Wednesday, September 17, 2008

1930 around the corner?

- Chellamuthu Kuppusamy

When Christopher Columbus landed in North America he would not have foreseen a financial institution to be established by his future fellow immigrants from western Europe, let alone that institution sending tremor to the financial market across the globe. Yes, I am talking about Lehman Brothers.

Henry Lehman was just 23-year-old when immigrated to the United States from Germany in 1844. He choose to settle down in the southern state of Alabama. Two of his brothers Emanuel & Mayer too took separate ships to the American shore and three of them formed Lehman Brothers in 1850. They took cotton trade as their primary business in which they excelled. In the next few years the center of cotton trade shifted from the south to New York City, which of course was - as it is today - the center of trading & commission business.

Civil war erupted 1982 and Lehman brothers financed Alabama state's reconstruction program. That was the beginning and the end came a couple of days ago. In the meantime they have grew, grew continually. They underwrote securities - initial public offers in particular - and did almost everything in the financial market. It did merger with American express and then de-merged again in 1994.

Subprime crisis that surfaced late last year forced Lehman Brothers to close down subprime division 'BNC Mortgage' and sending around 1,200 people home. On September 13 it decided to take bankruptcy protection. Its valuation based on September 15 stock price stood at $130 million. It's reported revenue for 2007 was 454 times more than this.

Sixth months ago Bear Stearns, the fifth largest bank, was on the prink of bankruptcy. JP Morgan Chase bought it out for dirt cheap $2 per share. That was not alone. Just recently Fannie Mae and Freddie Mac were bailed out by the US government. Now even before this 'broke' news from America's fourth largest investment bank Lehman could sink in, even more troubling stories come out. American International Group (AIG), the largest insurance firm in the US, would become next Lehman unless it gets around $70 - $80 billion. Luckily FED has come forward to perform rescue act. Likewise Merrill Lynch & Co was luck enough to find a buyer in Bank of America.

The US economy has been the driving force of the global economy, whether we like it or not. Any trouble in the US is not a standalone subject in the current world where everything is interconnected and eventually nothing is insulted in the great financial eco-system.

Already some analysts are talking about 'another' great repression of 1930 that we have only studied in history books. But we are unlikely to see 'another' great depression, but a greater or lesser depression, because the world economy now is interconnected while it was insulated back in 1930.


Udhayakumar said...

//Civil war erupted 1982//


//The US economy has been the driving force of the global economy, whether we like it or not. //


Chellamuthu Kuppusamy said...


Thanks for pointing out. It is was a typo.. civil war erupted in 1862