Soft Corner of Tejas Lakhani

Lehman Brothers and Merill Lynch, two of the world’s largest financial institutions, booked big losses on account of their exposures in some ‘highly risky’ assets. Lehman Brothers posted a loss of $3.9 billion (Rs 17,500 crore) in the quarter ending June 2008. This created panic among investors leading to fall of Lehman’s stock price into rubble, leading to filing of bankruptc On the same note Merrill Lynch posted a second quarter loss of $4.65 billion. Following this, the shares of the two companies came under pressure.

Yes, Lehman saw its share price fall from $60 in January 2008 to $3.65 on September 12, Merrill Lynch shares fell from $50 in January to $17.05. The difference between the two is in their endings: while Lehman could not find a saviour for itself and hence had to file for bankruptcy, Merrill Lynch managed to draw Bank of America to its rescue. What led to the huge losses? Lehman Brothers was counting big on the real estate boom and hence had overexposed its investments in the real estate sector As property prices went blist, so did the optimism of Lehman prospect on those investments.

The fall in real estate prices was triggered by a sub-prime crisis.

Sub-prime, refers to a loan given to a borrower who does not qualify for a regular home loan, because of a poor credit record, low income and no job security In the current context, in the US, banks gave out many such loans in their zeal to keep ahead of their peers in the banking sector The subsequent defaults coupled with high unemployment resulted in major loss of income across the economy The sub-prime issue erupted almost a year ago.

Possibly not. Analysts not ruling out similar downturns in some other financial institutions in the coming months.

The sub-prime crisis is a result of individual incentives and lack of accountability. As risk is spreading globally, its ripple effect might surface in the unlikeliest of places. Credit history of borrowers is essential. There has to be greater check on background of borrowers and their repayment ability Rating agencies are typically paid by issuers and only for initial rating. Therefore, true assessment should be carried out through a robust and appropriate re-rating system.

If you are talking about your investments in the stock markets, the answer is ‘yes’ in the short term. In the long term, if the companies you’ve invested in are fundamentally strong, there is no reason to panic. Your money in you bank is safe to the extent of Rs 1 lakh under the Reserve Bank of India’s deposit insurance scheme.