What is Recession?

A recession is a contraction phase of the business cycle. The National Bureau of Economic Research (NBER) defines recession as a "significant decline in economic activity lasting more than a few months, which is normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.

What Causes Recession? An economy which grows over a period of time tends to slow down the growth as a part of the normal economic cycle. An economy typically expands for 6-10 years and tends to go into a recession for about six months to 2 years. A recession normally takes place when consumers lose confidence in the growth of the economy and spend less. This leads to a decreased demand for goods and services, which in turn leads to a decrease in production, lay-offs and a sharp rise in unemployment. Investors spend less as they fear stocks values will fall and thus stock markets fall on negative sentiment. Causes Of US Recession The general consensus is that a recession is primarily caused by the actions taken to control the money supply in the economy

The Federal Reserve is responsible for maintaining an ideal balance between money supply, interest rates, and inflation. When the Fed loses balance in this equation, the economy can spiral out of control, forcing it to correct itself Relaxed policies in lending practices making it easy to borrow money The economic activity became unsustainable resulting in the economy coming to a near halt. Recession can be caused by factors that stunt short term growth in the economy, such as spiking oil prices or war.

Crisis In The US The United States entered 2008 during a housing market correction, a subprime mortgage crisis and a declining dollar value In February, 63,000 jobs were lost, a 5-year record. In September, 159,000 jobs were lost, bringing the monthly average to 84,000 per month from January to September of 2008. On September 5, 2008, the United States Department of Labor issued a report that its unemployment rate rose to 6.1%, the highest in five years The defaults on sub-prime mortgages (home loan defaults) have led to a major crisis in the US. Sub-prime is a high risk debt offered to people with poor credit worthiness or unstable incomes. Major banks have landed in trouble after people could not pay back loans. The housing market soared on the back of easy availability of loans. The realty sector boomed but could not sustain the momentum for long, and it collapsed under the gigantic weight of crippling loan defaults Foreclosures spread like wildfire putting the US economy on shaky ground. This, coupled with rising oil prices at $100 a barrel, slowed down the growth of the economy.

A collapse of the US sub-prime mortgage market and the reversal of the housing boom in other industrialized economies have had a ripple effect around the world. Furthermore, other weaknesses in the global financial system have surfaced. Some financial products and instruments have become so complex and twisted, that as things start to unravel, trust in the whole system started to fail. The collapse of the US sub-prime mortgage market and the housing bubble are described in detail below: Subprime Mortgage Crisis and bursting of Housing Bubble Subprime lending is the practice of lending, mainly in the form of mortgages for the purchase of residences, to borrowers who do not meet the usual criteria for borrowing at the lowest prevailing market interest rate. The subprime crisis came about in large part because of financial instruments such as securitization where banks would pool their various loans into sellable assets, thus offloading risky loans onto others. (For banks, millions can be made in money-earning loans, but they are tied up for decades. So they were turned into securities. The security buyer gets regular payments from all those mortgages; the banker off loads the risk. Securitization was seen as perhaps the greatest financial innovation in the 20th century.) Home building on the basis of profits has led to what is referred to as the housing bubbleprices rising beyond the standards expected by supply and demand. Housing prices in the first quarter of 2005 had soared by 22.5 percent over one yearfar beyond the 3.1 percent level of inflation. Phase-1 The housing bubble grew up alongside the stock bubble of the mid-1990s. People who had increased their wealth substantially with the extraordinary run-up of stock prices were spending based on this increased wealth. This led to the consumption boom of the late 1990s, with the savings rate out of disposable income falling from five percent in the mid-90s to two percent by 2000. The stock-wealth induced consumption boom led people to buy bigger and/or better homes, since they sought to spend some of their new stock wealth on housing. Phase-2 a) Losing faith in stock market The next phase of the housing bubble was the supply-side effect of the dramatic increase in house prices, as housing starts rose substantially from the mid-1990s onwards. Baker notes that if the course of the bubble in the United States had followed the same pattern

as in Japan, the housing bubble would have collapsed along with the collapse of the stock bubble between 2000-2002. Instead, the collapse of the stock bubble helped to feed the US housing bubble. After collectively losing faith in the stock market, millions of people turned to investments in housing as a safe alternative. b) Slow recovery from 2001 recession In addition, the economy was very slow in recovering from the 2001 recession, the weakness of the recovery leading the Federal Reserve Board to continue to cut interest rates - one of numerous occasions where the Fed cut rates in response to a crisis, a pattern of behaviour that had, by that time, become known as a Greenspan put. Fixed-rate mortgages and other interest rates hit 50-year lows. c) Buying of fixed rate mortgages instead of adjustable rate mortgages To further fuel the housing market, Federal Reserve Board Chairman Alan Greenspan suggested that homebuyers were wasting money by buying fixed rate mortgages instead of adjustable rate mortgages (ARMs). This was peculiar advice at a time when fixed rate mortgages were near 50-year lows, but even at the low rates of 2003 homebuyers could still afford larger mortgages with the adjustable rates available at the time. c) Increase in Foreclosures due to falling prices The bubble began to burst in 2007, as the building boom led to so much over-supply that prices could no longer be supported. Prices nationwide began to head downward, with this process accelerating through the fall of 2007 and into 2008. As prices decline, more homeowners face foreclosure. This increase in foreclosures is in part voluntary and in part involuntary. It can be involuntary, since there are cases where people who would like to keep their homes, who would borrow against equity if they could not meet their monthly mortgage payments. When falling house prices destroy equity, they eliminate this option. The voluntary foreclosures take place when people realize that they owe more than the value of their home, and decide that paying off their mortgage is in effect a bad deal. In cases where a home is valued far lower than the amount of the outstanding mortgage, homeowners may be able to effectively pocket hundreds of thousands of dollars (or pounds) by simply walking away from their mortgage.

ECONOMIES HIT World economic growth is expected to slow sharply, with the UK among the hardest hit. Developing countries such as China and India should fare better.

Effects of the bubble's collapse:

The thrust of recession was creating more risk by trying to manage risk. Securitization was an attempt at managing risk. There have been a number of attempts to mitigate risk, or insure against problems. While these are legitimate things to do, the instruments that allowed this to happen helped cause the current problems, too.

In essence, what had happened was that banks, hedge funds and others had become overconfident as they all thought they had figured out how to take on risk and make money more effectively. As they initially made more money taking more risks, they reinforced their own view that they had it figured out. They thought they had spread all their risks effectively and yet when it really went wrong, it all went wrong. One of the first victims was Northern Rock, a medium-sized British bank. The highly leveraged nature of its business led the bank to request security from the Bank of England. This in turn led to investor panic and a bank run in mid-September 2007. Calls by Liberal Democrat Shadow Chancellor Vince Cable to nationalize the institution were initially ignored; in February 2008, however, the British government (having failed to find a private sector buyer) relented, and the bank was taken into public hands. Northern Rock's problems proved to be an early indication of the troubles that would soon befall other banks and financial institutions. Initially the companies affected were

those directly involved in home construction and mortgage lending such as Northern Rock and Countrywide Financial. Financial institutions which had engaged in the securitization of mortgages such as Bear Stearns then fell prey. Later on, Bear Stearns was acquired by JP Morgan Chase through deliberate assistance from the US government. Its stock price plunged to $3 in reaction to the buyout offer of $2 by JP Morgan Chase, well below its 52 week high of $134. Subsequently, the acquisition price was raised to $10 by JP Morgan. On July 11, 2008, the largest mortgage lender in the US, Indy Mac Bank, collapsed, and federal regulators seized its assets after the mortgage lender succumbed to the pressures of tighter credit, tumbling home prices and rising foreclosures. That day the financial markets plunged as investors tried to gauge whether the government would attempt to save mortgage lenders Fannie Mae and Freddie Mac, which it did by placing the two companies into federal conservatorship on September 7, 2008 after the crisis further accelerated in late summer. At the heart of the portfolios of many of these institutions were investments whose assets had been derived from bundled home mortgages. Exposure to these mortgage-backed securities, or to the credit derivatives used to insure them against failure, threatened an increasing number of firms such as Lehman Brothers, AIG, Merrill Lynch, and HBOS. Other firms that came under pressure included Washington Mutual, the largest savings and loan association in the United States, and the remaining large investment firms, Morgan Stanley and Goldman Sachs.

Citigroup

Citigroup was formed on October 8, 1998 following the $140 billion merger of Citicorp and Travelers Group to create the world's largest financial services organization. The history of the company is, thus, divided into the workings of several firms that over time amalgamated into Citicorp, a multinational banking corporation operating in more than 100 countries; or Travelers Group, whose businesses covered credit services, consumer finance, brokerage, and insurance. As such, the company history dates back to the founding of: the City Bank of New York (later Citibank) in 1812; Bank Handlowy in 1870; Smith Barney in 1873, Banamex in 1884; Salomon Brothers in 1910. The company employs approximately 300,000 staff around the world, and holds over 200 million customer accounts in more than 100 countries. It is the world's largest bank by revenues as of 2008. It is a primary dealer in US Treasury securities.

Impact of Recession: Heavy exposure to troubled mortgages in the form of Collateralized debt obligation (CDO's), compounded by poor risk management led Citigroup into trouble as the subprime mortgage crisis worsened in 2008. The company had used elaborate mathematical risk models which looked at mortgages in particular geographical areas, but never included the possibility of a national housing downturn, or the prospect that millions of mortgage holders would default on their mortgages. Indeed, trading head Thomas Maheras was close friends with senior risk officer David Bushnell, which undermined risk oversight. As Treasury Secretary, Robert Rubin was said to be influential in lifting the regulations that allowed Travelers and Citicorp to merge in 1998. Then on the board of directors of Citigroup, Rubin and Charles Prince were said to be influential in pushing the company towards MBS and CDOs in the subprime mortgage market. As the crisis began to unfold, Citigroup announced on April 11, 2007 that it would eliminate 17,000 jobs, or about 5 percent of its workforce, in a broad restructuring designed to cut costs and bolster its long underperforming stock. Even after securities and brokerage firm Bear Stearns ran into serious trouble in summer 2007, Citigroup decided the possibility of trouble with its CDO's was so tiny (less than 1/100 of 1%) that they excluded them from their risk analysis. With the crisis worsening, Citigroup announced on January 7, 2008 that it was considering cutting another 5 percent to 10 percent of its work force, which totaled 327,000. Citigroup suffered huge losses during the global financial crisis of 2008 and was rescued in November 2008 in a massive bailout by the U.S. government. Federal bailout 2008 On 24 November 2008 the U.S. government announced a massive bailout of Citigroup, designed to rescue the company from bankruptcy while giving the government a major say in its operations. The Treasury will provide another $20 billion in TARP funds in addition to $25 billion given in October. The Treasury Department, the Federal Reserve and the FDIC will cover 90% of the losses on its $335-billion portfolio after Citigroup absorbs the first $29 billion in losses. In return the bank will give Washington $27 billion of preferred shares and warrants to acquire stock. The government will obtain wide powers over banking operations. Citigroup has agreed to try to modify mortgages, using standards set up by the FDIC after the collapse of IndyMac Bank, with the goal of keeping as many homeowners as possible in their houses. Executive salaries will be capped.As a condition of the bailout, Citigroup's dividend payment has been reduced to a mere 1 cent a share. By November 2008, the ongoing crisis hit Citigroup hard and despite federal TARP bailout money, the company announced further cuts. Its stock market value dropped to $21 billion, down from $244 billion two years prior. As a result, Citigroup and Federal

regulators negotiated a plan to stabilize the company. Its single largest shareholder is Prince Al-Waleed bin Talal of Saudi Arabia, who has a 4.9% stake. Vikram Pandit is Citigroup's current CEO, while Richard Parsons is the current chairman.

Deutsche Bank

Deutsche Bank was founded in Germany in January 1870 as a specialist bank for foreign trade in Berlin. Its first branches, inaugurated in 1871 and 1872 were opened in Bremen, Hamburg, Frankfurt, Leipzig and Dresden. The bank merged with other local banks in 1929 to create Deutsche Bank und DiscontoGesellschaft, at that point the biggest ever merger in German banking history. In 1937, the company name changed back to Deutsche Bank. After Adolf Hitler came to power, instituting the Third Reich, Deutsche Bank dismissed its three Jewish board members in 1933. In subsequent years Deutsche Bank took part in the aryanization of Jewish-owned businesses: according to its own historians, the bank was involved in 363 such confiscations by November 1938. During the war, Deutsche Bank incorporated other banks that fell into German hands during the occupation of Eastern Europe. Deutsche provided banking facilities for the Gestapo and loaned the funds used to build the Auschwitz camp and the nearby IG Farben facilities. Deutsche Bank revealed its involvement in Auschwitz in February 1999. In December 1999 Deutsche, along with other major German companies, contributed to a $5.2 billion compensation fund following lawsuits brought by Holocaust survivors While beginning in the United States the late 2000s recession spread to Europe rapidly and has affected much of the region which several countries already in recession as of February 2009, and most others suffering marked economic set backs. Global recession actually originated in Europe as Denmark was the first country to fall in recession. Deutsche Bank is to cut 4,500 jobs - bringing the total number of redundancies to to 7,100 after Germany's largest bank accelerated its effort to reduce costs in the face of the global economic slowdown. The extra redundancies come on top of 2,600 cuts announced earlier this year and will be felt hardest in its private client and asset management division. The majority of the losses will be felt in Germany but the bank admitted yesterday that some 800 positions outside the country would also be affected. The bank, which has 97,000 staff worldwide, is a leading employer in the City where its fund management operation is likely to feel the pain of any reductions. The investment banking business appears to be largely unaffected. Of the new 4,500 job losses, 3,300 will take place in asset management and private client business and 1,100 in support operations. While the job cuts address a particular problem at Deutsche, they also reflect the trend among major financial firms to cut head count to reduce costs.

The bank, which failed to merge with domestic rival Dresdner, is now positioning itself as an investment bank and gradually extricating itself from the German high street.

UBS

UBS AG (NYSE: UBS; SWX: UBSN; TYO: 8657) is a diversified global financial services company, with its main headquarters in Basel and Zrich, Switzerland. It is the world's largest manager of private wealth assets, "the world's biggest manager of other people's money" and is also the second-largest bank in Europe, by both market capitalisation and profitability. UBS has a major presence in the United States, with its American headquarters located in New York City (Investment banking); Weehawken, New Jersey (Private Wealth Management); and Stamford, Connecticut (Capital market). In 2007, after incurring huge losses, UBS was forced to turn to the Government of Singapore for fresh funding. Since then, the largest shareholder of UBS is Government of Singapore Investment Corporation. In November 2008, following further dramatic losses, UBS managers pledged to return bonuses. UBS shareholders voted to accept financial aid from the Swiss government, to restore the shaken trust in UBS Swiss bank UBS AG reported on 1 April 2008, that it expected to post net losses of 12 billion Swiss francs (US$12.1 billion) for the first quarter of 2008 and would seek 15 billion Swiss francs (US$15.1 billion) in new capital. UBS, hard hit by the U.S. Subprime mortgage crisis, also said it sees losses and writedowns of approximately US$19 billion on U.S. real estate and related credit positions. In April 2008 UBS's long term credit ratings were cut to AA- by Fitch Ratings and Standard & Poor's, and Aa1 by Moody's. On 16 October 2008, UBS announced they had CHF 6 billion of new capital through mandatory convertible notes, fully placed with Swiss Confederation. The SNB (Swiss National Bank) and UBS made an agreement to transfer approximately USD 60 billion of currently illiquid securities and various assets from UBS to a separate fund entity. On 4 November UBS announced that their third quarter Group net profit was in line with their 16 October pre announcement, with net profit attributable to UBS shareholders standing at CHF 296 million. This quarter was affected by a further CHF 4.8 billon of write-downs and losses on risk positions, gain on own credit of CHF 2.2m and a tax credit of over CHF 900m.

UBS announced on 12 November 2008 that from 2009 no more than one-third of any cash bonus would be paid out in the year it is earned with the rest held in reserve. Share incentives would also vest after three years, and top executives would have to hold 75% of any vested shares, with share bonus accounts subject to malus charges. It was also confirmed UBS chairman Peter Kurer would no longer have any extra variable compensation just a cash salary and a fixed allotment of shares, which cannot be sold for four years. This aligned the chairmans rewards with group performance while minimising risk. UBS also said that Kurer hoped that others would follow his lead. It was possible that regulators and influential groups such as the Financial Stability Forum would help his cause. In November 2008, UBS put $6 billion of equity into the new bad bank entity, keeping only an option to benefit if the value of its assets were to recover. Heralded as a neat package by the NY Times, the UBS structure guaranteed clarity for UBS investors by making an outright sale. On Friday, 30 January 2009, SNB Chairman Jean-Pierre Roth, the head of the Swiss National Bank, was quoted on Reuters as saying that UBS and Credit Suisse are the two best capitalised banks in the world. On Monday, 9 February 2009, UBS announced that it lost nearly 20 billion Swiss francs (US$17.2 billion) in 2008, the biggest single-year loss in the history of Switzerland. On Tuesday, 10 February 2009, UBS confirmed the Board of Directors and the Group Executive Board's commitment to each of the UBS business divisions and strategy. Despite difficult market conditions, it was stated that UBS has made substantial progress in adjusting its operations and has prepared itself for the new market environment, with a "substantial reduction" in risk positions during the fourth quarter. UBS is resolving investigations relating to its US cross-border business by entering into a Deferred Prosecution Agreement with the US Department of Justice and a Consent Order with the US Securities and Exchange Commission. Of the $780 million that UBS will pay, $380 million represents disgorgement of profits from its cross-border business. The remainder represents United States taxes that UBS failed to withhold on the accounts. The figures include interest, penalties and restitution for unpaid taxes. As part of the deal, UBS also entered into a consent order with the Securities and Exchange Commission in which it agreed to charges of having acted as an unregistered broker-dealer and investment adviser for Americans

Barclays
The Barclays Group is based in One Churchill Place, Canary Wharf. Barclays plc is a major global financial services provider operating in Europe, North America, the Middle East, Latin America, Australia, Asia and Africa. It is a holding company that is listed on the London, New York and Tokyo stock exchanges. It is also a constituent of the FTSE 100 Index. It operates through its subsidiary Barclays Bank plc. Barclays PLC is ranked as the 25th largest company in the world according to Forbes Global 2000 (2008 list) and the fourth largest financial services provider in the world according to Tier 1 capital ($32.5 billion). It is the second largest bank in the United Kingdom based on asset size, although its share price of about 50p in January 2009 is considerably lower as a result of a fall in investor confidence. The bank's headquarters are at One Churchill Place in Canary Wharf, in London's Docklands, having moved there in May 2005 from Lombard Street in the City of London. The company also operates Barclays Bank of Delaware, which issues Juniper credit cards, one of the largest issuers of credit cards in the United States.

Financial problems
On 30 August 2007, Barclays was forced to borrow 1.6bn ($3.2bn) from the Bank of England sterling standby facility. This is made available as a last-resort when banks are unable to settle their debts to other banks at the end of daily trading. Despite rumours about liquidity at Barclays, the loan was necessary due to a technical problem with their computerised settlement network. A Barclays spokesman was quoted as saying "There are no liquidity issues in the U.K markets. Barclays itself is flush with liquidity." On 9 November 2007, Barclays shares dropped 9% and were even temporarily suspended for a short period of time, due to rumours of a 4.8bn ($10bn) exposure to bad debts in the US. However, a Barclays spokesman denied the rumours. Subsequent write-downs at the bank were announced to be 1 billion ($1.9 billion), much less than feared. In July 2008, Barclays attempted to raise 4.5bn through a non-traditional rights issue to shore up its weakened Tier 1 capital ratio, which involved a rights offer to existing shareholders and the sale of a stake to Sumitomo Mitsui Banking Corporation. Only 19% of shareholders took up their rights leaving investors China Development Bank and Qatar Investment Authority with increased holdings in the bank. In 2008 Barclays bought the credit card brand Goldfish for $70 million gaining 1.7 million customers, and $3.9 billion in receivables. Barclays also bought a controlling stake in the Russian retail bank Expobank for $745 million. Later in the year Barclays commenced its Pakistan operations with initial funding of $100 million.

Lehman Brothers acquisition

On September 16, 2008, Barclays announced its agreement to purchase, subject to regulatory approval, the investment-banking and trading divisions of Lehman Brothers, a United States financial conglomerate that had filed for bankruptcy. In the deal, Barclays will also acquire the New York headquarters building of Lehman Brothers. On September 20, 2008, a revised version of the deal, a $1.35 billion (700 million) plan for Barclays plc to acquire the core business of Lehman Brothers (mainly Lehman's $960 million Lehman's Midtown Manhattan office skyscraper, with responsibility for 9,000 former employees), was approved. Manhattan court bankruptcy Judge James Peck, after a 7 hour hearing, ruled: "I have to approve this transaction because it is the only available transaction. Lehman Brothers became a victim, in effect the only true icon to fall in a tsunami that has befallen the credit markets. This is the most momentous bankruptcy hearing I've ever sat through. It can never be deemed precedent for future cases. It's hard for me to imagine a similar emergency." Luc Despins, the creditors committee counsel, said: "The reason we're not objecting is really based on the lack of a viable alternative. We did not support the transaction because there had not been enough time to properly review it." In the amended agreement, Barclays would absorb $47.4 billion in securities and assume $45.5 billion in trading liabilities. Lehman's attorney Harvey R. Miller of Weil, Gotshal & Manges, said "the purchase price for the real estate components of the deal would be $1.29 billion, including $960 million for Lehman's New York headquarters and $330 million for two New Jersey data centers. Lehman's original estimate valued its headquarters at $1.02 billion but an appraisal from CB Richard Ellis this week valued it at $900 million." Further, Barclays will not acquire Lehman's Eagle Energy unit, but will have entities known as Lehman Brothers Canada Inc, Lehman Brothers Sudamerica, Lehman Brothers Uruguay and its Private Investment Management business for high net-worth individuals. Finally, Lehman will retain $20 billion of securities assets in Lehman Brothers Inc that are not being transferred to Barclays. Barclays had a potential liability of $2.5 billion to be paid as severance, if it chooses not to retain some Lehman employees beyond the guaranteed 90 days.

Recent developments
Reuters later reported that the British government would inject 40 billion ($69 billion) into three banks including Barclays, which might seek over 7 billion. Barclays later confirmed that it rejected the Governments offer and would instead raise 6.5 billion of new capital (2 billion by cancellation of dividend and 4.5 billion from private investors)In January 2009 the press reported that further capital may be required and that while the government might be willing to fund this, it may be unable to do so because the previous capital investment from the Qatari state, subject to a proviso that no third party might put in further money without the Qataris receiving compensation at the value the shares had commanded in October.

Goldman Sachs

The Goldman Sachs Group, Inc., or simply Goldman Sachs, is a bank holding company that engages in investment banking, securities services, and investment management. The firm acts as a financial advisor and money manager for corporations, governments, and wealthy families around the world. Goldman offers its clients mergers & acquisitions advice, underwriting services, asset management, and engages in proprietary trading, and private equity deals Actions in the 2007- subprime mortgage crisis Despite the 2007 subprime mortgage crisis, Goldman was able to profit from the collapse in subprime mortgage bonds in the summer of 2007 by selling subprime mortgagebacked securities short. The firm initially avoided large subprime writedowns, and achieved a net profit due to significant losses on non-prime securitized loans being offset by gains on short mortgage positions. Detractors believe that Goldman wasn't quite as careful with its clients' money as it was with its ownits flagship Global Alpha hedge fund tumbled 37% in the global credit crunch. As most individual investments of hedge funds are not made public, however, no one can know exactly what assets the firm traded during the period leading up to the credit crisis. Impact of 2008-09 recession: In 2007, a year when Citigroup and Merrill Lynch cast out their chief executives, Goldman booked record revenue and earnings and paid its chief, Lloyd C. Blankfein, $68.7 million - the most ever for a Wall Street C.E.O. And as 2008 progressed, Goldman appeared to persevere through deepening economic crisis that consumed rivals Lehman Brothers and Merrill. In September, the company reported modest, though diminished, profits for the third quarter, beating expectations. But the company was not invincible as the credit crisis escalated later that month. American International Group, an insurance giant facing collapse due to its exposure to

the mortgage crisis, was Goldman's largest trading partner. When A.I.G. received an emergency $85 billion bailout from the federal government, jittery investors and clients pulled out of Goldman, nervous that stand-alone investment banks - even one as esteemed as Goldman - might not survive. Company shares went into a free fall. On 25th Jan 2008,Goldman Sachs Group said they will cut about 2,000 job worldwide as a credit crisis puts a damper on fixed-income trading and corporate dealmaking. Goldman Sachs, the most valuable U.S. investment bank by market capitalization, plans to cut its global work force 5 percent, targeting the worst-performing employees. On September 22, 2008, the last two major investment banks in the United States, Morgan Stanley and Goldman Sachs, both confirmed that they would become traditional bank holding companies, bringing an end to the era of investment banking on Wall Street. The Federal Reserve's approval of their bid to become banks ended the ascendancy of the securities firms, 75 years after Congress separated them from deposit-taking lenders, and capped weeks of chaos that sent Lehman Brothers Holdings Inc. into bankruptcy and led to the rushed sale of Merrill Lynch & Co. to Bank of America Corp. 2008 Berkshire Hathaway Investment in Goldman Sachs: Goldman Sachs, unlike other notable investment companies, did not receive any federal money in the series of financial institution bailouts in 2008. Instead it got help from Berkshire Hathaway, which bought $5 billion in Goldman's preferred stock, and got also warrants to buy another $5 billion in Goldman's common stockOn September 21, 2008, Goldman Sachs received Federal Reserve approval to transition from an investment bank to a bank holding company.

Morgan Stanley

Morgan Stanley is a global financial services provider headquartered in New York City, New York, United States. It serves a diversified group of corporations, governments, financial institutions, and individuals. Morgan Stanley also operates in 33 countries around the world with 600 offices, with an approximate employee workforce of 45,000. The company reports US$779 billion as assets under its management. The corporation, formed by J.P. Morgan & Co. employees Henry S. Morgan (grandson of J.P. Morgan), Harold Stanley and others, came into existence on September 16, 1935. In its first year the company operated with a 24% market share (US$1.1 billion) in public

offerings and private placements. The main areas of business for the firm are Global Wealth Management, Institutional Securities and Investment Management. The company found itself in the midst of a management crisis in the late 1990s that saw it lose a lot of talent and competence and ultimately saw the firing of its then CEO Philip Purcell in 2005. Impact of recession: The crisis in America's subprime mortgage market, which lends to people with patchy credit histories, shoke the very ground of the investment banker, Morgan Stanely too. On 14th February 2008, Morgan Stanley to cut 1,000 jobs worldwide as the Wall Street giant scales back home-lending business in the US and shuts down its British mortgage unit. The move comes as new management struggles to reposition the bank amid continued deterioration in the US mortgage market. In August 2008, Morgan Stanley was contracted by the United States Treasury to advise the government on potential rescue strategies for Fannie Mae and Freddie Mac. On September 17, 2008, it was reported that Morgan Stanley was facing difficulties after a 42% slide in its share price. CEO John Mack wrote in a memo to staff "we're in the midst of a market controlled by fear and rumours and short-sellers are driving our stock down." The company was said to explore merger possibilities with CITIC, Wachovia, HSBC, Banco Santander and Nomura. On September 21, 2008, it was reported that the Federal Reserve allowed Morgan Stanley to change its status from investment bank to bank holding company. On September 22, 2008, the last two bulge bracket investment banks in the US, Morgan Stanley and Goldman Sachs, both announced that they would become traditional bank holding companies, bringing an end to the era of investment banking on Wall Street. The Federal Reserve's approval of their bid to become banks ends the ascendancy of the securities firms, 75 years after Congress separated them from deposit-taking lenders, and caps weeks of chaos that sent Lehman Brothers Holdings Inc. into bankruptcy and led to the rushed sale of Merrill Lynch & Co. to Bank of America Corp. On September 29, 2008, it was announced that Mitsubishi UFJ Financial Group, Japan's largest bank, will take a stake of $9 billion in Morgan Stanley equity. In the midst of the October 2008 stock market crash, concerns over the completion of the Mitsubishi deal caused a dramatic fall in Morgan Stanley's stock price to levels last seen in 1994. The stock grew considerably after Mitsubishi UFJ closed the deal to buy 21% of Morgan Stanley on October 14, 2008.

On 3rd Oct 2007, Morgan Stanley become the latest victim of the sub-prime housing crisis after revealing it will make 600 staff redundant in its global mortgage business. The bank said 500 jobs would be cut in the US, with about 90 redundancies at the bank's UK mortgage subsidiary, Advantage. Morgan Stanley's announcement, which prompted its shares to climb 3.2pc to $66.06, came as data released in the US showed the housing market suffered a bigger knock in August than expected. Prospective decrease in Moodys Rating: Rating agency Moodys Investor Services announced that it may decrease Morgan Stanleys investment credit rating due to concerns that the current financial situation will negatively affect earnings and investor confidence. In August, Morgan Stanleys credit rating was cut from Aa3 to A1. Currently, Morgan Stanley has the 5th highest credit rating. According to Bloomberg analysis, it is crucial that Morgan Stanley close the deal with Mitsubishi UFJ in order to keep its current score.

Lehman Brothers

Lehman Brothers Holdings Inc. (Pink Sheets : LEHMQ , former NYSE ticker symbol LEH) (pronounced IP A : / li mn/ ) was a global financialservices firm that, until declaring bankruptcy in 2008, did business in investment banking , equity and fixed-income sales , research and trading , investment management , private equity , and private banking .

On September 15, 2008, the firm filed for Chapter 11 bankruptcy protection . The filing marked the largest bankruptcy in U.S. history. [ 2 ] The following day, the British bank Barclays announced its agreement to purchase, subject to regulatory approval, Lehman's North American investment-banking and trading divisions along with its New York headquarters building. [ 3 ] [ 4 ] On September 20, 2008, a revised version of that agreement was approved by Judge James Peck. [ 5 ] On September 22, 2008, Nomura Holdings announced that it had agreed to acquire Lehman Brothers' franchise in the Asia Pacific region, including

Japan, Hong Kong and Australia. [ 6 ] The following day, Nomura announced its intention to acquire Lehman Brothers' investment banking and equities businesses in Europe and the Middle East. The deal became effective on Monday, 13 October. [ 7 ] In 2007, non-U.S. subsidiaries of Lehman Brothers were responsible for over 50% of global revenue produced. [ 8 ] In August 2007, Lehman closed its subprime lender , BNC Mortgage, eliminating 1,200 positions in 23 locations, and took a $25-million aftertax charge and a $27-million reduction in goodwill . The firm said that poor market conditions in the mortgage space "necessitated a substantial reduction in its resources and capacity in the subprime space". [ 2 ]
BACKGROUND

In 2008, Lehman faced an unprecedented loss due to the continuing subprime mortgage crisis . Lehman's loss was apparently a result of having held on to large positions in subprime and other lower-rated mortgage tranches In the second fiscal quarter, Lehman reported losses of $2.8 billion and was forced to sell off $6 billion in assets. [ 3 ] In the first half of 2008 alone, Lehman stock lost 73% of its value as the credit market continued to tighten. [ 3 ] In August 2008, Lehman reported that it intended to release 6% of its work force, 1,500 people, just ahead of its third-quarter-reporting deadline in September. [ 3 ] On August 22, 2008, shares in Lehman closed up 5% (16% for the week) on reports that the state-controlled Korea Development Bank was considering buying Lehman. [ 4 ] Most of those gains were quickly eroded as news emerged that Korea Development Bank was "facing difficulties pleasing regulators and attracting partners for the deal." [ 5 ] It culminated on September 9, 2008, when Lehman's shares plunged 45% to $7.79, after it was reported that the state-run South Korean firm had put talks on hold.
[6

On September 10, 2008, Lehman announced a loss of $3.9 billion and their intent to sell off a majority stake in their investment-management business, which includes Neuberger Berman . [ 9 ] [ 1 0 ] The stock slid 7% that day. [ 1 0 ] [ 1 1 ] Impact of bankruptcy filing

Several money funds and institutional cash funds had significant exposure to Lehman with the institutional cash fund run by The Bank of New York Mellon and the Primary Reserve Fund, a money-market fund, both falling below $1 per share, called "breaking the buck ", following losses on their holdings of Lehman assets. In Japan , banks and insurers announced a combined 249 billion yen ($2.4 billion) in potential losses tied to the collapse of Lehman During bankruptcy proceedings a lawyer from The Royal Bank of Scotland Group said the company is facing between $1.5 billion and $1.8 billion in claims against Lehman partially based on an unsecured guarantee from Lehman and connected to trading losses with Lehman subsidiaries, Martin Bienenstock. [ 2 8 ] About 100 hedge funds used Lehman as their prime broker and relied largely on the firm for financing. As administrators took charge of the London business and the U.S. holding company filed for bankruptcy, positions held by those hedge funds at Lehman were frozen. As a result the hedge funds are being forced to de-lever and sit on large cash balances inhibiting chances at further growth Lehman was a counterparty to mortgage financier Freddie Mac in unsecured lending transactions that matured on September 15, 2008. Freddie said it had not received principal payments of $1.2 billion plus accrued interest. Freddie said it had further potential exposure to Lehman of about $400 million related to the servicing of single-family home loans, including repurchasing obligations. Freddie also said it "does not know whether and to what extent it will sustain a loss relating to the transactions" and warned that "actual losses could materially exceed current estimates." Politically the bankruptcy proved of influence on the 2008 United States Presidential Election , for the day after Barack Obama moved ahead of John McCain in the presidential gallup poll , never again to fall behind.

Merrill Lynch & Co., Inc.

Merrill Lynch & Co., Inc. is a global financial services firm which was acquired by Bank of America . Merrill Lynch provides capital markets services, investment banking and advisory services, wealth management , asset management , insurance , banking and related financial services worldwide . In November 2007, Merrill Lynch announced it would write-down $8.4 billion in losses associated with the national housing crisis . In December 2007, the firm announced it would sell its commercial finance business to General Electric and sell off major shares of its stock to Temasek Holdings , a Singapore investment group, in an effort to raise capital.The deal raised over $6 billion. In July of 2008, the new CEO of Merrill Lynch, John Thain, announced $4.9 billion fourth quarter losses for the company from defaults and bad investments in the ongoing mortgage crisis. In one year between July 2007 and July 2008, Merrill Lynch lost $19.2 billion, or $52 million daily. The company's stock price had also declined significantly during that time. Significant losses were attributed the drop in value of its large and unhedged mortgage portfolio in the form of Collateralized Debt Obligations . Trading partner's loss of confidence in Merrill Lynch's solvency and ability to refinance short-term debt ultimately led to its sale On September 14, 2008, Bank of America announced it was in talks to purchase Merrill Lynch for $38.25 billion in stock. The Wall Street Journal reported later that day that Merrill Lynch was sold to Bank of America for 0.8595 shares of Bank of America common stock for each Merrill Lynch common share, or about US$ 50 billion or $29 per share. This price represented a 70.1% premium over the September 12 closing price or a 38% premium over Merrill's book value of $21 a share, but that also meant a discount of 61% from its September 2007 price.

Fannie Mae and Freddie Mac

The Federal National Mortgage Association (FNMA), commonly known as Fannie Mae, is a stockholder-owned corporation chartered by Congress in 1968 as a government sponsored enterprise (GSE), but founded in 1938 during the Great Depression. The corporation's purpose is to purchase and securitize mortgages in order to ensure that funds are consistently available to the institutions that lend money to home buyers. The Federal Home Loan Mortgage Corporation (FHLMC), known as Freddie Mac, is an insolvent government sponsored enterprise (GSE) of the United States federal government. The FHLMC was created in 1970 to expand the secondary market for mortgages in the US. Along with other GSEs, Freddie Mac buys mortgages on the secondary market, pools them, and sells them as mortgage-backed securities to investors on the open market. This secondary mortgage market increases the supply of money available for mortgages lending and increases the money available for new home purchases. Impact of recession: As of 2008, Fannie Mae and Freddie Mac owned or guaranteed about half of the U.S.'s $12 trillion mortgage market. This made both corporations highly susceptible to the subprime mortgage crisis of that year. Ultimately, in July of that year, the speculation was made reality, when the US government took action to prevent the collapse of both corporations. Federal takeover of Fannie Mae and Freddie Mac The federal takeover of Fannie Mae and Freddie Mac refers to the placing into conservatorship of government sponsored enterprises Fannie Mae and Freddie Mac by the US Treasury in September 2008. The director of the Federal Housing Finance Agency (FHFA), James B. Lockhart III. on September 7, 2008 announced his decision to place two Government sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, into conservatorship run by the FHFA.

The following day, Herbert M. Allison was appointed chief executive of Fannie Mae. He came from TIAA-CREF, where he fired 500 employees (8 percent of the work force). The Treasury Department and the Federal Reserve took several steps to bolster confidence in the corporations, including extending credit limits, granting both corporations access to Federal Reserve low-interest loans (at similar rates as commercial banks), and potentially allowing the Treasury Department to own stock. This event also renewed calls for stronger regulation of GSEs by the government.

Wachovia

Wachovia, based in Charlotte, North Carolina, is a diversified, wholly owned financial services subsidiary of Wells Fargo. Wachovia Corporation was purchased by Wells Fargo on December 31, 2008, and it ceased to be an independent corporation on that date. Over the next three years, the Wachovia brand will be absorbed into the Wells Fargo brand. Wachovia Corporation's stock was traded on the New York Stock Exchange (NYSE) under the ticker WB. Wachovia provides a broad range of banking, asset management, wealth management, and corporate and investment banking products and services. It is one of the largest providers of financial services in the United States, operating financial centers in 21 states and Washington, D.C., with locations from Connecticut to Florida and west to California. It also serves retail brokerage clients under the name Wachovia Securities nationwide as well as in six Latin American countries, and investment banking clients in selected industries nationwide. Wachovia provides global services through more than 40 offices around the world. As an independent company, it was the fourth-largest bank holding company in the United States based on total assets.

Impact of Recession:
In the first quarter of 2007, Wachovia reported $2.3 billion in earnings, including acquisitions and divestitures. However, in the second quarter of 2008, Wachovia reported a much larger than anticipated $8.9 billion loss. On July 09, 2008, Wachovia Corp. hired Treasury Undersecretary Robert K. Steel as chief executive, citing his vast and varied financial experience as critical to managing the company through the turbulent environment.

Proposed divestiture of banking subsidiaries to Citigroup On 29 September 2008, the Federal Deposit Insurance Corporation (FDIC) announced that Citigroup would acquire Wachovia Corporation's banking operations. The transaction was to be an "open bank" transfer of ownership. Wachovia's bank subsidiaries did not fail, nor were they placed into receivership. After Steel took over, he insisted that Wachovia would stay independent. However, its stock price plunged 27 percent during trading on September 26 due to the seizure of Washington Mutual the previous night. On the same day, several businesses and institutional depositors withdrew money from their accounts in order to drop their balances below the $100,000 insured by the FDIC--an event known in banking circles as a "silent run." Ultimately, Wachovia lost a total of $5 billion in deposits that day--about one percent of the bank's total deposits. The large outflow of deposits attracted the attention of the Office of the Comptroller of the Currency, which regulates national banks. Federal regulators pressured Wachovia to put itself up for sale over the weekend; had Wachovia failed, it would have been a severe drain on the FDIC's insurance fund due to its size. As business halted for the weekend, Wachovia was already in talks with Citigroup and Wells Fargo. Wells Fargo initially emerged as the frontrunner to acquire the ailing Wachovia's banking operations, but backed out due to concerns over Wachovia's commercial loans. By this time, regulators were concerned that Wachovia wouldn't have enough short-term funding to open for business on September 29. In order to obtain enough liquidity to do business, banks usually depend on short-term loans to each other. However, the markets had been so battered by a credit crisis related to the housing bubble that banks were skittish about making such loans. Under the circumstances, regulators feared that if customers pulled out more money, Wachovia wouldn't have enough liquidity to meet its obligations. On the morning of September 29, the FDIC board, voted to order Wachovia to sell itself to Citigroup. The FDIC's open bank assistance procedures normally require the FDIC to find the cheapest way to rescue a failing bank. However, the FDIC bypassed this requirement after determining that a potential failure of Wachovia posed a "systemic risk" to the health of the economy. Steel had little choice but to agree, and the decision was announced roughly 45 minutes before the markets opened. In addition, the FDIC said that the agency would absorb Citigroup's losses above $42 billion; Wachovia's loan portfolio is valued at $312 billion. In exchange for assuming this risk, the FDIC will receive $12 billion in preferred stock and warrants from Citigroup. The transaction would have been an all-stock transfer, with Wachovia Corporation stockholders to receive stock from Citigroup, valuing Wachovia stock at about one dollar per share for a total transaction value of about $2.16 billion. Citigroup will also assume Wachovias senior and subordinated debt. Citigroup intends to sell ten billion dollars of new stock on the open market to recapitalize its purchased banking operations.

Wachovia expected to continue as a publicly traded company, retaining its retail brokerage and Evergreen asset management subsidiaries. The brokerage unit has 14,600 financial advisers and manages more than $1 trillion, third in the U.S. after Merrill Lynch and Citigroup's Smith Barney.[34] Bidding battle for Wachovia On September 29, 2008, Wachovia announced its intention to sell its banking operations to Citigroup for $2.2 billion in an open bank transaction facilitated by the Federal Deposit Insurance Corporation; according to the FDIC, Wachovia "did not fail." Wachovia would have continued to operate as a separate, publicly traded company as the owner of Wachovia Securities, AG Edwards and Evergreen Investments. The sale was agreed to be completed by December 31, 2008. However, on October 3, 2008, Wells Fargo and Wachovia announced they had agreed to merge in an all-stock transaction requiring no FDIC involvement, apparently nullifying the Citigroup deal. Wells Fargo announced it had agreed to acquire Wachovia for $15.1 billion in stock. Wachovia prefers the Wells Fargo deal, as it is a much higher valuation than the Citigroup deal, it keeps the banking and brokerage businesses together, and has less of an overlapping territory between the banks, as Wells Fargo is dominant in the West and Midwest compared to the redundant footprint of Wachovia and Citibank along the Atlantic Seaboard and in the South. Citigroup explored their legal options, demanding that Wachovia and Wells Fargo cease discussions, citing an exclusivity agreement between Citigroup and Wachovia. The deal still requires shareholder and regulatory approval. On October 9, 2008, Citigroup abandoned their attempt to purchase Wachovia, allowing Wells Fargo to proceed with a transaction instead. However, Citigroup is still pursuing its $60 billion claims, $20 billion in compensatory and $40 billion in punitive damages, against Wachovia and Wells Fargo for alleged violations of the exclusivity agreement. The Federal Reserve approved the merger with Wells Fargo on October 12, 2008.[46] The merger is, however, contingent on certain conditions, that the Federal Reserve has yet to announce

Washington Mutual

Washington Mutual, Inc. is a savings bank holding company and the former owner of Washington Mutual Bank, which was the United States' largest savings and loan association. On September 25, 2008, the United States Office of Thrift Supervision (OTS) seized Washington Mutual Bank from Washington Mutual, Inc. and placed it into the receivership of the Federal Deposit Insurance Corporation (FDIC). The FDIC sold the banking subsidiaries (minus unsecured debt or equity claims) to JPMorgan Chase for $1.9 billion, which re-opened the bank the next day. The holding company, Washington Mutual, Inc. was left with $33 billion assets, and $8 billion debt, after being stripped of its banking subsidiary by the FDIC. The next day, September 26, Washington Mutual, Inc. filed for Chapter 11 voluntary bankruptcy in Delaware, where it is incorporated. Washington Mutual Bank's closure and receivership is the largest bank failure in American financial history. Before the receivership action, it was the sixth-largest bank in the United States. According to Washington Mutual Inc.'s 2007 SEC filing, the holding company held assets valued at $327.9 billion. Rise and fall "Wal-Mart of Banking" Chairman and CEO Kerry Killinger had pledged in 2003 We hope to do to this industry what Wal-Mart did to theirs, Starbucks did to theirs. Subprime losses Complex mortgages and credit cards had terms that made it easy for the least creditworthy borrowers to get financing, a strategy the bank extended in big cities, including Chicago, New York and Los Angeles. WaMu pressed sales agents to pump out loans while disregarding borrowers incomes and assets. Variable-rate loans Option Adjustable Rate Mortgages (Option ARMs) in particular were especially attractive because they carried higher fees than other loans, and allowed WaMu to book profits on interest payments that borrowers deferred. As WaMu was selling many of its loans to investors, it did not worry about defaults. "Whoo hoo" "Whoo hoo!" was an advertising campaign introduced by Washington Mutual in February of 2008. As fears of an economic crisis were rising, and WaMu was looking to become an "iconic brand that people love", they began courting consumers with a new slogan, designed to position WaMu as a consumer-friendly institution. After WaMu launched the new advertisement, there was double digit growth at its website and the term wamu appeared in searches over 1,000% more between January and March than in all of 2007.

But it never knew that the WaMu would have a Boo Boo phase by the world coming up in a few months. In December 2007, the subsidiary Washington Mutual Bank reorganized its home-loan division, closing 160 of its 336 home-loan offices and removing 2,600 positions in its home-loan staff (a 22% reduction). In March 2008, on the same weekend that JPMorgan Chase Chairman and CEO Jamie Dimon negotiated the takeover of Bear Stearns, he secretly dispatched members of his team to Seattle to meet with WaMu executives, urging them to consider a quick deal. However, WaMu Chairman and CEO Kerry Killinger rejected JPMorgan Chase's offer that valued WaMu at $8 a share, mostly in stock. Washington Mutual cut 1,200 jobs amid mortgage crisis: In April 2008, the holding company, responding to losses and difficulties sustained as a result of the 2007-2008 subprime mortgage crisis, announced that 3,000 people companywide would lose their jobs, and the company stated its intent to close its approximately 186 remaining stand-alone, home-loan offices. It stopped buying loans from outside mortgage brokers known in the trade as "wholesale lending." WaMu also announced a $7 billion infusion of new capital by new outside investors led by TPG Capital. TPG agreed to pump $2 billion into the Washington Mutual holding company; other investors, including some of WaMu's current institutional holders, agreed to buy an additional $5 billion in newly issued stock. This angered many investors, as TPG's investment would dilute the holdings of existing shareholders, and as WaMu executives excluded mortgage losses from computing bonuses. In June 2008, Kerry Killinger stepped down as the Chairman, though remaining the Chief Executive Officer. On September 8, 2008, under pressure from investors, the Washington Mutual holding company's board of directors dismissed Kerry Killinger as the CEO. Alan H. Fishman, chairman of mortgage broker Meridian Capital Group, and a former chief operating officer of Sovereign Bank, was named the new CEO. Seizure by FDIC By mid-September 2008, WaMu's share price had closed as low as $2.00. It had been worth over $30.00 in September 2007, and had traded as high as $45 at one point in the previous year. While WaMu publicly insisted it could stay independent, earlier in the month it had quietly hired Goldman Sachs to identify potential bidders. However, several deadlines passed without anyone submitting a bid. At the same time, WaMu suffered a massive run (mostly via electronic banking over the internet and wire transfer); customers pulled out $16.7 billion in deposits in a ten-day span. This led the Federal Reserve and the Treasury Department to step up pressure for WaMu to find a buyer, as a takeover by the Federal Deposit Insurance Corporation (FDIC) could have been a severe drain on the FDIC insurance fund, which had already been hard hit by the failure of IndyMac that year. The FDIC ultimately brokered the deal, and held a

secret auction of the bank. Finally, on the morning of Thursday, September 25 (coincidentally the 119th anniversary of WaMu's establishment), regulators informed JPMorgan Chase that it was the winner. On Thursday night (shortly after the close of business on the West Coast), the Office of Thrift Supervision seized Washington Mutual Bank and placed it into the receivership of the FDIC. In a statement, the OTS said that the massive run meant that WaMu was no longer sound. The FDIC, as receiver, sold most of Washington Mutual Bank's assets, including the branch network, all of its deposit liabilities and secured debts to JPMorgan Chase for $1.9 billion. JPMorgan Chase didn't acquire any of Washington Mutual Bank's equity obligations (though JPMorgan Chase planned to issue $8 billion in common stock to recapitalize the bank). As a result of the seizure, WaMu's stockholders were nearly wiped out. Its stock price dropped to $0.16 a share, far from $45 a share in 2007. In their Chapter 11 filing, WaMu listed assets of $33 Billion and Debt of $8 Billion. (ref. Appendix A). The filing also indicates that enough funds are available for distribution to unsecured creditors. Currently, shareholders are fighting for what they see as the illegal seizure of Washington Mutual through such websites as www.wamucoup.com, claiming that the OTS acted in an arbitrary and capricious manner and seized the bank for political reasons or for the benefit of JPMorgan Chase, which acquired a large network of branches at what they claim to be an unfairly low price. Shareholders claim that as of the date of the takeover, the bank had enough liquidity to meet all its obligations and was in compliance with the business plan negotiated with the OTS 2 weeks earlier and that the holding company's board and management was kept completely in the dark about the government's negotiations with Chase, hampering the bank's ability to sell itself on its own. Chief executive Alan H. Fishman was flying from New York to Seattle on the day the bank was closed, and eventually received a $7.5 million sign-on bonus and cash severance of $11.6 million after being CEO for 17 days. Senator Maria Cantwell has demanded an explanation from the government and threatened to open an investigation and Washington Mutual's former shareholders have threatened a lawsuit demanding compensation for the lost value of their shares. The seizure of WaMu Bank resulted in the largest bank failure in American financial history. Bankruptcy On September 26, 2008, Washington Mutual, Inc. and its remaining subsidiary, WMI Investment Corp., filed for Chapter 11 bankruptcy. As a result, it was delisted from the NYSE, and now trades on Pink Sheets.

All assets of the bank and most liabilities (including deposits, covered bonds, and other secured debt) of Washington Mutual Bank's liabilities had been assumed by JPMorgan Chase. However, unsecured senior debt obligations were not assumed, leaving holders of those obligations with little meaningful source of recovery. Sep. 26, 2008, Washington Mutual customers in the branches were given a letter that said the combined banks have 5,400 branches and 14,200 ATM's in 23 states. For the time being, Washington Mutual account holders can continue banking as normal. Deposits held by Washington Mutual are now liabilities of JPMorgan Chase. Post receivership bank operations In the future, all of the Washington Mutual Bank branches will be renamed to Chase or will be shuttered. All financial documents issued by WaMu will carry the JP Morgan logo. WaMu credit and debit cards will also carry the Chase logo. As of November 2008, Chase ATMs are accessible for WaMu customers at no extra charge, and WaMu customers will eventually be able to bank at Chase branches. The acquisition of Washington Mutual Bank gives Chase its first significant presence on the West Coast.

American International Group, Inc. (AIG)

American International Group, Inc. (AIG) (NYSE: AIG) is a major American insurance corporation based at the American International Building in New York City. It suffered from a liquidity crisis after its credit ratings were downgraded below "AA" levels, and the Federal Reserve Bank on September 16, 2008, created an $85 billion credit facility to enable the company to meet collateral and other cash obligations, at the cost to AIG of the issuance of a stock warrant to Federal Reserve Bank for 79.9% of the equity of AIG. AIG announced the same day that its board accepted the terms of the Federal Reserve Bank's rescue package and secured credit facility. This was the largest government bailout of a private company in U.S. history, though smaller than the bailout of Fannie Mae and Freddie Mac a week earlier On October 9, 2008, the company borrowed an additional $37.8 billion via a second secured asset credit facility created by the Federal Reserve Bank of New York.[8] From

mid September till early November, AIG's credit-default spreads were steadily rising, implying the company was heading for default. As Lehman Brothers (the largest bankruptcy in U.S. history) suffered a major decline in share price, investors began comparing the types of securities held by AIG and Lehman, and found that AIG had valued its Alt-A and sub-prime mortgage-backed securities at 1.7 to 2 times the rates used by Lehman. On September 14, 2008, AIG announced it was considering selling its aircraft leasing division, International Lease Finance Corporation, in an effort to raise necessary capital for the company. The Federal Reserve has hired Morgan Stanley to determine if there are systemic risks to a failing AIG, and has asked private entities to supply short-term bridge loans to the company. In the meantime, New York regulators have approved AIG for $20 billion in borrowing from its subsidiaries.[17 On September 16, AIG's stock dropped 60 percent at the market's opening. The Federal Reserve continued to meet that day with major Wall Street investment firms to broker a deal to create a $75 billion line of credit to the company. Rating agencies Moody's and Standard and Poor's downgraded their credit ratings on AIG's credit on concerns over continuing losses on mortgage-backed securities, forcing the company to deliver collateral of over $10 billion to certain creditors. The New York Times later reported that talks on Wall Street had broken down and AIG may file for bankruptcy protection on Wednesday, September 17.

Post-bailout spending
The following week, AIG executives participated in a lavish California retreat which cost $444,000 and featured spa treatments, banquets, and golf outings. It was reported that the trip was a reward for top-performing life-insurance agents planned before the bailout. Less than 24 hours after the news of the party was first reported by the media, it was reported that the Federal Reserve had agreed to give AIG an additional loan of up to $37.8 billion. AP reported on October 17 that AIG executives spent $86,000 on a luxurious English hunting trip. News of the lavish spending came just days after AIG received an additional $37.8 billion loan from the Federal Reserve, on top of a previous $85 billion emergency loan granted last month. Regarding the hunting trip, the company responded, "We regret that this event was not canceled." An October 30, 2008 article from CNBC reported that AIG had already drawn upon $90 billion of the $123 billion allocated for loans. On November 10, 2008, just a few days before renegotiating another bailout with the US Government for $40 billion, ABC News reported that AIG spent $343,000 on a trip to a lavish resort in Phoenix, Arizona.

India holdings AIG is the minority partner with the Tata Group in two insurance companies in India, holding 26 percent each in Tata AIG Life Insurance Co Ltd and Tata AIG General Insurance Co Ltd.[45

BILLION-DOLLAR STIMULUS PACKAGES Governments are spending billions of dollars to kick-start economic growth. Measures include tax cuts and building projects.

The bailout package announced by US government inched towards two trillion-dollar mark - an amount nearly double the size of Indian economy. With the US Congress giving nod to USD 700-billion aid for troubled financial institutions in the country, the US government alone has announced a total package worth about 990 billion dollars. Still, the collective bailout packages in the US and Europe, currently at about 1.8 trillion dollars, could soon be double the size of one trillion-dollar Indian economy. India's GDP is estimated at Rs 46,93,602 crore for the latest fiscal 2007-08, which stands at just over USD one trillion based on the current exchange rate of about Rs 46.8 to a dollar. The US takes the top spot with bailout packages of 990 billion dollars so far, followed by Ireland government which put in around 572 billion dollars as part of guarantee for liabilities of the country's banks. The proposal covers retail, commercial and inter-bank deposits and covered bonds, among others.

Elsewhere in Europe, the German administration last week pumped in 50 billion dollars to shore up the fortunes of mortgage lender Hypo Real Estate, while Belgian government invested 16 billion dollars in banking and insurance major Fortis. In another rescue act, another Belgian major Dexia was saved by the country's government by throwing a lifeline to the tune 9.2 billion dollars. The UK economy also had a victim of the credit crunch, with the government putting in about 32.5 billion dollars in troubled British lender Bradford & Bingley. Moreover, Iceland administration injected 864 million dollars as part of improving the credit position of the country's leading lender Glitnir. Among investments made by the US are the 85 billion-dollar bailout of AIG and the rescue of Freddie Mac and Fannie Mae, estimated to be worth over 200 billion dollars. Besides the government's aid, some large private investors have also chipped in with billions of dollars as investment in Wall Street giants. Legendary investor Warren Buffett has pumped in five billion dollars to salvage Goldman Sachs and another three billion dollars in diversified conglomerate General Electric.

US Bailout Plan: A giant band-aid or a Catalyst for further crisis?? It has been reported that US banks have defended bail-out spending. There is a substantial public anger. Bosses of eight US banks have attempted to reassure a Congressional hearing that the US government's banking bail-out has been well spent.

The chief executives of firms including Citigroup and Bank of America told the House Committee they had increased lending and prevented foreclosures. The eight firms have so far received $166bn (114bn) of public funds. Members of the House committee expressed concern at what they see as a lack of accountability. As the meeting started, the committee's chairman, Massachusetts Democrat Representative Barney Frank, warned the bank bosses that "there's a great deal of anger in the country, much of it justified". "I want to know where the money has gone," said Democrat Paul Kanjorski. Republican Gresham Barrett said: "My folks simply haven't seen the evidence that the money you were given is working or making their lives better." Transparency call BAIL-OUTS RECEIVED Bank of America - $45bn Citigroup - $45bn JP Morgan Chase - $25bn Wells Fargo - $25bn Goldman Sachs - $10bn Morgan Stanley - $10bn State Street - $3bn Bank of New York Mellon - $3bn Mr Frank also asked the executives to justify the payment of bonuses despite the financial crisis. Citigroup boss Vikram Pandit said he had asked to take a salary of $1 a year with no bonus until Citigroup returned to profitability. Lawmakers were also concerned about allegations from New York Attorney General Andrew Cuomo that investment bank Merrill Lynch brought forward the payment of $3.6bn worth of bonuses to its bosses, despite needing to be rescued by Bank of America. Kenneth Lewis said that his bank, which acquired Merrill last autumn, had urged Merrill executives to reduce the bonuses. He said that major changes will be made but we cannot make them until we own the company. 2007 PAY DEALS Jamie Dimon, JP Morgan Chase - $28m Kenneth Lewis, Bank of America - $25m Lloyd Blankfein, Goldman Sachs - $70m John Mack, Morgan Stanley - $2m Robert Kelly, Bank of New York Mellon - $20m Ronald Logue, State Street - $28m

John Stumpf, Wells Fargo - $13m Vikram Pandit, Citigroup - $574,000 The executives were keen to explain how they had spent their funds so far, and the extent to which this had enabled them to raise lending levels. Citigroup's Mr Pandit emphasised That they have helped 440,000 homeowners avoid foreclosure. He said Citi would pay $3.4bn in annual dividends to the US government in return for its investment in his company. Mr Dimon of JP Morgan Chase said the $25bn received by his bank had allowed it to delay the start of repossession proceedings on more than $22bn of mortgages held by about 80,000 homeowners. Mr Lewis of Bank of America said it was right that "taxpayers want us to manage our expenses carefully, and provide transparency about how we are putting their money to work to restart the economy". Bailed-out The eight banks secured their bail-outs under the $700bn Troubled Asset Relief Program first unveiled by President George W Bush in October. Bank of America and Citigroup have both received $45bn, while JP Morgan Chase and Wells Fargo got $25bn. Goldman Sachs and Morgan Stanley both got $10bn. State Street and Bank of New York Mellon were each given $3bn. When asked about how much of their personal new money the executives had invested in their business in the last six months, Mr Dimon said he had invested $12m, Mr Pandit said $8.4m, while Mr Lewis said he had bought 400,000 shares. The rest did not invest anything. New Treasury Secretary Timothy Geithner announced a new banking bail-out package totalling $1.5 trillion. This includes the creation of a new fund into which banks can dump any remaining toxic debt.

Why India stands largely insulated from global financial crisis The collapse of the mighty global financial system has triggered a series of chain reactions in India, but the impact is not going to be as widespread as earlier imagined. The reasons are numerous. First, the subsidiaries of collapsed investment banks like Lehman are being bailed out by entities like Nomura of Japan. This includes the 2,500-strong back office operations in Mumbai, apart from the smaller securities set up. Similarly, American Insurance Group -

in India has a tie-up with the ever reliable Tatas who have given a thumbs up to all consumers who were worried about their insurance carried out through this vehicle. Second, and even more significant, is the fact that the conservative approach to reforms in the financial services sector has ensured that the tremors of earthquakes in the US are being felt minimally in India. A meeting a few days ago of the regulators for the pension, insurance and other similar sectors concluded with a sigh of relief and pronouncement that slow and steady opening up of the economy has helped in the long run. This is not to say that capital account convertibility - or making the rupee freely tradable - will not take place. But probably as the regulators have pointed out, this can happen when the economy is at a more mature stage. Ultimately, therefore, the big losers in the global financial crisis in this country are likely to be the iconic software firms like Infosys, Wipro and Tata Consultancy Services -. Much of their business comes from the erstwhile giant investment banks and that could affect their profitability in the short term. In the medium-to-long term, however, these companies are likely to have greater resilience given their innovative approach in the past to hunting out new markets and customers. The other area where worries still remain is the pullout of funds by foreign institutional investors from the country's equities and debt markets. The bourses have been showing considerable volatility ever since the news came in about the failure of Lehman and the domino-like effect on other investment banks. While the Indian stock markets became volatile, they have not crashed as might have been expected initially. They now seem to be stabilizing as safety nets are being created for collapsed banks, like converting Goldman Sachs and JP Morgan into commercial banks while other banks are picking up some entities cheap like the takeover of Wachovia by Wells Fargo. As far as the US and even Europe are concerned, the ramifications appear to be unending as the scenario is unfolding into the biggest banking crisis in 100 years. Financial institutions considered to have a rock-like stability including Merrill Lynch, Morgan Stanley, JP Morgan and the Lehman Brothers collapsed within days of each. Some were rescued through various manoeuvres and only Lehman actually declared bankruptcy. Reports reaching here also indicate that many smaller banks are declaring insolvency in the US - a development not being taken note of by the international media which is focusing on the big fish. Thus average people in the US are facing severe hardship. No wonder then the battle is being described as one of Main Street vs Wall Street. The complex set of circumstances that created the crisis are a fascinating story of greed and over-reach at the highest level of the financial system in the US. The solutions being

found are even more fascinating - at least in India. The US administration actually bailed out mortgage giants like Freddie Mac, Fannie Mae and the world's biggest insurance company, AIG. The bailout has resulted in the government taking a majority stake in these institutions including an 80 percent equity share in AIG. In other words, the US is doing what we in India call nationalisation. The irony has not been lost on those in the banking industry in this country. Former prime minister Indira Gandhi was roundly condemned by the US and other Western powers when she nationalised banks in this country in order to ensure that credit reached the poor and powerless. Deemed to be a socialist - or communist-like measure -, it has now been adopted without any qualms by the avowed world leader of free market economies. It seems the US government had little choice, as otherwise widespread mayhem may have resulted for the average citizen both within America and abroad. In the case of AIG especially, it was recognized that the sudden collapse of the largest insurer in the world would wreak havoc globally. Besides the timing of these events could not have been worse for the Bush administration as the presidential elections are just weeks away. It thus had little option but to carry out damage control as rapidly as possible. Clearly the rules of the game change for Western economies during crisis. Nationalisation can be resorted to when the American people need to be protected but the same measure can be decried when a developing economy needs to do so to similarly protect its far more impoverished citizenry. The nationalization of banks in India opened the way for ordinary people to use the financial system for small and tiny deposits. It paved the way for what is known as compulsory priority sector lending. In other words, banks had to provide a certain amount of credit for agriculture and rural areas. In the normal course, commercial banks only lend to sectors providing assured and fairly high returns. But Indian nationalised banks have a social obligation to fulfil and the directive to do so was made possible only by the drastic takeovers effected by Indira Gandhi in 1969. Apart from banks, many other industries had to be nationalized to prevent millions of workers from becoming jobless. The perennially loss-making National Textile Corp is one such case when the government had to step in as private mill owners were closing shop and leaving their workers in the lurch. Though the corporation and its regional subsidiaries have rarely made profits, the mills under its charge have also performed a social obligation by producing cheap cloth meant for weaker sections of society. No doubt the nationalization process was carried too far, but at the time it seemed the only way out to save jobs in a country without any social safety nets for the jobless. So there can be few tears shed in India for the plight of the US economy. Our focus should only be on how to deal with the fallout of the financial disaster that has overtaken the global bastion of free markets.

Ten reasons why India would grow almost as strongly as it has done in the past many years: Lets demolish some myths and finally bury some shibboleths while talking about the Indian economy. And lets do that with unadulterated facts; not prejudice and perceptions. In 1967, when Europe and America were hit by a crisis of confidence, the Indian economy literally tanked. In 1973, after the oil shock roiled the global economy, GDP growth rate collapsed in India. In 1979, after the second oil shock, GDP growth rate collapsed all over again and India went to IMF for a bailout. When the global economy was entering a mini recession in 1990, the Indian economy again collapsed and the powers that be again went hat in hand to IMF. GDP growth rates in India tumbled yet again after the East Asian financial crisis of 1997. The dot-com bust across the world in 2001 again led to growth rates crashing in India. So lets stop fooling ourselves with this de-coupling nonsense. The Indian economy will definitely be affected during the ongoing crisis. We cant wish away bad news. And yet, there are very strong reasons why the Indian economy will be the most successful one when it comes to riding out the current storm. And there is little doubt that it will be the first economy to emerge stronger with a more solid foundation of sustained growth. Surprised with such a statement when all you get is hysterically bad news from media vehicles? Dont be. Here are the fact based reasons why: FDI: China habitually gets more than $150 billion in foreign direct investments every year. As a percentage of GDP, it hovers between 7% to 10%. In sharp contrast, Indian policy makers start whooping with joy when FDI crosses $20 billion. Not to mention that FDI has almost never exceeded even 0.5% of GDP. Now, we all know that foreign investments will dry up. But since most of Indias GDP growth has been driven by domestic investment, we will be the least adversely affected. Lets say FDI inflow declines by a whopping 50% or about $10 billion. That works out to one-tenth of one percent of GDP. EXPORTS: There are horror stories floating around of how hundreds of thousands of jobs are being lost because exports are slowing down and declining. A recent government survey says that half a million jobs were lost in the last quarter of 2008 because of contracting exports. Half a million jobs gone is bad news indeed. But compare that with an admission by the Chinese government that 20 million jobs were lost in the same period and you suddenly get a fresh perspective on where India stands compared to other nations. Also remember, exports from India still hover around 15% of GDP, one of the lowest figures among major economies in the world. CONSUMPTION: The Indian economy resembles that of the United States in many unique ways. One of the most striking similarities is that related to consumption. Consumption accounts for just about 35% of GDP in China while it constitutes about 65% of GDP in India. One reason why GDP growth in China kept racing ahead of India was huge increase in investments year after year while consumption expenditure can

really grow at more modest levels. When bad times come, consumption might stagnate in India while investment is bound to plunge in China. No wonder, the Indian GDP growth rate will moderate from about 9% to about 7% in 2008-09 while it is poised to crash from 13% to 6% in China. Slow and steady is often better. SIXTH PAY COMMISSION: Of course, there is no Barack Obama out here calling a $20 billion bonus payout for Wall Street honchos in 2008 as shameful. But the fact is, the largest employer in the country, the State, has recently handed over a pay hike that ranges from 40% to 100%. Not just that. The hike is to be implemented with past effect from January 1, 2006, ensuring that government employees will get hundreds of thousands of rupees as arrears. The results are visible. Maruti and Hero Honda sales have either remained stable or actually grown when everyone is crying about tumbling demand. Sure, extravagant spending has fallen drastically; but that anyway accounted for a miniscule proportion of total consumption expenditure. WELFARE SCHEMES: One of the better known and controversial features of the UPA government has been the emphasis it has put on welfare schemes for the poor. The most important of this is the National Rural Employment Guarantee Program (NREGP) that promises at least 100 days of employment to the poor in rural areas. Sure, there have been many valid criticisms of corruption and leakages. But the fact is that rich farmers in Punjab are finding it desperately difficult to find labourers to work in their farms. NREGP has a lot to do with this, despite the leakages. Of course, the rural poor who benefit from NREGP will not be buying plasma TV sets; but the small amounts they will spend keeps the economy chugging along. No matter what prejudiced critics say, companies like ITC and HUL have shown that there is a fortune to be made at the bottom of the pyramid. The NREGP is consistently broadening the base of the pyramid! INTEREST RATES: If every crisis is an opportunity, here is the mother of all opportunities. A few years ago, when major economies of the world had started cutting interest rates because of recession worries, the Reserve Bank of India kept hiking them to combat inflation. After the September 2008 meltdown, there has been a move to once again cut interest rates. But the fact of the matter is that no other major economy of the world has interest rates as high as Indias. The prime lending rate is still more than 12% and there is enough scope to reduce it drastically. The positive impact on the Indian economy will be monumental. Please remember: more than 7% of average GDP growth rates of the last decade came after interest rates in India were cut drastically to single digits from peak levels of about 16% in the mid 1990s! No other major economy in the world can boast of this incredible cushion and opportunity. HEALTHY BANKS: This is arguably the biggest advantage that the Indian economy enjoys in these turbulent times. In Europe and the United States, it has become habitual for the once mighty and envied banks to report losses to the tune of tens of billions of dollars. Nobody knows for sure the position of Chinese banks when it comes to bad debts; but analysts are deeply worried about the Chinese banking system anyway. But the once derided Indian banking system is literally in the pink of health in contrast. Profits for most banks have soared and there is no doubt that bad debts are simply not a problem

for the Indian banking system at the moment barring a few aggressive banks that will anyway be bailed out by the government if the need arises. This is a slap for the free market fundamentalists who were repeatedly pushing Indian banks to adopt the American model. Have you heard any comments from Western analysts and their ilk about Indian banks adhering to Basel-II norms by 2009? INDIA INC: Back in the 1990s, virtually every analyst worth her salt had written off India Inc. Used to protectionism for decades, Indian companies were bludgeoned and battered when global competition came to the country. But alongside rose the animal spirits of entrepreneurship that has led to the astounding recovery of India Inc. by the early 21st century. Mostly without government support, a new breed of entrepreneurs have sensed opportunities in new sectors and grabbed them brilliantly with both hands. Many western scholars now acknowledge that India holds the advantage compared to China because of two reasons. Most successful Indian companies are private. More importantly, they have used capital far more productively and efficiently than Chinese counterparts. In these turbulent times, firms that have acquired a nasty habit of depending on crony capitalism will suffer just as powerful business families suffered badly in the 1990s. But the smarter ones will emerge bigger, stronger and more profitable. Also remember, most Indian companies are sitting on billions of dollars of reserves! EXPECTATIONS: Investors and consumers in America, Europe and China had been behaving as if the good times will last forever. Irrational expectations and exuberance were the order of the day. Hardly anybody paid attention to the dark clouds hovering over the horizon. And when the meltdown came, the shock was even more profound and unnerving. China faces a more peculiar problem. State fed and encouraged patriotism and nationalism has gradually led most Chinese to believe that they are invulnerable and that it is only a matter of time before China replaces America as the Superpower of the world. Now, the shock is unfolding as the Chinese juggernaut starts stumbling and threatens to come to a grinding halt. Barring a tiny minority swayed by unrealistic and unsustainable pay packages, most Indians have been conservative when it comes to expectations. The psychological impact on Indian consumers and investors has been far more sanguine than it has been in other countries. DEMOCRACY: For many decades, so called pundits have argued that an authoritarian regime is better than a democratic one when it comes to delivering high growth rates and economic prosperity. For decades, the same pundits while admiring Indian democracy and the functional anarchy it represents have also remarked on how fractious politics has led to lower growth rates. By now, even the most hardened of these pundits have come to accept that democracy is surely a better bet in the long run. First, let us remove the myth about dictatorships and economic prosperity. Latin America, Africa and Eastern Europe are classic examples of how dictatorships do not result in high growth rates. The only major authoritarian regimes that have achieved high growth rates and economic prosperity have been South Korea, Malaysia, Indonesia, Taiwan and China. Of the lot, only China remains truly autocratic. In any case, the reason why these countries grew so fast in the last few decades are not political. The fact is: their policy makers were smart enough to adopt the right policies that could gain from prosperity in the West. Indonesia

is also a reminder of how autocratic regimes can unravel when the economy is subjected to unexpected shocks. Sure, India will probably never grow at 13%. But then, there is also no chance of the country unravelling. Thats the advantage of democracy. The ten reasons stated above are sound & valid enough to ensure that the Indian economy will ride this storm without much damage. But there is one really important factor that shames India and also offers prospects of steady growth. More than 300 million Indians earn less than one dollar a day; the highest incidence of poverty amongst major nations of the world. Simple, practical policies to lift even 250 million of them out of poverty towards a lower middle class existence will ensure that GDP in India will keep growing at between 6% to 9% every year for the next three decades to say the least. RBI Response to the Crisis The financial crisis in advanced economies on the back of sub-prime turmoil has been accompanied by near drying up of trust amongst major financial market and sector players, in view of mounting losses and elevated uncertainty about further possible losses and erosion of capital. The lack of trust amongst the major players has led to near freezing of the uncollateralized inter-bank money market, reflected in large spreads over policy rates. In response to these developments, central banks in major advanced economies have taken a number of coordinated steps to increase short-term liquidity. Central banks in some cases have substantially loosened the collateral requirements to provide the necessary short-term liquidity. In contrast to the extreme volatility leading to freezing of money markets in major advanced economies, money markets in India have been, by and large, functioning in an orderly fashion, albeit with some pressures. Large swings in capital flows as has been experienced between 2007-08 and 2008-09 so far in response to the global financial market turmoil have made the conduct of monetary policy and liquidity management more complicated in the recent months. However, the Reserve Bank has been effectively able to manage domestic liquidity and monetary conditions consistent with its monetary policy stance. This has been enabled by the appropriate use of a range of instruments available for liquidity management with the Reserve Bank such as the Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) stipulations and open market operations (OMO) including the Market Stabilisation Scheme (MSS) and the Liquidity Adjustment Facility (LAF). Furthermore, money market liquidity is also impacted by our operations in the foreign exchange market, which, in turn, reflect the evolving capital flows. While in 2007 and the previous years, large capital flows and their absorption by the Reserve Bank led to excessive liquidity, which was absorbed through sterilisation operations involving LAF, MSS and CRR. During 2008, in view of some reversal in capital flows, market sale of foreign exchange by the Reserve Bank has led to withdrawal of liquidity from the banking system. The daily LAF repo operations have emerged as the primary tool for meeting the liquidity gap in the market. In view of the reversal of capital flows, fresh

MSS issuances have been scaled down and there has also been some unwinding of the outstanding MSS balances. The MSS operates symmetrically and has the flexibility to smoothen liquidity in the banking system both during episodes of capital inflows and outflows. The existing set of monetary instruments has, thus, provided adequate flexibility to manage the evolving situation. In view of this flexibility, unlike central banks in major advanced economies, the Reserve Bank did not have to invent new instruments or to dilute the collateral requirements to inject liquidity. LAF repo operations are, however, limited by the excess SLR securities held by banks. While LAF and MSS have been able to bear a large part of the burden, some modulations in CRR and SLR have also been resorted, purely as temporary measures, to meet the liquidity mismatches. For instance, on September 16, 2008, in regard to SLR, the Reserve Bank permitted banks to use upto an additional 1 percent of their NDTL, for a temporary period, for drawing liquidity support under LAF from RBI. This has imparted a sense of confidence in the market in terms of availability of short-term liquidity. The CRR which had been gradually increased from 4.5 per cent in 2004 to 9 per cent by August 2008 was cut by 50 basis points on October 6 (to be effective October 11, 2008) the first cut after a gap of over five years - on a review of the liquidity situation in the context of global and domestic developments. Thus, as the very recent experience shows, temporary changes in the prudential ratios such as CRR and SLR combined with flexible use of the MSS, could be considered as a vast pool of back-up liquidity that is available for liquidity management as the situation may warrant for relieving market pressure at any given time. The recent innovation with respect to SLR for combating temporary systemic illiquidity is particularly noteworthy. The relative stability in domestic financial markets, despite extreme turmoil in the global financial markets, is reflective of prudent practices, strengthened reserves and the strong growth performance in recent years in an environment of flexibility in the conduct of policies. Active liquidity management is a key element of the current monetary policy stance. Liquidity modulation through a flexible use of a combination of instruments has, to a significant extent, cushioned the impact of the international financial turbulence on domestic financial markets by absorbing excessive market pressures and ensuring orderly conditions. In view of the evolving environment of heightened uncertainty, volatility in global markets and the dangers of potential spillovers to domestic equity and currency markets, liquidity management will continue to receive priority in the hierarchy of policy objectives over the period ahead. The Reserve Bank will continue with its policy of active demand management of liquidity through appropriate use of the CRR stipulations and open market operations (OMO) including the MSS and the LAF, using all the policy instruments at its disposal flexibly, as and when the situation warrants. Indias Bailout Plan: In a bid to contain the impact of the global financial crisis on India, the government unveiled a Rs. 3,00,000 crore(Rs 3,000 bn) package to pump prime economy with specific measures for various sectors in dec, 2008.

The amount is to be spent over the remaining four months on a host of areas and stake holders such as exporters, housing, infrastructure and textiles. A 4 per cent cut in Value Added Tax has also been announced to help the corporate sector in general. "The economy will continue to need stimulus in 2009-2010 also and this can be achieved by ensuring a substantial increase in plan expenditure as part of the budget for next year," the statement said. Instructions have also been given to state-run banks to unveil a scheme under which borrowers for houses under two categories - up to Rs. 5,00,000 and up to Rs. 2 million will get special incentives. "Housing is a potentially very important source of employment and demand for critical sectors and there is a large unmet need for housing in the country, especially for middle and low income groups," the statement said. For small and micro enterprises, the limits under the credit guarantee scheme which gives access to working capital and other financial needs, have been doubled to Rs. 10 million. The lock in period for loans covered under the existing credit guarantee scheme is also being reduced from 24 to 18 months to encourage banks to extend more loans under the credit guarantee scheme, the statement said. The government has also authorised the India Infrastructure Finance Co Ltd (IIFCL) to raise Rs. 100 billion through tax-free bonds to support financing of government-financed infrastructure projects. These funds will be used by IIFCL to refinance bank lending of longer maturity to eligible infrastructure projects, particularly in highways and port sectors. Govt announced 2nd stimulus package in January, 2009. The much awaited second stimulus package unveiled by the government aims at providing much higher and cheaper funds in the economy along with additional expenditure by the Centre and the state to push demand in the country. While allowing states to access market for borrowing about Rs 30,000 crore to meet additional expenditure, the package provides for liberalisation of External Commercial Borrowing norms and raising FII investment limit in rupee-denominated instruments to $15 billion from $6 billion now.

Conclusion:
The government tackles recession generally in the following ways: Tax cuts are the first step that a government fighting recessionary trends or a fullfledged recession proposes to do.

The government also hikes its spending to create more jobs and boost the manufacturing and services sectors and to prop up the economy. The government also takes steps to help the private sector come out of the crisis.

In the current case, governments proposed bailout packages: The US$700 billion bailout package has given hope to the US economy and the world at large. The bailout package is essentially a plan to buy troubled assets from banks, and includes a number of new provisions aimed at ordinary people struggling under the credit crunch. The British government has set aside 500 billion for huge injections of liquidity into the banking system, guaranteeing lending between banks, and incentives to kick-start investment and get bank loans to businesses and for mortgages flowing again. Other EU countries, have put aside over US$2.3 trillion in guarantees and other emergency measures to save the banking system. India released her first stimulus package in early December when it announced an increased planned expenditure of US$4.1 billion and cuts in excise duties and interest rates. The aim at the time was to boost the ailing infrastructure, textiles and small sale industries. The second stimulus package cut policy interest rates, eased borrowing norms for various vital sectors such as infrastructure, finance and real estate companies and increased the foreign-investment limit in rupee corporate bonds to US$15 billion from US$6 billion. Besides pumping additional money into strategic sectors, the Indian government plans to revive the economy through increased domestic consumption. The government plans to increase liquidity in the market by further dropping interest rates and attracting additional FDI. Inflation rates which have fallen by more than 50 percent since October last year have boosted the government exchequer encouraging the state to reveal a third stimulus package. Commerce and industry minister Kamal Nath announced that the government was likely to introduce a third stimulus package in February. "The government will continue to inject adequate funds and will continuously provide stimulus to the domestic demand-driven economy,'' the minister told the Times of India.

Eighteen government banks are to be recapitalized. Almost all public sector banks, barring a handful such as Punjab National Bank, Bank of India and Canara Bank, are in line to get recapitalisation finance from the government over the next 24 months. Although the capital adequacy ratio the ratio of capital fund to risk weighted assets of all public sector banks and the six State Bank of India associates is above the prescribed level of 9 per cent, the government has decided to go for fund infusion and restructuring because they need capital to expand their business and are finding it difficult to expand their equity base. The public sector players have already submitted their capital requirement for the next two years and how they intend to meet the needs. United Bank of India, Dena Bank, Bank of Maharashtra and IDBI Bank are expected to be among the next set of banks whose capital infusion proposals will be taken up and an allocation is likely to be made when the budget for 200910 is presented this summer. So far, the government has either provided funds or restructured the capital of State Bank of India, Punjab & Sind Bank, Vijaya Bank, Central Bank of India and Uco Bank. In all, nearly Rs 15,000 crore has been paid to these banks since March 2007 to help them bolster their capital base to meet their growth requirements. In this years budget, the government has made an allocation of Rs 1,900 crore that was part of the proposal to provide over Rs 3,800 crore to Vijaya, Uco and Central Bank.