Debo Submprime

8/2/2019 Debo Submprime

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Comparative Study of Effects of Sub-Prime Crisis on BSE and Dow Jones

EXECUTIVE SUMMARY

Indias stock market are rather scarce, despite various stylised facts suggesting,

prima facie, the growing linkage of the Indian market with global and major regional

markets in Asia during the reform period beginning in the early 1990s. The Bombay

Stock Exchange (BSE) and National Stock Exchange (NSE) of India have emerged

as the largest stock exchanges in the world in terms of the number of listed

companies, comprising many large, medium-sized and small firms.

Among the factors contributing to growing financial integration is a rapid increase in

the cross-border mobility of private capital inflows due to investors seeking portfolio

diversification and better yields, a growing reliance of nations on the savings ofother nations, and a shift in the leverage preference of companies from debt to equity

finance?

With a market capitalisation of US$ 1.8 trillion in 2007, the BSE has become the

tenth largest stock exchange globally and come closer to advanced economies in

terms of the ratio of market capitalisation to gross domestic product. As regards

transaction cost, the Indian stock market compares with some of the developed and

emerging economies. With the objective of comparing Indian stock markets with

that of USA, with special reference to sub-prime crisis, this study has been

carried out and major findings are concluded as follows:

There are signals of slowdown in the US Economy: high unemployment rate,

falling real estate prices and huge credit defaults and to offset this, rate cuts by

Federal Reserve as expected. Due to this slowdown, the Indian Economy,

including world economy is also feeling the heat.

Dow wasnt at half of its peak of 14000 till the end of December 2008, but

Sensex remained almost one-third of its highest level at the end of

December.

Impact of sub-prime crisis can be equally seen on Dow, Sensex and all

sectoral indices of BSE. However the loss is significantly higher on Indian

indices than that on Dow.

The correlation between BES IT and Dow is 0.734. It means that there is a

significant impact of the changes in the American market on the IT sector.

B. M. College of Business Administration
http://www.financialexpress.com/section/Economy/97/http://www.financialexpress.com/section/Economy/97/http://www.financialexpress.com/section/Economy/97/http://www.financialexpress.com/section/Economy/97/


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This is because this sector is export oriented and is exposed to the US market

by a very high degree.

FII shareholding in 34 out of 50 key shares that constitute the S&P Nifty

Index has fallen significantly during the quarter ended March 2008. As perSEBI figures, Rs. 13035 corers was pulled out by foreign funds in January

alone when Sensex lost 3522 points. After that Rs. 14272.4 crore was pulled

out during the month of October, 08 when Sensex lost 2525 points.

Due to sub-prime crisis and resulting slow down in the market compelled the

Central Bank of America to reduce it bank rate seven times in the year 2008.

After the emergence of sub-prime crisis IT is showing strong negative

correlation with increasing prices of dollars. That is mainly due to the crisis

occurred in the US. There is over all sharp decline in the demands all over

the world, particularly in the US, which has washed out the likely benefits of

export oriented IT and technology sectors. As a result stock prices of IT

giants like Infosys, Wipro and TCS touched their 52 weeks bottom during

2008 with dollar becoming stronger.

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INDUSTRY DETAILS

International Scenario:

Global integration, the widening and intensifying of links, between high-income and

developing countries, have accelerated over the years. The correlation of global

markets over a period of time is presented in (Table below).

(Source: Source: S&P Global Stock Market Face book, 2007)

Over the past few years, the financial markets have become increasingly global. The

descriptive statistics of the major markets in terms of daily returns is presented in

Table below, which shows that the markets are increasingly getting interlinked.

(Source: S&P Global Stock Market Face book, 2007)

Cross border capital flows have shifted from public transfers to primarily privatesector flows. Indian market has gained from foreign inflows through investment of



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Foreign Institutional Investors (FIIs) route. During 2006-07, cumulative net

investments by FIIs amounted to US $ 51,967 million. Following the

implementation of reforms in the securities industry in the past years, Indian stock

markets have stood out in the world ranking. As may be seen from (Table 1-4), India posted a turnover ratio of 93.1 %, which was quite comparable to the other

developed markets. As per Standard and Poor's Fact Book 2007, India ranked 15th

in terms of market capitalization (18th in 2004 and 17th in 2005) and 18th in terms

of total value traded in stock exchanges and 21st in terms of turnover ratio as of

December 2006.

A comparative study of concentration of market indices and index stocks in different

world markets is presented in the (Table 1-5). It is seen that the index stocks share of

total market capitalization in India is 81.6% whereas US index accounted for 89.5%.

The ten largest index stocks share of total market capitalization is 32.2% in India and

13.4% in case of US.



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The stock markets worldwide have grown in size as well as depth over the years. Ascan be observed from (Table 1-6), the turnover of all markets taken together have

grown from US $ 39.61 trillion in 2004 to US $ 67.91 trillion in 2006. It is

significant to note that US alone accounted for about 48.99 % of worldwide turnover

in 2006. Despite having a large number of companies listed on its exchanges, India

accounted for a meagre 0.94% in total world turnover in 2006. The market

capitalization of all listed companies taken together on all markets stood at US $

54.19 trillion in 2006 (US $ 43.68 trillion in 2005). The share of US in worldwide

market capitalization decreased from 38.85 % as at end-2004 to 35.84 % as at end

2006, while Indian listed companies accounted for 1.51% of total market

capitalization in 2006.



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The US has slowed down significantly and the US investor is at risk. That is

something, which is a serious problem. If you look at market behaviour, over the last

10-15 years, whenever the Fed cut rates, it has normally been good for markets,

provided that the US does not go into a recession. But at present the situation is quiteadverse. The wiping of biggest investment banks in US has led to risk of

employment for numerous employees of these companies in US & in other nations

in which India also comprises. The employees of these firms are being converted

into sales executives by domestic AMC's at half of their net salary.

THE US FINANCIAL CRISIS

What were the factors that catalysed the financial meltdown in the United States? A listing

and discussion of seven triggers of the crisis.

In his annual chairman's letter to shareholders of Berkshire Hathaway Inc for year

2001, dealing with the subject of financial derivatives, particularly credit derivatives,

Warren Buffet made the now famous statement that "derivatives are financial

weapons of mass destruction, carrying dangers that, while now latent, are potentially

lethal". In the wake of the ongoing global financial carnage, Buffet's comment seems

almost prophetic.

But the deep insight that credit derivatives are potentially lethal did not come

painlessly to Warren Buffet; It came only after experiencing their toxicity first hand

in the derivatives business of General Re Securities, a dealer in derivatives that was a

subsidiary of Gen Re which had been acquired by Berkshire Hathaway. The

potentially distressed business remained unsold despite efforts and had to be even-

tually wound up after picking up its credit derivative losses. It took four years to un-

wind General Re Securities' portfolio of credit derivatives - at a loss of $ 400 million

till 2007, and another S 500 million in Q1 2008 [Morris 2008].

Copious analysis, investigation, research, and introspection of the current mayhem will

go on for years. The world will want to know what to learn from this historic, and

incredibly expensive lesson to figure out the vices that afflict modern finance.



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The following seven triggers (some interlinked) seem to emerge as the immoral

pillars that shoulder responsibility for the crisis:

(i) Reckless sub-prime lending;

(ii) Originate, securitize and service model, also called the origination and

distribution (O&D) model;

(iii) Proliferating credit derivatives market without central counterparty;

(iv) Excessive leverage, permissive regulatory framework;

(v) us housing market downturn;

(vi) Valuation challenges of complex derivative products: and

(vii) Low probability extreme events - Underestimation versus Panic.

(i) Reckless Sub-Prime Lending

Most of this decade witnessed reckless lending in the us credit market through

mortgage loans, car loans, credit cards, etc,-to borrowers with impaired or limited

credit histories. These "sub-prime loans" encompassed loans with no down-payment,no verification of income, jobs and assets (referred to as NJNJA orLIAR loans), initial

payment only of interest, negative amortisation, teaser interest rates, etc. About 60

per cent of all mortgage origination since 2005 through 2007 had these reckless and

toxic features. According to the newsletter, Inside Mortgage Finance, vs. lenders

added, a total of S 2.5 trillion in sub-prime mortgages between 2002 and 2007.

(ii) Origination and Distribution Model

The origination, securitisation and servicing model (also known as, the O&D model)

proliferated in the us on the back of a booming mortgage credit market. The O&D



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model worked something like this: Typically, a huge investment bank (HIB) - such as

the big five investment banks, Bears Stems, Lehman Brothers, Merrill Lynch,

Morgan Stanley, or Goldman Sachs - would encourage mortgage banks countrywide

to make home loans, often providing the capital, and then the HIB would purchasethese loans and package them into large securities called residential mortgage

backed securities (RMBS). They would package loans from different mortgage banks

and different regions. They generally grouped the loans together according to their

initial quality as in prime mortgages, alternative-A paper (ALT-A) and the now

infamous sub-prime mortgages. They also grouped together second lien loans, which

were the loans generally made to get 100 per cent financing or cash-out financing as

homeowners borrowed against the equity in their homes. Typically, an RMBS would

be sliced into anywhere from five to 15 different pieces called tranches. They would

go to the ratings agencies, who would give them a series of ratings on the various

tranches, and the ratings would actually have a hand in saying what the size of each

tranche could be. The top or senior level tranche had the right to get paid back first

in the event there was a problem with some of the underlying loans. That tranche

was typically rated AAA. Then the next tranche would be rated AA and so on down to

the junk level. The lowest level was called the equity level, and it would take the

first losses. The lower levels paid very high yields for the risk they took.

Since it was hard to sell some of the lower levels of these securities, the HIB would

take a lot of the lower level tranches and put them into another security called a

collateralised debt obligation (CDO). And yes, they sliced them up into tranches and

went to the rating agencies and got them rated. The highest tranche was typically

again AAA. Through the alchemy of finance, investment bank took sub-prime mortgages

and turned 96 per cent (give or take a few points depending on theCDO

) of them intoAAA bonds. Almost like taking nuclear waste and turning it into gold. Clever trick

when you can do it, and everyone, from the mortgage broker to investment bankers

was paid handsomely to dance at the party

That the outstanding cons are estimated at $ 3.9 trillion against the estimated size

risk of the sub-prime market of $ 1 to $ 1.3 trillion is a revealing index of the multi-

plier effect of securitisation structures and CDOS. There was no method for reporting



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on CDO issuance or on sub-prime loans outstanding. Indeed, many of the originators

were mortgage brokers who had no reporting obligations.

(iii) Proliferating Derivatives

To be sure, the credit boom was accompanied by proliferation of complex, illiquid,

and inherently high-leverage, over-the-counter (OTC) credit derivatives. The OTC

market was bereft of any central counter party (CCP) risk management mechanism

such as a clearing corporation that acted as a CCP. And, the preponderant dependence

was on the credit rating of the counter party that wrote the credit derivative or the

collaterals it was asked to keep. Credit derivatives, included unfunded credit

derivative products such as the credit default swap (CDS), total return swap, credit

default swaption, CDS index products as well as funded credit derivative products

such as the credit linked note (CLN), and the synthetic CDO. More

Than half of all CDS covered indexes of companies and debt securities such as asset-

backed securities. The rest included coverage of a single company's debt orCDO.

In its simplest form, a CDS is akin to credit insurance. It is an agreement between two

counter parties, in which one makes periodic payments to the other and gets the

promise of a payoff if a third party defaults. The first party gets credit protection, a

kind of insurance, and is called the "buyer". The second party gives credit protection

and is called the "seller". The third party, the one that might go bankrupt or default,

is known as the "reference entity". The "protection buyer" gets a large payoff if the

reference entity defaults within a certain period of time, while the "protection seller"

collects periodic payments for assuming the risk of default [Brown 2008]. Remark-

ably, sellers of protection are not required by law to set aside reserves in the CDS

market. While banks ask protection sellers to put up some money when making the

trade, there are no industry standards. It was the equivalent of a licensed insurance

company selling insurance protection against hurricane damage with no reserves

against potential claims. In the absence of any requirement to actually hold any

asset, credit default swaps could be used for hedging as well as for speculative

purposes [Engdahl 2008]. Further, unlike exchange traded products, which tend to

be standardized, relatively short term (usually not more than a year), and liquid, a



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typical CDS is customized, opaque, with a five-year term, illiquid and often with

embedded complexities.

The rate of growth of CDS HAS been breathtaking. According to the International Swap

Dealers Association (ISDA), the notional amount outstanding of CDS grew to a

staggering $ 62.2 trillion at 2007 year end, up from a modest $ 0.92 trillion at 2001

year end [ISDA 2007], depicting a compound annual growth rate of an astounding 102

per cent, and making CDS the fastest growing financial instrument of all times

[Morris, ibid]. Indeed, this rapid growth of credit derivatives formed the backbone

of the O&D model which proliferated in tandem during the period.

Despite its growth to a staggering $ 62.2 trillion at 2007 year end, the market forCDS

was entirely unregulated. And, as Engdahl points out, there are no public records

showing whether sellers have the assets to pay out if a reference obligation defaults.

The United States Federal Reserve only had supervision of regulated bank CDS

exposures (such J P Morgan Chase, the largest buyer and seller of CDS), but not that

of investment banks or hedge funds, both of which were significant CDS issuers and

both very highly leveraged. Hedge funds, for instance, are estimated to have written

31 per cent in CDS protection [Engdahl ibid]. Predictably, the other big sellers and

buyers of CDS are the big five investment banks and the monoline bond insurers

(Ambac, MBIA, AND FGIC). Yet, J P Morgan Chase remains by far the largest seller and

buyer ofCDS. A bulk of the risk in the CDS market keeps spinning amongst these 6 to

10 dealers in this daisy chain like a vortex, making it highly prone to financial

problems or even a rating down grade of one quickly affecting the rest and morphing

into a systemic risk issue.

Most financial instruments on the scale ofCDS

, like treasury futures, are traded onexchanges. Once brokers match a treasury future trade, the clearing corporation of

the exchange steps in as the CCP for both the buyer and the seller. The CCP insists on

daily collateral postings. More importantly, a CCP aggregates outstanding positions

data participant-wise, sets up participant-wise limits, and enables netting of long and

short positions participant-wise; all very vital systemic risk mitigation functions. In

the absence of a CCP in the OTC market where the CDS are transacted, collateral

arrangements are bilateral, inconsistent, and the updating of marked to market (MTM)



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positions is haphazard. A CCP could have mitigated if not prevented a systemic crisis

in the CDS market.

It appears that us Fed could not let Bear Stearns enter bankruptcy because - and

only because - the trillions of dollars of credit default swaps on its books would be

wiped out. All the banks and institutions that held CDS written by Bear would have to

take billions of dollars in MTM losses on markdowns of their outstanding positions to

a counter party whose rating dropped to default grade. In effect, if Bear had gone

bankrupt, the accounting requirement of fair valuing financial instruments would

have triggered a financial system-wide cascading effect ofMTM write downs, a write

off of capital of highly leveraged institutions and would have unleashed a chain of

rating down grades across the system, which in turn would have caused another

cascading and mounting cycle of MTM losses, rating down grades and finally acute

credit contractions.

A similar problem seems to have brought down AIG. A small AIG corporate

subsidiary apparently wrote $ 441 billion worth of credit default swaps on corporate

bonds, and worse, mortgage-backed securities. As the value of these insured-

referenced entities fell, AIG had massive write-downs and additionally had to post

more collateral. And when its ratings were downgraded on September 15, 2008, the

company had to post even more collateral, which it did not have. In short, what

happened in one small AIG corporate subsidiary appears to have blown apart one of

the largest insurance company globally [Gilani 2008].

The financial system would surely have been better off had it introspected upon

Warren Buffet's words: Many people argue that derivatives reduce systemic problems,

in that participants who can't bear certain risks are able to transfer them to strongerhands. These people believe that derivatives act to stabilise the economy, facilitate

trade, and eliminate bumps for individual participants. And, on a micro level, what they

say is often true. Indeed, at Berkshire, I sometimes engage in large-scale derivatives

transactions in order to facilitate certain investment strategies. Charlie (Munger), vice

chairman of Berkshire Hath way) and I believe, however, that the macro picture is

dangerous and getting more so. Large amounts of risk, particularly credit risk, have

become concentrated in the hands of relatively few derivatives dealers, who in addition

trade extensively with one other. The troubles of one could quickly infect the others. On



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top of that, these dealers are owed huge amounts by non-dealer counter parties. Some of

these counter parties, as I've mentioned, are linked in ways that could cause them to

contemporaneously run into a problem because of a single event (such as the implosion of

the telecom industry or the precipitous decline in the value of merchant power projects).Linkage, when it suddenly surfaces, can trigger serious systemic problems....History

teaches us that a crisis often causes problems to correlate in a manner undreamed of in

more tranquil times.

(iv) Excessive Leverage

Leverage is a double edged sword. It is the life blood of business and economic

growth when used wisely and moderately. Indeed, economic activity would come to

a grinding halt if no credit or leverage were available from the banking or shadow

financial system. Concomitantly, without lending the banking system would have no

avenue to deploy their deposits, except in treasury securities. Thereby, the household

savers would have no safe avenue of earning a fixed return, except by investing in

treasury securities directly or through banks. The role of leverage and credit is

therefore central to growth. Yet, excessive leverage leaves little margin of error if

things go wrong, and can have a damaging impact. At what level leverage is

moderate or excessive may differ across economies, businesses and business cycles.

Nonetheless, in any economy, financial firms tend to use more leverage than the real

economy firms. It is this inherent leveraged nature of banks and financial firms that

forms the basis of regulatory capital requirements and other regulations to which

these firms need to be subjected to in the larger public interest. Within the financial

system, banks tend to be most rigorously regulated due to their deposit taking

activities, cheque writing features, and their role in the clearing and settlement

systems. And, banking regulations usually limit the leverage ratio of banks through a

minimum capital to risk-weighted assets ratio (CRAR) on an ongoing basis. The Basel

11 framework evolved by the Bank for International Settlements (BIS) in 2006 sets a

CRARof 9 per cent for adoption by banking regulators globally.

At 2007 year end, Fannie Mae and Freddie Mac had an effective leverage of an

astounding 65X and 79X respectively. And, the leverage ratio for the big five invest-

ment banks at 2007 year end was 27.8X for Merrill Lynch, 30.7X for Lehman Bros,

and 32.8 X for Bear Stearns, 32.6 xs for Morgan Stanley, and 26.2 xs for Goldman



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Sachs. Notably, when financial assets are valued in the mark-to-market/model in the

financial statements under fair value accounting, the leverage ratio computed on

such MTM asset base tends to be understated in boom years when asset prices may be

higher than their fundamental value. This euphemistic leverage ratio of tranquilyears can rise sharply in years of asset price downturns, without adding a dollar

more to the liabilities.

Way back in 1975, the Securities and Exchange Commission (SEC) established a net

capital rule that required broker dealers (such as these investment banks) who traded

securities for customers as well as on their own account, to limit their leverage to

i2x. Reportedly, according to Lee Pickard, a former SEC official, SEC granted

exemption to these five investment banks from the net capital rule which limited

their leverage to i2x {New York Sun, September 18, 2008), though, their annual

reports suggest that leverage was higher than i2x even in 2003, at 15.7X for Merrill

Lynch, 23.7X for Lehman Bros, 26.4X for Bear Stearns, 23X for Morgan Stanley and

18.7X for Goldman Sachs. Add to this, their derivatives-heavy activities including

in the toxic CDO and CDS obligations which in a generous measure were correlated to

the us housing market and sub-prime credits.

Not surprising, as the downturn in the us. housing market proceeded, these

investment banks were caught in a vicious circle of credit derivative losses, mark-

to-market losses, rating downgrades, consequential margin calls, leverage contrac-

tion, asset illiquidity, and fire sale of assets at below fundamental prices causing

another cascading and mounting cycle of losses, further rating downgrades and

acute credit contraction. Indeed, asset prices are determined by the available

liquidity, that is, by the cash in the market. It is necessary for people to hold

liquidity and stand ready to buy assets when they are sold.

With extreme leverage providing little margin for error, what initially started as a

liquidity problem quickly precipitated into a solvency problem, making them search

for capital that was not readily available. Bear Stearns was sold to the commercial

bank J P Morgan Chase in mid-March 2008 in a deal mostly brokered by Henry

Paulson; Lehman Bros filed for bankruptcy in mid-September 2008; Merrill Lynch

was sold to another commercial bank, Bank of America; and finally, Morgan

Stanley and Goldman Sachs signed a letter of .intent with us Federal Reserve on



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September 22, 2008 to convert themselves into bank holding companies. The annals

of modern finance will take note of year 2008, inter alia, as the year in which an era

of powerful, iconic, high-octane, non-bank Wall Street investment banks came to an

end.

(v) Housing Market Downturn

The years that preceded the recent turbulence saw an exceptionally strong per-

formance of the world economy - another phase of what has come to be known as

the "Great Moderation". Following the global slowdown of 2001, the world

economy had recovered rather rapidly, posting record growth rates in 2004, 2005

and 2006. This strength went hand in hand with unusually strong performance in

financial markets and the financial system more generally, underpinned by the

strength of asset prices. Pretty much globally, residential property prices had been

rising rapidly, acting as a critical support for household spending. Their prolonged

strength had been especially in evidence in several English-speaking countries,

including the us, in some European economies, including Spain, and in parts of

Asia, not least China. Across a wide spectrum of asset classes, volatilities and risk

premia looked exceptionally low, including to varying degrees in fixed income,

credit, equity and foreign exchange markets. The record profitability and capital

position of financial intermediaries was high by historical standards.

Against the backdrop of historically low interest rates and booming asset prices,

credit aggregates, alongside monetary aggregates, had been expanding rapidly.

Despite the rapid increase in credit, however, the balance sheets and repayment

capacity of corporations and, to a lesser extent, households did not appear to be

under any strain. The high level of asset prices kept leverage ratios in check whilethe combination of strong income flows and low interest rates did the same with

debt service ratios. In fact, in the aggregate, the corporate sector enjoyed unusually

strong profitability and a comfortable liquidity position, even though in some

sectors leverage was elevated as a result of very strong leveraged buyout (LBO) and

so-called "recapitalization" activity. But debt-to-income ratios in the household

sectors exhibited a marked upward trend, on the back of a major rise in mortgage

debt.



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After a prolonged rise in housing prices from 2000 to 2005 on the back of an eco-

system of easy availability of credit at low interest rates, the us entered a phase of a

housing price correction in 2006, perhaps the worst in us history with no sign of it

bottoming out any time soon. As Nouriel Roubini outlined in February 2008: At thispoint it is clear that us home prices will fall between 20 per cent and 30 per cent

from their bubbly peak; that would wipe out between $ 4 trillion and $ 6 trillion of

household wealth. While the sub-prime meltdown is likely to cause about 2.2 million

foreclosures, a 30 per cent fall in home values would imply that over 10 million

households would have negative equity in their homes and would have a big

incentive to use "jingle mail" (i e, default, put the home keys in an envelope and

send it to their mortgage bank). Moreover, soon enough a few very large home

builders will go bankrupt and join the dozens of other small ones that have already

gone bankrupt thus leading to another free fall in home builders' stock prices that

have irrationally rallied in the last few weeks in spite of a worsening housing

recession.

Indeed, the prolonged housing price correction on the back of an extremely

leveraged system turbo charged with complex CDS and CDO all sitting on the re-

quirements of fair value MTM accounting, ensured that what began initially as a sub-prime crisis morphed into a general credit deterioration touching prime mortgages,

and causing their credit downgrades and system-wide mark downs.

(vi) Valuation Challenges

The us GAAP and IFRS requirement of fair valuing complex illiquid structured

derivative products is fraught with the following dangers: firstly, it brings enormous

subjectivity in normal times in marking-to-model illiquid credit derivatives with

distant settlement dates, with potency for errors in profit accounting, both honest

and intentional; secondly in times of crisis, it exacerbates their valuation problem

due to malfunctioning of the orderly sales assumption underlying the accounting



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framework of fair value; and thirdly, mistaking as realised losses, the extreme MTM

losses determined in times of crisis, the financial markets rapidly precipitate a

system-wide solvency crisis.

(vii) Low Probability Events

Surprise is endemic above all in the world of finance. As Peter Bernstein pointed cut

in his celebrated book way back in 1996, discontinuities, irregularities, and volatili-

ties seem to be proliferating rather than diminishing. In the world of finance, new

instruments turn up at a bewildering pace, new markets are growing faster than old

markets, and global interdependence makes risk management increasingly complex.

Indeed, our faith in risk management encourages us to take risks we would not

otherwise take. On most counts, that is beneficial, but we must be wary of adding to

the amount of risk in the system. The science of risk management sometimes creates

new risks even as it brings old risks under control.

We cannot enter data about the future into the computer because such data are

inaccessible to us. So we pour in data from the past to fuel the decision-making

mechanisms created by our models, be they linear or nonlinear. But therein lies the

logician's trap; past data from real life constitute a sequence of events rather than aset of independent observations, which is what the laws of probability demand.

History provides us with only one sample of the economy and the capital markets, not

with thousands of separate and randomly distributed numbers. Even though many

economic and financial variables fall into distributions that approximate a bell curve,

the picture is never perfect. Once again, resemblance to truth is not the same as

truth. It is in those outliers and imperfections that the wildness lurks [Bernstein

1996: 335-36].

In tranquil times, low probability events are treated by most participants and ob-

servers as being impossible. The inherent tendency of financial markets in times of

extreme crisis and panic is to take a flight to safety. Thus, amplifying (rather than

absorb) the shock and quickly precipitating a liquidity crisis at the systemic level

that transforms the scramble for liquidity at a firm level into a solvency problem at

unbelievable speed, irrespective of its asset liability profile. Whereas the converse is

often true in times of financial markets boom, when a latent solvency problem of a



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financial firm that is already understated on account of higher than fundamental

values, can remain hidden under a surfeit of liquidity.

It is fitting to end this article with the following quote from Bernstein's book: The

past seldom obliges by revealing to us when wildness will break out in the future.

Wars, depressions, stock-market booms and crashes, and ethnic massacres come and

go, but they always seem to arrive as surprises. After the fact, however, when we

study the history of what happened, the source of the wildness appears to be so

obvious to us that we have a hard time understanding how people on the scene were

oblivious to what lay in wait for them.

Market weaknesses, 2007

On July 19, 2007, the Dow Jones Industrial Average hit a record high, closing above

14,000 for the first time. On August 15, 2007, the Dow dropped below 13,000 and

the S&P 500 crossed into negative territory for that year. Similar drops occurred in

virtually every market in the world, with Brazil and Korea being hard-hit. Through

2008, large daily drops became common, with, for example, the KOSPI dropping

about 7% in one day, although 2007's largest daily drop by the S&P 500 in the U.S.

was in February, a result of the sub prime crisis.

Mortgage lenders and home builders fared terribly, but losses cut across sectors, with

some of the worst-hit industries, such as metals & mining companies, having only

the vaguest connection with lending or mortgages.

Stock indices worldwide trended downward for several months since the first panic

in JulyAugust 2007.

Market downturns and impacts, 2008

The TED spread an indicator of credit risk increased dramatically during

September 2008. The crisis caused panic in financial markets and encouraged

investors to take their money out of risky mortgage bonds and shaky equities and put

it into commodities as "stores of value". Financial speculation in commodity futures

following the collapse of the financial derivatives markets has contributed to theworld food price crisis and oil price increases due to a "commodities super-cycle."

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Financial speculators seeking quick returns have removed trillions of dollars from

equities and mortgage bonds, some of which has been invested into food and raw

materials.

Beginning in mid-2008, all three major stock indices in the United States (the DowJones Industrial Average, NASDAQ, and the S&P 500) entered abear market. On 15

September 2008, a slew of financial concerns caused the indices to drop by their

sharpest amounts since the 2001 terrorist attacks. That day, the most noteworthy

trigger was the declared bankruptcy of investment bank Lehman Brothers.

Additionally, Merrill Lynch was joined with Bank of America in a forced merger

worth $50 billion. Finally, concerns over insurer American International Group's

ability to stay capitalized caused that stock to drop over 60% that day. Poor

economic data on manufacturing contributed to the day's panic, but were eclipsed by

the severe developments of the financial crisis. All of these events culminated into a

stock sell off that was experienced worldwide. Overall, the Dow Jones Industrial

plunged 504 points (4.4%) while the S&P 500 fell 59 points (4.7%). Asian and

European markets rendered similarly sharp drops.

The much anticipated passage of the $700 billionbailout plan was struck down by

the House of Representatives in a 228205 vote on September 29. In the context of

recent history, the result was catastrophic for stocks. The Dow Jones Industrial

Average suffered a severe 777 point loss (7.0%), its worst point loss on record up to

that date. The NASDAQ tumbled 9.1% and the S&P 500 fell 8.8%, both of which

the worst losses were those indices experienced since the 1987 stock market crash.

Despite congressional passage of historic bailout legislation, which was signed by

President Bush on Saturday, Oct. 4, Dow Jones Index tumbled further when markets

resumed trading on Oct. 6. The Dow fell below 10,000 points for the first time in

almost four years, losing 800 points before recovering to settle at -369.88 for the

day. Stocks also continued to tumble to record lows ending one of the worst weeks

in the Stock Market since September 11, 2001."

Expectations and forecasts

Several years before the crisis Financials Prem Watsa warned:

"We have been concerned for some time about the risks in asset-backed

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bonds, particularly bonds that are backed by home equity loans, automobile

loans or credit card debt (we own no asset-backed bonds). It seems to us that

securitization (or the creation of these asset-backed bonds) eliminates the

incentive for the originator of the loan to be credit sensitive... Withsecuritization, the dealer (almost) does not care as these loans can be laid off

through securitization. Thus, the loss experienced on these loans after

securitization will no longer be comparable to that experienced prior to

securitization (called a moral hazard)... This is not a small problem. There is

$1.0 trillion in asset-backed bonds outstanding as of December 31, 2003 in

the U.S.... Who is buying these bonds? Insurance companies, money

managers and banks in the main all reaching for yield given the excellent

ratings for these bonds. What happens if we hit an air pocket?

Stifle Nicolas, writing in Market Watch, has claimed that the problem mortgages are

not confined to the sub prime niche: "the rapidly increasing scope and depth of the

problems in the mortgage market suggest that the entire sector has plunged into a

downward spiral similar to the sub prime woes whereby each negative development

feeds further deterioration," calling it a "vicious cycle" and adding that lenders

"continue to believe conditions will get worse". The crisis has led to a drastic decline

in new housing starts in the USA. Historically, such declines precede a surge of

unemployment in the following year. This fact points to another possible

consequence of the crisis.

As of 22 November 2007, analysts at a leading investment bank estimated losses on

sub prime CDO could eventually amount to US$148 billion. As of 22 December

2007, a leading business periodical estimated sub prime defaults between U.S.

$200300 billion. As of 1 March 2008 analysts from three large financial institutions

estimated the impact would be between U.S. $350600 billion.

On 20 March 2008, the Organization for Economic Cooperation and Development

downgraded its economic forecasts for the United States, the Euro zone and Japan

for e to the first half of 2008.

On 19 May, 2008,Nouriel Roubini, a professor atNew York University and head of

Roubini Global Economics, was quoted as saying that if the economy slips into

recession "then you have a systemic banking crisis like we haven't had since the

1930s". Because debt instruments backed by sub-prime mortgages were purchased

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worldwide, the International Monetary Fund (IMF) "says that worldwide losses

stemming from the USA sub-prime mortgage crisis could run to $945 billion."

Francis Fukuyama has argued that the crisis represents the end ofReaganism in the

financial sector, which was characterized by lighter regulation, pared-backgovernment, and lower taxes. Significant financial sector regulatory changes are

expected as a result of the crisis.

Fareed Zakaria believes that the crisis may force Americans and their government to

live within their means. Further, some of the best minds may be redeployed from

financial engineering to more valuable business activities, or to science and

technology.

The crisis has cast doubt on the legacy of Alan Greenspan, the Chairman of the

Federal Reserve System from 1986 to January 2006. Senator Chris Dodd claimed

that Greenspan created the "perfect storm". Greenspan has remarked that there is a

one-in-three chance of recession from the fallout. When asked to comment on the

crisis, Greenspan spoke as follows:

"The current credit crisis will come to an end when the overhang of inventories

of newly built homes is largely liquidated, and home price deflation comes to an

end. That will stabilize the now-uncertain value of the home equity that acts as a

buffer for all home mortgages, but most importantly for those held as collateral

for residential mortgage-backed securities. Very large losses will, no doubt, be

taken as a consequence of the crisis. But after a period of protracted adjustment,

the U.S. economy, and the world economy more generally, will be able to get

back to business."

IMPACT ON INDIA:

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As the slowdown in the India's Bull Run have its consequences on the FII's

investments in India. The chief technical officers (CTO) of US-based companies,

having their back-office operations in India, have compelled to lower their budget,

which further have a cascading impact on Indian companies. The major chunk of FIIinvestments from US have turned negative as most of these investors have pulled out

money from the equity market, with European countries at a risk after the US crisis

restricted their investments in the domestic markets. This would lead to major FII's

turning their back from the equity markets of India as on 16th September 2008 about

$2.2 billion of the investments of FII's came into the debt market of India. Thus we

can finally say that the bull run of the Indian equity market is over.

There was a certain amount of FDI investments by Merrill Lynch in various India

companies which would have a major effect on their future operations. Among them

are two major real estate firms of India- 'DLF' & 'Unitech'. The net investments by

Merrill Lynch which was wiped out turned out to be about $400 million.

Major sectors in India that are affected out to a certain extent due to the current crisis

are:

Banking Industry

IT & IT enabled services

Real Estate

Oil & Gas

FMCG

The good part of the story is that unlike China, which had an export oriented

economy, the Indian economy was based on the domestic market. The India's trade

theory is changing a lot as it is turning out to be more of a manufacturing export

oriented country. The net trade of services done by India accounts to about just 22%

just reflecting the risk on trade services is tried to be minimized. Also in the current

scenario the trade practices of India with US has decreased and on the other hand has

relatively increased with China reflecting out that the risk of US recession has been

deflected.



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A lot of experts being commenting that the India IT sector will have a major impact

with effect to these banking crisis in US recently. The major Indian IT majors had all

these companies as their major clients. So on a short term it will have its effect on

these IT companies and also on its revenues in their future quarter results. Indian ITemployees use to be mainly outsourced to US by various companies which would

drastically reduce. The growth in the employment in the IT sector in the year 2008

was 44 % up till August 08 which will drop to about 28% net growth for this

financial year.

United States is a big consumer of goods produces by developing countries. As the

consumption pattern in US economy is going down the demand for goods produced

by these countries is decreasing. Indias exports to US are $ 24.1 billion which is

increasing 10% YoY. India is a major outsourcing partner, as an FII (Foreign

institutional Investor in Indian stock market) and FDI (Foreign Direct Investment by

US companies) and big importer of consumer goods, textiles, medical and diagnostic

products, engineering goods and many more.

The impact of the crisis is not visible on the balance sheets of the Indian companies

as a whole baring some MNCs and BPO which are on a job cut spree. Till now

because most of them had there order books full for 6-8 months but the meltdown in

demand can be visible from Q4 (January09 to march09) and we can expect some cut

down in jobs by Indian companies in Q4 because the effect will be a slow pinching

process.

We will witness a short period slowdown in growth rate of Indias exports to US to

the tune of 20-25% which comes out to 7.5% to 8%. It is for economists to predict

for how long the recession will last but the $800 billion bail out package which if

effectively channeled into the system and if some strong structural and monetary

policy changes are made by the new US government under the leadership of Barrack

Obama helps to prop up demand in US economy and get the US and world economy

back on track.

As US economy slowing down the US dollar is suppose to get weaken which it has

started when compared to pound & has beaten seven year record but when compared

with the Indian Rupee, which has turned up weak would reflect out to the India's

GDP. Much more weakening of Indian Rupee beyond Rs 48 would lead RBI to take

some monetary measures to support Indian Economy.



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The Indian Banking Industry is not well known in the foreign market specially &

there are no big players of India among the top world banks where as other

developing countries like China has few banks among the top World Bank list. This

gives a green signal to Indian banks like ICICI & SBI which are not much affectedto the subprime crisis & thus can readily expand their services in the international

markets. ICICI bank has faced a net loss of Rs 375 cr. in the current banking crisis.

Learning from Sub Prime Crisis for India is:-

1. Sound banking practices: The root cause of the sub prime mortgage (even prime

mortgage loans are in trouble in US; e.g., trouble in Countrywide, America's biggest

home loan lender) crisis is the unsound credit practices that emerged in the US

market. Fake certification, which helps an ineligible person to raise a home loan,

cannot be ruled out in India. Housing loan frauds are not uncommon in the cities of

India and the aggressiveness with which housing loans are being sold by banks and

financial companies in violation of sound credit practices cannot be ignored.

Personal loans and overdue credit cards are the other sectors which the regulators

and bankers should handle carefully because they have the potential to plunge the

Indian banking sector into a crisis.

2. Controlled Derivatives market: Derivatives are financial instruments, which can

spread the default risk attaching to loans. All the same, indiscriminate use of such

derivatives can lead to havoc as in US. Derivatives lead to such a chain reaction that

it will be nearly impossible to quantify the risk of exposure to bad loans and

advances subsequently. RBI and GOI should prohibit indiscriminate use of such

derivatives if they intend to introduce such products in India.

3. Limited investment by Indian companies abroad: Prudent investment abroad

should be the order of the day. Reckless investment in the derivatives market abroad

by banks and financial institutions has to be controlled.

In the recent crisis, BNP Paribas of France and Macquarie Bank of Australia have

been affected because of such overseas investments. The exposure of Indian banks to

the sub prime crisis of US is minimal.

4. Quality Inward Investment: FDI should be given priority over FIIs as history has

shown that flight of capital in case of FDI is low compared to that in respect of FIIs.

Due to their stable nature, FDI can help in the growth of the country's infrastructure.



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Foreign Institutional Investors (FIIs):

India's exceptional growth story and its booming economy have made the country a

favourite destination with foreign institutional investors (FIIs).

FIIs showed huge interest in 2007, pumping in the highest ever net investment of

US$ 17.23 billion in the equity markets and were instrumental in the Bombay Stock

Exchange (BSE) and National Stock Exchange (NSE) clocking record index levels

of over 20,000 and 6,000, respectively. In fact, during the year, FIIs were net buyers

in 10 out of 12 months, turning net sellers in the rest, primarily to make up the losses

on account of the sub-prime crisis in the US.

This surge in FII investment has led to the cumulative net investments by FIIs into

Indian equities to total US$ 52.76 billion by the end of November 2008, since

December 1993, when FIIs were allowed to enter India. As of November 28, 2008,

1581 FIIs and 4824 sub-accounts were registered with the Securities and Exchange

Board of India (SEBI).

Though in 2008, thanks to the global meltdown, FIIs were mostly net sellers, they

reinstated their confidence in the Indian stock market in the first week of December.

As per data available with the Bombay Stock Exchange, on December 4, 2008, FIIs

invested US$ 61.83 million in equities showing confidence in the Indian stock

market.

Simultaneously, the up gradation of India's sovereign ratings combined with the

improvement in the macro-economic situation and growth fundamentals has led to a

significant increase in FII investments in the debt market. Total investment in the

country's debt market till November 2008 amounted to US$ 6.38 billion as against

US$ 2.80 billion by the end of November 2007.

Some Investment Highlights

The Indian growth story has attracted global majors like CLSA, HSBC, Citigroup,

Crown Capital, Fidelity, Goldman Sachs, Morgan Stanley, UBS, T Rowe Price



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International, Capital International and ABN Amro among others to enter the Indian

financial market.

Goldman Sachs picked up an 8.16 per cent stake in New Delhi Television

Ltd (NDTV) and a minority stake in Sterling & Wilson Pvt. Ltd.

RREEF Alternative Investments, the global alternative investment

management business of Deutsche Bank, plans to invest over US$ 1 billion

in the country.

Goldman Sachs and Macquarie have acquired a 20 per cent stake each in

PTC India Financial Services Ltd. They have both invested about US$ 16.06

million each.

Temasek Holdings, Investment Corporation of Dubai, Goldman Sachs,

Macquarie, AIF Capital, Citigroup and India Equity Partners (IEP) has each

picked a combined stake of 10 per cent in Bharti Infratel at US$ 1 billion.

Further, New York-based private equity firm, Kohlberg Kravis Roberts and

Co. (KKR), has also invested US$ 250 million in Bharti Infratel.

Private equity firm Blackstone has taken up a 26 per cent stake in MTAR

Technologies for US$ 65 million.

Citigroup, Morgan Stanley, Goldman Sachs and BSMA have picked up a

combined stake of over seven per cent in Gitanjali Gems at US$ 23.51

million.

Fidelity Investments International has picked up close to seven per cent

equity in Transport Corporation of India (TCI) for US$ 10.72 million.

JP Morgan Chase has invested Rs 250 crore (US$ 51.37 million) in BPTP

Ltd, a Delhi-based real estate company.

Significantly, FIIs have continued to add to their holdings in several Indian stocks.

Foreign investors have hiked their holdings in stocks such as Gitanjali Gems,

Monnet Ispat, Core Projects and Power Trading Corporation among others for the

quarter ended 31 March, 2008 compared to quarter ended 31 December, 2007.

A new trend has been that a third of 21 deals in November 2008 are syndicated.

According to Grant Thornton data for the month of November, more than a third of

the 21 deals that happened in the month were done in groups. There were three deals



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each in September and October. The number of PE deals has been 384 in 2008, and

the number of joint deals has risen to 26 per cent in 2008 from 17 per cent in 2007.

Earlier this year, eight private equities, led by Temasek Holdings, an investment arm

of the Singapore government, decided to band together to invest around US$ 1.01

billion in Bharti Infratel, the tower arm of the Bharti Group. Earlier in December

2008, Draper Fisher Jurvetson, Nexus Capital, Garage Technology ventures, the

Mahindra group and social fund Gray Matters Capital invested about US$ 5 million

in D.light design. Similarly, Unitus Equity Fund, Sequoia Capital, Lok Capital,

Unitus Equity Fund II, India Financial Inclusion Fund and SIDBI together put US$

20.89 million in Ujjivan Financial Services.



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Buying into the Indian Dream



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In spite of the global meltdown, FIIs continue to buy into the Indian dream. As many

as 120 new foreign institutional investors have registered in India since the global

financial crisis broke out in September. These include American Airlines,

International Finance Corporation, University of Southern California, Bank ofKorea, the Bill & Melinda Gates Foundation, and Warburg Pincus International.

Between September and November 2008, 358 new sub-accounts have been

registered. This is the highest in any block of three months in 2008. While an FII

registration allows a fund manager to operate in the Indian markets, a separate sub-

account is to be registered for every distinct fund run by the FII to be invested in

India.

The confidence that FIIs have in the Indian market can be gauged from the

behaviour of big-ticket global investors like Donald Coxes, the global portfolio

strategist for BMO Capital Markets. Coxes travelled across India in mid-November

with a group of influential fund managers who manage over US$ 1.5 trillion in

assets. BMO itself manages assets worth US$ 375 billion.

"India will be out of the emerging markets basket in the next cycle and your

companies will have PE ratios in line with mature markets. We want to be here for

that," said Coxes.

Similarly, Mark Mobius of Templeton Asset Management, world's best emerging

markets investor is also bullish on India. Mobius, who manages US$ 24 billion, said

that he was buying Indian stocks, especially consumer stocks, as it is a large market

not highly linked with the global market.

There is positive feedback from other big players in the FII segment as well.



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Norway's sovereign wealth fund (SWF) has indicated that it would rejig its

investment strategy to include markets like India. The US$ 314-billion

Norwegian fund will begin investing in real estate next year in India, China

and Egypt. Venture capital (VC) firms such as Avishkaar India Micro Venture Capital

Fund, Acumen Fund and Rural Innovations Network have begun investing in

rural-centric technology, with increased focus on rural markets.

Private equity firm, Blackstone, has picked up a majority stake in a new

venture consisting of the domestic IT business of CMS Computers, its card

printing, printing solutions and ATM cash management business.

Leading private equity investor, Actis, has closed a US$ 2.9-billion private

equity fund, of which about US$ 1 billion is likely to be invested in Indian

companies over the next four years.

Reliance Industries Ltd has signed a US$ 400-million financing facility with

global financial services firm, JP Morgan, for its capital expenditure

programme.

Government Initiatives

FIIs are allowed to invest in the primary and secondary capital markets in India

through the portfolio investment scheme (PIS). Under this scheme, FIIs can acquire

shares/debentures of Indian companies through the stock exchanges in India.

The ceiling for overall investment for FIIs is 24 per cent of the paid-up capital of the

Indian company, and limit is 20 per cent of the paid-up capital in the case of public

sector banks. The ceiling of 24 per cent for FII investment can be raised up to

sectoral cap/statutory ceiling, subject to the approval of the board and the general

body of the company passing a special resolution to that effect.

To further increase FII participation in the Indian market, the government and SEBI

have taken several measures:

The Government of India has reviewed the External Commercial Borrowing

(ECB) policy and has increased the cumulative debt investment limit from

US$ 3 billion to US$ 6 billion for FII investments in Corporate Debt.



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Allowed foreign individuals, corporate and other investors such as hedge

funds to register directly as foreign institutional investors.

SEBI has FII investment limit in government securities being increased to

US$ 5 billion from US$ 3.2 billion. Institutional investorsincluding FIIs and their sub-accountshave been

allowed to undertake short-selling, lending and borrowing of Indian

securities from February 1, 2008.

SEBI has simplified the registration norms for FIIs and sub-accounts.

Significantly, it has allowed investment managers, advisors or institutional

portfolio managers in the NRI category to be registered as FIIs.

In October 2008, SEBI did away with the 70:30 ratio of FII investment in equity

and debt, respectively. FIIs can now invest in equity and debt in any ration

they seem fit.

Federal funds rate:

In the United States, the federal funds rate is the interest rate at which private

depository institutions (mostly banks) lend balances (federal funds) at the Federal

Reserve to other depository institutions, usually overnight. Changing the target rate

is one form ofopen market operations that the Chairman of the Federal Reserve uses

to regulate the supply of money in the U.S. economy.

Mechanism

U.S.banks and thrift institutions are obligated by law to maintain certain levels of

reserves, either as non-interest-bearing reserves with the Fed or as vault cash. The

level of these reserves is determined by the outstanding assets and liabilities of each

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depository institution, as well as by the Fed itself, but is typically 10% of the total

value of the bank's demand accounts.

For example, assume a particular U.S. depository institution, in the normal course of

business, issues a loan. This dispenses money and reduces the bank's reserves. If its

reserve level falls below the legally required minimum, it must add to its reserves to

remain compliant with Federal Reserve regulations. The bank can borrow the

requisite funds from another bank that has a surplus in its account with the Fed. The

interest rate that the borrowing bank pays to the lending bank to borrow the funds is

negotiated between the two banks, and the weighted average of this rate across all

such transactions is the effective federal funds rate.

The nominalrate is a target set by the governors of the Federal Reserve, which they

enforce primarily by open market operations. When the media refer to the Federal

Reserve "changing interest rates," this nominal rate is almost always what is meant.

The actual Fed funds rate generally lies within a range of the target rate, as the

Federal Reserve cannot set an exact value through open market operations.

Another way banks can borrow funds to keep up their required reserves is by taking

a loan from the Federal Reserve itself at the discount window. These loans are

subject to audit by the Fed, and the discount rate is usually higher than the federal

funds rate. Confusion between these two kinds of loans often leads to confusion

between the federal funds rate and the discount rate. Another difference is that while

the Fed cannot set an exact federal funds rate, it can set a specific discount rate.

The federal funds rate target is decided at Federal Open Market Committee (FOMC)

meetings. Depending on their agenda and the economic conditions of the U.S., the

FOMC members will increase, decrease, or leave the rate unchanged. It is possible

to infer the market expectations of the FOMC decisions at future meetings from the

Chicago Board of Trade (CBOT) Fed Funds futures contracts, and these

probabilities are widely reported in the financial media.

Applications

Interbank borrowing is essentially a way for banks to quickly raise capital. Forexample, a bank may want to finance a major industrial effort but not have the time

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to wait for deposits or interest (on loan payments) to come in. In such cases the bank

will quickly raise this amount from other banks at an interest rate equal to or higher

than the Federal funds rate.

Raising the Federal funds rate will dissuade banks from taking out such inter-bank

loans, which in turn will make cash that much harder to procure. Conversely,

dropping the interest rates will encourage banks to borrow money and therefore

invest more freely.[3] Thus this interest rate acts as a regulatory tool to control how

freely the US economy, and by consequence - as there exists a certain

interdependence - world economy, operates.

By setting a higher discount rate the Federal Bank discourages banks fromrequisitioning funds from the Federal Bank, yet positions itself as a source of last

resort.

Predictions by the market

Considering the wide impact a change in the federal funds rate can have on the value

of the dollar and the amount of lending going to new economic activity, the Federal

Reserve is closely watched by the market. The prices of Option contracts on fed

funds futures (traded on the Chicago Board of Trade) can be used to infer the

market's expectations of future Fed policy changes. One set of such implied

probabilities is published by the Cleveland Fed.

Historical rates

As ofMarch 19, 2008, the most recent change the FOMC has made to the funds rate

was a 75basis point cut from 3.0% to 2.25% on March 18, 2008. This followed the

unusually large 75basis point cut made during a special January 22, 2008 meeting in

response to the stock market turmoil that January as well as a 50 basis point cut on

January 30, 2008.

http://en.wikipedia.org/wiki/Federal_funds_rate#cite_note-2http://en.wikipedia.org/wiki/Federal_funds_rate#cite_note-2http://en.wikipedia.org/wiki/Chicago_Board_of_Tradehttp://www.clevelandfed.org/research/Policy/fedfunds/index.cfmhttp://en.wikipedia.org/wiki/March_19http://en.wikipedia.org/wiki/2008http://en.wikipedia.org/wiki/Basis_pointhttp://en.wikipedia.org/wiki/March_18http://en.wikipedia.org/wiki/2008http://en.wikipedia.org/wiki/January_2008_stock_market_volatility#Tuesday.2C_January_22http://en.wikipedia.org/wiki/January_2008_stock_market_volatility#Tuesday.2C_January_22http://en.wikipedia.org/wiki/Basis_pointhttp://en.wikipedia.org/wiki/January_22http://en.wikipedia.org/wiki/2008http://en.wikipedia.org/wiki/January_2008_stock_market_volatilityhttp://en.wikipedia.org/wiki/Federal_funds_rate#cite_note-2http://en.wikipedia.org/wiki/Chicago_Board_of_Tradehttp://www.clevelandfed.org/research/Policy/fedfunds/index.cfmhttp://en.wikipedia.org/wiki/March_19http://en.wikipedia.org/wiki/2008http://en.wikipedia.org/wiki/Basis_pointhttp://en.wikipedia.org/wiki/March_18http://en.wikipedia.org/wiki/2008http://en.wikipedia.org/wiki/January_2008_stock_market_volatility#Tuesday.2C_January_22http://en.wikipedia.org/wiki/January_2008_stock_market_volatility#Tuesday.2C_January_22http://en.wikipedia.org/wiki/Basis_pointhttp://en.wikipedia.org/wiki/January_22http://en.wikipedia.org/wiki/2008http://en.wikipedia.org/wiki/January_2008_stock_market_volatility


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Source: Hand book of Statistics, RBI

(Historical chart of the effective Federal Funds Rate)

http://en.wikipedia.org/wiki/Image:Federal_Funds_Rate_%28effective%29.svg


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COMPANY DETAILS

BOMBAY STOCKEXCHANGE:

Mumbai heyar Bjr

Type Stock Exchange

Location Mumbai, India

Owner Bombay Stock Exchange Limited

Key people Rajnikant Patel (CEO)

Currency INR

No. of listings ~4,800

Market Cap US$ 1.61 trillion (2007)

Volume US$ 980 billion (2007)

Indexes BSE Sensex

Website www.bseindia.com

The Bombay Stock Exchange Limited is the oldest stock exchange in Asia. It is

also the biggest stock exchange in the world in terms of listed companies with 4,800

listed companies as of August 2007. It is located at Dalal Street, Mumbai, India. In

October 2007, the equity market capitalization of the companies listed on the BSE

http://en.wikipedia.org/wiki/Stock_Exchangehttp://en.wikipedia.org/wiki/Mumbaihttp://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/Chief_Executive_Officerhttp://en.wikipedia.org/wiki/INRhttp://en.wikipedia.org/wiki/Market_capitalizationhttp://en.wikipedia.org/wiki/US$http://en.wikipedia.org/wiki/BSE_Sensexhttp://en.wikipedia.org/wiki/Websitehttp://www.bseindia.com/http://en.wikipedia.org/wiki/Stock_exchangehttp://en.wikipedia.org/wiki/Asiahttp://en.wikipedia.org/wiki/Stock_exchangehttp://en.wikipedia.org/wiki/Dalal_Streethttp://en.wikipedia.org/wiki/Mumbaihttp://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/October_2007http://en.wikipedia.org/wiki/Market_capitalizationhttp://en.wikipedia.org/wiki/Image:Bombay_Stock_Exchange_18_August%2C_2006.jpghttp://en.wikipedia.org/wiki/Image:BSE_logo.jpghttp://en.wikipedia.org/wiki/Stock_Exchangehttp://en.wikipedia.org/wiki/Mumbaihttp://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/Chief_Executive_Officerhttp://en.wikipedia.org/wiki/INRhttp://en.wikipedia.org/wiki/Market_capitalizationhttp://en.wikipedia.org/wiki/US$http://en.wikipedia.org/wiki/BSE_Sensexhttp://en.wikipedia.org/wiki/Websitehttp://www.bseindia.com/http://en.wikipedia.org/wiki/Stock_exchangehttp://en.wikipedia.org/wiki/Asiahttp://en.wikipedia.org/wiki/Stock_exchangehttp://en.wikipedia.org/wiki/Dalal_Streethttp://en.wikipedia.org/wiki/Mumbaihttp://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/October_2007http://en.wikipedia.org/wiki/Market_capitalization


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was US$ 1.61 trillion, making it the largest stock exchange in South Asia and the

tenth largest in the world.[2]

The Bombay Stock Exchange was established in 1875. Around 4,800 Indian

companies list on the stock exchange, and it has a significant trading volume. The

BSE SENSEX (Sensitive index), also called the "BSE 30", is a widely used market

index in India and Asia. Though many other exchanges exist, BSE and the National

Stock Exchange of India account for most of the trading in shares in India.

BSE indices

The Bombay Stock Exchange as seen from a distance.

The BSE SENSEX (also known as the BSE 30 index) is a value-weighted index

composed of thirty scrips, with the base April 1979 = 100. The set of companies

which make up the index has been changed only a few times in the last twenty years.

These companies account for around one-fifth of the market capitalization of the

BSE. Apart from BSE SENSEX, which is the most popular stock index in India,

BSE uses other stock indices as well:

BSE Indices:

Broad Market Indices Sectoral Indices Dollar Linked Indices

SENSEX BSE Auto DOLLEX 30

BSE 100 BSE Bankex DOLLEX 100

BSE 200 BSE Capital Goods DOLLEX 200

BSE 500 BSE Consumer DurablesBSE Mid Cap Index BSE FMCG

http://en.wikipedia.org/wiki/US$http://en.wikipedia.org/wiki/1000000000000_(number)http://en.wikipedia.org/wiki/South_Asiahttp://en.wikipedia.org/wiki/List_of_stock_exchangeshttp://en.wikipedia.org/wiki/Bombay_Stock_Exchange#cite_note-1http://en.wikipedia.org/wiki/Bombay_Stock_Exchange#cite_note-1http://en.wikipedia.org/wiki/BSE_Sensexhttp://en.wikipedia.org/wiki/Asiahttp://en.wikipedia.org/wiki/National_Stock_Exchange_of_Indiahttp://en.wikipedia.org/wiki/National_Stock_Exchange_of_Indiahttp://en.wikipedia.org/wiki/Scriphttp://en.wikipedia.org/wiki/Image:BSE_from_a_distance.jpghttp://en.wikipedia.org/wiki/US$http://en.wikipedia.org/wiki/1000000000000_(number)http://en.wikipedia.org/wiki/South_Asiahttp://en.wikipedia.org/wiki/List_of_stock_exchangeshttp://en.wikipedia.org/wiki/Bombay_Stock_Exchange#cite_note-1http://en.wikipedia.org/wiki/BSE_Sensexhttp://en.wikipedia.org/wiki/Asiahttp://en.wikipedia.org/wiki/National_Stock_Exchange_of_Indiahttp://en.wikipedia.org/wiki/National_Stock_Exchange_of_Indiahttp://en.wikipedia.org/wiki/Scrip


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BSE Small Cap Index BSE Healthcare

BSE IT

BSE Metal

BSE Oil & Gas

BSE PowerBSE PSU

BSE Realty

BSE TEC k



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Time line of rise and fall of Sensex

Following is the timeline on the rise and rise of the Sensex through Indian stock

market history.

1000, July 25, 1990 On July 25, 1990, the Sensex touched the magical four-digit

figure for the first time and closed at 1,001 in the wake of a good monsoon and

excellent corporate results.

2000, January 15, 1992 On January 15, 1992, the Sensex crossed the 2,000-mark

and closed at 2,020 followed by the liberal economic policy initiatives undertaken by

the then finance minister and current Prime Minister Dr Manmohan Singh.

3000, February 29, 1992 On February 29, 1992, the Sensex surged past the 3000

mark in the wake of the market-friendly Budget announced by the then Finance

Minister, Dr Manmohan Singh.

4000, March 30, 1992 On March 30, 1992, the Sensex crossed the 4,000-mark and

closed at 4,091 on the expectations of a liberal export-import policy. It was then that

the Harshad Mehta scam hit the markets and Sensex witnessed unabated selling.

5000, October 8, 1999 On October 8, 1999, the Sensex crossed the 5,000-mark as

the BJP-led coalition won the majority in the 13th Lok Sabah election.

6000, February 11, 2000 On February 11, 2000, the InfoTech boom helped the

Sensex to cross the 6,000-mark and hit and all time high of 6,006.

7000, June 20, 2005 On June 20, 2005, the news of the settlement between theAmbani brothers boosted investor sentiments and the scrip of RIL, Reliance Energy,

Reliance Capital, and IPCL made huge gains. This helped the Sensex crossed 7,000

points for the first time.

8000, September 8, 2005 On September 8, 2005, the Bombay Stock Exchange's

benchmark 30-share index -- the Sensex -- crossed the 8000 level following brisk

buying by foreign and domestic funds in early trading.



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9000 November 28, 2005 The Sensex on November 28, 2005 crossed the magical

figure of 9000 to touch 9000.32 points during mid-session at the Bombay Stock

Exchange on the back of frantic buying spree by foreign institutional investors and

well supported by local operators as well as retail investors.

10,000, February 6, 2006 The Sensex on February 6, 2006 touched 10,003 points

during mid-session. The Sensex finally closed above the 10K-mark on February 7,

2006.

11,000 March 21, 2006 The Sensex on March 21, 2006 crossed the magical figure

of 11,000 and touched a life-time peak of 11,001 points during mid-session at the

Bombay Stock Exchange for the first time. However, it was on March 27, 2006 thatthe Sensex first closed at over 11,000 points.

12,000 April 20, 2006 The Sensex on April 20, 2006 crossed the 12,000-mark and

closed at a peak of 12,040 points for the first time.

13,000 October 30, 2006 The Sensex on October 30, 2006 crossed the magical

figure of 13,000 and closed at 13,024.26 points, up 117.45 points or 0.9%. It took

135 days for the Sensex to move from 12,000 to 13,000 and 123 days to move from12,500 to 13,000.

14,000, December 5, 2006 The Sensex on December 5, 2006 crossed the 14,000-

mark to touch 14,028 points. It took 36 days for the Sensex to move from 13,000 to

the 14,000 mark.

15,000, July 6, 2007 The Sensex on July 6, 2007 crossed the magical figure of

15,000 to touch 15,005 points in afternoon trade. It took seven months for theSensex to move from 14,000 to 15,000 points.

16,000, September 19, 2007 The Sensex scaled yet another milestone during early

morning trade on September 19, 2007. Within minutes after trading began, the

Sensex crossed 16,000, rising by 450 points from the previous close. The 30-share

Bombay Stock Exchange's sensitive index took 53 days to reach 16,000 from

15,000. Nifty also touched a new high at 4659, up 113 points. The Sensex finally



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ended with a gain of 654 points at 16,323. The NSE Nifty gained 186 points to close

at 4,732.

17,000, September 26, 2007 The Sensex scaled yet another height during early

morning trade on September 26, 2007. Within minutes after trading began, the

Sensex crossed the 17,000-mark. Some profit taking towards the end, saw the index

slip into red to 16,887 - down 187 points from the day's high. The Sensex ended with

a gain of 22 points at 16,921.

18,000, October 09, 2007 The BSE Sensex crossed the 18,000-mark on October 09,

2007. It took just 8 days to cross 18,000 points from the 17,000 mark. The index

zoomed to a new all-time intra-day high of 18,327. It finally gained 789 points toclose at an all-time high of 18,280. The market set several new records including the

biggest single day gain of 789 points at close, as well as the largest intra-day gains of

993 points in absolute term backed by frenzied buying after the news of the UPA

and Left meeting on October 22 put an end to the worries of an impending election.

19,000, October 15, 2007 The Sensex crossed the 19,000-mark backed by revival of

funds-based buying in blue chip stocks in metal, capital goods and refinery sectors.

The index gained the last 1,000 points in just four trading days. The index touched a

fresh all-time intra-day high of 19,096, and finally ended with a smart gain of 640

points at 19,059.The Nifty gained 242 points to close at 5,670.

20,000, October 29, 2007 The Sensex crossed the 20,000 mark on the back of

aggressive buying by funds ahead of the US Federal Reserve meeting. The index

took only 10 trading days to gain 1,000 points after the index crossed the 19,000-

mark on October 15. The 30-share index spurted in the last five minutes of trade to

fly-past the crucial level and scaled a new intra-day peak at 20,024.87 points before

ending at its fresh closing high of 19,977.67, a gain of 734.50 points.

21,000, January 8, 2008 The Sensex crossed the 21,000 mark in intra-day trading

after 49 trading sessions. This was backed by high market confidence of increased

FII investment and strong corporate results for the third quarter. However, it later

fell back.



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The 10 largest falls of the Sensex:

1. Jan 21, 2008 - 1,408.35 points

2. Mar 17, 2008 - 951.03 points

3. Mar 3, 2008 - 900.84 points

4. Jan 22, 2008 - 875.41 points

5. Feb 11, 2008 - 833.98 points

6. May 18, 2006 - 826.38 points

7. Nov 5, 2008 811.16

8. Oct 24, 2008 796.41

9. Oct 17, 2008 787.99

10. Mar 13, 2008 - 770.63 points

Out of ten biggest falls of the Sensex nine occurred in the year 2008.

http://trak.in/wp-content/uploads/2008/01/sensex-crash.jpg


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