Lehman Bros folds up like a pack of cards
“Humpty Dumpty sat on a Wall
Humpty dumpty had a great fall,
All the Kings horses and all the Kings men
Couldn’t put Humpty together again”
Well, Well, Well… all is not well on the investment banking side isnt it? Lehman bro has folded up, AIG is extending the begging bowl to the FED, Goldman Sach’s scrip prices is scraping the bottom with its Q3 results diving down by 70%. This comes as no surprise to me for I had predicted this as early as March 08 in this blog referring to the fact that DBS Singapore had already informed its traders to curtail positions with Lehman Bros. I once again tell the young (wet behind the ears) professional who thought getting a job in one of these firms was the ultimate nirvana – welcome to the real world where everything that glitters is not gold. These professionals who have taken huge loans to fund their fancy cars and fancy apartments are now on the streets and their bargaining power has reduced substantially. (Incidentally Lehman Bro has already handed over the pink slips to its employees in Mumbai – Refer today’s economic times where it says that employees of their worli office have been told to pack their belongings). RBI has already barred Lehman’s Indian arm from remitting money to its parent – same action has been taken by Japan too. Another banking group that i am extremely bearish is on is ICICI (yes our own ICICI) – the kind of hits they have been taking on their balance sheet is not funny. In the last episode where the banks locked horns with their customer on FX derivative losses – it was the bank which took the largest hit .. and now with Lehman Bro folding up it is estimated that it will have to take a $28 mn hit (Source ET – today instant).
Another sector that will face turbulent times ahead is the BPO / KPO sector. These sectors have a direct corelation with the wellbeing of their so called big principals. Lehman Bro collapse is reportedly cost 2200 BPO employees their jobs. With downsizing a reality in the US BPO / KPO employees are also likely to feel the heat – like I have been saying always – we will be left with thousands of telephone operators – who dont have any additional skillset or degrees – coz these foolish youngsters made the cardinal sin of giving up their education for the lure of immediate money that these BPO’s offered – Well guys – time to pay up for your sins !!!!
Rupee Dollar Action:
Rupee has been battered to 47 to a $ (it was Rs.44.5 to a $ on Sept 9th) . Overnight call money rate has shot upto 16% (this was ruling in the band of 6-8% for over a year now). So the RBI is stepping in to supply rupees to lower the banks rupee borrowing cost. RBI has increased the interest rates on NRI deposits by 50 basis points – this will have the impact of attracting more dollar deposits and thereby increasing the dollar supply. The RBI has also stated in a release that it will sell dollars to meet any demand supply gap – so the target of RBI seems to be to increase dollar supply and easy out the call markets.
Borrowing on Repos:
Normally the banks can borrow from RBI against securities by pledging its securities only if it has securities in excess of 25% of net deposits. However now RBI has allowed banks to borrow against securities even if their holdings is just 25% (upto a maximum of 1%) .. which means banks holding just 25% SLR can use 1% of the same to borrow in repos .. this will result in their SLR coming down to 24%. RBI has clarified that it will not charge any penalty for the SLR slipping below 25%. This move will prompt banks to borrow more from RBI thereby easing pressure on the call markets.
Over and above this banks can now borrow twice a day from RBI’s repo window @ 9%.
Conclusion:
Interesting (though not pleasant for those in the financial services sector) times ahead … It would be very interesting to watch RBI’s move to combat inflation, Re/$ pressure and interest rates. Keepwatching this space for more….
Post Script: It is rumored that Warren Buffet has refused to bail out Lehman Bros.
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