Friday, October 17, 2008

What a difference a financial crisis makes.


I
just bought my plane ticket from Istanbul to Kayseri. It cost me 104 TRY (Turkish Lira). At today's exchange rate which is 1USD = 1.496 TRY that comes to about $69. The same ticket would have cost me about $88 back in January when the rate was 1USD = 1.18 TRY. Unbelievable price drop.

2008 will go down in history for two memorable events. The first is the nomination of an African American, Barack Obama, as the Democratic Presidential nominee. The second is the global financial crisis that started to unfold earlier this year when Bear Sterns collapsed.

Years of global economic boom have finally burst. As described on a posting on the Global Issues website:
A collapse of the US sub-prime mortgage market and the reversal of the housing boom in other industrialized economies have had a ripple effect around the world. Furthermore, other weaknesses in the global financial system have surfaced. Some financial products and instruments have become so complex and twisted, that as things start to unravel, trust in the whole system started is failing.

The extent of this problem has been so severe that some of the world’s largest financial institutions have collapsed. Others have been bought out by their competition at low prices and in other cases, the governments of the wealthiest nations in the world have resorted to extensive bail-out and rescue packages for the remaining large banks and financial institutions.

Following Bear Sterns, a number of well known financial companies started to collapse. Some closed doors while others were bought out by other firms.

On September 14, 2008 Bank of America announced plans to acquire Merrill Lynch, if approved by regulators and shareholders of both companies. The plan was approved and Merrill Lynch was sold for $29 per share ($50 billion dollars).

On September 15th, 2008, Lehman Brothers which had been in business since 1850 declared bankruptcy. Barclay's Bank bought the North American Division and a Japanese firm, the Asia Pacific Division.

On September 25, 2008, Washington Mutual went into the receivership of the Federal Deposit Insurance Corporation (FDIC). The FDIC sold the banking subsidiaries (minus unsecured debt or equity claims) to JPMorgan Chase for $1.9 billion, which re-opened the bank the next day.

Just this past week, the US Federal Reserve approved the acquistion of Wachovia by Wells Fargo plans to acquire Wachovia for $15.1 billion in stock.

In recent weeks, the NASDAQ has been yo-yoing up and down with both record daily losses and gains. Major stock markets around the world have been doing the same.

On September 29, U.S. lawmakers rejected a $700 billion bailout plan for the financial industry in a shock vote that sent global markets sliding as European authorities scrambled to prop up a slew of banks. A week later the British government announced a 50 billion pound ($88 billion) plan to partly nationalize major banks and promised to guarantee a further 250 billion pounds ($438 billion) of bank loans to shore up the beleaguered sector amid the world financial crisis.

Earlier last week, Iceland's prime minister raised the spectre of his country being at risk of "national bankruptcy" meaning that the country cannot pay its debts or raise foreign currency to pay for imports. In economic jargon, it could also be known as a "balance of payments crisis". The balance of payments measures all the payments that flow in and out of a country. The declaration of bankruptcy coincided with the Annual Meetings of the World Bank and the International Monetary Fund (IMF) and it was rumored that Iceland would turn to the IMF for financial help.

For me personally, I've not (luckily) been impacted by the crisis though I do see the effects around me. To start with, I see quite a few home foreclosures in my neighborhood. I presume that at least some of those unlucky homeowners took out zero interest rate loans when they bought their homes. Then, in just the past few days, gas prices have dropped to below $3 per gallon - I can't remember the last time prices were this low.

As we go into the holiday buying season, it will be interesting to see how this crisis will impact US retailers. I suspect sales will be down from previous years and the housing market will continue to be a buyers market.

I don't think the crisis is over yet but I don't know that anyone can predict what will happen next. The US elections are less than a month away. It will indeed be a challenge for the next President of the United States to lift the world economies out of this slump.