Lehman files for Bankruptcy, Market Reacts

 

"Lehman Brothers Holdings Inc said it plans to file for bankruptcy protection, but the Chapter 11 filing will not include its broker-dealer operations and other units, including Neuberger Berman.

Lehman is looking at selling its broker-dealer operations, and is still in advanced discussions with a number of potential buyers of its investment management division.

Bankruptcy represents the end of a 158-year old company that survived world wars and the collapse of Long-Term Capital Management but could not survive the global credit crunch.

Investors in recent weeks had grown increasingly jittery about Lehman's $46 billion of mortgages and asset-backed securities, as well as its credit rating and its ability to raise capital.  Source : Reuters"

The news has broken hell on the global as well as Indian stock markets. As a public company Lehman had never reported a Qaurterly loss until June'08. The bank had actually reported a record net profit of $4.2 billion in year 2007. The ruptured U.S. financial system faces an unprecedented shakeup with Lehman Brothers set to file for bankruptcy, Bank of America buying Merrill Lynch, and the Federal Reserve saying for the first time it will accept stocks in exchange for cash loans.

I had mentioned in my Recent presentation on stock markets that the credit crisis in US is yet to unfold and may unsettle the dynamics of the financial regulations globally. There are other financial institution in pipeline to declare themselves on the verge of bankruptcy. It is high time that Indian banks take stock of their credit regulations and control in place for determining quality of credit. It's a wake-up call for the RBI to do a check on potency of its banking regulations.

What is Chapter 11 Bankruptcy?

Chapter 11 bankruptcy is a form of corporate financial reorganization in which a company's assets gets sold off to remunerate past due creditors. In some cases, Chapter 11 bankruptcy allows companies to continue to function. The theory here is that businesses which are allowed to move forward will generate revenue, protect jobs, and otherwise heal creditor wounds. Scraping and selling businesses for their parts, on the other hand, may lead to less than optimal utilization of company resources. Chapter 11 bankruptcy filings may be “strategic”. In other words, management may wish to reorganize for political reasons, not simply for the sake of balancing books.

Much of Chapter 11 bankruptcy case law is devoted to the finding what constitutes asset exemptions under the law. In cases in which parent companies and/or partnerships are involved, assets may be shielded by selling them off or otherwise hiding them within the financial infrastructures of sympathetic firms. It's even legally possible, under certain situations, to offshore assets to shield them from creditors. Despite the abundance of case law designed to establish precedent for Chapter 11 bankruptcy situations, the emergence of "globalized business" has added a new wrinkle to the ongoing debate over how failing businesses should repay creditors. (Source : Super Pages)

For Detailed study of Chapter 11 US Courts website provide a comprehensive reading material. Go to US Court Website to read more. Read More!

EAC Outlook for 2008-09 on Indian Economy

Has Indian economy Peaked ?

The Economic Advisroy council to the prime minister,headed by Dr. C. Rangarajan, has come out with the Economic outlook for the year 2008-09. The Report has thrown some interesting parameters to gauge the present condition of our India's economic growth in past several years and estimates for current year. The report has pegged India's economy to grow at 7.7% in the year 2008-09 against 9% last year. The council has expressed concern over negative global clues like crude oil and sub prime on one hand and inflation and slowdown in consumption and investment rate on the other. What does this suggest ? Has the Indian economy reached the peak of its economic growth cycle and has it started to slow down ? Let us look at some of the facts and figures and try to find out the truth behind India's story.

Economic Growth- Stepping down the ladder

• Indian economy has grown 9% in 2007-08 against 9.6% in 2006-07 and 9.4% in 2005-06. Our economy has grown at an average rate of 8.8% in the last 5 years. However, we are expected to clock a growth rate of just 7.7% for the current year 2008-09.

• The farm sector has seen tremendous growth in the last 4 years with average growth of 3.5%. However, the growth rate looks unsustainable in absence of focussed approach on rural infrastructure and technical improvements in productivity.

• The Manufacturing sector, after posting a record high growth of 12% in 2006-07 is expected to grow by 7.2% in 2008-09 which signifies that this sector is witnessing increased pressure of slowdown in consumption which again is a factor of rising inflation.

• Other sectors such as Construction,Trade, Hotels,Transport etc. are all expected to post a single digit growth against double digit growth recorded last year. This doesn't auger well for companies operating in these sectors.

• Finance,Insurance, Real Estate and Business Services are expected to post 10% growth against 13.9% growth posted in 2006-07.

• Per Capita GDP growth is also expected to be at 6.2% against 8.1% clocked in 2006-07.

• India's population is expected to stand at 1.154 billion against 1.106 billion registered in 2005-06.

International Economics- Ugly Picture

• The global economy has been subjected to the twin onslaught of a financial
  crisis that has gripped capital markets, and a sharp increase in the prices of primary goods, particularly those of crude petroleum and food. Simultaneous turmoil in financial, energy, and food sectors is unprecedented in recent world economic history.

• This has adversely affected consumer confidence and prospects for world economic growth, dented a range of asset prices, heightened inflationary expectations and is severely testing theories of ‘decoupling’ through global contagion.

• While expected losses from US subprime exposures have by now been mostly acknowledged, and banks have been able to raise capital in response, delinquencies and foreclosures in the US housing markets continue to rise sharply, house prices continue to plummet, loan deterioration has moved beyond subprime and housing portfolios, bank balance sheets and equity prices continue to be under pressure, and credit markets are still to normalize. It is therefore too early to assess whether the worst of the turmoil and loss of asset values is behind us.

Consumption Vs. Investment Driven Growth

The contribution of investment to growth has actually been as greater than that of consumption till 2005-06. The contribution of domestic consumption expenditure to overall GDP growth has been fairly steady since 2005-06, while its relative share in growth has risen over the past two years. This trend is projected to continue in 2008-09 also. Incurrent year, we expect to see both investment and consumption expenditure growth to slow down a bit.

Inflation - Enemy at Home

Inflation has skyrocketed from 3.8% at the end of December,2007 to 7.8% at the end of March,2008. It moved up further at 12.44 % as of 2nd August,2008. The rise in inflation is primarily contributed by rise in prices of Crude Oil, Commodities like Steel, and food prices of late.

The council is of the view that tight monetary policy, cooling down of Crude Oil and good monsoon can bring the inflation rate down to 8-9 percent by March 2008-09.

Besides the above factors, the employment rate has shown significant improvement in last 5 years nut the rate of growth is expected to slow down a bit. We have also witnessed wide variations in state wise emplyment growth which suggests huge divide between states.

To sum up, Year 2006-07 was the golden year for the Indian economy in which most of the sectors have given highest growth rates. However, the growth rate has slowed down significantly due to negative gloabl cues and pressure of rising inflation back at home. Hence , we can say that a brake has got applied to the economy which was operating in th top gear. We are still much behind china in terms of economic growth and the overall assessemnt says that though the pace of growth has slowed down, it's not the end of the world. The shape of India's growth story in the coming years would depend on how it deals with these evils of growth and resume its fast track growth. The peak is yet to come.

Read More!