across every sector. Right from IT to Industries, shares were being dumped at a frantic pace which finally boiled down to the Sensex crashing to an unexpected 800 point drop in the afternoon hours.Luckily,some sense prevailed and a meager bull charge somewhat secured the Sensex till it closed ,but still down 450 points.

Lehman were always looking for buyers and were on a downhill course since the sub-prime crisis began. They had invested heavily in sub prime lending and once that sector went bust, it was only a matter of time before Lehman fell. They had hoped that the US government would bail them out the way they had done for the housing firms Fannie Mae and Freddie Mac.

But the government could not be expected to takeover Lehman simply for the vast amount of debt that it had accumulated. Their filing indicated a debt of close to Six Hundred and Thirteen Billion Dollars ($ 613 Billion).As of writing this, the US Dow Jones index has fallen by Two hundred points and with a few more hours to go before the market closes there is a good chance to believe that figure might fall and recover.

What the Sensex will hope for is this trend of ‘panic selling’ to be halted. It’s evident that some control in this regard comes from SEBI and the RBI.For the RBI however; a new headache begins with the Rupee becoming weaker and weaker.

Some solace will however be derived from the fact that Merrill lynch has managed an acqui-merger with the Bank of America and the AIG group has received a subsidiary grant of $20 billion from the state of New York.

However, in the case of our Sensex, the Bears are smiling.