Crisis is over. Long live the Crisis

Four years after the collapse of Lehman Brothers, the market wants to leave it all behind, but concerns remain

It was the 9/11 moment of the financial world. It might have been just a coincidence that it unfolded within days of the seventh anniversary of the World Trade Centre attack, but the impact of the collapse of Lehman Brothers was equally devastating and similarly reverberated way beyond the American shores. Washington entered Wall Street and hasn’t left since. The US, the bedrock of free-market capitalism, almost got socialised as blue-blooded investment banks, insurance companies and mortgage lenders were queuing for tax-payer-funded bailouts. A credit freeze followed as institutions feared to lend to each other, as nobody knew who was solvent and who was not.

Euphoria gave way to conservatism as people went back to the basics. Nilesh Shah, president - corporate banking, Axis Bank, said: “I think the crisis has taught us to go back to the basics. That you have to focus on credit, credit and just credit to lend, rather than form structures to parcel out risk. All the parcelling of risk through securitisation could not do away with the basic risk of lending to non-credit worthy customers.”

In October 2008, the Troubled Asset Relief Program (TARP), with an initial corpus of $700 billion, was announced. TARP infused liquidity and defroze the credit system as it bought mortgage-backed securities lying with the different institutions. The Federal Reserve began quantitative easing (QE), which made money cheap. This easy money did not immediately go to the main street, as fear was still ruling high. It, in turn, found its way to speculative assets such as commodity derivatives and emerging market stocks.

This easy money helped the Sensex, which had fallen 44 per cent in the aftermath of Lehman, to bounce back spectacularly as the ruling United Progressive Alliance (UPA) was voted back to power in May 2009. The fact that the UPA managed the magic number of 272 in Parliament without the support of the Left was then seen as the icing on the cake.

Expecting speedy reforms, the Indian bellwether touched a new high of 21,000 on Diwali day in November 2010. This 18-month phase saw an inflow of Rs 2.21 lakh crore from foreign institutional investors, even as domestic investors were still too numb to buy. They sold the rally for Rs 29,731 crore.

Europe began to see upheavals as first banks and then entire nations came close to their own Lehman moments. First, it was the Icelandic banks, then it was British and the contagion spread to sovereign debt as PIIGS (Portugal, Italy, Ireland, Greece and Spain) came to the fore.

FUND TRACKER Net investments in equity market
In Rs crore	FIIs	MFs
Sep 2008 to Mar 2009	-33,345	557
March 2009 to Nov 2010	221,099	-29,731
Nov 2010 to Sep 2012	65,698	-3,868
Sep 2008 to Sep 2012	253,452	-33,042
Compiled by BS Research Bureau

Needless to say, Indian stocks tumbled. Though the crash was not as spectacular as before, European troubles have put a lid on the Sensex as it hovers in a tight range of 16,000-18,000 over the past two years. FIIs have bought stocks worth some Rs 65,700 crore since Diwali 2010, but there have hardly been any fireworks.

However, the last few days have been promising. Even as the Indian government is trying hard to woo investors with reform measures, Europe seems to be getting its act together.

But concerns remain as the western economies are still struggling with growth, say analysts. G Ananth Narayan, regional co-head, global markets and wholesale banking (South Asia), Standard Chartered Bank: “The known issues are large — the impending US fiscal cliff, European sovereign debt, possible growth slowdown in China."

However, he added that given the amount of attention and focus these issues are attracting, "it’s probably fair to assume as a base case that we will muddle through these. The risk to my mind are probably from the unknown unknowns — will commodity price inflation flare up on the back of sustained loose monetary policy, and complicate policy options, as it already has in India.”

Shah of Axis Bank is confident a 2008-like crisis may not play out again. "I think the regulators and the markets have taken corrective steps to ensure the same mistakes don't repeat.” But he added: “Will there be another crisis in the market? The answer would be yes. Markets will play with other risks.”