Tuesday, February 5, 2013

Ben, the concoction’s giving us a hangover!

Having paid a price for their ‘irrational exuberance’, economies in general, and financial institutions in specific are suffering from a hangover of their own mistakes, says B&E’s Gyanendra Kumar Kashyap

Ever since the collapse of the once mighty and iconic Lehman Brothers in September 2008, the Group of 20 largest industrialised economies in the world (G20) have spent more than $2.2 trillion – much of it borrowed – trying to restore growth. To put matters into perspective, US had too come up with a sweeping $787 billion bailout package (better known as Troubled Asset Relief Program, TARP) for the nation’s ailing financial institutions that included $180 billion assistance to the insurance giant AIG, $45 billion to Bank of America (BoA), $50 billion to Citigroup, $25 billion each to JPMorgan Chase & Wells Fargo and $10 billion each to Goldman Sachs & Morgan Stanley.

Considering the fact that the equity prices of global banks fell by 75% (between July 2007 & March 2009), resulting in a loss of market capitalisation of about $5 trillion, the efforts by industrialised economies to restore growth and stem the loss of global wealth, which by then had eroded $25 trillion (almost 45% of global GDP), the Federal Reserve’s move seemed well intended.

Cut to December 2009 – BoA announced a plan to repay the $45 billion in federal funds it received; Wells Fargo too declared repayment of $25 billion of TARP in full while Citigroup is still desperately trying to win permission from the Federal Reserve to repay its remaining debt by selling new stocks. Amidst the growing belief that the risk appetite has returned, the equity markets are improving and capital markets have reopened; nevertheless, policymakers face a unique situation which economists term as ‘debt overhang’ and non–economists prefer calling it ‘debt hangover’.

To get a tongue-tingling taste of what the term ‘debt hangover’ means, here are some earnings figures from the fourth quarter filings of some of the leading financial institutions who had once ‘seemingly’ benefitted from TARP. While BoA reported a loss of $5.2 billion (after a $2.24 billion loss in Q3), Citigroup returned home a negative $7.6 billion! And not surprisingly, both the losses are accounted for by the repayment of a portion of funds they had received as a part of the Fed bailout package (while Citi paid back $20 billion, BoA had to return $45 billion).Debt hangover, we repeat!


Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).

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