Financial crisis in US and we are feeling its effects....why? Its because of globalization. When economies of the world are connected with each other, the fall of one is fall of other and vice versa.
Continuous losses that the firms on wall street were incurring made their fall inevitable. The big names, like Lehman Brothers, Merrill Lynch, Fannie Mae, Freddie Mac, Bears Stearn, AIG etc which may be unknown to a layman, hold much wider significance in global finance such that if any of these firm fall it will have a great effect on the world. This is clear from the fact that combined revenues of these firm exceeds GDP of more than 80 countries of the world. And these countries have invested their money in various countries, India is one of them. Professionals in India run after the jobs offered by these firm not only because of work there but lucrative salary compensation offered by them. They offer 14-15 lacs to a SRCC or Stephen's graduate. Well this was just an additional information for the reader. What I implied by saying this is that fall of these firms will put economy of countries in which they have expanded down as well. So government of various countries have every right to save these firm from falling. Some economists say that bailing out done by government is not a correct step. Because private sector firm has no links with government and they are responsible for their outcomes but when the firms are such big, there is bound to be a government intervention. The shareholders of these firms and investors will fall along with the firms. For example, a Lehman Brothers share which was $50 one month earlier was 20 cents on 14th September 2008, fall of nearly 90%. Federal Bank (Fed) has already bailed out Bears Stearn (which was acquired by JP Morgan Chase), Fannie Mae and Freddie Mac (mortgage giants) and American International Group (AIG). This all has led to saying "Privatization of the profits and socialization of the losses". Fed which was approached by Lehman Bros for a bail out was not helped and firm finally declared bankruptcy, the biggest bankruptcy in US. Bail out of AIG ($85b) by Fed in return for 80% stake in the firm and power to elect top management of the firm has led to the notion that US is turning Socialist. Recently Morgan Stanley and Goldman Sachs requested Fed to control their businesses has added to that notion. Investment banking would never be same again. People with no knowledge about it also wanted to be part of it for prospects of growth it offered. But in search of profit these firm went so far that there was no turning back. Subprime mortgage crisis was biggest reason for their fall. Subprime mortgage is offering home loan to an undeserving person i.e. a person who may not be able to pay back the loan. After offering great profits earlier, soon subprime mortgages led to tremendous losses because of a big list of defaulters (those who don't pay back the loan). Another major reason for fall was credit default swaps. This is contituent of derivatives which is one of the riskiest form of investment. Many economists believe that derivatives are weapons of mass destruction. Here they exactly proved that. Credit default swaps involve three parties, namely seller, buyer and third party is inactive. Third is inactive because he is the one on whom the 'bet' is placed (borrower). The 2 parties bets on if the third party (borrower) will default or not. If he defaults, seller of the swap (usually an insurer) pays the money that borrower defaults to the buyer. This was a layman definition of the credit default swap which is actually much more complex. This was a major cause of losses incurred by AIG (an insurance company). The news of losses incurred by firms only made their recovery difficult as investors lost their trust on the firms and decided to take back money they invested in the company adding on the debt on these firms furthering their losses. But how does fall of these companies affect the jobs in India? Answer to this question is that all major KPO, IT, IT enabled services (ITES) companies have these companies as their clients. These are the firms to which they provide services and if these companies are not there then they lose their business and as a result their revenue fall and who else would cut their costs (to make profit) except our jobs. So as a result, we lose our jobs or have lesser options. There is no job security and we have to be the best to survive in a company.
I end here though I have a lot to share.... maybe some other day..
What I would like to say finally is that to whatever extend we may say that we are decoupled from US economy, we can never be (unless we become a superpower) .
I hope these firms stay firm so that the world economy stays firm..
