:: Nitish Sengupta

Could Wall Street relocate to Dalal St?

Nitish Sengupta

The collapse of the "big five" investment bank, in the Wall Street crash, which started a week ago, has been the biggest humiliation for the United States since Pearl Harbour (1941). There have been isolated rumblings in the immediate past viz. the collapse of Bear Stearns. But the spectacular collapse of Lehman Brothers, 150-year-old company, when it applied for bankruptcy surprised everyone. More surprise was in store when Merrill Lynch had to shut shop and was taken over by Bank of America. Close on its heels came the takeover of AIG by the US Federal Reserve. The last two pillars of the "big five", namely Goldman Sachs and Morgan Stanley, were also compelled to end their glorious careers as investment bankers and repackage themselves as ordinary commercial banks. Parts of these two were taken over by a variety of foreign commercial banks. The Japanese financial giant, Mitsubishi, has announced that it is buying a 2 per cent stake in Morgan Stanley for around $8.5 billion. Similarly, Lehman’s Asian operations are being bought over by Nomura, the top Japanese brokerage house, while absorbing 3,000 Lehman employees. Does this illustrate Asians replacing Manhattan in global finance? Thus, in a matter of five-six days, these cult names which dominated world private finance for decades, have almost done the vanishing trick!

The crisis arose due to a host of small banks which had, for several years, been sanctioning housing loans without, or inadequate, securities. When they realised the likely results of their mistakes, they simply put a silver lining by sugar-coating these loans and passed them on to investment banks as attractive which, in reality, were worthless credits. It was the multiplication of this unhealthy trend which led to this great crash.

Some critics are comparing this with the Great Depression of 1929. But this comparison is somewhat unsubstantiated and, perhaps, incorrect. The world that mattered in 1929 was far smaller than today’s globalised economy. Secondly, the world’s capability to endure such problems is far stronger today, thanks in part to the new information systems.

The very fact that the US government has gone about with its "bailing out" option on such a massive scale illustrates this. Interestingly, as of now, the US Federal Reserve’s $700 billion rescue operation was voted down by the US House of Representatives on September 29. This has created considerable uncertainties, but hopefully this matter will be renegotiated and resolved in a manner by which the US government can still come to the assistance of struggling banks by buying their debts. This act of nationalisation of private debts and the State taking responsibility of improvident behaviour of private bankers would make US leaders of the past cringe. But that is the cost, which is President Bush’s opinion, for saving millions of jobs and bank accounts. Whether this will succeed in containing the crisis and get Wall Street back on the path of recovery is still open to question. But, let us hope for the best.

Incidentally, the US example has led to several other governments, such as Japan, Russia, Australia and the UK, in committing huge sums from the public exchequer to contain the impact of the crisis on their own banking systems, in addition to pouring funds across their markets to shore up their bankrupt banks. In any case, the world is now seeing the consignment of the mighty investment banking system of the past half-century to history. Its holder cousin, commercial banking, will step in to fill the resulting vacuum.

Among the white knights in the rescue operation in the US, is the famous adventurer in financial debts, Warren Buffet, who announced his investment of $5 billion in Goldman Sachs. This will, no doubt, invest confidence in Goldman’s sagging shares.

There is no doubt that the Wall Street crisis will only have a marginal effect on India, thanks largely to the cautious regulatory system in place. Tata AIG, the joint-venture between the Tatas and AIG, is likely to be the most affected by the crisis, but Mr Chidambaram has pledged that they will have the government’s support if need be. ICICI Bank has the maximum exposure to Wall Street and will, therefore, need to do some crisis management by way of writing off $28 million worth of losses and replenishing the deficits at some points with surpluses elsewhere. The SBI is reported to have 5 per cent exposure, which is just a "flea bite". The issue for serious consideration is whether India can turn the American financial crisis in to her opportunity. An opportunity to step in to fill the vacuum in Asia and the Middle East, caused by the withdrawal of the dollar.

Inevitably, the dollar will lose considerable ground as the world’s preferred mode of currency and the US will surely lose part of its position as the only preferred destination for currency. Can India think of an Asian Bretton Woods system with the help of Japan and, perhaps, China? India will no doubt need to take some risks, but it can be considered as a risk worth taking.

Dr Nitish Sengupta, an academic and an author, is a former Member of Parliament and a former secretary to the Government of India