BUSINESS BLOGS
BUSINESS BLOGS
category: business
17 Sep 2008

Tech Crunch points to a piece in the NYT on the loss of value of financial companies between October 9, 2007 and September 12, 2008, or roughly 11 months.  Reading it, you can’t help but shake your head:

Citigroup: $236.7 billion to $97.8 billion.
Bank of America: $236.5 billion to $150.2 billion.
AIG: $179.8 billion to $32.3 billion
Goldman Sachs: $97.7 billion to $61.3 billion
American Express: $74.8 billion to $45 billion.
Morgan Stanley: $73.1 billion to $41.1 billion.
Fannie Mae: $64.8 billion to $700 million.
Merrill Lynch: $63.9 billion to $24.2 billion
Freddie Mac: $41.5 billion to $300 million.
Lehman Brothers: $34.4 billion to $2.5 billion.
Washington Mutual: $31.1 billion to $2.9 billion

In percentage terms, it is brutal:

Now the crazy part is that the broader stock market has not really woken up to this, and that spells bad news for the stock market. Bear in mind, much like the auto industry’s indirect impact on the economy is exponentially larger than its direct impact, the financial sector is pivotal to the economy.  I’d say it is the industry with the greatest multiplier effect, and this effect is much sharper in downturns than upticks in growth.  I remain convinced that some markets (be it sectors or geographies) will be less impacted, however, the fact that it is financial firms that are cratering, due to exposure to mortgages, is alarming.  It’s one thing if financials crash due to risk mismanagement, but when it’s over mortgage risk mismanagement, expect chaos of gargantuan proportions.

Recall that in 2000, the Nasdaq imploded and took down the economy with it, this time around, the mortgage market crashed, and since these are not priced in real times, the shakeout is much less instantaneous, transparent, and seamless.  I don’t think we’re feeling the full effects just yet. Don’t forget, these banks work with companies by lending and safeguarding their money, as such, layoffs as HP, eBay etc. are just the tip of the iceberg.

Nouriel Roubini, an economic guru I came across on Paul Kedrosky’s blog, has been apparently right throughout this tornado of crap and is pretty adamant that both Goldman Sachs and Morgan Stanley are next.  Having studied finance, I must say, once he lays down his rationale as to why their business models are wrong, you tend to understand that indeed, they are doomed.  This is why, to quote William Larkin, fixed income manager at Cabot Money Management in Salem, Massachusetts, “Goldman Sachs and Morgan Stanley are lining up dancing partners. They don’t want to be … this week’s victim.”

Sad, but true.