BIGGER THE SIZE, GREATER THE FALL
Are you one of those who are wondering how the woes of a handful of companies can create a global
financial crisis? Perhaps you should for starters consider just how huge they are. The total revenue of Freddie Mac, Fannie Mae, AIG, Lehman Brothers and Merrill Lynch added up to nearly $322 billion in 2007. There are 185 countries, including fairly developed economies like Denmark or Greece, whose GDP cannot match that size.
In fact, even the combined GDP of the 96 smallest economies doesn’t add up to the aggregate revenues of these Wall Street giants, which were often considered too big to collapse. Between them, the CEOs running these firms had an annual compensation package of close to $118 million last year. In the past decade, which was considered the golden era of the financial industry, most of these companies made pots of money, particularly through real estate loans. Increasing property values were only adding to the profits of these companies who experienced an exponential surge in their revenues.
Things started going sour towards the end of 2006, with the bursting of the housing bubble in the US. Fannie Mae was the first to feel the heat, incurring a whopping $2.3 billion or 26% drop in net income. However, net incomes of the others were still surging.
Freddie Mac even witnessed a recovery after a slowdown in 2005. But, by 2007-end the decrease in inco
mes turned into real losses. Freddie Mac, Fannie Mae and Merrill Lynch started incurring loss from the third quarter of 2007. In the calendar year, Merrill Lynch lost $7.8 billion, which was more the $7.5 billion it has earned as net income in 2006.
The losses of Freddie Mac and Fannie Mae were respectively $3.1 billion and $2.1 billion.Although AIG still made profits for the year as a whole, it had also started incurring losses from the last quarter of 2007. As a result its net income over the year fell 56% from the $14 bn it made in 2006.
Lehman Brothers was the only exception, because it did not incur any loss in 2007. In fact, there was a
slight increase in the yearly profits from $4 billion to $4.2 billion. But it also joined the loss makers league when it lost $2.8 billion in the first quarter of 2008, a loss which was more than half the net income generated in all of 2007.
This dramatic roller coaster of profits and losses is perhaps best summed up by a quote of former Morgan Stanley MD Anson Beard: “If you’re betting with other people’s money, you’re more willing to take risk than if it’s your own.”
Given that mindset, it’s also easy to see why some have characterized what’s happened as ‘privatisation of profits and nationalization of losses’.
To Americans who were already debating the waste of taxpayer’s money in waging wars in Iraq and Afghanistan, the $900 billion and more of taxpayer money used for bailing out some of America’s largest financial giants is a staggering burden. This amount is nearly five times the $182.2 billion estimated as the expenditure for the war on terror for FY 2008. (TOI)
Buffett TO BUY Goldman Sachs
The world richest man Mr. Warren Buffett has come to save the world from the financial turmoil. His company Berkshire Hathaway Inc said on Tuesday that they would be investing at least $5 billion in Goldman Sachs Group Inc. In addition to buying $5 billion in preferred stock, Warren Buffett’s company also got warrants to buy another $5 billion in Goldman’s common stock. Goldman said that they would raise another $2.5 billion in its own public stock offering. Buffett, one of the most successful investors in history, did not mention what is happening in Washington, but he praised the ‘Goldman Sachs’, the New York-based firm. According to him “It has an unrivaled global franchise, a proven and deep management team and the intellectual and financial capital to continue its track record of out performance.” This will be Buffett’s second major foray into Wall Street. Before this Berkshire Hathaway invested in Salomon Brothers Inc in late 1980s. when the investment firm admitted wrongdoing in bidding for US Treasury bonds in 1991