Deal: The Epitome of Fate?

The financial turmoil has unravelled into an oscillating malignance. From nationalisation of banks to high-profile bailout packages, nothing has stemmed the flow of this unprecedented downturn. However, the performance of stock markets is so inconsistent with underlying economic principles, it borders on the comical. Angered investors and laid off workers have voiced their continued concern over government efforts to counter these financial calamities, but admittedly all propositions have failed to materialise. Ultimately, we have become victim to our greatest human frailty, greed. Large scale corporate greed accounted for the collapse of investment banking giant Lehman Brothers. It encapsulates our inability to acknowledge failure and take responsibility for the remedial process. Instead, the conglomerate was left in tatters due to CEO Richard Fuld’s mind-boggling decision to refuse its buyout from Korean Development Bank for $26 per share. Losing personal touch with reality through preposterous executive pay is comprehensible, but to put the company at risk with the option of resorting to safe haven is despicable. Its share price fell heaps and bounds over the past two years, and accepting this deal may have sparked a revival in the wider economic framework. Unfortunately, the perpetrators did not pay the price for their notoriety; we did!

Although many heads have cited loyalty and prestige as reasons to veto company buyouts, their disapproval marks the intrinsic source of disrepute. Similar to Fuld’s actions, Yahoo Founder & Chief Jerry Young refused the $47.5 Billion offered by Microsoft. In a nutshell, this would have increased the market share of both companies in the online search sector and simultaneously enable them to compete heads-on with market leader Google. It seems that the highest order of Chiefs have carved a niche for themselves as ruthless individuals who pride themselves on exclusivity rather than sustainability. Yang was left to rue his decision amid heightened pressure from shareholders and Yahoo’s continued stagnation in the commercial online search market, with Google continuing to propagate its stronghold. His resignation as CEO followed shortly, and marked a gloomy end to a generally prosperous reign. His failure was magnified when Microsoft resumed negotiations, however, with a comparatively lower offer price of $20 Billion. Moreover, in light of their under-par performance Microsoft’s offer had more strings attached to it. Agreement on such a buyout would oversee Microsoft revamping Yahoo’s management structure and corporate culture to correspond with the doctrines of their own company. Effectively, the remnants of Yahoo’s own corporate culture would remain concealed, with cross-cultural coordination simply a delusion.

The significance of such offers may be understated in times of prosperity, but in times of crises a company should not view it as an undermining of their cultural values. Customs may be pre-eminent, but even they evolve with time. Promoting flexibility requires adjustment, and adjustment is aligned with change. Importantly, cultural heritage cannot be overshadowed by any corporate buyout, but an obsolete culture calls for innovation, and Microsoft may be that critical driver to mutual success. The question beckons whether Yahoo will relinquish to the power of the “deal”? Contemporary history suggests they would be foolish not to.

Denial: The Adversary of Conscience

Denial has long been seen as the source of repetition, repetition of history. History is a benchmark for change, but even history cannot be the sole informant for future actions. A perfect financial market is characterised by its incompliance to historic movements. Information cannot be filtered through to stock markets to effect substantive change. However, our utopian desires have been slapped by the financial hurricane we find ourselves in right now. The mounting unrest has left many authorities concerned, particularly China, as the looming recession has threatened job security immeasurably. Social imbalance has been instigated by denial of recession, and once again the continued downturn has been a self-infliction by Government officials. It appears that high-rank executives and government authorities are eschewing accountability, but how does this bode for the wider economy. Are we seriously entering into a world of anarchy, because accountability is an embodiment of power, but this power is no longer manifold?

The sub-prime market was a jack-in-the-box endeavour for quick cash, but such pursuits are short-lived. The high credit risk of borrowers was growing amid rising inflation, but we were blinded by the euphoria of unprecedented returns, and now the domino effect is being felt across several sectors worldwide. China has been the latest economic powerhouse to be hit by this downturn, seeing its exports plunge to record lows as a result of falling demand from the West. The government has voiced there concerns, citing the possibility of social unrest should China fail to sustain its current growth rates. Simultaneously, several export companies have filed for bankruptcy, leaving several blue and white collar workers alike unemployed. Export is the engine of their industrial economic growth, and this crisis has put them in a highly precarious position. The Baltic Dry Index below illustrates the fall in commodity confinements i.e. ore and coal.


Since May exports have experienced a massive drop. This cannot be termed a slight blip in their remarkable performance, and validates the jitters of the Chinese government. Their stimulus package of $586 billion may soothe the worries of investors slightly, but their overall fate lies in the performance of global economies. An expansive resource base is essentially futile without corresponding demand, and the fading prospect will inevitably leave officials in doldrums. To acknowledge the current state of our global economy is the key to future development. China has publicized their anxieties, setting a precedent for those who have become infatuated by their own denial. Hence, it is time to follow suit!

The Rise of the Credit Grinch

The trickle-down effect sparked by the credit crisis has affected a plethora of business sectors, most notably the financial, property and oil markets. Complex derivatives and a wide array of other incomprehensible financial instruments have undermined economic fundamentals, with the real economy not being eschewed either. High growth rates among developing countries, particularly tiger economies, have been offset by regional multi-billion bailout packages in a bid to overhaul liquidity shortages. China, as the world’s fastest growing economy, has also begun to feel the effects of the crisis through a considerable fall in demand for their export markets. Their main export hub, Guangzhou, witnessed 130,000 job cuts to correspond with the difficult trading environment in addition to the collapse of several key entities. Although China still has reserves within the trillion-dollar bracket, it is evident that their lauded success may not be sustained should their exports markets continue to swivel in decline. Companies who derive their greatest profits from the Christmas season have also been hard-hit as retail sales have fallen to record lows. The Christmas forecasts do not appear to buck the trend either as consumers begin to tighten their belts amid the unprecedented volatility of the global economy.

The prospect of a fairytale Christmas appears bleak, and reality has inevitably succumbed to the dogmas of the infamous Grinch. The credit crisis has paved way for potentially irreparable gloom, ensuing in an influx of negative energy among investors, consumers and all other stakeholders concerned. Our structural ambiguities and social negligence has brought about the rise of the so-called credit “Grinch”, and the question beckons how he will steal Christmas from us this time round. A study conducted by Ernst & Young forecasts the Austrian population to reduce their Christmas expenditure to € 288, down from €326 in 2007. This represents a 12% decline in sales, also reflected by the woes of the retail market. Furthermore, the age bracket of 46-65 years is predicted to spend an average of €338, a hefty sum relative to the €192 forecasted for people aged up to 35 years. It further exhibits the discrepancies in the level of impact for different age groups, and notably the young are bearing the greatest brunt of the current mayhem.

The inability of Christmas, as an emblem for hope and prosperity, to upstage the current economic conundrum illustrates our deep-rooted problem. Conglomerates have got us into a severe mess, with executives cashing out their earnings and deserting their company into insolvency. Consequently, corporate greed has set center stage for our greatest Christmas adversary.

Calamity: The Window of Opportunity?

Another week of record falls has left many global leaders in doldrums concerning the futility of their measures to revive financial markets. Japan’s Nikkei fell to five and a half year lows after electronic magnate Sony halved their full year profit forecasts. India’s Sensex fell to its lowest level in 10 years and South Korea’s market plunged 10.6% amid Samsung’s announcement of a 44% fall in third quarter profits. Furthermore, the growing strength of the Yen was recognized as a threat to economic stability among G7 members. This has been instigated through the end of the carry trade, whereby investors borrowed the Japanese currency to buy currencies with higher interest rate, effectively exploiting arbitrage opportunities. This continues to exhibit the current deficient state of financial markets, epitomizing the self-imposed frailties that have unraveled during years of uninhibited corporate greed and confined government scrutiny.

What we are witnessing does not defy economic theory and logic; it is defiance against logic that has lead about to this global catastrophe. Conversely, it seems incomprehensible that taxpayers are made to bore the brunt for the irregularities conducted by multinational conglomerates. Governments may appear united in co-coordinating their rescue efforts, but there are no clear implications outlined for taxpayers, and concealing this information will leave the general public through to investors continuing to trade amid volatility highly anxious. The economic downturn has brought the UK into a technical recession, and this validates the mind-boggling activity prevalent within global stock markets. The question beckons whether we have finally seen market capitulation, or is this just the beginning of an unprecedented economic calamity?

However, history has taught us that every shortcoming provides an opening. Evidently, this crisis has led to a surge in litigation, as investors are looking to sue leading banks due to their inadequate underwriting procedures and ‘blind’ investment of funds in sub-prime bonds. Yet, despite increased demand for litigation, it poses various problems for law firms as well since the complexity of the financial instruments could make it impossible to determine the liability and extent of losses. Disgruntled investors are seeking redress from law firms, which has increased the size of the threat to investment banks to unquantifiable measures. Although the current mayhem could be profitable for law firms it has surely incurred bleak prospects for all other stakeholders concerned, and in the wider context anxiety cannot be laid to rest.

The Promiscuous Marriage

The enigma of stock market performance has left investors and the general public alike in bewilderment. Anomalistic gains have been offset by a hoard of high-profile bankruptcies, and pundits still reiterate that the worst is yet to come. Although stimulus packages have been inducted to avert further disintegration, the phenomena of mergers and acquisitions has taken centre stage in an effort to revive fortunes of the global economic outlook. The theory of mergers and acquisitions has long been disputed since value addition is argued to be a delusional passage of thought rather than the positive realm. Forced mergers as a result of the ongoing hiatus are highlighted by the potential unification of automobile giants GM and Chrysler. Illuminated by the fact that a merge would enable them to effectively mobilise their capital in tandem with government aid, the prospect of this fusion appears more likely. However, there is a danger of issues arising concerning the monopolistic outcome of such an action. Moreover, their similar production base is becoming relatively obsolete in an era that is beginning to pride itself upon the preservation of greenery. There mass line manufacturing of SUVs and strategic semblance should generally be a reason to overrule any ideas of a merge. Evidently, tough times require tough measures, but a decision in favour of a corporate alliance between both companies can be termed as pedantic and promiscuous, if you will.

The ill-thought propositions of GM and Chrysler’s executive management are largely tied with the glooming prospect of facing illiquidity by 2010. GM has posted a loss of $18 billion, incurring expenses amounting to approximately $1 billion per month. Mathematically, this is a prevailing inequality; realistically, there appears to be no sigh of relief. By induction, this suggests that both firms will be facing internal problems in wake of the increasing pressure to reassure investors of their corporate viability. Chrysler has fared even worse this year, with sales falling a whooping 25%. However, as the saying goes, “two wrongs don’t make a right”; these companies are not exempt from this notion, and a merge may simply exacerbate their plight.

The euphoria of mergers and acquisitions has instilled a sense of negligence among the corporate world, and in times of crises we cannot rely on impulsion to mitigate the consequences of our own blunders. Careful and constructive planning in addition to extensive research is the cornerstone of overcoming the current turmoil. A reminder will not suffice for persuading GM and Chrysler to rethink their options as promiscuity is the epitome of human imperfection, and sinful attraction tends to prevail over constructive action. Our pursuit towards utopia has once again failed through our own hypocrisy, and as it stands we are about witness a marriage that is both lethal as it is meridian.

The Global Search for Light at the End of the Tunnel

President Bush’s latest outcry for a coordinated effort to tackling the global financial crisis may have been heard, but all government efforts continue to appear to be in vain. Global stock markets had no respite from the recent downturn, continuing their slide to all time-lows; UK’s FTSE 100 fell 21.1% during the week, the Dow Jones fell 18%, and the German DAX plunged by 21.6%. The prospects of eschewing a global economic recession are grim, and unsurprisingly the hiatus of financial markets has begun to filter through to the real economy. For example, Eurozone leader Germany has seen a year-on-year fall in exports of 2.5%. Furthermore, the global slump has accounted for a 13% drop in exports to 75.7 billion euros in August from 87 billion euros in July. Evidently, as one of the world’s biggest exporters, the credit crunch has cost Germany dearly. Iceland’s outgrown and troubled banking sector also took another massive hit with the nationalization of the country’s largest bank Kaupthing. Despite concerted efforts of governments to revive money markets, the cut in interest rates by 0.5 percentage points within the Eurozone and the U.S. has not halted the massive stock sell-off amid continuing fears of a global recession. With rescue packages exhibiting little sign of a deep-rooted impact and continued symptoms similar to those prevalent prior to the Great Depression, can we actually still apply the foundations of free-market theory to current economic discrepancy?

The euphoria surrounding complex financial instruments was exaggerated by inevitable corporate greed. As human nature is inherently evil, excessive deregulation of economies has undermined the virtues of long-term growth and development. Now we are seeing middle-income families close to retirement lose their life savings invested in corporate pension funds through company bankruptcy while those same company executives are walking out with multi-million dollar remunerations. While governments are endeavoring to maneuver the crisis back to safe haven, their failure to recognize that they were, in fact, the main instigators will of course leave the general public in fury and bewilderment. Admittedly, the expansion of money markets has brought about several opportunities, but these have been outweighed by flawed intricacies. The aggravation and anxiety is reflected through the global sell-off, and in times of crisis people search for light at the end of the tunnel. With sales of the Vienna Philharmonic gold coins increasing by 230% since last year, the recent “Gold Rush” indicates that the search for security may be coming to an end.

Bail-out: The Devil’s Advocate?

The mayhem that has unraveled over the previous years within global financial markets has been unprecedented and compelled many underlying doctrines of free market economies into redundancy. Having embraced the virtues of capitalism for decades, we are now forced to witness the potential Armageddon of global financial markets. Stock markets have plunged to all time lows and investor confidence is virtually non-existent. Ironically, centralized economies of the Far East have averted a complete fiasco, and although there are mounting concerns of a worldwide recession, the events of contemporary global markets vindicate that there can be multifaceted approaches to economic prosperity. The tables have turned rapidly and conspicuously for what was once the world’s overwhelming economic powerhouse coupled with the epitome of economic extravaganza. However, these imminent events have transpired the U.S. into debris of exaggerated power distribution and de-regulation. The question now beckons whether the bail-out bill provides a sustainable solution for the revival of credit markets or whether their general economic framework requires a considerable makeover?

Many pundits have criticized the bail-out bill, labeling it as a short-term contingency exemplifying that no lessons have been learnt. The government’s decision to nationalize Freddie Mac and Fannie Mae provides a short term solution, and they may have been justified in their actions as the collapse of these companies would have prompted a ripple effect highly detrimental to the already shattered economy. However, absorbing the toxic assets of several companies by providing liquidity of this amount will continue to conceal the deficiencies of this highly deregulated economy. Excessive deregulation has sparked an array of corruptive influences, and these cannot be laid to rest through persistent liquidity injections worth billions of dollars. Ireland has enforced the provision of 100% security for consumer deposits, which has been met with heated criticism from prominent EU member states. France has experienced two quarters of negative growth, and is hence already in a recession. President Sarkozy’s ad-hoc meeting with Europe’s greatest economic leaders to resolve the crisis appeared to be in vain, and the collapse of Hypo Real Estate due to the inability to find a private buyer has led Chancellor Merkel to follow suit with Ireland. An era of globalization, where cross-border transactions and mutual understanding were adopted as norm, has now turned into “survival of the fittest”, and as long as no affirmative solution can be found, the possibility of a global economic overhaul appears bleak.

America’s bail-out bill may provide some economic stability, but their actions can be termed as self-fulfilling and negligent. Such liquidities would sweep aside any financial worries that have haunted each and every conglomerate, but in a global context this would create an unfair competitive advantage for U.S. companies. Should this bail-out fail to alleviate markets, the consequences would be fatal, and the government debt surely irrecoverable. Conformity, it seems, is now utopian.

Central Banks act as Dark Knight again?

In the past few weeks many companies have depended on bailouts and others have had to file for bankruptcy as a result of the credit crisis. Companies such as AIG, Merril Lynch or Lehman Brothers are only a few examples of victims of the existing crisis that faced disastrous fates last week. As a result, the American Government proposed a bailout plan of $700 billion led by Mr. Paulson in an attempt to boost investor confidence. Initially, the market responded positively as the FTSE-100 and Dow Jones Index in New York both rose sharply after Democrat party leaders said a deal "is basically done". The bailout plan, which included buying back toxic assets such as subprime mortgages from banks, would have been a large step forward in curbing the current lack of liquidity in the market.

Unfortunately, talks for the $700 billion bailout plan for the US financial industry failed in the US Congress on the 25th of September as they ended in a "shouting match". Following several hours of discussions the plan was blocked by a group of republican members of the Congress and it has been decided that talks shall resume on the 26th of September. If the plan does not go through, more finance companies are expected to collapse, causing greater damage to the global economy as banks are too weary to lend to one another as well as to other companies due to the risk of counter-party failure. On the 26th of September, the US suffered its greatest banking failure to date when regulators moved in to close down Washington Mutual and sold it to JP Morgan Chase for $1.9bn.

As a direct result of failed talks over the bailout plan the Central Banks (Bank of England, US Federal Reserve, European Central Bank and the Swiss National Bank) stepped up co-ordinated efforts to inject longer term cash into money markets. The Bank of England announced that it would extend $30bn in cash for a week in exchange of eligible collateral, which intends to address funding pressures and ease the lending rates between banks. Furthermore it will make $10bn available for overnight borrowing and will inject longer term money into the sterling markets. Hopefully, this will increase investor confidence and stabilise markets until a longer term plan can be implemented.

Who is Next?

What a Surprise



At the beginning of the week Lehman Brothers filed for bankruptcy. Lehman Brothers were the forth largest investment bank in America. The loss of Lehman Brothers have clearly put a shadow over the stock market. The loss has not only affected thousands of employers but has even caused the CEO Richard Fuld, who hid and avoided sealing the deal between Lehman Brothers and Barcalys. At the same time Bank of America bought off Merrill Lynch, one of the worlds leading financial management and advisory companies. These are two big companies but only a small portion of the many failed ones.

The World is not only facing losses from those two companies but American International Group Inc. (AIG) the world largest insurance company is also facing with immense problems, which was aided with $85 billion by the FED. The aid or the bail from the FED was important due to the high dependence on AIG. The FED said, "The Board determined that, in current circumstances, a disorderly failure of AIG could add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth and materially weaker economic performance."


This is only the happenings of one weeks period, but it was definitely a large surprise to everyone, so who will be next? JP Morgan maybe?