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SERIOUS LESSON LEARNT FROM THE CRISIS

Last 6 months in the market is so turbulent that I had to unlearn whatever i have learnt from ny experince as an investment management professional as well as a student in the B-School. All the theories about risk free securities, equity risk premium, efficient market hypothesis, risk management systems have not worked in these turbulent times. Even the regulators are totally confused. Only in the second quarter of 2008-09, inflation was considered to be serious threat to the economy and crude oil pricees were soaring high and expert analysts were talking about crude going to USD 200. In a bid to save the Indian economy, RBI decided to solve the problem through monetary tigtening as the textbooks on economy suggests. Banks were worried about their profit margin due to treasury losses. I as a trader in bond market was also making losses on my trading positions.

But came September 2008, that will be remembered by all the people who are not even directly interested in Financial markets.In USA, Lehman brothers declared bankruptcy, Merrill Lynch was taken over by Bank of America, AIG was bailed out by FED (picked up 80% stake), Morgan Stanley and Goldman Sachs were converted from Investment Banks to Commercial Banks, Washington Mutual was taken over by J P Morgan and Assets of Wachovia Bank were taken over by Citi Bank. The Myth like "Too Big to fail" shattered. The Bank that never sleeps, started crawling on its knees.

Now, I dont'know how, the macroeconomic outlook suddenly changed and a series of aggressive rate cuts started. The regulators realised (probably) that monetary tightening curbed the demand to such an extent that economy could go in recession. I have never imagined that interest rate cycle can be so violent in a very short span of time.

Now that I am trying to unlearn the old theories, it will take some time to understand the market dynamics in the current situation. We will have to give a serious thought to what is happenning around us (particularly after the Satyanash of SATYAM).

Comments

RAJEEV FAUJDAR said…
Yes, I do agree with you Mukesh. All theories related to market are just theories, as they are spelt and have nothing to do with reality. These theories are created by various authors/ professors just to increse the volume of studies a various management courses and are hyped. Practically the market is sfficient in itself and has its own driving forces and is not at all governed by any theory. ALL risk assesment and management tools are just there to please various regulators and management.
Tue Jan 13, 09:18:00 PM 2009
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