Do U. S. investment banks really deserve a bailout for their erroneous strategies?

The famous saying that goes, “When US sneezes, the world catches a cold” has proved to be true with the US credit crisis hitting the global financial markets as well. This credit crisis which emerged as a result of a crash in the prices of mortgage loans has now dragged with it not only the host economy that initiated this recession but also other inter-linked economies of the world functioning close to that of US. The outburst of the crisis that traces its roots down to the bankruptcy of Lehman Brothers has spread multifold since then and has swept along with it many investment banks and insurance groups that functioned on the same principles and strategies as that of Lehman. The bandwagon of big banks reeling under its severe impact includes Merrill Lynch, Morgan Stanley, Bank of America, AIG, Freddie Mac, Fannie Mae, JP Morgan Chase, etc.

Morgan Stanley which was required to generate $9 billion to avert the sword of bankruptcy hanging on its head, finally made a joint venture with Mitsubishi Financial Group of Japan to sustain itself in this wave of credit crunch. Further, Citigroup Financial has rescued Wachovia in another merger for existence. Earlier this week, UK Prime Minister Gordon Brown issued a $37.5 billion rescue plan for the troubled UK investment banks as relief from the deteriorating financial framework across the globe. Following the European bandwagon, the US was forced to issue a bailout package of $250 billion to increase liquidity in the market through greater cash inflow.

Though all these actions have been perceived as saviors for the investment banks that had greatly sacrificed the investor’s confidence in all these proceedings, but still such ways of rescue seem questionable. It exposes the negligence that these investment firms and banks had expressed while working on their credit lending policies and giving access to easy loans even to the debtors with bad credit ratings. Thiis was aimed at gaining access to mortgaged properties that had been witnessing a continuous rise in their evaluation, but the scenario crashed after the burst of the real-estate bubble. And now the debate remains whether it’s justifiable on the part of the government to help these over-ambitious institutions manipulating the financial principles and twisting their strategies in a look-out for lucrative earnings. It has never happened before that the government has had to step in and contribute its capital in such a great extent to any other sector, be it IT, manufacturing, transportation, engineering or others for their own faulty policies. This certainly shows the soft side of the government towards these institutions known as ‘governors of economy’ and tends to overlook the blunders of the financial firms.

The idea of all this support might sound a bit wavered on ethical grounds it has been proposed primarily to lift the economy (which affects every individual in some way or the other) from the black hole that it has fallen into. This recession owes its root to the banking firms, but it has certainly been overblown and now threatens the growth of many developing countries. Hence, in order to prevent this crisis from encroaching upon the lives of common investors, shareholders, brokers and fund managers, this bailout step has been proposed as the markets still try and recover their track by every passing hour.

Ishant Arora

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