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.