The Filing of Chapter 11 bankruptcy petition by Lehman Brothers, the emergency rescue of American International Group, Inc. (AIG) by the US Treasury, the merger of Merrill Lynch and Bank of America, the take over of Bear Stearns by JP Morgan Chase following a series of unexpected and unprecedented events in the aftermath of the US subprime crisis have badly shattered the investor's confidence and posed a serious threat to the global financial stability.
Another Wall Street major, Morgan Stanley was also reported to have faced serious threats to its financial health. Similar was the story of Northern Rock (UK), which faced severe liquidity crunch. While AIG and Northern Rock were saved by their respective monetary authorities through emergency liquidity support, others had no choice but to succumb to the market forces.The vast size, outreach and transnational character of these institutions not only hit the US market (the UK in the case of Northern Rock) but caused tremors in the global financial markets, the effects of which have far-reaching implications. Even the emerging economies are not spared from its ill-effects, though a significant degree of decoupling exists due to lower exposure of these institutions and comparatively less developed nature of the financial markets in these economies.
The crisis has also necessitated a phase of consolidation and restructuring in the US financial market, which has started with Federal Reserve's announcement that Goldman Sachs and Morgan Stanley will become bank holding companies under close regulation and monitoring.Banking is an inherently risky business due to high leverage, asset-liability mismatch and dependence on short-term borrowings. As a matter of fact, banks make their earnings due to their ability to take benefit of trading on thin equity (leverage) and manage asset-liability mismatches to their advantage.
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