Behemoth is not the word

It was thought that when institutions turn into behemoths, they cease to get affected by the mistakes of the mortals in charge of running them. This view got a serious hit when the US Investment bank Lehman Brothers filed for Chapter-11 bankruptcy protection, after failing to scout suitable buyers to take over the US operations and its overseas operations.

The troubles started brewing when the sub prime mortgage crisis started unfolding in the summer of 2007. Suddenly, the stock prices of the firm began a southward journey and the shares fell from the peak price of $82. The main cause behind the precipitous fall was the market fear that firm had direct exposure to the mortgage market.

The firm managed to avoid the fate of Bear Stearns, another investment bank on Wall Street, which was taken over by JP Morgan and Chase The fatal blow came with the firm announcing a series of write offs and the quarterly loss of $ 2.8 billion. The firm tried to sell off its investment banking division, a move that was expected to bring home, $ 3 billion.

The crisis reached a crescendo, when the US Fed announced the takeover of Insurance company AIG but failed to extend the life support mechanism of bail out money to the investment bank, citing reason that it can’t afford to rescue every creditor on Wall Street.

The immediate ramification of this crisis was the evaporation of trust in financial institutions, a complete freeze in lending and countries finding themselves at the doorstep of recession

Judging by the looks of it, this crisis is far from over and has since claimed many causalities, with more to come. The sad part is that some of them will not be directly engaged in defective practices and were only sitting on the periphery of the crisis. We will face the imminent slowdown and can only hope that it is for a short span. For these mammoth firms, which were given to complacency and tenaciously held onto the Shakespearean notion of infallibility and immortality of their selves, it is a rude awakening albeit a one that came little late. They were saddled with outdated policies, faulty management practices and legions of over paid workers, whose salaries were always coveted by their non financial counterparts (Read: a Plump salary was the reason behind Wall Street attracting top talent from the world). It all seemed a perfect recipe for a financial Armageddon and what we are witnessing is nothing less that.

It is not the intention of this write up, to dwell on the suggestions for improvement of organizations or the financial regulators. This is the task cut out for experts and should not be the subject of any layman’s commentary. It can only be hoped that better sense prevails in the future and a coherent school of financial thought emerges after this crisis.

Geetu Batra

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